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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 March 31, 2003
[ ] 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
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act.)
YES NO X
------- -------
The registrant had 2,079,889 shares of common stock, $.001 par value,
outstanding as of May 14, 2003.
MARGO CARIBE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE FIRST QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PART I
------
Page
----
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 17
-------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
----------------------------------------------
MARKET RISK 22
-----------
ITEM 4. CONTROL AND PROCEDURES 22
----------------------
PART II
-------
ITEM 1. LEGAL PROCEEDINGS 23
-----------------
ITEM 2. CHANGES IN SECURITIES 23
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 23
-------------------------------
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 23
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
--------------------------------
SIGNATURES
----------
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
March 31, 2003 and December 31, 2002
(Unaudited)
ASSETS
------
2003 2002
----------- -----------
Current assets:
Cash and equivalents $ 1,352,833 $ 1,417,879
Accounts receivable, net 1,702,536 1,818,076
Inventories 3,403,302 3,378,779
Due from related entity 44,900 51,026
Prepaid expenses and other current assets 273,220 323,506
----------- -----------
Total current assets 6,776,791 6,989,266
Property and equipment, net 1,454,470 1,249,889
Land held for future development 1,105,627 1,105,627
Investment in unconsolidated subsidiary 579,851 417,296
Notes receivable 28,112 28,112
Other assets 6,022 6,016
----------- -----------
Total assets $ 9,950,873 $ 9,796,206
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 138,967 $ 138,967
Notes payable 1,730,500 1,730,500
Accounts payable 1,009,186 829,382
Accrued expenses 175,481 332,305
----------- -----------
Total current liabilities 3,054,134 3,031,154
Deferred revenue 66,814 74,238
Long-term debt 338,232 244,425
----------- -----------
Total liabilities 3,459,180 3,349,817
----------- -----------
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; 2,119,609 shares issued,
2,079,889 shares outstanding 2,120 2,120
Additional paid-in capital 5,241,136 5,241,136
Retained earnings 1,344,725 1,299,421
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
----------- -----------
Total shareholders' equity 6,491,693 6,446,389
----------- -----------
Total liabilities and shareholders' equity $ 9,950,873 $ 9,796,206
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Net sales $ 2,494,813 $ 2,319,703
Cost of sales 1,615,278 1,405,629
----------- -----------
Gross profit 879,535 914,074
Selling, general and administrative expenses 871,177 727,244
----------- -----------
Income from operations 8,358 186,830
----------- -----------
Other income (expenses):
Interest income 3,492 3,468
Interest expense (16,239) (17,400)
Gain on collection of note receivable previously
written down 25,000 --
Equity in earnings of unconsolidated subsidiary 2,555 --
Commissions and fees from unconsolidated subsidiary 13,206 --
Miscellaneous income 8,932 7,307
----------- -----------
36,946 (6,625)
----------- -----------
Net income $ 45,304 $ 180,205
=========== ===========
Basic income per common share $ .02 $ .09
=========== ===========
Diluted income per common share $ .02 $ .08
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months ended March 31, 2003
(Unaudited)
Common Common Additional
stock stock paid-in Retained Treasury
shares amount capital earnings stock Total
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 2,079,889 $ 2,120 $5,241,136 $1,299,421 $ (96,288) $6,446,389
Net income -- -- -- 45,304 -- 45,304
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2003 2,079,889 $ 2,120 $5,241,136 $1,344,725 $ (96,288) $6,491,693
========== ========== ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
6
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
- -------------------------------------
Net income $ 45,304 $ 180,205
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 137,905 121,017
Provision for uncollectible accounts
receivable 8,000 7,500
Gain on disposition of equipment -- (6,287)
Amortization of deferred revenue (7,424) --
Equity in earnings of unconsolidated subsidiary (2,555) --
Gain on collection of note receivable previously
written down (25,000) --
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable 107,540 (294,026)
Inventories (24,523) 94,248
Prepaid expenses and other current assets 50,286 (33,066)
Advances to related entity (44,900) --
Collection of amounts advanced to related
entity 51,026 --
Other assets (6) --
Accounts payable 179,804 (232,045)
Accrued expenses (156,824) 5,962
----------- -----------
Net cash provided by (used in)
operating activities 318,633 (156,492)
----------- -----------
Cash flows from investing activities:
- -------------------------------------
Additions to property and equipment (342,486) (28,188)
Investment in unconsolidated subsidiary (160,000) --
Proceeds from collection of notes receivable 25,000 26,331
Investment in land held for future development -- (7,530)
----------- -----------
Net cash used in investing activities (477,486) (9,387)
----------- -----------
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt 109,720 --
Repayment of long-term debt (15,913) (48,419)
----------- -----------
Net cash provided by (used in)
financing activities 93,807 (48,419)
----------- -----------
Net decrease in cash (65,046) (214,298)
- --------------------
Cash and equivalents at beginning of period 1,417,879 838,921
- --------------------------------------------------- ----------- -----------
Cash and equivalents at end of period $ 1,352,833 $ 624,623
- --------------------------------------------------- =========== ===========
See accompanying notes to condensed consolidated financial statements.
7
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 three months ended March 31, 2003 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 2003. 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, 2002.
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.
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.
8
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.
The Company has a deferred tax asset of $673,612, which is partially offset by a
valuation allowance of $662,212. 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
depending on future levels of taxable income.
Note 3 - Accounting for Stock-Based Compensation Plans
- -------------------------------------------------------
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan").
Outstanding options granted under the previous plan, including all related
obligations and commitments, will continue to be honored by the Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can
award options to purchase up to 220,000 shares of common stock (exclusive of
outstanding options under the previous plan) to eligible employees at 100% of
the 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. The 1998 Plan
also provides for the automatic grant of options to purchase 2,750 shares of
common stock to each non-employee director on the first business day following
every annual meeting of shareholders.
Options vest ratably 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 Company accounts for its stock-based compensation plans pursuant to the
provisions of Accounting Principles Board Opinion 25 and related interpretations
in measuring stock based compensation, including options, which generally
require that compensation cost be recognized to the extent the market price of
the related stock exceeds the exercise price at the measurement date.
Accordingly, no compensation expense has been recognized for options granted
under both plans. However, SFAS No. 123, "Accounting for Stock-Based
Compensation", provides an alternative method for measuring compensation cost by
measuring the fair value of the option at the award date. Although the
compensation cost measurement criteria is not required to be adopted, SFAS No.
123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123", requires prominent
disclosure of pro forma information regarding the effects of the application of
its compensation cost measurement criteria and of other information.
9
Stock options outstanding as of March 31, 2003 and December 31, 2002 amounted to
249,700, at the end of each period. No stock options were granted during the
quarters ended March 31, 2003 and 2002.
As required under SFAS No. 123 and SFAS No. 148, the pro forma effects of
stock-based compensation on net income and and net income per share have been
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Three Months Ended March 31,
---------------------------
2003 2002
---------- ----------
Risk-free interest rate 5.36% 5.18%
Average life of options 10 yrs. 10 yrs.
Volatility 50% 8%
Dividend yield 0% 0%
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no restrictions and are fully
transferable and negotiable in a free trading market. Black-Scholes does not
consider the employment, transfer or vesting restrictions that are inherent in
the Company's employee options. Use of an option valuation model, as required by
SFAS No. 123, includes highly subjective assumptions based on long-term
predictions, including the expected stock price volatility and average life of
each option grant. Because the Company's employee options have characteristics
significantly different from those of freely traded options, and because changes
in the subjective input assumptions can materially affect the Company's estimate
of the fair value of those options, in the Company's opinion, the existing
valuation models, including Black-Scholes, are not reliable single measures and
may misstate the fair value of the Company's employee options.
For purposes of pro forma disclosures, the estimated fair value of the options
is assumed to be amortized to expense over the options' vesting periods. The pro
forma effects of recognizing compensation expense under the fair value method on
net income and net income per share were as follows:
Three Months Ended March 31,
---------------------------------
2003 2002
--------------- ---------------
Net income as reported $ 45,304 $ 180,205
Total stock based com-
pensation expense
determined under fair
value based method for
all awards (13,918) (4,073)
--------------- ---------------
Pro forma net income $ 31,386 $ 176,132
=============== ===============
Earnings per share:
Basic - as reported $ 0.02 $ 0.09
=============== ===============
Basic - pro forma $ 0.02 $ 0.08
=============== ===============
Diluted - as reported $ 0.02 $ 0.08
=============== ===============
Diluted - pro forma $ 0.01 $ 0.08
=============== ===============
10
Note 4 - Inventories
- --------------------
At March 31, 2003 and December 31, 2002, inventories included the following:
Description 2003 2002
- --------------------------- ---------- -----------
Plant material $2,762,998 $2,799,960
Lawn and garden products 359,496 251,438
Raw materials and supplies 280,808 327,381
---------- ----------
$3,403,302 $3,378,779
========== ==========
Note 5 - Property and Equipment
- -------------------------------
At March 31, 2003 and December 31, 2002 property and equipment included the
following:
Description 2003 2002
- ----------------------------- ---------- -----------
Leasehold improvements $1,603,659 $1,456,960
Equipment and fixtures 1,608,854 1,599,948
Transportation equipment 787,226 600,344
Real estate property 224,327 224,327
---------- ----------
4,224,066 3,881,579
Less accumulated depreciation
and amortization (2,769,596) (2,631,690)
---------- ----------
$1,454,470 $1,249,889
========== ==========
Note 6 - Investment in Unconsolidated Equity Subsidiary
- -------------------------------------------------------
On October 14, 2002, the Company entered into an agreement with two other
unrelated parties and organized Salinas Holdings, Inc.("Salinas"), a Puerto Rico
corporation engaged in the production and distribution of sod (turf) and palms
and trees grown in the ground. The Company has a 33.33% interest in Salinas. The
Company further entered into a management agreement with Salinas to provide
certain management services to the entity and to market its products. The
Company earns $2,000 per month for such services and between 15% and 17%
commission on the sales of its products. Salinas commenced operations on
November 1, 2002.
11
The Company has accounted for its investment in Salinas using the equity method
of accounting. At March 31, 2003, and for the three month period then ended,
Salinas' unaudited condensed financial position and results of operations
information was as follows:
Assets Amount
------ ----------
Current assets $1,066,343
Property and equipment 790,119
----------
$1,856,462
==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities $ 116,910
Shareholders' equity 1,739,552
----------
$1,856,462
==========
Results of Operations Amount
--------------------- --------
Sales $44,368
Cost of sales 15,262
General and administrative
expenses 21,443
-------
Net income $ 7,663
=======
At March 31, 2003, the Company's investment in Salinas Holdings, Inc., was as
follows:
Description Amount
---------------------------- ---------
Balance at December 31, 2002 $417,296
Additional investment 160,000
Equity in earnings of
unconsolidated subsidiary 2,555
---------
Balance at March 31, 2003 $579,851
========
Note 7 - 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.
12
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 shares issuable upon exercise of stock
options) for the periods prior to March 31, 2003 have been adjusted to reflect
the effect of the stock dividend.
Basic and diluted income per common share for the periods ended March 31, 2003
and 2002 were determined as follows:
Three Months
ended March 31,
-----------------------
Basic income per common share: 2003 2002
----------------------------- ---------- ----------
Net income attributable to
common shareholders $ 45,304 $ 180,205
========== ==========
Weighted average number of
common shares outstanding 2,079,889 2,072,204
========== ==========
Basic income per common share $ .02 $ .09
========== ==========
Diluted income per common share:
-------------------------------
Net income attributable to
common shareholders $ 45,304 $ 180,205
========== ==========
Weighted average number of
common shares outstanding 2,079,889 2,072,204
Plus incremental shares from
assumed exercise of stock options 89,296 57,159
---------- ----------
Adjusted weighted average shares 2,169,185 2,129,363
========== ===========
Diluted income per common
shares $ .02 $ .08
========== ==========
Note 8 - 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.
13
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 segment's financial
condition and results of operations as if they were independent entities.
The Company's segment information for the three months ended March 31, 2003 and
2002, is as follows:
Three Months ended March 31, 2003
--------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
--------------------------------------------------
Revenues from external customers $1,255,491 $ 835,343 $ 403,979 $2,494,813
Intersegment revenues 69,856 7,377 -- 77,233
Interest income 3,492 -- -- 3,492
Interest expense 16,239 -- -- 16,239
Depreciation and amortization 102,266 21,195 14,444 137,905
Segment income (loss) 110,589 29,891 (95,176) 45,304
Segment assets 8,064,212 998,637 888,024 9,950,873
Expenditures for segment assets 342,486 -- -- 342,486
Three Months ended March 31, 2002
--------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
--------------------------------------------------
Revenues from external customers $ 909,956 $ 716,225 $ 693,522 $2,319,703
Intersegment revenues 119,249 21,988 -- 141,237
Interest income 3,468 -- -- 3,468
Interest expense 17,400 -- -- 17,400
Depreciation and amortization 105,837 10,059 5,121 121,017
Segment income 37,230 50,154 92,821 180,205
Segment assets 6,706,440 1,149,878 1,082,906 8,939,224
Expenditures for segment assets 28,188 -- -- 28,188
14
Note 9 - 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 10 - Supplemental Disclosures for the Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
a) Non-Cash Investing Activities
-----------------------------
During the three months ended March 31, 2003, the Company purchased various
vehicles amounting to approximately $139,000 by assuming a related debt for
approximately $110,000.
During the three months ended March 31, 2002, the Company applied a
certificate of deposit amounting to $500,000 to pay off a note that was
secured by such certificate. Subsequently, during this same period, the
Company opened a certificate of deposit amounting to $500,000 with the
proceeds from a note payable to another financial institution. The Company
also traded in a vehicle with a cost of $31,500, receiving $7,000 as
trade-in value for the old vehicle, and assuming a related debt of $24,500.
b) Other Cash Flow Transactions
----------------------------
Other cash flow transactions for the three months ended March 31, 2003 and
2002, include interest payments amounting to approximately $16,000 and
$17,000, respectively. There were no income tax payments for the three
months ended March 31, 2003 and 2002.
Note 11 - Major Customers
- -------------------------
During the three months ended March 31, 2003 and 2002, the Company's single
largest customer accounted for approximately 37% ($936,000) and 30% ($698,000)
respectively, of the Company's net sales.
15
Note 12 - 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 August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long lived assets. The Statement
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. This statement did not have a
significant effect on the Company's results of operations or financial
condition.
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 a 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 No. 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 No. 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 No. 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 No. 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
---------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
For a discussion regarding Margo Caribe Inc.'s critical accounting policies,
please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations", under Item 7 of Margo Caribe, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2002.
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 seeking
the required permits for 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. During the fourth quarter of 2002, the
Company entered into an agreement with the lessor of the Barranquitas facility
to vacate the facility by June 30, 2003, and intends to consolidate this
operation into its main nursery farm in Vega Alta, Puerto Rico.
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. Its customers include wholesalers, retailers, chain stores and
landscapers primarily located in Puerto Rico and the Caribbean. In Barranquitas,
Nursery Farms (operating as Margo Flora) produces orchids, bromeliads,
anthuriums, spathiphylum and poincettias. The Barranquitas operation will be
consolidated with the Vega Alta facility.
17
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.
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, 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 Board of Directors will also explore business
opportunities for expansion outside of Puerto Rico.
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 in the Municipality of Salinas, Puerto Rico,
operated by Salinas Holdings, Inc. ("Salinas"). Salinas is a newly formed entity
in which Nursery Farms owns one-third of the outstanding voting stock. The
remaining two-thirds are owned in equal parts by Mr. Mark Greene, a former
director of the Company, and by Mr. Alberto Rubi. The Company has committed to
make equity cash contributions to the new entity of up to $775,000. As of March
31, 2003, the Company had invested $593,333 .
18
The farm is leased by Salinas Holdings, Inc. from an entity controlled by Mr.
Rubi, for an initial 10-year term with renewal options for an additional 20-year
period.
Salinas has entered into a five year management agreement with Nursery Farms
(automatically renewable for additional five year terms unless otherwise elected
by either party) whereby Nursery Farms will provide certain management services
to 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%. Commissions and fees earned for
services provided to Salinas for the three months ended March 31, 2003 were
$13,206. 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 Salinas are not consolidated with
the financial statements of the Company, but instead are reported under the
equity method of accounting for investments. Accordingly, the Company's
financial statements reflect the Company's proportionate share (33.33%) of the
results of operations of Salinas.
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
eight stores in Puerto Rico and plans to open two more stores during the
remainder of 2003.
The Company also supplies live goods (plant material) and lawn and garden
products to Costco Wholesale, which has three stores in Puerto Rico.
The Company continues to supply live goods to Wal*Mart International, which
presently has eleven stores (including two "super centers") throughout Puerto
Rico and plans to open two more super centers during the remainder of 2003. The
Company also supplies plant material and lawn and garden products to six Sam's
Club, a division of Wal*Mart International.
The Company also supplies Kmart Corporation in Puerto Rico. Kmart has 24 stores
in Puerto Rico and four stores in the U.S. Virgin Islands. Kmart promotes its
garden centers' sales with the Company's plant material as well as with lawn and
garden products.
19
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 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. However, the
Company cannot give any assurance as to how long it will take to obtain the
necessary permits to develop the project or whether said permits will in fact be
obtained.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- ------------------------------------------------------------------------
During the three months ended March 31, 2003, the Company had net income of
approximately $45,000, or $.02 per share (diluted), compared to approximately
$180,000 for the same period in 2002, or $.08 per share (diluted).
The decrease in net income for the three months ended March 31, 2003, when
compared to the same period in 2002 is principally due to a decrease in income
from operations, offset in part, by an increase in other income. The decrease in
income from operations for the three months ended March 31, 2003 is principally
due to a decrease in revenues (and related gross profit) from sales of
landscaping services, and an increase in selling, general and administrative
expenses. The increase in other income for the three months ended March 31, 2003
is principally due to the collection of a note receivable, the value of which
had been written down in prior years.
Sales
- -----
The Company's consolidated net sales for the three months ended March 31, 2003
were approximately $2,495,000, compared to $2,320,000 for the same period in
2002, representing an overall increase of approximately 7.5%.
The 7.5% increase in consolidated net sales for the three months ended March 31,
2003 when compared to the same period in 2002, was due to an increase of
approximately 38% in sales of plant material, as well as a 17% increase in sales
of lawn and garden products. However, revenues from sales of landscaping
services decreased by 42%. This decrease was principally due to a decrease in
the volume of landscaping projects during the three month period.
Gross Profits
- -------------
The Company's consolidated gross profit for the three months ended March 31,
2003 was approximately 35%, compared to 39% for the same period in 2002, or a
decrease of 4%.
20
The decrease of 4% in gross profit for the three months ended March 31, 2002
when compared to the same period in 2002 was the result of a decrease of
approximately 26% in gross profit from revenues of landscaping services (which
accounted for 16% of consolidated net sales for the three months ended March 31,
2003), and a decrease of 0.6% in sales of lawn and garden products (which
accounted for 34% of consolidated net sales for the three months ended March 31,
2003). These decreases in consolidated gross profit were offset, in part, by an
increase of approximately 1% in gross profit from sales of plant material (which
accounted for approximately 50% of consolidated net sales for the three months
ended March 31, 2003).
Even though sales of plant material represents 50% of the Company's consolidated
net sales for the three months ended March 31, 2003, this was not sufficient to
absorb the decrease in gross profit from sales of landscaping services and sales
of lawn and garden products.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses (SG&A) were approximately $871,000
and $727,000 for the three months ended March 31, 2003 and 2002, respectively.
This represented a 20% increase in dollar terms and a 4% increase as a
percentage of sales.
The increase in SG&A for the three months ended March 31, 2003 when compared to
the same period in 2002 is principally due to increases in administrative,
marketing and shipping salaries, increase in legal and contracted services, and
the accelerated amortization of certain leasehold improvements at the
Barranquitas location, which in view of the Company's plan of consolidating its
operations at its Vega Alta facility, are now being amortized through June 30,
2003.
Other Income and Expenses
- -------------------------
Interest income as well as interest expense for the three months ended March 31,
2003 remain comparable to those of 2002.
Other income for the three months ended March 31, 2003 also includes several
income sources not present in 2002. Among these were the following:
1) A gain of $25,000 from the collection of a note receivable previously written
down in prior years. This represents the remaining portion of a note partially
collected in the fourth quarter of 2002 (refer to Note 5 in the Notes to
Consolidated Financial Statements for the year ended December 31, 2002).
2) The equity in earnings of unconsolidated subsidiary of $2,555 and related
commissions and fees of $13,206. The $2,555 represents the Company's 33.33%
21
share of Salinas Holdings Inc.'s net income for the three months ended March 31,
2003. The commissions and fees of $13,206 represent the Company's commissions
and fees for the three month period under the terms of the management agreement
with Salinas Holdings, Inc.
FINANCIAL CONDITION
- -------------------
The Company's financial condition at March 31, 2003 remains comparable with that
of December 31, 2002. The Company's current ratio did not change significantly,
with a ratio of 2.2 to 1 at March 31, 2003, compared to 2.3 to 1 at December 31,
2002.
At March 31, 2003, the Company had cash of approximately $1,353,000, compared to
cash of $1,418,000 at December 31, 2002. The decrease in cash at March 31, 2003
is principally due to cash outflows from purchases of equipment ($342,000) and
an additional investment in the Company's unconsolidated subsidiary ($160,000),
which were offset in part, by cash flows from operating activities ($319,000)
and proceeds from long-term debt ($110,000).
Shareholders' equity at March 31, 2003 increased due to net income for the three
month period. No dividends were declared nor stock issued during the three
months ended March 31, 2003.
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 short-term credit facilities with a local commercial bank. As
of May 14, 2003, the Company had available a short-term credit facility of $2.35
million, of which approximately $620,000 was available as of such date. This
credit facility 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
22
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.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K.
--------------------
The Company filed the following Report on Form 8-K:
(i) Report on Form 8-K, dated March 31, 2003 reporting filing of
CEO and CFO certifications under Item 9.
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: May 14, 2003 By: /s/ Michael J. Spector
------------ ----------------------------
Michael J. Spector,
Chairman of the Board and
Chief Executive Officer
Date: May 14, 2003 By: /s/ J. Fernando Rodriguez
------------ -----------------------------
J. Fernando Rodriguez
President and Chief
Operating Officer
Date: May 14, 2003 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: May 14, 2003 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
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
27
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: May 14, 2003 By: /s/ Alfonso Ortega
------------ ------------------
Alfonso Ortega
Chief Financial Officer
28