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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-15336
MARGO CARIBE, INC.
A Puerto Rico Corporation - I.R.S. No. 66-0550881
Address of Principal Executive Offices:
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
Registrant's Telephone Number:
(787) 883-2570
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days.
YES X NO
------- -------
The registrant had 2,079,889 shares of common stock, $.001 par value,
outstanding as of November 14, 2002.
MARGO CARIBE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I
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Page
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ITEM 1. FINANCIAL STATEMENTS (unaudited)
--------------------
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Shareholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
-----------------------------------------------
OF OPERATIONS AND FINANCIAL CONDITION 16
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
----------------------------------------------
MARKET RISK 21
-----------
ITEM 4. CONTROL AND PROCEDURES 21
----------------------
PART II
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ITEM 1. LEGAL PROCEEDINGS 22
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ITEM 2. CHANGES IN SECURITIES 22
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE 22
-------------------------------
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 23
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
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SIGNATURES
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FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "believes", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, natural disasters, competitive and regulatory factors and
legislative changes, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstance after the date of such statements.
3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(Unaudited)
ASSETS
------
2002 2001
----------- -----------
Current assets:
Cash and equivalents $ 887,701 $ 838,921
Accounts receivable, net 2,043,466 1,798,251
Inventories 3,630,890 3,510,381
Current portion of note receivable -- 26,331
Prepaid expenses and other current assets 277,125 296,482
----------- -----------
Total current assets 6,839,182 6,470,366
Property and equipment, net 1,245,508 1,398,689
Land held for future development 1,105,627 1,053,406
Notes receivable 48,112 42,164
Other assets 164,091 44,396
----------- -----------
Total assets $ 9,402,520 $ 9,009,021
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 59,358 $ 129,047
Notes payable 2,030,500 1,930,500
Accounts payable 662,972 868,071
Accrued expenses 227,345 194,294
----------- -----------
Total current liabilities 2,980,175 3,121,912
Deferred revenue 74,238 --
Long-term debt 339,378 307,528
----------- -----------
Total liabilities 3,393,791 3,429,440
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 250,000
shares authorized, no shares issued -- --
Common stock, $.001 par value; 10,000,000
shares authorized; 2,114,009 and 1,923,622
shares issued, 2,074,289 and 1,883,822 shares
outstanding in 2002 and 2001, respectively 2,114 1,924
Additional paid-in capital 5,230,938 4,659,792
Retained earnings 871,965 1,014,153
Treasury stock, 39,800 common shares,
at cost (96,288) (96,288)
----------- -----------
Total shareholders' equity 6,008,729 5,579,581
----------- -----------
Total liabilities and shareholders' equity $ 9,402,520 $ 9,009,021
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods ended September 30, 2002 and 2001
(Unaudited)
Three Months ended September 30, Nine Months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 2,310,942 $ 2,242,815 $ 7,119,654 $ 6,695,086
Cost of sales 1,292,015 1,449,194 4,176,164 4,266,408
----------- ----------- ----------- -----------
Gross profit 1,018,927 793,621 2,943,490 2,428,678
Selling, general and administrative expenses 910,947 752,256 2,498,107 2,187,068
----------- ----------- ----------- -----------
Income from operations 107,980 41,365 445,383 241,610
----------- ----------- ----------- -----------
Other income (expense):
Interest income 7,689 14,638 11,446 48,452
Interest expense (15,569) (34,728) (48,176) (107,268)
Gain on disposition of equipment -- -- -- 13,913
Miscellaneous income (expense) 1,354 (832) 16,236 4,973
----------- ----------- ----------- -----------
(6,526) (20,922) (20,494) (39,930)
----------- ----------- ----------- -----------
Income before provision for income tax 101,454 20,443 424,889 201,680
Income tax provision -- -- -- --
----------- ----------- ----------- -----------
Net income $ 101,454 $ 20,443 $ 424,889 $ 201,680
=========== =========== =========== ===========
Basic income per common share $ .05 $ .01 $ .21 $ .10
=========== =========== =========== ===========
Diluted income per common share $ .05 $ .01 $ .20 $ .10
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months ended September 30, 2002
(Unaudited)
Common Common Additional
stock stock paid-in Retained Treasury
shares amount capital earnings stock Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 1,883,822 $ 1,924 $ 4,659,792 $ 1,014,153 $ (96,288) $ 5,579,581
Issuance of common stock from
10% stock dividend 188,367 188 566,843 (567,077) -- (46)
Issuance of common stock from
conversion of stock options 2,100 2 4,303 -- -- 4,305
Net income -- -- -- 424,889 -- 424,889
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2002 2,074,289 $ 2,114 $ 5,230,938 $ 871,965 $ (96,288) $ 6,008,729
=========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
6
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
--------- ---------
Cash flows from operating activities:
- -------------------------------------
Net income $ 424,889 $ 201,680
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 314,270 345,314
Provision for uncollectible accounts
receivable 67,859 37,533
Gain on disposition of equipment (6,287) (13,913)
Deferred revenue 74,238 --
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (313,074) (293,495)
Inventories (120,509) (667,415)
Prepaid expenses and other current assets 19,357 57,331
Other assets (119,695) (61,985)
Accounts payable (205,099) (57,554)
Accrued expenses 33,051 33,929
--------- ---------
Net cash provided by (used in)
operating activities 169,000 (418,575)
--------- ---------
Cash flows from investing activities:
- -------------------------------------
Additions to property and equipment (98,452) (192,533)
Investment in land held for future development (52,221) --
Increase in notes receivable (10,590) (18,193)
Repayment of notes receivable 30,973 10,452
Collection of amount due from shareholder -- 233,226
Proceeds from disposition of equipment -- 13,913
--------- ---------
Net cash provided by (used in)
investing activities (130,290) 46,865
--------- ---------
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt -- 222,051
Repayment of long-term debt (94,189) (93,683)
Increase in notes payable 100,000 200,000
Repayment of notes payable -- (225,000)
Cash payment in lieu of issuing fractional
shares in stock dividend (46) --
Issuance of common stock from conversion
of stock options 4,305 2,250
--------- ---------
Net cash provided by financing activities 10,070 105,618
--------- ---------
Net increase (decrease) in cash 48,780 (266,092)
Cash and equivalents at beginning of period 838,921 973,061
- ------------------------------------------------ --------- ---------
Cash and equivalents at end of period $ 887,701 $ 706,969
- ------------------------------------------------ ========= =========
See accompanying notes to condensed consolidated financial statements.
7
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
These interim condensed consolidated financial statements include the financial
statements of Margo Caribe, Inc. and its wholly-owned subsidiaries (collectively
"the Company"), Margo Nursery Farms, Inc., Margo Landscaping and Design, Inc.,
Margo Garden Products, Inc., Rain Forest Products Group, Inc., Margo Flora,
Inc., Garrochales Construction and Development Corporation and Margo Development
Corporation.
These interim condensed consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal accruals) that, in the
opinion of management, are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
covered. These statements have been prepared in accordance with the United
States Securities and Exchange Commission's instructions to Form 10-Q, and
therefore, do not include all information and footnotes necessary for a complete
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America.
The preparation of interim financial statements relies on estimates. Therefore,
the results of operations for the nine months ended September 30, 2002 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 2002. These statements should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included in
the Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Note 2 - Use of Estimates in the Preparation of Condensed Financial Statements
- ------------------------------------------------------------------- ----------
The preparation of condensed financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
8
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb estimated losses on existing accounts receivable that
become uncollectible based on evaluations of collectibility of specific
customers and their prior credit experience. Because of uncertainties inherent
in the estimation process, management's estimate of credit losses inherent in
the existing accounts receivable and related allowance may change in the near
term.
Direct and indirect costs that are capitalized as part of inventory of plant
material which management estimates cannot be recovered from future sales of
plant inventory are charged to cost of sales. Management's determination of the
amount of capitalized costs that should be charged to cost of sales is based on
historical sales experience and its judgement with respect to the future
marketability of the inventory.
Note 3 - Inventories
- --------------------
At September 30, 2002 and December 31, 2001, inventories included the following:
Description 2002 2001
- --------------------------- ---------- -----------
Plant material $3,028,035 $2,813,920
Lawn and garden products 296,732 362,273
Raw materials and supplies 306,123 334,188
---------- ----------
$3,630,890 $3,510,381
========== ==========
Note 4 - Property and Equipment
- -------------------------------
At September 30, 2002 and December 31, 2001, property and equipment included the
following:
Description 2002 2001
- ------------------------- ---------- -----------
Leasehold improvements $1,403,445 $1,364,949
Equipment and fixtures 1,612,186 1,585,675
Transportation equipment 539,910 460,232
Real estate property 224,327 224,327
---------- ----------
3,779,868 3,635,183
Less accumulated depreciation
and amortization (2,534,360) (2,236,494)
---------- ----------
$1,245,508 $1,398,689
========== ==========
Note 5 - Income (loss) per Common Share
- ---------------------------------------
The Company reports its earnings per share (EPS) using Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128").SFAS 128
requires dual presentation of basic and diluted EPS. Basic EPS is computed by
dividing income attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
9
On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend
on the Company's common stock. The stock dividend was issued on June 28, 2002 to
shareholders of record as of June 14, 2002. The stock dividend resulted in the
issuance of 188,367 additional shares of common stock. Accordingly, the weighted
average number of shares outstanding (and stock options) for the periods prior
to September 30, 2002 have been adjusted to reflect the effect of the stock
dividend.
Basic and diluted income per common share for the periods ended September 30,
2002 and 2001 were determined as follows:
Three Months Nine Months
ended September 30, ended September 30,
Basic income per common share: 2002 2001 2002 2001
- ----------------------------- ---------- ---------- ---------- ----------
Net income attributable to
common shareholders $ 101,454 $ 20,443 $ 424,889 $ 201,680
========== ========== ========== ==========
Weighted average number of common
shares outstanding 2,073,239 2,071,364 2,072,539 2,070,814
========== ========== ========== ==========
Basic income per common share $ .05 $ .01 $ .21 $ .10
========== ========== ========== ==========
Diluted income per common share:
- --------------------------------
Net income attributable to
common shareholders $ 101,454 $ 20,443 $ 424,889 $ 201,680
========== ========== ========== ==========
Weighted average number of common
shares outstanding 2,073,239 2,071,364 2,072,539 2,070,814
Plus incremental shares from assumed
exercise of stock options 36,480 49,260 49,900 27,062
---------- ---------- ---------- ----------
Adjusted weighted average shares 2,109,719 2,120,624 2,122,439 2,097,876
========== ========== ========== ==========
Diluted income per common
share $ .05 $ .01 $ .20 $ .10
========== ========== ========== ==========
10
Note 6 - Segment Information
- ----------------------------
The Company reports its segment information pursuant to Financial Accounting
Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the
way an enterprise reports information about operating segments in annual
financial statements and requires that enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Statement requires a reconciliation of total segment revenue
and expense items and segment assets to the amounts in the enterprise's
financial statements. SFAS 131 also requires a descriptive report on how the
operating segments were determined, the products and services provided by the
operating segments, and any measurement differences used for segment reporting
and financial statement reporting.
The Company's management monitors and manages the financial performance of three
primary business segments: the production and distribution of plants, sales of
lawn and garden products and landscaping services. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income or
loss.
The financial information presented below was derived from the Company's
accounting system and is based on internal management accounting policies. The
information presented does not necessarily represent each segments's financial
condition and results of operations as if they were independent entities.
The Company's segment information for the three months ended September 30, 2002
and 2001, is as follows:
Three Months ended September 30, 2002
---------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
---------------------------------------------------------------
Revenues from external customers $ 994,580 $ 727,456 $ 588,906 $2,310,942
Intersegment revenues 87,563 5,270 -- 92,833
Interest income 7,689 -- -- 7,689
Interest expense 15,569 -- -- 15,569
Depreciation and amortization 64,568 12,690 9,993 87,251
Segment income 160,462 (38,415) (20,593) 101,454
11
Three Months ended September 30, 2001
---------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
---------------------------------------------------------------
Revenues from external customers $ 725,322 $ 750,436 $ 767,057 $2,242,815
Intersegment revenues 105,279 30,489 -- 135,768
Interest income 14,638 -- -- 14,638
Interest expense 34,728 -- -- 34,728
Depreciation and amortization 110,678 10,039 5,421 126,138
Segment income (loss) 22,045 18,687 (20,289) 20,443
The Company's segment information as of and for the nine months ended September
30, 2002 and 2001, is as follows:
Nine Months ended September 30, 2002
---------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
---------------------------------------------------------------
Revenues from external customers $3,040,696 $2,166,487 $1,912,471 $7,119,654
Intersegment revenues 317,259 40,031 -- 357,290
Interest income 11,446 -- -- 11,446
Interest expense 48,176 -- -- 48,176
Depreciation and amortization 237,319 44,804 32,147 314,270
Segment income 286,895 30,572 107,422 424,889
Segment assets 7,329,901 995,245 1,077,374 9,402,520
Expenditures for segment assets 98,452 -- -- 98,452
Nine Months September 30, 2001
---------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
---------------------------------------------------------------
Revenues from external customers $ 2,757,594 $ 2,252,915 $ 1,684,577 $ 6,695,086
Intersegment revenues 184,669 65,621 -- 250,290
Interest income 48,452 -- -- 48,452
Interest expense 107,268 -- -- 107,268
Depreciation and amortization 295,386 33,421 16,507 345,314
Segment income (loss) 202,519 75,577 (76,416) 201,680
Segment assets 7,168,703 1,121,681 868,685 9,159,069
Expenditures for segment assets 192,533 -- -- 192,533
12
Note 7 - Deferred Revenue
- -------------------------
As a result of the damages caused by Hurricane Georges in September 1998, the
Puerto Rico Department of Agriculture (the "Department of Agriculture")
committed to providing assistance to bona-fide agricultural enterprises affected
by the hurricane. During May 2002, the Company received $74,238, representing
the assistance approved by the Department of Agriculture to the Company, and
signed an agreement with the Department of Agriculture, which among other
things, requires that the Company's Barranquitas facility be operated as an
agricultural enterprise for a minimum period of ten years from the date of
signing. Accordingly, the Company recorded the amount received as deferred
revenue to account for the assistance received, which will be recognized as
revenue over the ten-year period that the Company's required to comply with.
Note 8 - Supplemental Disclosures for the Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
a) Non-Cash Investing Activities
-----------------------------
During the nine months ended September 30, 2002, the Company applied a
certificate of deposit amounting to $500,000 to pay off a related note
payable. Subsequently, on two separate occasions, the Company opened a
certificate of deposit amounting to $500,000 with the proceeds from a
related note payable. The Company also traded-in a vehicle with a cost of
$31,500, receiving $7,000 as a trade-in value for the old vehicle, and
assuming a related debt of $24,500. The Company also purchased another
vehicle for $31,850 by assuming the related debt.
During the nine months ended September 30, 2001, the Company applied
short-term investments amounting to $500,000 against a related note payable
for the same amount.
b) Non-Cash Financing Activities
-----------------------------
During the nine months ended September 30, 2002, the Company issued a 10%
stock dividend, resulting in the capitalization of 188,367 common shares at
a market price of $3.01 as of June 28, 2002.
c) Other Cash Flow Transactions
----------------------------
Other cash flow transactions for the nine months ended September 30, 2002
and 2001, include interest payments amounting to approximately $41,000 and
$113,800, respectively. There were no income tax payments for the nine
months ended September 30, 2002 and 2001.
13
Note 9 - New Accounting Pronouncements
- --------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. This statement is effective
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's financial condition
or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections". SFAS No. 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt - an
amendment of APB Opinion No. 30", which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion No. 30 will now be used to classify those gains and losses. This
amendment is effective for fiscal years beginning after May 15, 2002.
SFAS No. 145 also amends SFAS No. 13 "Accounting for Leases", which requires
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment became effective for transactions
occurring after May 15, 2002. SFAS No. 145 is not expected to have significant
effect on the Company's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities". SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS also
establishes that fair value is the objective for initial measurement of the
liability. SFAS 146 applies to costs associated with an exit activity, but does
not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 146 does
not apply to costs associated with a retirement of long-lived assets covered by
SFAS No. 143. The Company is required to implement SFAS 146 for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of this statement to have a significant effect on its
financial position or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144, and FASB
Interpretation No. 9". Except for transactions between two or more mutual
14
enterprises, SFAS No. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations" and SFAS No. 142. In addition, SFAS No. 147 amends SFAS No. 144,
to include in its scope long-term customer-relashionship intangible assets of
financial institutions such as depositor-and borrower-relationship intangible
assets and credit cardholders intangible assets. SFAS No. 147 is effective for
acquisitions or impairment measurement of above intangibles effected on or after
October 1, 2002. SFAS No. 147 is not expected to have a significant effect on
the Company's financial condition or results of operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Margo Caribe, Inc. and its subsidiaries, (collectively, the "Company") are in
the business of growing, distributing and installing tropical plants and trees.
The Company is also engaged in the manufacturing and distribution of its own
line ("Rain Forest") of planting media and aggregates, the distribution of lawn
and garden products and also provides landscaping design and installation
services. The Company's real estate development division is currently permitting
and designing an affordable housing project in the Municipality of Arecibo,
Puerto Rico.
PRINCIPAL OPERATIONS
- --------------------
The Company's operations are focused in the Commonwealth of Puerto Rico ("Puerto
Rico").
These operations are conducted at a 92 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 92 acre farm is leased from
Michael J. Spector and Margaret Spector, who are directors, officers and
principal shareholders of the Company. The 13 acre nursery in Barranquitas is
leased from an unrelated third party.
The Company's operations include Margo Caribe, Inc. (the holding company), Margo
Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc.
("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest
Products Group, Inc. ("Rain Forest"), Margo Flora, Inc., Garrochales
Construction and Development Corporation and Margo Development Corporation, all
Puerto Rico corporations.
Nursery Farms, 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. In Vega Alta, Nursery Farms produces various types of palms,
flowering and ornamental plants, trees, shrubs, bedding plants and ground
covers. In Barranquitas, Nursery Farms (operating as Margo Flora) produces
orchids, bromeliads, anthuriums, spathiphylum and poincettias. Its customers
include wholesalers, retailers, chain stores and landscapers primarily located
in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, both
Nursery Farms and Margo Flora enjoy a 90% tax exemption under Puerto Rico law
from income derived from its nursery business in Puerto Rico.
Landscaping provides landscaping, maintenance and design services to customers
in Puerto Rico and the Caribbean, including commercial as well as residential
landscape design and landscaping.
16
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor (for Puerto Rico and the Caribbean) of
Sunniland Corporation's fertilizer and pesticide products, Colorite garden
hoses, Greenes Fence Company, Fiskars Consumer Product Division, State Line Bark
& Mulch, L.R. Nelson Consumer Products, Tel-Com decorative pottery, Crysalia
plastic pottery, and DEROMA Italian terracotta pottery. Garden Products also
markets and merchandises Ortho and Round-up brand products for the Scotts
Company at all Home Depot stores operating in Puerto Rico.
Rain Forest is engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock, gravels and related aggregates. Rain
Forest's products are marketed by Garden Products. The Company enjoys a tax
exemption grant from the Government of Puerto Rico for the manufacturing
operations of Rain Forest.
Margo Development Corporation and Garrochales Construction and Development
Corporation are presently engaged in designing and seeking development permits
on a new site for the development of a residential project in the Municipality
of Arecibo, Puerto Rico.
FUTURE OPERATIONS
- -----------------
The Company will continue to concentrate its economic and managerial resources
in expanding and improving its present operations in Puerto Rico and the
Caribbean. However, the Company will also explore business opportunities in the
mainland United States.
On October 14, 2002, the Company, through its wholly-owned subsidiary, Nursery
Farms entered into a joint venture to grow sod, palms and trees on a farm of
approximately 254 acres located on the South Coast of Puerto Rico. The Company
owns one-third of the outstanding voting stock of the new entity, Salinas
Holdings, Inc. The remaining two-thirds are owned in equal parts by Mr. Mark
Greene and another private investor. Mr. Greene, a former director of the
Company, resigned from the Board of Directors in connection with this
transaction. The Company is required to make an equity cash contribution to the
new entity of up to $775,000. As of September 30, 2002, the Company had incurred
approximately $114,000 for the purchase of equipment and inventory of the new
entity. This amount has been initially recorded as other assets in the
accompanying consolidated financial statements.
The farm will be leased by Salinas Holdings, Inc. from an entity controlled by
the other private investor for an initial 10-year term with renewal options for
an additional 20-year period.
The new entity has entered into a five year management agreement with Nursery
Farms (automatically renewable for additional five year terms unless otherwise
17
elected by either party) whereby Nursery Farms will manage the new entity and
will be responsible for all sales and marketing activities for the new entity.
Under the terms of the management agreement, Nursery Farms. will receive a basic
administrative fee of $2,000 per month, and a commission on gross collected
revenue varying from 15% to 17%. During the term of the management agreement,
the Company has agreed not to grow sod or to have more than 50 "cuerdas" (a
"cuerda" equals approximately 0.97 of an acre) of palms or trees under
cultivation on its facilities. The Company is currently not engaged in the
business of growing sod.
The investment in and results of operations of the new entity will not be
consolidated with the financial statements of the Company, but instead will be
reported under the equity method of accounting for investments. Accordingly, the
Company's financial statements will reflect the Company's proportionate share
(33.3%) of the results of operations of the new entity.
The Company is a supplier of plants and lawn and garden products for The Home
Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and
garden products according to Nursery Retailer magazine. Home Depot currently has
seven stores in Puerto Rico and plans to open one more store during 2002.
During the fourth quarter of 2001, the Company became a supplier to Costco
Wholesale, which opened two stores in Puerto Rico and plans to open one
additional store during 2002, and another one in 2003.
During December 2000, the Company purchased approximately 109 acres of land in
the Municipality of Arecibo, Puerto Rico, for the development of a residential
housing project. The Company paid approximately $950,000 plus incidental
expenses for this land. The Company is currently in the process of designing a
master development plan, as well as seeking the required permits for the
development of this site. The Company recently received an endorsement from the
Puerto Rico Housing Bank, which will enable prospective buyers to qualify for
government assistance in purchasing homes from this project.
RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THIRD QUARTERS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2002 AND 2001
- -------------
During the nine months ended September 30, 2002, the Company had net income of
approximately $425,000, or $.20 per share (diluted), compared to approximately
$202,000 for the same period in 2001, or $.10 per share.
For the quarter ended September 30, 2002, the Company had net income of
approximately $101,000 or $.05 per share, compared to approximately 20,000, or
$.01 per share for the same period in 2001.
18
The increases in net income for the nine months and the quarter ended September
30, 2002 when compared to the same periods in 2001 are principally due to
increased sales and gross profits obtained from sales of plant material as well
as revenues from landscaping services. These increases in revenues and gross
profits were offset, in part, by increases in selling general and administrative
expenses.
Sales
- -----
The Company's consolidated net sales for the nine months ended September 30,
2002 were approximately $7,120,000, compared to $6,695,000 for the same period
in 2001, representing an overall increase of approximately 6%.
The Company's consolidated net sales for the quarter ended September 30, 2002
were approximately $2,311,000, compared to $2,243,000 for the same period in
2001, representing an overall increase of approximately 3%.
The 6% increase in consolidated net sales for the nine months ended September
30, 2002 was due to an increase of approximately 14% in revenues from
landscaping services when compared to the same period in 2001. Sales of plant
material also increased by 10% for the nine months ended September 30, 2002.
Conversely, sales of lawn and garden products decreased by approximately 4%
during the nine month period ended September 30, 2002.
The 3% increase in consolidated net sales for the quarter ended September 30,
2002 was due to an increase of 37% in sales of plant material, offset by a
decrease in revenues of 23% from landscaping services and a decrease in sales of
lawn and garden products of 3%.
The decrease in revenues from landscaping services during the quarter ended
September 30, 2002 was due to a reduction of projects in progress during this
period when compared to the same period in 2001. The decrease in sales of lawn
and garden products during the nine months and the quarter ended September 30,
2002 was due to a reduction in sales to Wal*Mart International.
Gross Profits
- -------------
The Company's consolidated gross profit for the nine months ended September 30,
2002 was approximately 41%, compared to 36% for the same period in 2001, or an
increase of 5%. Consolidated gross profit for the third quarter of 2002 was
approximately 44%, compared to 35% for the same period in 2001, or an increase
of 9%.
The 5% increase in gross profit for the nine months ended September 30, 2002
when compared to the same period in 2001 was the result of an increase of
approximately 3% in gross profit from sales of plant material (which accounted
19
for 43% of consolidated net sales for the nine months ended September 30, 2002),
an increase of approximately 12.5% in gross profit from revenues of landscaping
services (which accounted for approximately 27% of consolidated net sales for
the nine months ended September 30, 2002), and an increase of approximately 2.5%
in gross profit from sales of lawn and garden products (which accounted for
approximately 30% of consolidated net sales for the nine months ended September
30, 2002).
The 9% increase in gross profit for the third quarter ended September 30, 2002
when compared to the same period in 2001 was the result of an increase of
approximately 10% in gross profit from sales of plant material (which accounted
for 43% of consolidated net sales in the third quarter of 2002), an increase of
approximately 15% in gross profit from revenues of landscaping services (which
accounted for approximately 25% of consolidated net sales in the third quarter
of 2002). Conversely, gross profit decreased by 2% from sales of lawn and garden
products (which accounted for approximately 32% of consolidated sales in the
third quarter of 2002).
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses (SG&A) were approximately
$2,498,000 and $2,187,000 for the nine months ended September 30, 2002 and 2001,
respectively. This represented a 14% increase in dollar terms and a 2% increase
as a percentage of sales.
SG&A for the third quarter of 2002 were approximately $911,000 compared to
$752,000 for the same period in 2001. This represented a 21% increase in dollar
terms and a 6% increase as a percentage of sales.
The increase in SG&A for the nine months and third quarter ended September 30,
2002 when compared to the same periods in 2001 is principally due to increases
in administrative and marketing salaries, advertising expenses, and Board of
Directors (and related Audit Committee) meeting expenses during 2002, when
compared to the same periods in 2001.
Other Income and Expenses
- -------------------------
The decrease in interest income for the nine months as well as the third quarter
ended September 30, 2002, when compared to the same periods in 2001, is due to a
reduction of funds invested as well as lower yields obtained during 2002.
The decrease in interest expense for the nine months and third quarter ended
September 30, 2002, when compared to the same periods in 2001, is the result of
a lower interest rates experienced during 2002.
20
FINANCIAL CONDITION
- -------------------
The Company's financial condition at September 30, 2002 remains comparable with
that of December 31, 2001. The Company's current ratio did not change
significantly, with a ratio of 2.3 to 1 at September 30, 2002, compared to 2.1
to 1 at December 31, 2001.
At September 30, 2002, the Company had cash of approximately $888,000, compared
to cash of $839,000 at December 31, 2001. The increase in cash at September 30,
2002 is principally due to cash flows from operations of $169,000 and short-term
borrowings of $100,000. This increase in cash was partially offset by cash
outflows from additions to property and equipment ($98,000), investment in land
held for future development ($52,000) and repayment of long-term debt ($94,000).
Shareholders' equity at September 30, 2002 increased due to net income for the
nine month period. On June 28, 2002, the Company issued a 10% stock dividend. No
other dividends were declared during the nine months ended September 30, 2002.
Current Liquidity and Capital Resources
- ---------------------------------------
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. The Company believes it has adequate resources to meet
its current and anticipated liquidity and capital requirements. The Company
finances its working capital needs from cash flows from operations as well as
borrowings under two short-term credit facilities with a local commercial bank.
As of November 14, 2002, the Company had available short-term credit facilities
aggregating $3.0 million, of which approximately $970,000 were available as of
such date. Of the $3.0 million credit facility, $2.5 million is secured by the
Company's trade accounts receivable and inventories.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Within the 90-day period preceding the filing of this Quarterly Report on Form
10-Q, an evaluation was performed under the supervision of and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
21
evaluation, the Company's management, including the CEO and CFO, concluded that
the design and operation of the Company's disclosure controls and procedures
were effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
-----------------
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
Not applicable.
22
ITEM 5. OTHER INFORMATION
-----------------
On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend
on the Company's common stock. The stock dividend was issued on June 28, 2002 to
shareholders of record as of June 14, 2002. The stock dividend resulted in
188,367 additional shares issued.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
(i) Management Agreement, dated October 14, 2002, between Salinas
Holdings, Inc. and Margo Nursery Farms, Inc.
(b) Reports on Form 8-K. The Company filed the following Report on
--------------------
Form 8-K:
(i) Report on Form 8-K dated August 14, 2002, reporting under
Item 9 the filing of the CEO and CFO Certifications required by
Section 906 of the Sarbanes-Oxley Act.
(ii) Report on Form 8-K dated October 14, 2002, reporting under
Item 5, a joint venture entered by the Company to grow sod, palms
and trees.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARGO CARIBE, INC.
Date: November 14, 2002 By: /s/ Michael J. Spector
------------------ ----------------------------
Michael J. Spector,
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2002 By: /s/ J. Fernando Rodriguez
----------------- -----------------------------
J. Fernando Rodriguez
President and Chief
Operating Officer
Date: November 14, 2002 By: /s/ Alfonso Ortega
----------------- -----------------------
Alfonso Ortega,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
24
I, Michael J. Spector, Chairman of the Board and Chief Executive Officer of
Margo Caribe, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Margo Caribe, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial dataand have identified
for the registrant's auditors any material weakness in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
25
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Michael J. Spector
----------------- ----------------------
Michael J. Spector
Chief Executive Officer
26
I, Alfonso Ortega, Chief Financial Officer of Margo Caribe, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Margo Caribe, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial dataand have identified
for the registrant's auditors any material weakness in internal
controls; and
27
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Alfonso Ortega
----------------- ------------------
Alfonso Ortega
Chief Financial Officer
28