10-Q 1 margocar10qmarch03.txt ================================================================================ 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