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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, 2004
[ ] 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 2,244,539 shares of common stock, $.001 par value,
outstanding as of October 29, 2004.
-1-
MARGO CARIBE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THIRD QUARTER ENDED September 30, 2004
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 20
-------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
----------------------------------------------
MARKET RISK 30
-----------
ITEM 4. CONTROL AND PROCEDURES 31
----------------------
PART II
-------
ITEM 1. LEGAL PROCEEDINGS 31
-----------------
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
-------------------------------------------------
PURCHASES OF EQUITY SECURITIES 32
------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 32
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
-------------------------------
OF SECURITY HOLDERS 32
-------------------
ITEM 5. OTHER INFORMATION 32
-----------------
ITEM 6. EXHIBITS
-------- 32
SIGNATURES 33
----------
-2-
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "believes", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, natural disasters, competitive and regulatory factors, legislative
changes and regulatory or judicial proceedings, 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, 2004 and December 31, 2003
(Unaudited)
ASSETS
------
2004 2003
---------- -----------
Current Assets:
Cash and equivalents $ 959,596 $ 446,891
Accounts receivable, net 1,667,313 1,225,039
Inventories 2,830,477 3,192,357
Due from related entity 103,076 170,800
Deferred tax asset 11,400 11,400
Prepaid expenses and other current assets 178,003 334,685
---------- -----------
Total current assets 5,749,865 5,381,172
Property and equipment, net 2,377,893 2,292,511
Land held for future development 1,131,127 1,105,627
Investment in unconsolidated subsidiary 505,547 253,159
Notes receivable 22,164 22,164
Distribution rights 100,000 100,000
Other assets 4,349 4,349
---------- -----------
Total assets $ 9,890,945 $ 9,158,982
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 143,178 $ 143,178
Notes payable 2,563,501 2,685,359
Note payable to shareholder 1,000,000 --
Accounts payable 1,091,263 735,203
Accrued expenses 222,012 228,204
---------- -----------
Total current liabilities 5,019,954 3,791,944
Other liabilities 142,794 66,813
Long-term debt, net of current portion 71,383 187,073
---------- -----------
Total liabilities 5,234,131 4,045,830
========== ===========
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, 2,244,539 and
2,198,709 shares issued, 2,204,739
and 2,158,989 shares outstanding as of
September 30, 2004 and December 31, 2003,
respectively
2,244 2,199
Additional paid-in capital 5,697,559 5,523,781
Retained earnings (deficit) (733,518) (192,446)
Deferred stock compensation (213,183) (124,094)
Treasury stock, 39,800 common shares, at cost
(96,288) (96,288)
=========== ===========
Total shareholders' equity 4,656,814 5,113,152
Total liabilities and shareholders' equity
$ 9,890,945 $ 9,158,982
=========== ===========
See accompanying notes to condensed consolidated financial statements.
-4-
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods ended September 30, 2004 and 2003
(Unaudited)
Three Months ended September 30 Nine Months ended September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 1,836,334 $ 1,872,773 $ 5,972,031 $ 6,523,598
Cost of sales 1,226,612 1,250,132 4,047,672 4,273,763
------------ ------------ ------------ ------------
Gross profit 609,722 622,641 1,924,359 2,249,835
Selling, general and administrative expenses 878,714 976,809 2,489,689 2,620,530
Costs related to consolidating nursery facilities -- -- -- 142,903
------------ ------------ ------------ ------------
Loss from operations (268,992) (354,168) (565,330) (513,598)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 2,094 1,642 5,568 7,357
Interest expense (29,788) (22,320) (77,835) (54,710)
Gain on collection of note receivable
previously written down -- -- -- 25,000
Equity in earnings of unconsolidated subsidiary 30,650 29,303 77,388 50,227
Commissions from unconsolidated subsidiary 49,940 37,940 134,808 76,817
Loss from damages caused by Tropical
Storm Jeanne (140,315) -- (140,315) --
Miscellaneous income 5,870 4,883 24,644 29,007
------------ ------------ ------------ ------------
(81,549) 51,448 24,258 133,698
------------ ------------ ------------ ------------
Loss before provision for income tax (350,541) (302,720) (541,072) (379,900)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (350,541) $ (302,720) $ (541,072) $ (379,900)
============ ============ ============ ============
Basic loss per common share $ (0.16) $ (0.14) $ (0.25) $ (0.18)
============ ============ ============ ============
Diluted loss per common share $ (0.16) $ (0.14) $ (0.25) $ (0.18)
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
-5-
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2004
(Unaudited)
Outstanding
Common Common Additional Retained
Stock Stock Paid-in Deferred Stock Earnings Treasury
Shares Amount Capital Compensation (Deficit) Stock Total
--------- ------- ----------- ------------ ------------ ------------ ------------
Balance at
December 31, 2003 2,158,989 $ 2,199 $ 5,523,781 $ (124,094) $ (192,446) $ (96,288) $ 5,113,152
Issuance of common
stock from exercise
Of stock options 19,250 19 46,604 -- -- -- 46,623
Issuance of common
stock under
restricted stock
plan 26,500 26 127,174 (127,200) -- -- --
Restricted stock
amortized to
operations -- -- -- 38,111 -- -- 38,111
Net loss -- -- -- -- (541,072) -- (541,072)
--------- ------- ----------- ------------ ------------ ------------ ------------
Balance at
September 30, 2004 2,204,739 $ 2,244 $ 5,697,559 $ (213,183) $ (733,518) $ (96,288) $ 4,656,814
========= ======= =========== ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
-6-
MARGO CARIBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (541,072) $ (379,900)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 293,833 357,371
Provision for bad debts -- 49,595
Gain from collection of note receivable -- (25,000)
Deferred stock compensation 38,111 --
Equity in earnings of unconsolidated
subsidiary (77,388) (50,227)
Changes in assets and liabilities affecting cash
flows from operating activities:
Decrease (increase) in:
Accounts receivable (442,274) 496,000
Inventories 361,880 (203,597)
Due from related entity 67,724 (79,625)
Prepaid expenses and other current assets 156,682 3,512
Distribution rights -- (100,000)
Other assets -- (26,904)
Increase (decrease) in:
Accounts payable 356,060 129,128
Accrued expenses (6,192) (114,745)
Other liabilities 75,981 (7,425)
------------ ------------
Net cash provided by operating activities 283,345 48,183
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (404,715) (1,355,984)
Distribution from unconsolidated subsidiary -- 400,000
Investment in unconsolidated subsidiary (175,000) (160,000)
Proceeds from collection of notes receivable -- 25,000
------------ ------------
Net cash used in investing activities (579,715) (1,090,984)
------------ ------------
Cash flows from financing activities:
Increase in notes payable 1,335,000 350,000
Repayment of notes payable (456,858) --
Issuance of common stock from exercise
of stock options and stock grants 46,623 150,732
Proceeds from long-term debt -- 109,458
Repayments of long-term debt (115,690) (123,963)
------------ ------------
Net cash provided by financing activities 809,075 486,227
------------ ------------
Net increase (decrease) in cash and equivalents 512,705 (556,574)
Cash and equivalents at beginning of period 446,891 1,417,879
------------ ------------
Cash and equivalents at end of period $ 959,596 $ 861,305
============ ============
See accompanying notes to condensed consolidated financial statements.
-7-
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Periods Ended September 30, 2004 and 2003
(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 recurring 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. All significant intercompany balances and transactions have
been eliminated in the accompanying unaudited consolidated financial statements.
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 results of operations for the three months and nine months ended September
30, 2004, are not necessarily indicative of the operating results to be expected
for the year ending December 31, 2004. These statements should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.
Note 2 - Accounting for Stock-Based Compensation Plans
- ------------------------------------------------------
Effective May 2,2003, the Company adopted the Margo Caribe, Inc. 2003 Restricted
Stock Plan (the "Restricted Stock Plan"). Under the terms of the Restricted
Stock Plan, the Compensation Committee of the Board of Directors is authorized
to grant up to 200,000 shares of common stock to officers and other key
employees of the Company. The restricted stock grants may be subject to
time-based or performance-based restrictions.
During the period ended September 30, 2004, the Company granted 26,500 shares of
restricted common stock at a market value of $4.80 per share under the Margo
Caribe, Inc. 2003 Restricted Stock Plan to certain employees and certain members
of senior management. During the year ended December 31, 2003, the Company
granted 17,500 of restricted common stock at a market value of $7.25 per share
-8-
under the Margo Caribe, Inc. 2003 Restricted Stock Plan to members of senior
management. The shares of restricted stock vest at the rate of 20% per year over
a five-year period. These shares are subject to forfeiture if employment
terminates prior to vesting. Recipients of restricted shares are entitled to
dividends and to vote their respective shares. The value of all of the
restricted shares is established by the market price on the date of grant.
Deferred stock compensation is charged for the market value of the restricted
shares. The deferred stock compensation is shown as a reduction of shareholders'
equity and is being amortized prorated over the vesting period. During the nine
months ended September 30, 2004, and during the third quarter ended September
30, 2004, the Company recognized $38,000 and $13,000, respectively, in selling,
general and administrative expenses related to restricted stock grants. The
unamortized portion remaining in shareholders' equity at September 30, 2004 was
$213,000.
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 prorated over a period of five years, and 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 either stock option plan. 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",
-9-
requires prominent disclosure of pro forma information regarding the effects of
the application of its compensation cost measurement criteria and of other
information.
Stock options outstanding as of September 30, 2004 and December 31, 2003
amounted to 110,550 and 129,800, respectively, at the end of each period. During
the nine months ended September 30, 2004 and 2003, no stock options were
granted.
As required under SFAS No. 123 and SFAS No. 148, the pro forma effects of
stock-based compensation on net income (loss) and net income (loss) per share
have been estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate 5.24% 5.28% 5.24% 5.28%
Average life of options 10 yrs. 10 yrs. 10 yrs. 10 yrs.
Volatility 13.52% 15.44% 27.93% 65.82%
Dividend yield 0.00% 0.00% 0.00% 0.00%
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.
-10-
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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss
as reported $(350,541) $(302,720) $(541,072) $(379,900)
Total stock based com-
pensation expense
determined under fair
value based method for
all awards (4,729) (5,507) (13,424) ( 29,995)
----------- ---------- ---------- ----------
Pro forma net loss $ (355,270) $(308,227) $(554,496) $(409,895)
=========== ========== ========== ==========
Earnings per share:
Basic - as reported $ (0.16) $ (0.14) $ (0.25) $ (0.18)
=========== ========== ========== =========
Basic - pro forma $ (0.16) $ (0.14) $ (0.25) $ (0.19)
=========== ========== ========== =========
Diluted - as reported $ (0.16) $ (0.14) $ (0.25) $ (0.18)
=========== ========== ========== =========
Diluted - pro forma $ (0.16) $ (0.14) $ (0.25) $ (0.18)
=========== ========== ========== =========
Note 3 - Significant Accounting Policies
- ----------------------------------------
Use of Estimates
- ----------------
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.
Allowance for Doubtful Accounts
- -------------------------------
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. In addition, the Company evaluates
the prior years experience of the allowance as a whole.
Inventory
- ---------
Direct and indirect costs that are capitalized as part of inventory of plant
-11-
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 4 - New Accounting Pronouncements
- --------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
issue voting interests (or other interests with similar rights) or (b) the total
equity investment at risk is not sufficient to permit the entity to finance its
activities. FIN 46 requires an enterprise to consolidate a variable interest
entity if that enterprise has a variable interest that will absorb a majority of
the entity's expected losses if these occur, receive a majority of the entity's
expected residual returns if these occur, or both. Qualifying Special Purpose
Entities are exempt from the consolidation requirements. In addition to numerous
FASB Staff Positions written to clarify and improve the application of FIN 46,
the FASB recently announced a deferral for certain entities, and an amendment to
FIN 46 entitled FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R). The Company applied FIN
46R as of the first interim or annual period ended after March 15, 2004. The
implementation of FIN 46R did not have a significant effect on the Company's
financial position or results of operations.
Note 5 - Inventories
- --------------------
At September 30, 2004 and December 31, 2003, inventories included the following:
Description 2004 2003
- ------------------------------- ----------- ------------
Plant material $ 2,166,806 $ 2,388,460
Lawn and garden products 344,010 313,001
Raw materials and supplies 319,661 490,896
----------- ------------
$ 2,830,477 $ 3,192,357
============ ============
-12-
Note 6 - Property and Equipment
- -------------------------------
At September 30, 2004 and December 31, 2003, property and equipment included the
following:
Description 2004 2003
---- ----
Leasehold improvements 2,743,180 2,412,363
Equipment and fixtures 1,707,723 1,659,325
Transportation equipment 809,206 809,206
Real estate property 224,327 224,327
--------- ---------
5,484,436 5,105,221
Less accumulated depreciation
and amortization (3,106,543) (2,812,710)
----------- ----------
$ 2,377,893 $ 2,292,511
=========== ==========
Depreciation expense for the nine months ended September 30, 2004 and 2003
amounted to approximately $294,000 and $357,000, respectively.
Note 7 - Investment in Unconsolidated Subsidiary
- ------------------------------------------------
On October 14, 2002, the Company entered into an agreement with two other
unrelated parties to organize Salinas Holdings, Inc.("Salinas"), a Puerto Rico
corporation engaged in the growing of sod (turf), palms and trees grown in the
ground. The Company has a 33.33% equity interest in Salinas. The Company also
entered into a management agreement with Salinas. Under the Agreement, the
Company earns $2,000 per month for management services and from 15% to 17%
commission on the sales of Salinas' products. Salinas commenced operations on
November 1, 2002.
The Company has accounted for its investment in Salinas using the equity method
of accounting. At September 30, 2004 and December 31, 2003, and for the
nine-month periods ended September 30, 2004 and 2003, Salinas' unaudited
condensed statements of financial position and results of operations information
were as follows:
-13-
Assets 2004 2003
- ------ ---------- ----------
Current assets $1,865,335 $1,430,763
Property and equipment, net 779,674 821,918
---------- ----------
$2,645,009 $2,252,681
========== ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities $ 261,900 $ 735,090
Long-term liabilities 866,667 758,335
---------- ----------
Total liabilities 1,128,567 1,493,425
Shareholders' equity 1,516,442 759,256
---------- ----------
Total liabilities and shareholders'
equity $2,645,009 $2,252,681
========== ==========
Company's share of equity $ 505,547 $ 253,159
========== ==========
Results of Operations 2004 2003
- --------------------- ---------- ----------
Sales $ 891,125 $ 487,767
Cost of sales 365,521 184,466
---------- ----------
Gross profit 525,604 303,301
General and administrative
Expenses 293,418 152,470
---------- ----------
Net income $ 232,186 $ 150,831
========== ==========
Company's share of net income $ 77,388 $ 50,272
========== ==========
For the nine months ended September 30, 2004, the change in the Company's
investment in Salinas Holdings, Inc., was as follows:
Description Amount
---------------------------------- --------
Balance at December 31, 2003 $ 253,159
Additional investment 175,000
Equity in earnings of
unconsolidated subsidiary for 2004 77,388
--------
Balance at September 30, 2004 $ 505,547
========
Note 8 - Income 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.
-14-
Basic and diluted income per common share for the three and nine month periods
ended September 30, 2004 and 2003 were determined as follows:
Three Months Nine Months
ended September 30, ended September 30,
Basic loss per common share: 2004 2003 2004 2003
- --------------------------- ---------- ----------- ---------- ----------
Net loss attributable to
common shareholders $ (350,541) $ (302,720) $ (541,072) $ (379,900)
=========== =========== ========== ==========
Weighted average number of common
shares outstanding 2,204,739 2,131,894 2,194,934 2,098,833
=========== =========== ========== ==========
Basic loss per common share $ (0.16) $ (0.14) $ (0.25) $ (0.18)
=========== =========== ========== ==========
Diluted loss per common share:
- ------------------------------
Net loss attributable to
common shareholders $ (350,541) $ (302,720) $ (541,072) $ (379,900)
=========== =========== ========== ==========
Weighted average number of common
shares outstanding 2,204,739 2,131,894 2,194,934 2,098,833
Plus incremental shares from assumed
exercise of stock options (1) -- -- -- --
----------- ----------- ---------- ----------
Adjusted weighted average shares 2,204,729 2,131,894 2,194,934 2,098,833
=========== =========== ========== ==========
Diluted loss
per common share $ (0.16) $ (0.14) $ (0.25) $ (0.18)
=========== =========== ========== ==========
-15-
(1)For the three and nine month periods ended September 30,2004 and 2003, the
effect of the assumed exercise of stock options determined by using the treasury
stock method was anti-dilutive; thus no incremental shares were added to the
weighted average number of common shares outstanding for the periods.
Note 9 - Segment Information
- ----------------------------
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 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. SFAS No. 131 requires a reconciliation of total segment revenue and
expense items and segment assets to the amount in the enterprise's financial
statements. SFAS No. 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 four
primary business segments: the production and distribution of plants, sales of
lawn and garden products, landscaping services and real estate. During 2003, the
Company commenced acting as sales agent for consumer related products. These
activities are included within the lawn and garden segment. 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 internal
management 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.
-16-
Three Months ended September 30, 2004
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Other Eliminations Totals
-------------------------------------------------------------------------
Revenue from
External customers $ 650,201 $ 857,548 $ 378,625 $ -- $ (50,040) $ 1,836,334
Cost of Sales (468,836) (519,869) (287,947) 50,040 (1,226,612)
Selling, general and
administrative (180,946) (502,550) (195,218) -- -- (878,714)
Intersegment
Revenues 44,376 5,664 -- -- (50,040) --
Intersegment
Expenses (44,376) (5,664) -- -- 50,040 --
Interest income 2,094 -- -- -- -- 2,094
Interest expense (29,788) -- -- -- (29,788)
Equity in earnings of
unconsolidated
subsidiary 30,650 -- -- -- -- 30,650
Commission from
unconsolidated
subsidiary 49,940 -- -- -- -- 49,940
Loss on tropical
Storm Jeanne (138,793) -- (1,522) -- -- (140,315)
Miscellaneous Income 5,870 -- -- -- -- 5,870
Segment income (loss) $ (79,608) $ (164,871) $ (106,062) $ -- $ -- $ (350,541)
Three Months ended September 30, 2003
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Other Eliminations Totals
-------------------------------------------------------------------------
Revenue from
External customers $ 685,707 $ 821,238 $ 403,233 $ -- (37,405) $ 1,872,773
Cost of Sales (538,745) (441,721) (307,071) 37,405 (1,250,132)
Selling, general and
administrative (247,020) (469,966) (259,823) -- -- (976,809)
Intersegment
Revenues 34,003 3,402 -- -- (37,405) --
Intersegment
Expenses (34,003) (3,402) -- -- 37,405 --
Interest income 1,642 -- -- -- -- 1,642
Interest expense (22,320) -- -- -- -- (22,320)
Equity in earnings of
unconsolidated
subsidiary 29,303 -- -- -- -- 29,303
Commission from
unconsolidated
subsidiary 37,940 -- -- -- -- 37,940
Miscellaneous Income 4,883 -- -- -- -- 4,883
Segment income (loss) $ (48,610) $ (90,449) $ (163,661) $ -- $ -- $ (302,720)
-17-
Nine Months ended September 30, 2004
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Other Eliminations Totals
-------------------------------------------------------------------------
Revenue from
external customers $ 2,225,716 $ 2,594,219 $ 1,351,390 $ -- $(199,294) $ 5,972,031
Cost of Sales (1,927,618) (1,381,833) (937,515) -- 199,294 (4,047,672)
Selling, general and
administrative (791,959) (1,291,894) (405,836) -- -- (2,489,689)
Intersegment
revenues 176,530 22,764 -- -- (199,294) --
Intersegment
Expenses (176,530) (22,764) -- -- 199,294 --
Interest income 5,568 -- -- -- -- 5,568
Interest expense (77,835) -- -- -- (77,835)
Equity in earnings of
unconsolidated
subsidiary 77,388 -- -- -- -- 77,388
Commission from
unconsolidated
subsidiary 134,808 -- -- -- -- 134,808
Loss on tropical
Storm Jeanne (138,793) -- (1,522) -- -- (140,315)
Miscellaneous Income 24,644 -- -- -- -- 24,644
Segment income (loss) $ (468,081) $ (79,508) $ 6,517 $ -- $ -- $ (541,072)
Total assets as of
September 30, 2004 20,899,847 8,165,090 451,218 1,224,702 (20,849,912) 9,890,945
Nine Months ended September 30, 2003
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Other Eliminations Totals
-------------------------------------------------------------------------
Revenue from
external customers $ 2,995,709 $ 2,582,614 $ 1,092,680 $ -- $(147,405) $ 6,523,598
Cost of Sales (2,095,898) (1,423,799) (901,471) -- 147,405 (4,273,763)
Selling, general and
administrative (927,333) (1,166,801) (526,396) -- -- (2,620,530)
Closing costs
Barranquitas (142,903) -- -- -- -- (142,903)
Intersegment
revenues 134,492 12,913 -- -- (147,405) --
Intersegment
Expenses (134,492) (12,913) -- -- 147,405 --
Interest income 7,357 -- -- -- -- 7,357
Interest expense (54,710) -- -- -- -- (54,710)
Gain on collection of
Note receivable
previously written down
25,000 -- -- -- -- 25,000
Equity in earnings of
unconsolidated
subsidiary 50,227 -- -- -- -- 50,227
Commission from
unconsolidated
subsidiary 76,817 -- -- -- -- 76,817
Miscellaneous Income 29,007 -- -- -- -- 29,007
Segment income (loss) $ (36,727) $ (7,986) $ (335,187) $ -- $ -- $ (379,900)
Total assets as of
September 30, 2003 $19,998,458 $ 6,124,417 $ 623,965 $1,199,202 $(18,036,550) $9,909,492
-18-
Note 10 - Supplemental Disclosures for the Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
There were no non-cash investment activities during the nine months ended
September 30, 2004.
During the nine months ended September 30, 2003, the Company purchased various
vehicles amounting to approximately $139,000 by assuming a related debt for
approximately $110,000.
Other cash flow transactions for the nine months ended September 30, 2004 and
2003, include interest payments amounting to approximately $78,000 and $50,000,
respectively. There were no income tax payments for the nine months ended
September 30, 2004 and 2003.
During the third quarter ended September 30, 2004, and the second quarter ended
June 30, 2004, the Company received $500,000 and $500,000, respectively, as
unsecured loans from its major shareholder. These loans pay interest monthly at
the prevailing Citibank, N.A. prime rate and the principal amounts are payable
on February 1, 2005 and January 3, 2005, respectively. Margo did not pay any
commitment fee or commission in connection with the loans. Margo's Board of
Directors believes that the terms and conditions of the loans are at least as
favorable to Margo as those could have been obtained from an unaffiliated third
party.
During the nine months ended September 30, 2004, the Company collected
approximately $75,000, from an account receivable that had been previously
written off.
Note 11 - Major Customers
- -------------------------
During the nine months ended September 30, 2004 and 2003, the Company's single
largest customer accounted for approximately 38% ($2,245,000) and 39%
($2,546,000), respectively, of the Company's net sales. There were no other
customers accounting for 10% or more of the Company's net sales.
Note 12 - Contingencies
- -----------------------
In 2003, a former officer of the Company brought a civil action in the U.S.
District Court of Puerto Rico against the Company. The complaint alleges, among
others, a federal securities law violation in connection with the exercise of
employee stock options by the plaintiff. The Company believes, based on the
opinion of legal counsel, that it will be able to defend this action
successfully.
The Company is also a party to various legal actions arising in the ordinary
course of business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial condition or
results of operations of the Company.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
--------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
OVERVIEW
- --------
Margo Caribe, Inc., and its subsidiaries (collectively referred to as 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, landscaping design and
installation services. In addition, since 2003, the Company acts as sales
representative for several consumer goods brands in Puerto Rico and Mexico. The
Company's real estate development division is involved in seeking the required
permits for an affordable housing project in the Municipality of Arecibo, Puerto
Rico.
The Company's operations include Margo Caribe, Inc. (the holding company) and
its subsidiaries, 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 interior and exterior landscaping of office
buildings, shopping malls, hotels and other commercial sites, as well as private
residences. In its nursery facility located in Vega Alta, Puerto Rico, 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. Prior to July 1, 2003, the Company operated an additional nursery
farm in Barranquitas, Puerto Rico, that produced orchids, bromeliads,
anthuriums, spathiphylum and poinsettias. This operation was consolidated into
the Vega Alta nursery operation effective June 30, 2003.
As a bona fide agricultural enterprise, Nursery Farms enjoys 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.
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
-20-
Products is the exclusive distributor (for Puerto Rico and the Caribbean) of
Sunniland Corporation's fertilizer and pesticide products, Greenes Fence
Company, Fiskars Consumer Product Division, State Line Bark & Mulch, L.R. Nelson
Consumer Products, Tel-Com decorative pottery, Crysalia plastic pottery, DEROMA
Italian terracotta pottery, North American Outdoor Products, and Les Carrieres
de la Pierre Bleue Belge, S.A. 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 and the United States Virgin Islands.
Rain Forest is engaged in the manufacturing of potting soils, professional
growing mixes, river rock, gravel 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 were created for the development of residential projects in Puerto
Rico. Currently, Garrochales Construction is still pending approval of a permit
for the development of a new residential 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 87-"cuerda" (a "cuerda" equals
approximately 0.97 of an acre) nursery farm in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. This farm is leased from Michael J.
Spector and Margaret Spector, who are executive officers and principal
shareholders of the Company.
Until June 30, 2003, the Company also operated a 13-"cuerda" nursery in
Barranquitas, Puerto Rico. Effective July 1, 2003, the Company consolidated the
Barranquitas operation into its Vega Alta nursery farm.
FUTURE OPERATIONS
- -----------------
The Company will continue to concentrate its economic and managerial resources
in expanding and improving its present operations in Puerto Rico. The Company
will continue to capitalize on its advantage as one of the largest, full service
nurseries in the region. The full service nursery includes but is not limited
to: production of high quality plants, sod, trees, palms and topsoil;
distribution of high quality mulch, bark, peat moss, rocks and pots; and, garden
installation and maintenance. The Board is seeking new products to introduce in
the Island's major store chains. The Board also, is exploring opportunities for
expansion outside of Puerto Rico.
In December 2000, the Company purchased approximately 109 "cuerdas" of land in
the Municipality of Arecibo, Puerto Rico, for the development of a residential
-21-
housing project. The Company paid approximately $988,000. The carrying value as
of September 30, 2004 of approximately $1,131,000 includes approximately
$144,000 of capitalized interest, design and other permit-phase costs. 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 when purchasing
homes in 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 NINE MONTHS AND THIRD QUARTER ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2004 AND 2003
- -------------
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, 2003.
SUMMARY
- -------
On September 14, 2004, the Island of Puerto Rico was hit by Tropical Storm
Jeanne. Although no significant damages were reported to the crop, some
structures were damaged. These were repaired within a short period of time.
Estimated losses as a result of Tropical Storm Jeanne amounted to $140,000. The
Company is in the process of submitting its loss claims to the Insurance
Company.
For the nine months ended September 30, 2004, the Company had a net loss of
approximately $541,000, compared to a net loss of approximately $380,000 for the
same period in the year 2003. These amounts represent a diluted loss per common
share of $(0.25) and $(0.18) for the nine months ended September 30, 2004 and
2003, respectively. The net loss for the nine months ended September 30, 2004,
was mainly due to a net decrease in sales of approximately $552,000, or 8.5%,
and a net decrease in gross profits of 6.6% for the nine months ended September
30, 2004. Offsetting the net loss for the nine months ended September 30, 2004,
were commissions and equity in earnings from an investment in an unconsolidated
joint venture (Salinas Holdings) in the amount of approximately $212,000.
For the third quarter ended September 30, 2004, the Company had a net loss of
approximately $351,000 or $(0.16) per share (diluted), compared to a net loss of
approximately $303,000 or $(0.14) per share (diluted) for the same quarter in
the year 2003. The net loss for the third quarter ended September 30, 2004, was
greater than the net loss for the same quarter in the year 2003, mainly due to a
net decrease in sales of approximately $37,000, or 1.9%, and to the loss
attributable to damages caused by Tropical Storm Jeanne of approximately
$140,000. Offsetting the net loss for the third quarter ended September 30,
2004, were commissions and equity in earnings from an investment in an
unconsolidated joint venture (Salinas Holdings) in the amount of approximately
$81,000.
-22-
Plants Segment
- --------------
The plants segment's net loss was approximately $468,000 for the nine months
ended September 30, 2004, compared to a net loss of approximately $37,000 for
the nine months ended September 30, 2003. The plants segment's net loss was
approximately $80,000 for the third quarter ended September 30, 2004, compared
to a net loss of approximately $49,000 for the third quarter ended September 30,
2003. The net loss from the plants segment for the nine months and third quarter
ended September 30, 2004, was mainly attributable to a decrease in net sales of
approximately $799,000 and $42,000, respectively. Also, the net loss from the
plants segment was mainly due to a decrease in gross margin of approximately
53.3% for the nine months ended September 30, 2004. In addition, during the
third quarter ended September 30, 2004, the plants segment recorded a loss of
$139,000, related to damages caused by Tropical Storm Jeanne. Offsetting the
loss of the plants segment for the nine months and third quarter ended September
30, 2004, were commissions and equity in earnings from an investment in an
unconsolidated joint venture (Salinas Holdings) in the amounts of approximately
$212,000 and $81,000, respectively.
The total net sales from the plants segment was approximately $2,049,000 for the
nine months ended September 30, 2004 compared to approximately $2,848,000 in net
sales for the nine months ended September 30, 2003. The total net sales from the
plants segment was approximately $606,000 for the third quarter ended September
30, 2004 compared to approximately $648,000 in net sales for the third quarter
ended September 30, 2003. The gross margin from the plants segment was
approximately 14.5% for the nine months ended September 30, 2004, compared to
approximately 31.1% for the nine months ended September 30, 2003. The gross
margin from the plants segment was approximately 29.9% for the third quarter
ended September 30, 2004, compared to approximately 22.1% for the third quarter
ended September 30, 2003.
Landscaping Segment
- -------------------
The landscaping segment's net income was approximately $7,000 for the nine
months ended September 30, 2004, compared to a net loss of approximately
$335,000 for the nine months ended September 30, 2003. The landscaping segment's
net loss was approximately $106,000 for the third quarter ended September 30,
2004, compared to a net loss of approximately $164,000 for the third quarter
ended September 30, 2003. The net income of the landscaping segment for the
nine-month period and the net loss for the third quarter ended September 30,
2004, were affected by a reduction in revenues of $24,000 in the third quarter
ended September 30, 2004, when compared to the third quarter ended September 30,
2003. Also, there was an increase of approximately $60,000, in the expenses
allocated to the landscaping segment for the nine months ended September 30,
2004, when compared to the same period for the year 2003. Offsetting the result
of operations of the landscaping segment for the nine months ended September 30,
-23-
2004, was the collection of approximately $75,000, from an account receivable
that had been previously written off.
Revenues for the landscaping segment were approximately $1,351,000 for the nine
months ended September 30, 2004, compared to approximately $1,093,000 for the
nine months ended September 30, 2003. Revenues for the landscaping segment were
approximately $379,000 for the third quarter ended September 30, 2004, compared
to approximately $403,000 for the third quarter ended September 30, 2003. The
gross margin for the landscaping segment was approximately 30.6% for the nine
months ended September 30, 2004, compared to approximately 17.4% for the nine
months ended September 30, 2003. The gross margin for the landscaping segment
was approximately 23.9% for the third quarter ended September 30, 2004, compared
to approximately 23.8% for the third quarter ended September 30, 2003.
Lawn & Garden Segment
- ---------------------
The lawn & garden segment's net loss was approximately $80,000 for the nine
months ended September 30, 2004, compared to a net loss of approximately $8,000
for the nine months ended September 30, 2003. The lawn & garden segment's net
loss was approximately $165,000 for the third quarter ended September 30, 2004,
compared to a net loss of approximately $90,000 for the third quarter ended
September 30, 2003. The net loss of the lawn & garden segment for the nine
months and the third quarter ended September 30, 2004, were affected by a
reduction in gross margin of 15.2% during the third quarter ended September 30,
2004, when compared to the third quarter ended September 30, 2003. Also, there
was an increase of approximately $111,000, in the expenses allocated to the lawn
& garden segment for the nine months ended September 30, 2004, when compared to
the same period in the year 2003.
Net sales from the lawn & garden segment were approximately $2,571,000 for the
nine months ended September 30, 2004, compared to approximately $2,583,000 for
the nine months ended September 30, 2003. Net sales from the lawn & garden
segment were approximately $852,000 for the third quarter ended September 30,
2004, compared to approximately $821,000 for the third quarter ended September
30, 2003. The gross margin from the lawn & garden segment was approximately
47.1% for the nine months ended September 30, 2004, compared to approximately
45.3% for the nine months ended September 30, 2003. The gross margin from the
lawn & garden segment was approximately 39.5% for the third quarter ended
September 30, 2004, compared to approximately 46.6% for the third quarter ended
September 30, 2003.
Sales
- -----
The Company's consolidated net sales for the nine months ended September 30,
2004, were approximately $5,972,000, compared to approximately $6,524,000 for
the nine months ended September 30, 2003, representing an overall decrease of
approximately $552,000 or 8.4%. The Company's consolidated net sales for the
third quarter ended September 30, 2004, were approximately $1,836,000, compared
to approximately $1,873,000 for the third quarter ended September 30, 2003,
-24-
representing an overall decrease of approximately $37,000 or 1.9%. Net sales by
segment for the nine months ended September 30, 2004 and 2003, and for the third
quarter ended September 30,2004 and 2003,are shown below:
Segment Quarter ended Quarter ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Plants $606,000 $648,000 $2,049,000 $2,848,000
Landscaping $379,000 $403,000 $1,351,000 $1,093,000
Lawn & Garden $852,000 $821,000 $2,571,000 $2,583,000
The plants segment had a decrease in net sales for the nine months and for the
third quarter ended September 30, 2004, of approximately $799,000 or 28.0%, and
$42,000 or 6.4%, respectively. The lawn and garden segment had a decrease in net
sales for the nine months ended September 30, 2004, of $11,000 or .4%, and an
increase in net sales for the third quarter ended September 30, 2004, of $31,000
or 3.7%. The landscaping segment had an increase in net sales for the nine
months ended September 30, 2004, of $259,000 or 23.7%, and a decrease in net
sales for the third quarter ended September 30, 2004, of $25,000 or 7.1%.
Decrease in the 2004 net sales is mainly attributable to the performance of the
plants segment. The plants segment's decrease in sales was mainly due to the
lack of availability of certain plants including, orchids, anthurium,
spathifyllum, and areca palms, which recorded high sales during the first
quarter of the year 2003. Most of these plants are currently being grown and
will become available for sale later in 2004 and early in 2005. At the same
time, the Company is placing emphasis on the marketing of bedding and other
plants which mature more rapidly and become available for sale in a shorter
period. Also, the Company is purchasing certain plants from local growers for
resale, as needed. On the other hand, the Company will grow and reintroduce into
the market some of the last decades' most popular plants. The Company expects
these crops to generate increased sales. The nursery segment is well-positioned
to increase sales during the fourth quarter of 2004. The poinsettia crop, a
plant with high demand during the Christmas season, is in perfect shape and is
becoming available for sale, as some large store chains are placing orders. The
remainders of the crops are also becoming available for sale.
The lawn & garden segment's net sales for the nine months ended September 30,
2004, remain comparable with the net sales registered during the same period for
the year 2003. The lawn & garden segment's increase in net sales for the third
quarter ended September 30, 2004 was mainly due to the heavy rains experienced
during the third quarter. The lawn & garden segment is expecting an increase in
-25-
sales during the fourth quarter of 2004 given that certain sales promotions with
the large store chains will be conducted for the Christmas season. The expected
increase in sales for the fourth quarter of 2004 will be partially offset by the
cancellation received from Scotts Company for the marketing and merchandising of
Ortho and Round-Up products. Such cancellation will be effective December, 2004.
These products accounted for approximately $45,000 and $88,000 in sales for the
quarter and nine months ended September 30, 2004, respectively.
The landscaping segment's increase in revenues for the nine months ended
September 30, 2004, was mainly due to the adjustments in pricing for old
contracts as well as the results of new contracts (private and governmental)
signed during this period.
Gross Profit
- ------------
The gross profit for the nine months ended September 30, 2004, was approximately
32.2% of net sales compared to approximately 34.5% for the same period in the
year 2003. The gross profit for the third quarter ended September 30, 2004, was
approximately 33.2% of net sales compared to approximately 33.3% for the same
period in the year 2003. Adversely impacting the gross profit for the nine
months ended September 30, 2004, was a decline of approximately 53.4% in gross
profit for the plants segment. Gross profits by segment for the nine months
ended September 30, 2004 and 2003, and for the third quarter ended September 30
,2004 and 2003,are shown below:
Segment Quarter ended Quarter ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Plants 29.9% 22.1% 14.5% 31.1%
Landscaping 23.9% 23.8% 30.6% 17.4%
Lawn & Garden 39.5% 46.6% 47.1% 45.3%
The plants segment's gross profit for the nine months ended September 30, 2004,
was significantly lower than the gross profit for the same period in the year
2003, principally due to a lower margin in sales. At the end of the year 2003, a
portion of the plant materials was classified as unsaleable and marked for
dumping. During the first nine months of the year 2004, part of this plant
material was sold with low margins. The Company expects to sell additional
amounts of this plant material in the same manner throughout the remainder of
the year 2004. However, the plant segment's gross margin is improving as new
crops are becoming available for sale. Quarterly gross profits for the plant
segment for the nine months ended September 30, 2004 and 2003, are shown below:
Year Nine months ended Quarter ended Quarter ended Quarter ended
September 30 September 30 June 30 March 31
- ---- ------------ ------------ ------- --------
2004 14.5% 29.9% -4.5% 18.1%
2003 31.1% 22.1% 33.9% 33.9%
The landscaping segment's gross profit improved in comparison with that for the
same period in the year 2003 mainly due to improved efficiency in project and
-26-
maintenance management. This improvement is related to the operational changes
realized during the fourth quarter of 2003 and during the year 2004. Quarterly
gross profits for the landscaping segment for the nine months ended September
30, 2004 and 2003, are shown below:
Year Nine months ended Quarter ended Quarter ended Quarter ended
September 30 September 30 June 30 March 31
- ---- ------------ ------------ ------- --------
2004 30.6% 23.9% 30.7% 35.8%
2003 17.4% 23.8% 14.7% 13.0%
The lawn & garden segment's gross profit improved in comparison with the same
period for the year 2003 mainly due to an increase in the sale of mulch and
potting soil, whose profit margins are high. Quarterly gross profits for the
landscaping segment for the nine months ended September 30, 2004 and 2003, are
shown below:
Year Nine months ended Quarter ended Quarter ended Quarter ended
September 30 September 30 June 30 March 31
- ---- ------------ ------------ ------- --------
2004 47.1% 39.5% 49.4% 52.0%
2003 45.3% 46.6% 44.1% 47.5%
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses (SG&A) were approximately
$2,490,000 and $2,621,000 for the nine months ended September 30, 2004 and 2003,
respectively. This represents an approximate 5.0% or $131,000 decrease in
comparison with the same period for year 2003. SG&A expenses were approximately
$879,000 and $977,000 for the third quarters ended September 30, 2004 and 2003,
respectively. This represents an approximate 10.0% or $98,000 decrease in
comparison with the same period for year 2003. This decrease is related to the
cost containment program established at the end of the year 2003 which includes,
among others, the reduction of payroll expenses and better utilization of
existing resources.
Costs Related to Consolidating Nursery Facilities
- -------------------------------------------------
Until June 30, 2003, the Company also operated a 13-acre nursery in
Barranquitas, Puerto Rico, 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 terminate the lease and vacated the facility by
June 30, 2003. As a result, on July 1, 2003, the Company consolidated the
Barranquitas operation with its Vega Alta nursery farm.
Costs associated with closing the Barranquitas nursery operation in connection
with the consolidation of the Company's nursery facilities to its Vega Alta
nursery operation amounted to approximately $143,000 during the nine months
ending September 30, 2003.
-27-
Other Income and Expenses
- -------------------------
Interest income for the nine-month period ended September 30, 2004, was
approximately $6,000, compared to approximately $7,000, for the nine months
ended September 30, 2003. Interest income for the third quarter ended September
30, 2004,remained comparable to the third quarter ended September 30,2003.
Interest income is derived from a $500,000 certificate of deposit.
Interest expense for the nine months ended September 30, 2004, and for the third
quarter ended September 30, 2004, increased by approximately $23,000 and $8,000,
respectively, when compared with the same periods in 2003. This increase is
related to the increase in short-term borrowings used to fund the Company's
operations (refer to CURRENT LIQUIDITY AND CAPITAL RESOURCES).
Participation in income of unconsolidated subsidiary and commissions' income
from unconsolidated subsidiary increased approximately $27,000 and $58,000,
respectively, for the nine months ended September 30, 2004. Increases are
related to the increase in net income of the unconsolidated joint venture
(Salinas Holdings, Inc.) and the increase in sales of Salinas' business.
Participation in income of unconsolidated subsidiary and commissions' income
from unconsolidated subsidiary for the third quarter ended September 30, 2004,
increased approximately $2,000 and $12,000, respectively.
Loss from Damages Caused by Tropical Storm Jeanne
- -------------------------------------------------
On September 14, 2004, the Island of Puerto Rico was hit by Tropical Storm
Jeanne. Although no significant damages were reported to the Company's crops,
some structures were damaged. These were repaired within a short period of time.
Estimated losses as a result of Tropical Storm Jeanne amounted to $140,000. The
Company is in the process of submitting its loss claims to the Insurance
Company.
FINANCIAL CONDITION
- -------------------
The Company's current ratio decreased to 1.14 to 1 on September 30, 2004,
compared to 1.42 to 1 on December 31, 2003. The decrease in the current ratio is
principally due to cash outflows used for investment activities, an unsecured
loan received from its major shareholder, and an increase in short-term
borrowings used to finance current operations (refer to CURRENT LIQUIDITY AND
CAPITAL RESOURCES).
On September 30, 2004, total assets were approximately $9,890,000, compared to
approximately $9,159,000 in total assets on December 31, 2003. As of September
30, 2004, the Company had approximately $960,000 in cash, compared to
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approximately $447,000 in cash as of December 31, 2003. Accounts receivable
increased approximately $442,000 and the investment in unconsolidated subsidiary
increased approximately $253,000, compared to December 31, 2003.
Shareholders' equity as of September 30, 2004, decreased by $456,000, as a
result of losses incurred for the nine-month period then ended, and the
amortization of deferred stock compensation of approximately $38,000. The net
losses and deferred stock compensation were partially offset by approximately
$47,000 received from the exercise of stock options. During the nine months
ended September 30, 2004, the Company issued 19,250 shares of common stock at a
weighted average price of $2.17 in connection with the exercise of stock
options. During the nine months ended September 30, 2004, the Company issued
26,500 shares of common stock in connection with stock awards. The awards did
not result in net proceeds to the Company because the increase in stockholders
equity was offset by deferred stock compensation expenses. No dividends were
declared during the nine months ended September 30, 2004.
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 ensure a new source of
products for the future.
The Company finances its working capital needs from cash flow of operations as
well as borrowings under short-term credit facilities with a local commercial
bank. As of September 30, 2004, the Company had a short-term credit facility of
$2.5 million, of which approximately $264,000 was available as of such date.
This credit facility is secured by the Company's trade accounts receivable and
inventories.
During the third quarter ended September 30, 2004, and the second quarter ended
June 30, 2004, the Company received $500,000 and $500,000, respectively, in
unsecured loans from its major shareholder. These loans pay interest monthly at
the prevailing Citibank, N.A., prime rate and the principal amounts are payable
on February 1, 2005, and January 3, 2005, respectively. Margo did not pay any
commitment fee or commission in connection with these loans. Margo's Board of
Directors believes that the terms and conditions of the loans are at least as
favorable to Margo as those that could have been obtained from an unaffiliated
third party.
During the fourth quarter of 2003, the Company implemented a cost containment
program designed to reduce expenses. As part of this program, the Company
reduced its labor costs through a reduction in head count by approximately 10.0%
during 2003, and by approximately 11.0% during 2004. The results of the cost
containment program began to have a positive impact on the Company's SG&A
expenses.
Based on its current situation, the Company, believes that it has adequate
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resources to meet its current and anticipated liquidity and capital
requirements. The Company, however, is currently continuing to explore other
alternatives to increase its liquidity including, but not limited to, (1) an
increase in its short-term credit facilities, and (2) the sale of preferred
stock to a limited number of investors in a private placement transaction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
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ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Disclosure Control and Procedures
- ---------------------------------
As of September 30, 2004, 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 evaluation, the Company's management, including the CEO and CFO,
concluded that the design and operation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
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.
Internal Control over Financial Reporting
- -----------------------------------------
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On October 20, 2003, Mr. Fernando Rodriguez, the Company's former President and
Chief Operating Officer, filed a civil action against the Company before the
U.S. District Court for the District of Puerto Rico. The complaint was
subsequently amended to include Michael J. Spector, the Company's Chief
Executive Officer, as a defendant; service of process as to the amended
complaint was executed on March 24, 2004.
The amended complaint states two basic causes of action: (1) an alleged COBRA
violation in connection with the dismissal of Mr. Rodriguez from the Company,
and; (2) an alleged federal securities law violation in connection with the
exercise of employee stock options by Mr. Rodriguez. The complaint also includes
various related state law claims. The Company has filed a motion to dismiss both
causes of action and believes that it has meritorious defenses as to each.
The Company is also a party to a number of legal proceedings in the ordinary
course of its business, none of which, in the opinion of management, will have a
material adverse effect on the Company's Financial Condition or Results of
Operations.
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ITEM2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
-------------------------------------------------------------------------
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
-----------------
None.
ITEM 6. EXHIBITS
--------
Exhibits
--------
Exhibit 10(a) Promissory Note, dated June 15, 2004, in the amount of
$500,000 payable to Mr. And Mrs. Spector.
Exhibit 10 (b) Promissory Note, dated September 21, 2004, in the
amount of $125,000 payable to Mr. And Mrs. Spector.
Exhibit 10 (c) Promissory Note, dated September 30, 2004, in the
amount of $375,000 payable to Mr. And Mrs. Spector.
Exhibit 31 (a) CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act.
Exhibit 31 (b) CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act.
Exhibit 32 (a) CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act.
Exhibit 32 (b) CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act.
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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 15, 2004 By: /s/ Michael J. Spector
----------------- -------------------------------
Michael J. Spector, President,
Chairman of the Board, and
Chief Executive Officer
Date: November 15, 2004 By: /s/ Juan B. Medina
----------------- -----------------------
Juan B. Medina,
Senior Vice President and
Chief Financial Officer
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