10-Q 1 margo10q_june2002.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 June 30, 2002 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15336 MARGO CARIBE, INC. A Puerto Rico Corporation - I.R.S. No. 66-0550881 Address of Principal Executive Offices: Road 690, Kilometer 5.8 Vega Alta, Puerto Rico 00692 Registrant's Telephone Number: (787) 883-2570 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO ------- ------- The registrant had 2,072,189 shares of common stock, $.001 par value, outstanding as of August 13, 2002. MARGO CARIBE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE SECOND QUARTER ENDED JUNE 30, 2002 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 14 ------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT ---------------------------------------------- MARKET RISK 18 ----------- PART II ------- ITEM 1. LEGAL PROCEEDINGS 19 ----------------- ITEM 2. CHANGES IN SECURITIES 19 --------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE 19 ------------------------------- OF SECURITY HOLDERS ------------------- ITEM 5. OTHER INFORMATION 20 ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 -------------------------------- 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 June 30, 2002 and December 31, 2001 (Unaudited) ASSETS ------ 2002 2001 ----------- ----------- Current assets: Cash and equivalents $ 856,075 $ 838,921 Accounts receivable, net 2,148,084 1,798,251 Inventories 3,502,429 3,510,381 Current portion of note receivable -- 26,331 Prepaid expenses and other current assets 301,460 296,482 ----------- ----------- Total current assets 6,808,048 6,470,366 Property and equipment, net 1,290,665 1,398,689 Land held for future development 1,083,535 1,053,406 Notes receivable 42,164 42,164 Other assets 50,230 44,396 ----------- ----------- Total assets $ 9,274,642 $ 9,009,021 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 74,655 $ 129,047 Notes payable 1,930,500 1,930,500 Accounts payable 609,582 868,071 Accrued expenses 343,319 194,294 ----------- ----------- Total current liabilities 2,958,056 3,121,912 Deferred revenue 74,238 -- Long-term debt 339,378 307,528 ----------- ----------- Total liabilities 3,371,672 3,429,440 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; 250,000 shares authorized, no shares issued -- -- Common stock, $.001 par value; 10,000,000 shares authorized; 2,111,909 and 1,923,622 shares issued, 2,072,189 and 1,883,822 shares outstanding in 2002 and 2001, respectively 2,112 1,924 Additional paid-in capital 5,226,635 4,659,792 Retained earnings 770,511 1,014,153 Treasury stock 39,800 common shares, at cost (96,288) (96,288) ----------- ----------- Total shareholders' equity 5,902,970 5,579,581 ----------- ----------- Total liabilities and shareholders' equity $ 9,274,642 $ 9,009,021 =========== =========== See accompanying notes to condensed consolidated financial statements. 4

MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods ended June 30, 2002 and 2001 (Unaudited) Three Months ended June 30, Six Months ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ----------- Net sales $2,489,009 $2,282,510 $4,808,712 $4,452,271 Cost of sales 1,478,520 1,427,781 2,884,149 2,817,214 ---------- ---------- ---------- ---------- Gross profit 1,010,489 854,729 1,924,563 1,635,057 Selling, general and administrative expenses 859,916 742,158 1,587,160 1,434,812 ---------- ---------- ---------- ---------- Income from operations 150,573 112,571 337,403 200,245 ---------- ---------- ---------- ---------- Other income (expense): Interest income 289 18,828 3,757 33,814 Interest expense (15,207) (25,885) (32,607) (72,540) Miscellaneous income 7,575 4,376 14,882 19,716 ---------- ---------- ---------- ---------- (7,343) (2,681) (13,968) (19,008) ---------- ---------- ---------- ---------- Income before provision for income tax 143,230 109,890 323,435 181,235 Income tax provision - - - - ---------- ---------- ---------- ----------- Net income $ 143,230 $ 109,890 $ 323,435 $ 181,235 ========== ========== ========== ========== Basic income per common share $ .07 $ .05 $ .16 $ .09 ========== ========== ========== ========== Diluted income per common share $ .07 $ .05 $ .15 $ .09 ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements.

5

MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Six Months ended June 30, 2002 (Unaudited) Common Common Additional stock stock paid-in Retained Treasury shares amount capital earnings stock Total ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 1,883,822 $ 1,924 $ 4,659,792 $ 1,014,153 $ (96,288) $ 5,579,581 Issuance of common stock from 10% stock dividend 188,367 188 566,843 (567,077) -- -- Net income -- -- -- 323,435 -- 323,435 ----------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2002 2,072,189 $ 2,112 $ 5,226,635 $ 770,511 $ (96,288) $ 5,902,970 =========== =========== =========== =========== =========== =========== See accompanying notes to condensed consolidated financial statements.

6 MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2002 and 2001 (Unaudited) 2002 2001 --------- --------- Cash flows from operating activities: ------------------------------------- Net income $ 323,435 $ 181,235 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 227,019 219,176 Provision for uncollectible accounts receivable 18,000 31,533 Gain on disposition of equipment (6,287) (13,913) Deferred revenue 74,238 -- Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable (367,833) (149,169) Inventories 7,952 (363,983) Prepaid expenses and other current assets (4,978) 16,309 Other assets (5,834) (55,469) Accounts payable (258,489) (214,769) Accrued expenses 149,025 31,272 --------- --------- Net cash provided by (used in) operating activities 156,248 (317,778) --------- --------- Cash flows from investing activities: ------------------------------------- Additions to property and equipment (56,358) (153,610) Investment in land held for future development (30,129) -- Increase in notes receivable -- (5,000) Repayment of notes receivable 26,331 -- Collection of amount due from shareholder -- 54,594 Proceeds from disposition of equipment -- 13,913 --------- --------- Net cash used in investing activities (60,156) (90,103) --------- --------- Cash flows from financing activities: ------------------------------------- Proceeds from long-term debt -- 222,051 Repayment of long-term debt (78,892) (54,324) Increase in notes payable -- 100,000 Repayment of notes payable -- (225,000) Cash payment in lieu of issuing fractional shares in stock dividend (46) -- --------- --------- Net cash provided by (used in) financing activities (78,938) 42,727 --------- --------- Net increase (decrease) in cash 17,154 (365,154) --------- Cash and equivalents at beginning of period 838,921 973,061 ---------------------------------------------------- --------- --------- Cash and equivalents at end of period $ 856,075 $ 607,907 ---------------------------------------------------- ========= ========= See accompanying notes to condensed consolidated financial statements. 7 MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (Unaudited) Note 1 - Basis of Presentation ------------------------------ These interim condensed consolidated financial statements include the financial statements of Margo Caribe, Inc. and its wholly-owned subsidiaries (collectively "the Company"), Margo Nursery Farms, Inc., Margo Landscaping and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc., Margo Flora, Inc., Garrochales Construction and Development Corporation and Margo Development Corporation. These interim condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal accruals) that, in the opinion of management, are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods covered. These statements have been prepared in accordance with the United States Securities and Exchange Commission's instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of interim financial statements relies on estimates. Therefore, the results of operations for the six months ended June 30, 2002 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2002. These statements should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Note 2 - Use of Estimates in the Preparation of Condensed Financial Statements ------------------------------------------------------------------------------ The preparation of condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8 The allowance for doubtful accounts is an amount that management believes will be adequate to absorb estimated losses on existing accounts receivable that become uncollectible based on evaluations of collectibility of specific customers and their prior credit experience. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the existing accounts receivable and related allowance may change in the near term. Direct and indirect costs that are capitalized as part of inventory of plant material which management estimates cannot be recovered from future sales of plant inventory are charged to cost of sales. Management's determination of the amount of capitalized costs that should be charged to cost of sales is based on historical sales experience and its judgement with respect to the future marketability of the inventory. Note 3 - Inventories -------------------- At June 30, 2002 and December 31, 2001, inventories included the following: Description 2002 2001 --------------------------- ---------- ----------- Plant material $2,878,327 $2,813,920 Lawn and garden products 311,768 362,273 Raw materials and supplies 312,334 334,188 ---------- ---------- $3,502,429 $3,510,381 ========== ========== Note 4 - Property and Equipment ------------------------------- At June 30, 2002 and December 31, 2001, property and equipment included the following: Description 2002 2001 ----------------------------- ---------- ----------- Leasehold improvements $ 1,395,263 $1,364,949 Equipment and fixtures 1,604,774 1,585,675 Transportation equipment 513,410 460,232 Real estate property 224,327 224,327 --------- ---------- 3,737,774 3,635,183 Less accumulated depreciation and amortization (2,447,109) (2,236,494) ---------- ---------- $1,290,665 $1,398,689 ========== ========== Note 5 - Income (loss) per Common Share --------------------------------------- The Company reports its earnings per share (EPS) using Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128").SFAS 128 requires dual presentation of basic and diluted EPS. Basic EPS is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 9 On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend on the Company's common stock. The stock dividend was issued on June 28, 2002 to shareholders of record as of June 14, 2002. The stock dividend resulted in 188,367 additional shares issued. Accordingly, the weighted average number of shares outstanding (and stock options) for the periods ended June 30, 2002 have been adjusted to reflect the effect of the stock dividend. The weighted average number of shares outstanding (and stock options) for the periods ended June 30, 2001 were also restated to reflect the effect of the stock dividend. Basic and diluted income per common share for the periods ended June 30, 2002 and 2001 were determined as follows:

Three Months Six Months ended June 30, ended June 30, ----------------------- ----------------------- Basic income per common share: 2002 2001 2002 2001 ----------------------------- ---------- ---------- ---------- ---------- Net income attributable to common shareholders $ 143,230 $ 109,890 $ 323,435 $ 181,235 ========== ========== ========== ========== Weighted average number of common shares outstanding 2,072,189 2,070,539 2,072,189 2,070,539 ========== ========== ========== =========== Basic income per common share $ .07 $ .05 $ .16 $ .09 ========== ========== ========== =========== Diluted income per common share: ------------------------------- Net income attributable to common shareholders $ 143,230 $ 109,890 $ 323,435 $ 181,235 ========== ========== ========== ========== Weighted average number of common shares outstanding 2,072,189 2,070,539 2,072,189 2,070,539 Plus incremental shares from assumed exercise of stock options 34,349 21,720 45,481 15,964 ---------- ---------- ---------- ----------- Adjusted weighted average shares 2,106,538 2,092,259 2,117,670 2,086,503 ========== ========== ========== ============ Diluted income per common share $ .07 $ .05 $ .15 $ .09 ========== ========== ========== ============

Note 6 - Segment Information ---------------------------- The Company reports its segment information pursuant to Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way an enterprise reports information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing 10 performance. The Statement requires a reconciliation of total segment revenue and expense items and segment assets to the amounts in the enterprise's financial statements. SFAS 131 also requires a descriptive report on how the operating segments were determined, the products and services provided by the operating segments, and any measurement differences used for segment reporting and financial statement reporting. The Company's management monitors and manages the financial performance of three primary business segments: the production and distribution of plants, sales of lawn and garden products and landscaping services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on net income or loss. The financial information presented below was derived from the Company's accounting system and is based on internal management accounting policies. The information presented does not necessarily represent each segments's financial condition and results of operations as if they were independent entities. The Company's segment information for the three months ended June 30, 2002 and 2001, is as follows:

Three Months ended June 30, 2002 ------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------------------------------------- Revenues from external customers $1,136,160 $ 722,806 $ 630,043 $2,489,009 Intersegment revenues 110,447 12,773 -- 123,220 Interest income 289 -- -- 289 Interest expense 15,207 -- -- 15,207 Depreciation and amortization 66,914 22,055 17,033 106,002 Segment income 89,203 18,833 35,194 143,230

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Three Months ended June 30, 2001 -------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------- Revenues from external customers $ 953,723 $ 839,243 $ 489,544 $2,282,510 Intersegment revenues 46,496 18,323 -- 64,819 Interest income 18,828 -- -- 18,828 Interest expense 25,885 -- -- 25,885 Depreciation and amortization 81,900 13,411 5,421 100,732 Segment income (loss) 112,306 28,291 (30,707) 109,890 The Company's segment information as of and for the six months ended June 30, 2002 and 2001, is as follows: Six Months ended June 30, 2002 ------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------------------------------------- Revenues from external customers $2,046,116 $1,439,031 $1,323,565 $4,808,712 Intersegment revenues 229,696 34,761 -- 264,457 Interest income 3,757 -- -- 3,757 Interest expense 32,607 -- -- 32,607 Depreciation and amortization 172,751 32,114 22,154 227,019 Segment income 126,433 68,987 128,015 323,435 Segment assets 6,993,658 1,145,453 1,135,531 9,274,642 Expenditures for segment assets 56,358 -- -- 56,358 Six Months June 30, 2001 ----------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ----------------------------------------------------- Revenues from external customers $2,032,272 $1,502,479 $ 917,520 $4,452,271 Intersegment revenues 79,390 35,132 -- 114,522 Interest income 33,814 -- -- 33,814 Interest expense 72,540 -- -- 72,540 Depreciation and amortization 184,706 23,382 11,086 219,176 Segment income (loss) 180,472 56,890 (56,127) 181,235 Segment assets 7,594,271 1,235,725 585,865 9,415,861 Expenditures for segment assets 153,610 -- -- 153,610

12 Note 7 - Supplemental Disclosures for the Condensed Consolidated Statements of -------------------------------------------------------------------------------- Cash Flows ---------- a) Non-Cash Investing Activities ----------------------------- During the six months ended June 30, 2002, the Company applied a certificate of deposit amounting to $500,000 to pay off a related note payable. Subsequently, on two separate occasions, the Company purchased a certificate of deposit amounting to $500,000 by signing a related note payable. The Company also traded-in a vehicle with a cost of $31,500, receiving $7,000 as a trade-in value for the old vehicle, and assuming a related debt of $24,500. The Company also purchased another vehicle for $31,850 by assuming the related debt. During the six months ended June 30, 2001, fully depreciated equipment amounting to $166,820 was written off. The Company also transferred unamortized leasehold improvements with a cost of $331,456 and a book value of $45,384 as an amount due from shareholder, in connection with a commitment made by the shareholder regarding the termination of a lease agreement of a 27 acre parcel of land previously leased to the Company. b) Non-Cash Financing Activities ----------------------------- During the six months ended June 30, 2002, the Company issued a 10% stock dividend, resulting in the capitalization of 188,367 common shares at a market price of $3.01 as of June 28, 2002. c) Other Cash Flow Transactions ---------------------------- Other cash flow transactions for the six months ended June 30, 2002 and 2001, include interest payments amounting to approximately $34,000 and $107,700, respectively. There were no income tax payments for the six months ended June 30, 2002 and 2001. Note 8 - 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. Adoption of this statement is not expected to have a material effect on the Company's financial condition or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 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 extraordinary item, net of related income tax effect. As a result, the criteria for Opinion No. 30 will now be used to classify those gains and losses. This amendment is effective fiscal years beginning after May 15, 2002. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", which requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment became effective for transactions occurring after May 15, 2002. SFAS No. 145 is not expected to have significant effect on the Company's financial condition or result of operations. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ------------------------------------------------------------------- FINANCIAL CONDITION ------------------- Margo Caribe, Inc. and its subsidiaries, (collectively, the "Company") are in the business of growing, distributing and installing tropical plants and trees. The Company is also engaged in the manufacturing and distribution of its own line ("Rain Forest") of planting media and aggregates, the distribution of lawn and garden products and also provides landscaping design and installation services. The Company's real estate development division is currently permitting and designing an affordable housing project in the Municipality of Arecibo, Puerto Rico. PRINCIPAL OPERATIONS -------------------- The Company's operations are focused in the Commonwealth of Puerto Rico ("Puerto Rico"). These operations are conducted at a 92 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 92 acre farm is leased from Michael J. Spector and Margaret Spector, who are directors, officers and principal shareholders of the Company. The 13 acre nursery in Barranquitas is leased from an unrelated third party. The Company's operations include Margo Caribe, Inc. (the holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc. ("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest Products Group, Inc. ("Rain Forest"), Margo Flora, Inc., Garrochales Construction and Development Corporation and Margo Development Corporation, all Puerto Rico corporations. Nursery Farms, which operates under the trade name of Margo Farms del Caribe, is engaged in the production and distribution of tropical and flowering plants. Its products are primarily utilized for the interior and exterior landscaping of office buildings, shopping malls, hotels and other commercial sites, as well as private residences. In Vega Alta, Nursery Farms produces various types of palms, flowering and ornamental plants, trees, shrubs, bedding plants and ground covers. In Barranquitas, Nursery Farms (operating as Margo Flora) produces orchids, bromeliads, anthuriums, spathiphylum and poincettias. Its customers include wholesalers, retailers, chain stores and landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, both Nursery Farms and Margo Flora enjoy a 90% tax exemption under Puerto Rico law from income derived from its nursery business in Puerto Rico. Landscaping provides landscaping, maintenance and design services to customers in Puerto Rico and the Caribbean, including commercial as well as residential landscape design and landscaping. 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 14 plastic pottery, and DEROMA Italian terracotta pottery. Garden Products also markets and merchandises Ortho and Round-up brand products for the Scotts Company at all Home Depot stores operating in Puerto Rico. Rain Forest is engaged in the manufacturing of potting soils, mulch, professional growing mixes, river rock, gravels and related aggregates. Rain Forest's products are marketed by Garden Products. The Company enjoys a tax exemption grant from the Government of Puerto Rico for the manufacturing operations of Rain Forest. Margo Development Corporation and Garrochales Construction and Development Corporation are presently engaged in designing and obtaining development permits on a new site for the development of a residential project in the Municipality of Arecibo, Puerto Rico. FUTURE OPERATIONS ----------------- The Company will continue to concentrate its economic and managerial resources in expanding and improving its present operations in Puerto Rico and the Caribbean. However, the Company will also explore attractive business oportunities in the mainland United States. The Company is a supplier of plants and lawn and garden products for The Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and garden products according to Nursery Retailer magazine. Home Depot currently has seven stores in Puerto Rico and plans to open one more store during 2002. The Company is also a supplier of live goods (plant material) to Wal*Mart International, which has ten stores throughout Puerto Rico. The Company also supplies lawn and garden products to six Sam's Club stores, a division of Wal*Mart International. During the fourth quarter of 2001, the Company became a supplier to Costco Wholesale, which opened two stores in Puerto Rico and plans to open two additional stores during 2002. 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 obtaining permits for the development of this site. The Company recently received an endorsement from the Puerto Rico Housing Bank, which will enable prospective buyers to qualify for government assistance in purchasing homes from this project. RESULTS OF OPERATIONS FOR THE SIX MONTHS AND SECOND QUARTERS ENDED JUNE 30, 2002 -------------------------------------------------------------------------------- AND 2001 -------- During the six months ended June 30, 2002, the Company had net income of approximately $323,000, or $.15 per share (diluted), compared to approximately $181,000 for the same period in 2001, or $.09 per share. 15 For the quarter ended June 30, 2002, the Company had net income of approximately $143,000 or $.07 per share, compared to approximately 110,000, or $.05 per share for the same period in 2001. The increases in net income for the six months and the quarter ended June 30, 2002 when compared to the same periods in 2001 is principally due to higher revenues and gross profits obtained in the landscaping business segment. Sales ----- The Company's consolidated net sales for the six months ended June 30, 2002 were approximately $4,809,000, compared to $4,452,000 for the same period in 2001, representing an increase of 8%. The Company's consolidated net sales for the quarter ended June 30, 2002 were approximately $2,489,000, compared to $2,283,000 for the same period in 2001, representing an increase of 9%. The 8% increase in consolidated net sales for the six months ended June 30, 2002 was due to an increase of approximately 44% in revenues from landscaping services when compared to the same period in 2001. Sales of plant material remained comparable, while sales of lawn and garden products decreased by approximately 4% during the six month period ended June 30, 2002. The 9% increase in consolidated net sales for the quarter ended June 30, 2002 was due to an increase of 29% in revenues from landscaping services and an increase of 19% in sales of plant material that were partly offset by a decrease in sales of lawn and garden products of 14%. Decrease in sales of lawn and garden products during the six months ended June 30, 2002 was due to a reduction in sales to Wal*Mart International. Gross Profits ------------- The Company's consolidated gross profit for the six months ended June 30, 2002 was approximately 41%, compared to 37% for the same period in 2001, or an increase of 4%. Consolidated gross profit for the second quarter of 2002 was approximately 40%, compared to 37% for the same period in 2001, or an increase of 3%. The increase in gross profit for the six months ended June 30, 2002 when compared to the same period in 2001 was the result of an increase of approximately 5% in gross profit from sales of lawn and garden products (which accounts for 30% of consolidated net sales in the first half of 2002), and an increase of approximately 11% in gross profit from revenues of landscaping services (which accounts for approximately 28% of consolidated net sales in the first half of 2002). Gross profit on sales of plant material remained comparable during both periods. 16 The increase in gross profit for the second quarter ended June 30, 2002 when compared to the same period in 2001 was the result of an increase of approximately 5% in gross profit from sales of lawn and garden products (which accounts for 29% of consolidated net sales in the second quarter of 2002), and an increase of approximately 9% in gross profit from revenues of landscaping services (which accounts for approximately 25% of consolidated net sales in the second quarter of 2002). Gross profit on sales of plant material remained comparable during both periods. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses (SG&A) were approximately $1,587,000 and $1,435,000 for the six months ended June 30, 2002 and 2001, respectively. This represented an 11% increase in dollar terms and a 1% increase as a percentage of sales. The increase in SG&A for the six months ended June 30, 2002, when compared to the same period in 2001 is principally due to increases in various administrative expenses. SG&A for the second quarter of 2002 were approximately $860,000 compared to $742,000 for the same period in 2001. This represented a 16% increase in dollar terms and a 2% increase as a percentage of sales. The increase in SG&A for the second quarter of 2002 when compared to the same period in 2001 is also principally due to increases in various administrative expenses. Other Income and Expenses ------------------------- The decrease in interest income for the six months as well as the second quarter ended June 30, 2002, when compared to the same periods in 2001, is due to a reduction of funds invested as well as lower yields obtained during 2002. The decrease in interest expense for the six months and second quarter ended June 30, 2002, when compared to the same periods in 2001, is the result of a lower average outstanding balance of notes payable during the periods, and lower interest rates experienced. FINANCIAL CONDITION ------------------- The Company's financial condition at June 30, 2002 remains comparable with that of December 31, 2001. The Company's current ratio did not change significantly, with a ratio of 2.3 to 1 at June 30, 2002, compared to 2.1 to 1 at December 31, 2001. At June 30, 2002, the Company had cash of approximately $856,000, compared to cash of $839,000 at December 31, 2001. The increase in cash at June 30, 2002 is principally due to cash flows from operations of $156,000, that were partially offset by cash outflows from additions to property and equipment ($56,000) and repayment of long-term debt ($79,000). 17 Shareholders' equity at June 30, 2002 increased due to net income for the six month period. On June 28, 2002, the Company issued a 10% stock dividend. No other dividends were declared nor shares of stock issued during the six months ended June 30, 2002. Current Liquidity and Capital Resources --------------------------------------- The nursery industry requires producers to maintain large quantities of stock plants and inventory to meet customer demand and to assure a new source of products in the future. The Company believes it has adequate resources to meet its current and anticipated liquidity and capital requirements. The Company finances its working capital needs from cash flows from operations as well as borrowings under two short-term credit facilities with a local commercial bank. As of August 13, 2002, the Company had available short-term credit facilities aggregating $3.0 million, of which approximately $1,070,000 were available as of such date. Of the $3.0 million credit facility, $2.5 million is secured by the Company's trade accounts receivable and inventories. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Not applicable. 18 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 ----------------------------------------------------- The Company held its annual meeting of shareholders on May 24, 2002. At this meeting, shareholders were asked to vote on two proposals: the election of seven directors and the ratification of the Company's independent auditors. Quorum at the meeting consisted of 1,769,967 shares, or approximately 94% of 1,883,822 total outstanding commons shares. The proposals, together with voting results, were as follows: PROPOSAL FOR WITHHELD --------------------------- --------- -------- 1. Election of seven directors Michael J. Spector 1,761,467 8,500 Margaret D. Spector 1,761,467 8,500 Blas R. Ferraiuoli 1,769,967 0 Michael A. Rubin 1,769,967 0 Ramon L. Dominguez 1,769,967 0 Mark H. Greene 1,769,967 0 John A. Wing 1,769,967 0 J. Fernando Rodriguez 1,761,467 8,500 2. Ratification of Deloitte & Touche, LLP as independent auditors FOR AGAINST ABSTAIN ------------ -------------- ------- 1,769,732 35 200 There were no broker non-votes on either proposal. 19 ITEM 5. OTHER INFORMATION ----------------- On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend on the Company's common stock. The stock dividend was issued on June 28, 2002 to shareholders of record as of June 14, 2002. The stock dividend resulted in 188,367 additional shares issued. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits -------- None. (b) Reports on Form 8-K. ------------------- The Company did not file any Reports on Form 8-K during the quarter ended June 30, 2002. 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: August 13, 2002 By: /s/ Michael J. Spector ---------------- ---------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer Date: August 13, 2002 By: /s/ J. Fernando Rodriguez --------------- ----------------------------- J. Fernando Rodriguez President and Chief Operating Officer Date: August 13,2002 By: /s/ Alfonso Ortega --------------- ----------------------- Alfonso Ortega, Vice President, Treasurer, Principal Financial and Accounting Officer 20