10-Q 1 margocaribe10q_sept2001.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 September 30, 2001 [ ] 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 1,883,822 shares of common stock, $.001 par value, outstanding as of November 14, 2001. ================================================================================ MARGO CARIBE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2001 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 19 ----------- PART II ------- ITEM 1. LEGAL PROCEEDINGS 20 ----------------- ITEM 2. CHANGES IN SECURITIES 20 --------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20 ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE 20 ------------------------------- OF SECURITY HOLDERS ------------------- ITEM 5. OTHER INFORMATION 20 ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 -------------------------------- SIGNATURES ---------- 2 FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "believes", "estimate", "project", or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, natural disasters, competitive and regulatory factors and legislative changes, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstance after the date of such statements. 3

MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2001 and December 31, 2000 (Unaudited) ASSETS ------ 2001 2000 ----------- ----------- Current assets: Cash and equivalents $ 706,969 $ 973,061 Short-term investments - 500,000 Accounts receivable, net 1,491,668 1,235,706 Inventories 3,837,489 3,170,074 Prepaid expenses and other current assets 251,168 308,499 ----------- ----------- Total current assets 6,287,294 6,187,340 Property and equipment, net 1,523,377 1,676,158 Due from shareholder 161,043 394,269 Land held for future development 988,485 988,485 Notes receivable 68,495 60,754 Other assets 130,375 68,390 ----------- ----------- Total assets $ 9,159,069 $ 9,375,396 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 36,050 $ 103,403 Notes payable 1,930,500 2,455,500 Accounts payable 1,081,425 1,138,979 Accrued expenses 233,073 199,144 ----------- ----------- Total current liabilities 3,281,048 3,897,026 Long-term debt 435,203 239,482 ----------- ----------- Total liabilities 3,716,251 4,136,508 ----------- ----------- 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; 1,923,622 and 1,922,122 shares issued,1,883,822 and 1,882,322 shares outstanding in 2001 and 2000, respectively 1,924 1,922 Additional paid-in capital 4,659,792 4,657,544 Retained earnings 877,390 675,710 Treasury stock, 39,800 common shares,at cost (96,288) (96,288) ----------- ----------- Total shareholders' equity 5,442,818 5,238,888 ----------- ----------- Total liabilities and shareholders' equity $ 9,159,069 $ 9,375,396 =========== =========== See accompanying notes to condensed consolidated financial statements.

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MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods ended September 30, 2001 and 2000 (Unaudited) Three Months ended September 30, Nine Months ended September 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net sales $2,242,815 $1,632,205 $6,695,086 $6,108,481 Cost of sales 1,449,194 1,186,234 4,266,408 4,116,185 ---------- ---------- ---------- ---------- Gross profit 793,621 445,971 2,428,678 1,992,296 Selling, general and administrative expenses 752,256 598,015 2,187,068 1,842,664 ---------- ---------- ---------- ---------- Income (loss) from operations 41,365 (152,044) 241,610 149,632 ---------- ---------- ---------- ---------- Other income (expense): Interest income 14,638 26,196 48,452 80,991 Interest expense (34,728) (34,052) (107,268) (90,386) Terminated merger expenses - (50,448) - (431,657) Gain on disposition of equipment - - 13,913 - Miscellaneous income (expense) (832) 3,000 4,973 12,109 ---------- ---------- ---------- ---------- (20,922) (55,304) (39,930) (428,943) ---------- ---------- ---------- ---------- Income (loss) before provision for income tax 20,443 (207,348) 201,680 (279,311) Income tax provision - - - - ---------- ---------- ---------- ---------- Net income (loss) $ 20,443 $ (207,348) $ 201,680 $ (279,311) ========== ========== ========== =========== Basic and diluted income (loss) per common share $ .01 $ (.11) $ .11 $ (.15) ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements.

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MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Nine Months ended September 30, 2001 (Unaudited) Common Common Additional stock stock paid-in Retained Treasury shares amount capital earnings stock Total ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 1,882,322 $ 1,922 $4,657,544 $ 675,710 $ (96,288) $5,238,888 Issuance of common stock from conversion of stock options 1,500 2 2,248 -- -- 2,250 Net income -- -- -- 201,680 -- 201,680 ---------- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 2001 1,883,822 $ 1,924 $4,659,792 $ 877,390 $ (96,288) $5,442,818 ========== ========== ========== ========== ========== ==========

See accompanying notes to condensed consolidated financial statements. 6

MARGO CARIBE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2001 and 2000 (Unaudited) 2001 2000 ----------- ----------- Cash flows from operating activities: ------------------------------------- Net income (loss) $ 201,680 $ (279,311) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 345,314 336,686 Provision for uncollectible accounts receivable 37,533 18,000 Gain on disposition of equipment (13,913) -- Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable (293,495) 20,060 Inventories (667,415) (632,326) Prepaid expenses and other current assets 57,331 36,167 Other assets (61,985) (52,549) Accounts payable (57,554) 142,073 Deferred revenue -- (111,885) Accrued expenses 33,929 (9,980) ----------- ----------- Net cash used in operating activities (418,575) (533,065) ----------- ----------- Cash flows from investing activities: ------------------------------------- Additions to property and equipment (192,533) (164,184) Increase in notes receivable (18,193) -- Repayment of notes receivable 10,452 -- Due from shareholder 233,226 (74,504) Proceeds from disposition of equipment 13,913 -- ----------- ----------- Net cash used in investing activities 46,865 (238,688) ----------- ----------- Cash flows from financing activities: ------------------------------------- Proceeds from long-term debt 222,051 -- Repayment of long-term debt (93,683) (101,806) Increase in notes payable 200,000 500,000 Repayment of notes payable (225,000) -- Issuance of common stock from conversion of stock options 2,250 19,845 ----------- ----------- Net cash provided by financing activities 105,618 418,039 ----------- ----------- Net decrease in cash (266,092) (353,714) -------------------- ----------- ----------- Cash and equivalents at beginning of period 973,061 1,082,592 ------------------------------------------- ----------- ----------- Cash and equivalents at end of period $ 706,969 $ 728,878 ------------------------------------- =========== =========== 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 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 Company's results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2001. 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, 2000. On April 11, 2000, the Company entered into an agreement to merge with iTract, LLC, a privately held development stage internet company. The merger called for the sale of the Company's operating businesses, and an agreement to that effect was reached on June 30, 2000. Effective June 30, 2000, the Company presented its assets, liabilities, results of operations and cash flows as discontinued operations. However, certain conditions for the Company's obligation to proceed with the merger were not met as of March 1, 2001, and the Company's Board of Directors decided that it was not in the best interest of the Company or its shareholders to proceed with the transaction and on March 5, 2001 voted to terminate the merger agreement. The agreement for the sale of the Company's operating businesses was also terminated and the Company decided to continue to focus on expanding and developing its existing business. As a result, the Company changed the presentation of its assets, liabilities, results of operations and cash flows in the accompanying condensed consolidated financial statements for the nine months ended September 30, 2000 from discontinued operations to continuing operations. The provision for loss on disposition of 8 discontinued operations recorded on June 30, 2000 was reversed as a result of the termination of the merger agreement, and merger expenses actually incurred during the periods reported are reflected in the accompanying condensed consolidated financial statements. Note 2 - Use of Estimates in the Preparation of Financial Statements -------------------------------------------------------------------- The preparation of 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 and 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. Note 3 - Inventories -------------------- At September 30, 2001 and December 31, 2000, inventories included the following: Description 2001 2000 --------------------------- ---------- ---------- Plant material $2,997,370 $2,556,984 Lawn and garden products 427,081 250,135 Raw materials and supplies 413,038 362,955 ---------- ---------- $3,837,489 $3,170,074 ========== ========== Note 4 - Property and Equipment ------------------------------- At September 30, 2001 and December 31, 2000 property and equipment included the following: Description 2001 2000 ----------------------------- ---------- ---------- Leasehold improvements $ 1,355,652 $ 1,338,304 Equipment and fixtures 1,601,067 1,443,925 Transportation equipment 460,232 442,189 Real estate property 224,327 224,327 ----------- ----------- 3,641,278 3,448,745 Less accumulated depreciation and amortization (2,117,901) (1,772,587) ----------- ----------- $ 1,523,377 $ 1,676,158 =========== =========== 9 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. Basic and diluted income (loss) per common share for the periods ended September 30, 2001 and 2000 were determined as follows:

Three Months Nine Months ended September 30, ended September 30, ----------------------- ----------------------- Basic income (loss) per common share: 2001 2000 2001 2000 ------------------------------------ ---------- ---------- ---------- ---------- Net income (loss) attributable to common shareholders $ 20,443 $ (207,348) $ 201,680 $ (279,311) ========== ========== ========== ========== Weighted average number of common shares outstanding 1,883,072 1,882,322 1,882,572 1,882,322 ========== ========== ========== ========== Basic income (loss) per common share $ .01 $ (.11) $ .11 $ (.15) ========== ========== ========== ========== Diluted income (loss) per common share: -------------------------------------- Net income (loss) attributable to common shareholders $ 20,443 $ (207,348) $ 201,680 $ (279,311) ========== ========== ========== ========== Weighted average number of common shares outstanding 1,882,072 1,882,322 1,882,572 1,882,322 Plus incremental shares from assumed exercise of stock options 44,782 - 24,602 - ---------- ---------- ---------- ---------- Adjusted weighted average shares 1,926,854 1,882,322 1,907,174 1,882,322 ========== ========== ========== ========== Diluted income (loss) per common share $ .01 $ (.11) $ .11 $ (.15) ========== ========== ========== ==========

For the three and the nine month periods ended September 30, 2000, the effect of the assumed exercise of stock options determined by using the treasury stock method was antidilutive; thus no incremental shares were added to the weighted average number of common shares outstanding. 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 10 about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Statement requires a reconciliation of total segment revenue and expense items and segment assets to the amounts in the enterprise's financial statements. SFAS 131 also requires a descriptive report on how the operating segments were determined, the products and services provided by the operating segments, and any measurement differences used for segment reporting and financial statement reporting. The Company's management monitors and manages the financial performance of three primary business segments: the production and distribution of plants, sales of lawn and garden products and landscaping services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, included in the Company's annual consolidated financial statements. The Company evaluates performance based on net income or loss. The financial information presented below was derived from the Company's accounting system and is based on internal management accounting policies. The information presented does not necessarily represent each segments's financial condition and results of operations as if they were independent entities. The Company's segment information for the three months ended September 30, 2001 and 2000, is as follows:

Three Months ended September 30, 2001 -------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------- Revenues from external customers $ 725,322 $ 750,436 $ 767,057 $2,242,815 Intersegment revenues 105,279 30,489 -- 135,768 Interest income 14,638 -- -- 14,638 Interest expense 34,728 -- -- 34,728 Depreciation and amortization 110,678 10,039 5,421 126,138 Segment income (loss) 22,045 18,687 (20,289) 20,443

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Three Months ended September 30, 2000 -------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------------- Revenues from external customers $ 699,915 $ 472,033 $ 460,257 $ 1,632,205 Intersegment revenues 78,470 5,431 -- 83,901 Interest income 26,196 -- -- 26,196 Interest expense 34,052 -- -- 34,052 Depreciation and amortization 93,471 7,884 11,315 112,670 Segment loss (151,468) (6,480) (49,400) (207,348)

The Company's segment information as of and for the nine months September 30, 2001 and 2000, is as follows: Nine Months ended September 30, 2001 ------------------------------------------------------------ Lawn & Garden Plants Products Landscaping Totals ------------------------------------------------------------ Revenues from external customers $ 2,757,594 $ 2,252,915 $ 1,684,577 $ 6,695,086 Intersegment revenues 184,669 65,621 -- 250,290 Interest income 48,452 -- -- 48,452 Interest expense 107,268 -- -- 107,268 Depreciation and amortization 295,386 33,421 16,507 345,314 Segment income (loss) 202,519 75,577 (76,416) 201,680 Segment assets 7,168,703 1,121,681 868,685 9,159,069 Expenditures for segment assets 192,533 -- -- 192,533

Nine Months September 30, 2000 ------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------------------------------------------------- Revenues from external customers $ 2,773,307 $ 1,587,091 $ 1,748,083 $ 6,108,481 Intersegment revenues 257,684 22,691 -- 280,375 Interest income 80,991 -- -- 80,991 Interest expense 90,386 -- -- 90,386 Depreciation and amortization 275,309 24,985 36,392 336,686 Segment income (loss) (269,229) 72,737 (82,819) (279,311) Segment assets 7,445,366 1,104,824 525,727 9,075,917 Expenditures for segment assets 164,184 -- -- 164,184

12 Note 7 - Supplemental Disclosures for the Consolidated Statements of Cash Flows ------------------------------------------------------------------------------- a) Non-Cash Investing Activities ----------------------------- During the nine months ended September 30, 2001, the Company applied short-term investments amounting to $500,000 against a related note payable for the same amount. During the nine months ended September 30, 2000, 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) Other Cash Flow Transactions ---------------------------- Other cash flow transactions for the nine months ended September 30, 2001 and 2000, include interest payments amounting to approximately $113,800 and $89,500, respectively. There were no income tax payments for the nine months ended September 30, 2001 and 2000. 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 Arecibo, Puerto Rico. TERMINATION OF MERGER AGREEMENT WITH iTRACT, LLC ------------------------------------------------ On April 11, 2000, the Company entered into an agreement (the "iTract Merger Agreement") to merge with iTract, LLC, a privately held developmental stage internet company. The iTract Merger Agreement provided for the sale of all operating assets (subsidiaries) prior to the consummation of the merger. Accordingly, on June 30, 2000, the Company entered into an agreement with Empresas Margo, Inc., a wholly owned company of Michael J. Spector (the principal shareholder of the Company) to sell all of its assets. Because several of the conditions necessary for the merger to proceed did not occur by the agreed upon date of March 1, 2001, the Company's Board of Directors decided that it was not in the best interest of the Company or its shareholders to continue with the transaction, and on March 5, 2001, voted to terminate the iTract Merger Agreement. The Company also terminated the agreement with Empresas Margo, Inc. 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 Cali Orchids, Inc., 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. 14 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, Nursery Farms enjoys a 90% tax exemption under Puerto Rico law from income derived from its nursery business in Puerto Rico. Landscaping provides landscaping, maintenance and design services to customers in Puerto Rico 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 hoses, L.R. Nelson Consumer Products, Tel-Com decorative pottery, Crysalia plastic pottery, and DEROMA Italian terracotta pottery. Garden Products also markets and merchandises Ortho and Round-up brand products for the Scotts Company at all Home Depot stores operating in Puerto Rico. Rain Forest is engaged in the manufacturing of potting soils, mulch, professional growing mixes, river rock and gravels. 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 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. The Company's Board of Directors has determined that these operations present the Company's most attractive opportunities for the near future. The Board believes that the Company should continue to capitalize on its advantage as one of the largest, full service nurseries in the region. 15 The Company is a supplier to 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. -------- The Company is the largest supplier of live goods (plant material) to Wal*Mart International, which has ten stores throughout Puerto Rico, including a recently opened "super center".The Company also supplies plant material and lawn and garden products to six Sam's Club, a division of Wal*Mart International. During the first quarter of 2001, the Company increased its sales to Kmart Corporation. Kmart has 24 stores in Puerto Rico and 2 stores in the U.S. Virgin Islands, and promotes its garden centers' sales with the Company's plant material as well as with lawn and garden products. The Company is currently concluding the landscaping of a large commercial shopping center in Canovanas, Puerto Rico, with an approximate contract value of $600,000. During the fourth quarter of 2001, the Company was awarded another landscaping contract amounting to approximately $225,000 to be completed before December 31, 2001. 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 $988,000 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. 16 RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THIRD QUARTERS ENDED ------------------------------------------------------------------ SEPTEMBER 30, 2001 AND 2000 --------------------------- During the nine months ended September 30, 2001, the Company had net income of approximately $202,000, or $.11 per share, compared to a net loss of approximately $279,000 for the same period in 2000, or $.15 per share. For the quarter ended September 30, 2001, the Company had net income of approximately $20,000 or $.01 per share, compared to a net loss of approximately $207,000, or $.11 per share for the same period in 2000. The increases in net income for both the nine months and the quarter ended September 30, 2001 when compared to the same periods in 2000 are, in part, due to legal, professional and other expenses incurred during these periods in 2000, in connection with the terminated merger transaction with iTract, LLC. Merger related expenses amounted to approximately $432,000 and $50,000 for the nine months and the quarter ended September 30, 2000, respectively. Also, the increase in net income for the quarter ended September 30, 2001, when compared to the some period in 2000, was due to a higher gross profit in 2001. Income from operations for the the nine months and the quarter ended September 30, 2001 were approximately $242,000 and $41,000, respectively, compared to operating income of approximately $150,000 for the nine months ended September 30, 2000 and an operating loss of $152,000 for the quarter ended September 30, 2000. Increases in income from operations for the nine months and quarter ended September 30, 2001 are due to higher gross profits (sufficient to absorb increases in selling, general and administrative expenses) during these periods when compared to the same periods in 2000. Sales ----- The Company's consolidated net sales for the nine months ended September 30, 2001 were approximately $6,695,000, compared to $6,108,000 for the same period in 2000, representing an increase of 9.6%. The Company's consolidated net sales for the quarter ended September 30, 2001 were approximately $2,243,000, compared to $1,632,000 for the same period in 2000, representing an increase of 37.4%. The increase of almost 10% in consolidated net sales for the nine months ended September 30, 2001 was due to an increase of approximately 42% in sales of lawn and garden products when compared to the same period in 2000, while sales of both plant material and landscaping services remained comparable. The increase of 37% in consolidated net sales for the quarter ended September 30, 2001 was due to an increase of 64% in sales of lawn and garden products together with a 67% increase in revenues from 17 landscaping services. Sales of plant material remained comparable. Gross Profits ------------- The Company's consolidated gross profit for the nine months ended September 30, of 2001 was approximately 36%, compared to 33% for the same period in 2000, or an increase of 3%. Consolidated gross profit for the third quarter of 2001 was approximately 35%, compared to 27% for the same period in 2000, or an increase of 8%. The increase in gross profit for the nine months and the third quarter ended September 30, 2001 when compared to the same periods in 2000 were the result of an increase of approximately 4% in gross profit of plant material (which accounts for 41% of consolidated net sales in 2001), and an increase of approximately 3% in gross profit of landscaping services (which accounts for approximately 25% of consolidated net sales in 2001). Gross profit on sales of lawn and garden products remained comparable during both periods in 2001 and 2000. During the third quarter of 2001, gross profit from landscaping services had a proportionately higher increase than for the nine month period due to more profitable projects during 2001. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses (SG&A) were approximately $2,187,000 and $1,843,000 for the nine months ended September 30, 2001 and 2000, respectively. This represented a 19% increase in dollar terms and a 3% increase as a percentage of sales. The increase in SG&A for nine months ended September 30, 2001, when compared to the same period in 2000 is principally due to increases in shipping & warehousing costs (from increased sales of lawn and garden products) and other increases in certain general and administrative expenses. SG&A for the third quarter of 2001 were approximately $752,000 compared to $598,000 for the same period in 2000. This represented a 26% increase in dollar terms and a 3% decrease as a percentage of sales. The increase in SG&A for the second quarter of 2001 when compared to the same period in 2000 is also principally due to increases in shipping and warehousing costs, and administrative expenses. Other Income and Expenses ------------------------- The decrease in interest income for the nine months as well as the third quarter ended September 30, 2001, when compared to the same periods in 2000, is due to the collection of a note receivable during the latter part of 2000, as well as lower yields obtained during 2001 on cash and cash equivalents invested. The increase in interest expense for the nine months and quarter ended September 30, 2001, when compared to the same periods in 2000, is the result of additional short term borrowings during the 18 period (with repayment towards the end of the second quarter) and the increase in long term debt. During the period ended September 30, 2000, the Company was negotiating a proposed merger with iTract, LLC, a developmental stage internet company. Professional (legal, accounting and other expenses) services incurred in connection with such merger negotiations during the nine months and the quarter ended September 30, 2000 amounted to approximately $432,000 and $50,000, respectively. FINANCIAL CONDITION ------------------- The Company's financial condition at September 30, 2001 remains comparable with that of December 31, 2000. The Company's current ratio continues to be strong, with a ratio of 1.9 to 1 at September 30, 2001, compared to 1.6 to 1 at December 31, 2000. At September 30, 2001, the Company had cash of approximately $707,000, compared to cash of $973,000 and short term investments of $500,000 at December 31, 2000. The decrease in cash at September 30, 2001 is principally due to cash out flows from operations ($419,000), additions to property and equipment ($193,000) and repayment of short and long-term debt ($319,000), offset by cash flows from proceeds of short and long-term debt ($422,000) and repayment by shareholder from advances previously made by the Company ($233,000). Shareholders' equity at September 30, 2001 increased principally due to net income for the nine month period. No dividends were declared during the nine months ended September 30, 2001. Current Liquidity and Capital Resources --------------------------------------- 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 lines of credit with two local commercial banks. The two credit facilities provide for borrowings up to $2 million, of which approximately $570,000 was available at September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Not applicable. 19 PART II - Other Information --------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- In the opinion of the Company's management, the pending or threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition or results of operations 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 October 26, 2001. At this meeting, shareholders were asked to vote on two proposals: the election of directors and the ratification of the Company's independent auditors. Quorum at the meeting consisted of 1,554,965 shares, or 82.5% of 1,883,822 total outstanding common shares. The proposals, together with voting results were as follows: PROPOSAL FOR WITHHELD ----------------------------- --------- -------- 1.Election of eight Directors Michael J. Spector 1,548,265 6,700 Margaret D. Spector 1,548,265 6,700 Blas R. Ferraiuoli 1,554,965 0 Michael A. Rubin 1,554,965 0 Ramon L. Dominguez 1,554,965 0 Mark H. Greene 1,554,965 0 John A. Wing 1,554,965 0 J. Fernando Rodriguez 1,548,465 6,500 2.Ratification of Deloitte & Touche LLP as independent auditors FOR AGAINST --------- -------- 1,554,965 0 There were no abstentions or broker non-votes on either proposal. ITEM 5. OTHER INFORMATION ----------------- Not applicable. 20 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 September 30, 2001. 21 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARGO CARIBE, INC. Date: November 14, 2001 By: /s/ Michael J. Spector ------------------ ---------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer Date: November 14, 2001 By: /s/ J. Fernando Rodriguez ----------------- ----------------------------- J. Fernando Rodriguez President and Chief Operating Officer Date: November 14, 2001 By: /s/ Alfonso Ortega ------------------ ---------------------------- Alfonso Ortega, Vice President, Treasurer, Principal Financial and Accounting Officer 22