-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HUmB7oaYlEdbwiKg/C7FqKE29B/VhKZQ8HyeARWIUvOih6ifol50V60zdzL8n2pW 7FeOtmc96X5Penz8noUxOQ== 0000950170-99-001742.txt : 19991117 0000950170-99-001742.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950170-99-001742 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARGO CARIBE INC CENTRAL INDEX KEY: 0000808493 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 592807561 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15336 FILM NUMBER: 99753052 BUSINESS ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 BUSINESS PHONE: 8098832570 MAIL ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 STREET 2: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 FORMER COMPANY: FORMER CONFORMED NAME: MARGO NURSERY FARMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 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, 1999 [ ] 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 1,875,322 shares of common stock, $.001 par value, outstanding as of November 12, 1999. MARGO CARIBE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS PART I PAGE ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statement of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 16 PART II ITEM 1. LEGAL PROCEEDINGS 24 ITEM 2. CHANGES IN SECURITIES 24 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 ITEM 5. OTHER INFORMATION 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24 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 CONSOLIDATED BALANCE SHEETS September 30, 1999 and December 31, 1998 ASSETS ------- 1999 1998 ----------- ----------- (UNAUDITED) (AUDITED) Current assets: Cash and equivalents $ 809,478 $ 747,390 Short-term investments 500,000 500,000 Accounts receivable, net of allowance for doubtful accounts of $143,000 in 1999 and $123,700 in 1998 1,018,476 1,228,572 Inventories 2,888,599 2,264,372 Prepaid expenses and other current assets 228,621 190,804 ----------- ----------- Total current assets 5,445,174 4,931,138 Property and equipment, net 2,002,987 2,094,799 Due from shareholder 290,226 290,226 Notes receivable 625,379 620,413 Other assets 121,045 53,632 ----------- ----------- Total assets $ 8,484,811 $ 7,990,208 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 39,932 $ 158,468 Notes payable 1,000,000 500,000 Accounts payable 553,244 665,140 Accrued expenses 170,884 211,077 ----------- ----------- Total current liabilities 1,764,060 1,534,685 Long-term debt 85,880 85,880 ----------- ----------- Total liabilities 1,849,940 1,620,565 ----------- ----------- 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; 1,915,122 shares issued, and 1,875,322 shares outstanding 1,915 1,915 Additional paid-in capital 4,637,706 4,637,706 Retained earnings 2,091,538 1,826,310 Treasury stock, 39,800 common shares,at cost (96,288) (96,288) ----------- ----------- Total shareholders' equity 6,634,871 6,369,643 ----------- ----------- Total liabilities and shareholders' equity $ 8,484,811 $ 7,990,208 =========== =========== See accompanying notes to consolidated financial statements. 4 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods ended September 30,1999 and 1998 (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 1,586,927 $ 1,012,722 $ 4,584,454 $ 3,789,737 Cost of sales 978,479 895,399 2,877,185 2,726,391 ----------- ----------- ----------- ----------- Gross profit 608,448 117,323 1,707,269 1,063,346 Selling, general and administrative expenses 568,152 497,661 1,687,603 1,560,070 ----------- ----------- ----------- ----------- Income (loss) from operations 40,296 (380,338) 19,666 (496,724) ----------- ----------- ----------- ----------- Other income (expense): Interest income 24,451 30,347 75,076 90,324 Interest expense (15,728) (16,228) (36,352) (49,707) Hurricane Georges assistance proceeds (loss) 150,080 (1,009,039) 162,880 (1,009,039) Write-down of note receivable -- (201,621) -- (201,621) Gain on disposition of equipment 13,705 -- 16,451 -- Miscellaneous income 2,512 -- 27,507 33,933 ----------- ----------- ----------- ----------- 175,020 (1,196,541) 245,562 (1,136,110) ----------- ----------- ----------- ----------- Income (loss) before provision for income tax 215,316 (1,576,879) 265,228 (1,632,834) Income tax provision -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ 215,316 $(1,576,879) $ 265,228 $(1,632,834) =========== =========== =========== =========== Basic and diluted income (loss) per common share $ .11 $ (.84) $ .14 $ (.87) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 5 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Nine Months ended September 30, 1999 (Unaudited)
Common Common Additional stock stock paid-in Retained Treasury shares amount capital earnings stock Total ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 1,875,322 $ 1,915 $4,637,706 $1,826,310 $ (96,288) $6,369,643 Net income -- -- -- 265,228 -- 265,228 ---------- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 1999 1,875,322 $ 1,915 $4,637,706 $2,091,538 $ (96,288) $6,634,871 ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 6 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1999 and 1998 (Unaudited)
1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 265,228 $(1,632,834) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 358,439 372,871 Write-down of note receivable -- 201,621 Provision for uncollectible accounts receivable 63,500 36,000 Provision for inventory valuation allowance -- 30,000 Gain on disposition of equipment (16,451) -- Assistance/insurance proceeds receivable related to Hurricane Georges (150,000) (367,000) Estimated loss of unsalable inventory from hurricane -- 650,000 Estimated costs of clean-up, restoration and debris removal -- 424,457 Loss on property destroyed by hurricane -- 171,039 Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable 296,596 144,689 Inventories (624,227) (73,985) Prepaid expenses and other current assets (28,029) 19,165 Other assets (67,413) 6,938 Accounts payable (111,896) 177,757 Accrued expenses (40,193) (3,863) ----------- ----------- Net cash provided by (used in) operating activities (54,446) 156,855 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (288,999) (212,628) Proceeds from sale of equipment 29,035 -- Decrease in due from shareholder -- 1,255 Increase in notes receivable (6,966) -- Collection of notes receivable 2,000 40,000 ----------- ----------- Net cash used in investing activities (264,930) (171,373) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (118,536) (112,227) Increase in notes payable 500,000 -- Acquisition of treasury stock -- (47,500) ----------- ----------- Net cash provided by (used in) financing activities 381,464 (159,727) ----------- ----------- NET INCREASE (DECREASE) IN CASH 62,088 (174,245) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 747,390 1,230,250 ----------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $ 809,478 $ 1,056,005 =========== ===========
See accompanying notes to consolidated financial statements. 7 MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 1 - BASIS OF PRESENTATION These interim 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. and Margo Development Corporation. These interim consolidated financial statements are unaudited, but include all adjustments that, in the opinion of management, are necessary for a fair statement 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 generally accepted accounting principles. The preparation of interim financial statements relies on estimates. Therefore, the results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the operating results to be expected for the year ending December 31, 1999. 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, 1998. NOTE 2 - USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 possible losses on existing accounts receivable that may 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. 8 The inventory valuation allowance is another estimate which is established through charges to cost of sales. Management's judgement in determining the adequacy of the allowance is based on several factors which include, but are not limited to, costs of specific inventory items, sales histories of these items and management's judgement with respect to future marketability of the inventory. Based on the above, it is possible that the Company's estimate of the inventory valuation allowance could change in the near term. The valuation allowance at September 30, 1999 and December 31, 1998 was $155,000 and $200,000, respectively. Set forth below is the movement of the inventory valuation allowance for the nine months ended September 30, 1999: DESCRIPTION AMOUNT - ---------------------------------- ---------- Beginning balance, January 1, 1999 $ 200,000 Write downs (45,000) Ending balance, September 30, 1999 $ 155,000 ========= NOTE 3 - INVENTORIES At September 30, 1999 and December 31, 1998, inventories included the following: DESCRIPTION 1999 1998 - -------------------------- ----------- ----------- Plant material $ 2,497,646 $ 1,900,250 Lawn and garden products 352,359 347,637 Raw materials and supplies 193,594 216,485 ----------- ----------- 3,043,599 2,464,372 Less valuation allowance (155,000) (200,000) ----------- ----------- $ 2,888,599 $ 2,264,372 NOTE 4 - NOTES RECEIVABLE The Company owns a note receivable with an outstanding principal balance of $996,962, from the sale of Cariplant S.A. (a former Dominican Republic subsidiary) to Altec International, C. por A. ("Altec"), another Dominican Republic company. The note is collateralized by the common stock and personal guarantee of the major shareholder of Cariplant. From the inception of the note in March 1993, the Company received several payments through December 1995. However, Altec has been unable to comply with the terms of the note. 9 Due to the unfavorable collection experience as well as the difficulties of operating in the Dominican Republic, in 1994 Company management wrote down the carrying amount of the note to $316,000, representing the estimated value of Cariplant's land and related improvements, including buildings, shadehouses, and fixed and installed equipment. On February 12, 1997, the Company obtained a junior lien on Cariplant's property and equipment and entered into an agreement with Altec to modify the repayment terms of the unpaid principal balance of $996,962, with payments of principal and interest commencing in the year 2000. Payment of interest on the note was waived through January 1, 2000. On September 23, 1998, the Dominican Republic was struck by Hurricane Georges severely damaging Cariplant's facilities. As a result of the damages caused by the hurricane, the Company wrote down the carrying value of the note to $100,000. The write down, amounting to $201,621 was included as an other expense in the consolidated statements of operations for the year ended December 31, 1998. At September 30, 1999 and December 31, 1998, notes receivable included the following:
DESCRIPTION 1999 1998 - ------------------------------------------------------------------------ -------- -------- Note receivable from Altec $100,000 $100,000 8% mortgage note, collateralized by land in South Florida, with interest payments due monthly and principal due in a balloon payment on November 28, 2000 475,000 475,000 10% note, collateralized by real property 26,331 26,331 8% notes, due on demand, personally guaranteed by present and former Company personnel 24,048 19,082 -------- -------- $625,379 $620,413 ======== ========
10 NOTE 5 - PROPERTY AND EQUIPMENT At September 30,1999 and December 31, 1998 property and equipment included of the following: DESCRIPTION 1999 1998 - -------------------------------------- ----------- ----------- Leasehold improvements $ 1,470,737 $ 1,590,145 Equipment and fixtures 1,501,005 1,618,312 Transportation equipment 322,422 407,266 Construction in progress 104,678 -- Real estate property 224,327 224,327 ----------- ----------- 3,623,169 3,840,050 Less accumulated depreciation and amortization (1,620,182) (1,745,251) ----------- ----------- $ 2,002,987 $ 2,094,799 NOTE 6 - 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 available 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, 1999 and 1998 were determined as follows:
THREE MONTHS ENDED SEPT.30, NINE MONTHS ENDED SEPT.30, ----------------------------- ---------------------------- BASIC INCOME (LOSS) PER COMMON SHARE: 1999 1998 1999 1998 - --------------------------------------------------- ----------- ------------ ----------- ----------- Net income (loss) available to common shareholders $ 215,316 $ (1,576,879) $ 265,228 $(1,632,834) =========== ============ =========== =========== Weighted average number of common shares outstanding 1,875,322 1,875,322 1,875,322 1,879,767 =========== ============ =========== =========== Basic income (loss) per common share $ .11 $ (.84) $ .14 $ (.87) =========== ============ =========== =========== DILUTED INCOME (LOSS) PER COMMON SHARE: Net income (loss) available to common shareholders $ 215,316 $ (1,576,879) $ 265,228 $(1,632,834) =========== ============ =========== =========== Weighted average number of common shares outstanding 1,875,322 1,875,322 1,875,322 1,879,767 Plus incremental shares from assumed exercise of stock options 13,702 -- 9,726 -- ----------- ------------ ----------- ----------- Adjusted weighted average shares 1,889,024 1,875,322 1,885,048 1,879,767 =========== ============ =========== =========== Diluted income (loss) per common share $ .11 $ (.84) $ .14 $ (.87) =========== ============ =========== ===========
11 For the three months ended September 30, 1998, and the nine months ended September 30, 1998 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 7 - 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. 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 September 30, 1999 and 1998, is as follows: 12
THREE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------------------------- Revenues from external customers $ 1,048,850 $ 269,673 $ 268,404 $ 1,586,927 Intersegment revenues 40,567 4,457 -- 45,024 Interest income 24,451 -- -- 24,451 Interest expense 15,728 -- -- 15,728 Depreciation and amortization 93,005 8,955 17,853 119,813 Segment income (loss) 273,583 (22,426) (35,841) 215,316 THREE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------------------------- Revenues from external customers $ 592,173 $ 189,347 $ 231,202 $ 1,012,722 Intersegment revenues 27,044 2,041 -- 29,085 Interest income 30,347 -- -- 30,347 Interest expense 16,228 -- -- 16,228 Depreciation and amortization 105,298 5,571 14,584 125,453 Segment loss (1,446,461) (53,589) (76,829) (1,576,879) The Company's segment information as of and for the nine months ended September 30, 1999 and 1998, is as follows: NINE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------------------------- Revenues from external customers $ 2,786,856 $ 861,317 $ 936,281 $ 4,585,454 Intersegment revenues 161,533 21,111 -- 182,644 Interest income 75,076 -- -- 75,076 Interest expense 36,352 -- -- 36,352 Depreciation and amortization 285,400 24,808 48,231 358,439 Segment income (loss) 446,046 (101,033) (79,785) 265,228 Segment assets 7,144,616 834,075 506,120 8,484,811 Expenditures for segment assets 288,999 -- -- 288,999 13 NINE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals -------------------------------------------------------------------------- Revenues from external customers $ 2,338,259 $ 656,352 $ 795,126 $ 3,789,737 Intersegment revenues 154,126 17,573 -- 171,699 Interest income 90,324 -- -- 90,324 Interest expense 49,707 -- -- 49,707 Depreciation and amortization 312,331 16,518 44,022 372,871 Segment income (loss) (1,294,129) (121,557) (217,148) (1,632,834) Segment assets 6,649,871 817,702 479,978 7,947,551 Expenditures for segment assets 212,628 -- -- 212,628
NOTE 8 - HURRICANE GEORGES On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3 hurricane on the Saffir/Simpson scale. The hurricane damaged the Company's facilities and destroyed a portion of the inventory of plant material. At September 30, 1998, as a result of the damages caused by the hurricane, the Company recorded the following loss: DESCRIPTION AMOUNT - ------------------------------------- ------------ Estimated loss of unsalable and damaged inventory $ 650,000 Estimated costs of clean-up, restoration and debris removal 555,000 Book value of property destroyed 171,039 ----------- 1,376,039 Less: Insurance proceeds receivable (subsequently collected) (367,000) ----------- Loss from damages caused by the hurricane $1,009,039 =========== 14 During April 1999, the Company received an assistance payment of $12,880 from the Farm Service Agency of the United States Department of Agriculture for debris removal from damages caused by the hurricane. The Puerto Rico Department of Agriculture has also committed to provide assistance to bona-fide agricultural enterprises for damages caused by the hurricane to uninsured agricultural infrastructure. As of September 30, 1999, the Company had applied for approximately $214,000 in assistance from the Puerto Rico Department of Agriculture. During the quarter ended September 30, 1999, the Company recorded estimated assistance revenues of $150,000 based on preliminary indications from the Puerto Rico Department of Agriculture of the amount the Company may be eligible to receive. The assistance to be ultimately received, however, may vary from the estimate and the difference may be material. NOTE 9 - INCOME TAX For the nine months ended September 30, 1999 and 1998, the Company did not record any provision for income tax due to a 90% tax exemption from income derived from its bona-fide agricultural operation, as well as the net loss and related loss carryforwards as of September 30, 1998, arising from the damages caused by Hurricane Georges. NOTE 10 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF CASH FLOWS a) NON-CASH INVESTING ACTIVITIES During the nine months ended September 30, 1999, fully depreciated equipment amounting to $443,569 was written off, and equipment with a cost of $66,109 and a book value of $43,459 was sold at a gain of $16,451. During the nine months ended September 30, 1998, accrued bonuses amounting to $11,948 were applied to outstanding notes receivable owed by Company personnel and fully depreciated equipment amounting to $505,070 was written off. b) OTHER CASH FLOW TRANSACTIONS Other cash flow transactions for the nine months ended September 30, 1999 and 1998, include interest payments amounting to approximately $21,000 and $49,700, respectively. There were no income tax payments for the nine months ended September 30, 1999 and 1998. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Margo Caribe, Inc. and its subsidiaries, (collectively, the "Company") are primarily engaged 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, sales of lawn and garden products and also provides landscaping design and installation services. During 1999 and 1998, the Company has also been engaged in seeking sites for the development of residential housing projects. PRINCIPAL OPERATIONS The Company's operations are focused in the Commonwealth of Puerto Rico ("Puerto Rico") and the Caribbean. These operations are conducted at a 117 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in Barranquitas, Puerto Rico. The 117 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"), 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 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 services to customers in Puerto Rico and the Caribbean, including commercial as well as residential landscape design and landscaping. 16 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 of Sunniland Corporation's fertilizer and pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico and the Caribbean. 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 has been engaged in seeking real estate sites for the development of residential projects in 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 its advantage as one of the largest, full service nurseries in the region. 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. As of November 12, 1999, Home Depot had opened two stores, and has announced plans to open seven additional stores in Puerto Rico over the next three years. During March 1999, the Company leased two additional parcels of land (approximately 320 acres) from the Puerto Rico Land Authority. The Company intends to eventually relocate its existing Vega Alta facilities and corporate offices to this property. The Company also intends to use this additional land to increase the Company's volume of field grown material and to diversify within the nursery business by growing turf (sod). During the third quarter of 1999, the Company became the largest supplier of live goods (plant material) to Wal-Mart Stores, which presently has nine stores throughout Puerto Rico. The Company was awarded a contract for approximately $668,000 by the Municipality of San Juan for the purchase of trees in connection with an ongoing reforestation program. At September 30, 1999 the Company had already delivered approximately 76% of the contract and expects the delivery process to be complete during the fourth quarter of 1999. The Company was also awarded a landscaping project for the Puerto 17 Rico Art Museum. This landscaping project is scheduled for commencement during the fourth quarter 1999 at an approximate contract price of $650,000. On August 31, 1999, the Company entered into an option agreement to pruchase approximately 109 acres of land in the Municipality of Barceloneta, Puerto Rico. The Company paid $ 47,500 for the option agreement, which will be applied to the purchase price of the land of $950,000. The Company intends to develop a low cost residential housing project on this land, through its wholly-owned subsidiary, Margo Development Corporation. During the remainder of 1999, the Company will continue seeking to acquire options to purchase and/or purchase real estate sites for the development of residential projects in Puerto Rico. As of November 12, 1999, the Company had identified several additional sites for possible future development, however, no formal agreements had been reached. 18 RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THIRD QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998 During the nine months ended September 30, 1999, the Company had net income of approximately $265,000, or $.14 per share, compared to a net loss of $1,633,000 for the same period in 1998, or $.87 per share. For the quarter ended September 30, 1999, the Company had net income of approximately $215,000 or $.11 per share, compared to a net loss of approximately $1,577,000, or $.84 per share for the same period in 1998. Income from operations for the nine months as well as the quarter ended September 30, 1999 improved as a result of increased sales and higher gross profits when compared to the operating losses incurred for the same periods in 1998. Net income for the nine months and quarter ended September 30, 1999 also improved when compared to the same periods in 1998 principally due to the loss incurred from damages caused by Hurricane Georges in 1998, a portion of which was recovered through government assistance during 1999. SALES The Company's consolidated net sales for the nine months ended September 30, 1999 were approximately $4,584,000, compared to $3,790,000 for the same period in 1998, representing an increase of 21%. Consolidated net sales for the quarter ended September 30, 1999 were approximately $1,587,000 compared to $1,013,000 for the same period in 1998, representing an increase of 57%. The increase in consolidated net sales of 21% and 57% for the nine months as well as the quarter ended September 30, 1999 (respectively), was principally due to increased sales of plant material under a sales contract with the Municipality of San Juan, of which a major portion of the sales were recorded during the third quarter of 1999. During the nine months ended September 30, 1998, the Company was also engaged in a similar sales contract with the Puerto Rico Department of Transportation and Public Works, however, sales under this contract were recorded during the second quarter of 1998, and the contract price was for a lesser amount. Consolidated net sales for the nine months and quarter ended September 30, 1999 also incresed when compared to the same periods in 1998 due to an increase in sales volume to chain stores such as 19 Wal-Mart and The Home Depot. Increases included sales of both plant material and lawn and garden products, with Rain Forest products representing the major increase. Additionally, during 1998 the Company lost sales during the last week of September due to the passing of Hurricane Georges over Puerto Rico on September 21, 1998. GROSS PROFITS The Company's consolidated gross profit for the nine months ended September 30, 1999 was 37%, compared to 28% for the same period in 1998, or an increase of 9%. Consolidated gross profit for the third quarter of 1999 was 38%, compared to 12% for the same period in 1998, or an increase of 26%. The increase in consolidated gross profit of 9% for the nine months and 26% for the quarter ended September 30, 1999 when compared to the same periods in 1998 is due to an increase in sales of plant material in connection with the sales contract with the Municipality of San Juan, increased sales of lawn and garden products (specifically sales of the Company's Rain Forest product line) and improved efficiency in landscaping services. In addition, gross profits for the quarter and nine months ended September 30, 1998, were adversely affected by a charge to cost of sales resulting from a physical inventory performed during the third quarter of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (SG&A) were approximately $1,688,000 for the nine months ended September 30, 1999, compared to $1,560,000 for the same period in 1998, representing an increase of 8% in dollar terms and a decrease of 4% as a percentage of sales (due to increased sales during 1999). SG&A for the quarter ended September 30, 1999 were approximately $568,000 compared to $498,000 for the same period in 1998, representing an increase of 14% in dollar terms and a decrease of 13% as a percentage of sales (also due to increased sales during 1999). The increase is SG&A (in dollar terms) for the nine months as well as the quarter ended September 30, 1999, when compared to the same periods in 1998 is due to increases in shipping and warehousing costs (partially due to increased sales of the Rain Forest product line), increase in landscaping management personnel and the establishment of a salary deferral retirement plan to which the Company has contributed throughout 1999. Also, as a result of the damages caused by Hurricane Georges, a portion of SG&A (including salaries) from September 21st through September 30th were classified as hurricane losses at September 30, 1998. 20 OTHER INCOME AND EXPENSES The decrease in interest income for nine months as well as the third quarter ended September 30, 1999, when compared to the same periods in 1998, is due to lower yields obtained during 1999 on similar investments. The decrease in interest expense for the nine months as well as the third quarter ended September 30, 1999 when compared to the same periods in 1998, is due to reductions in the outstanding principal balances of long-term debt, despite an increase in notes payable during the third quarter of 1999. HURRICANE GEORGES As previously mentioned, Hurricane Georges struck Puerto Rico on September 21, 1998. The Company wrote down property with a book value of $171,039 and expensed estimated costs (including administrative expenses) of clean-up, restoration and debris removal of $555,000 as of September 30, 1998, due to the damages caused by the hurricane. The hurricane also damaged or destroyed plant material at both of the Company's locations. After the hurricane, it was not practical nor feasible to perform a physical inventory in order to determine losses of plant material inventory, since damage to various varieties was not yet fully visible. However, based on preliminary review and evaluations of plant material inventory, the Company estimated the loss at approximately $650,000 at September 30, 1998. Subsequent to the above losses, the Company received $367,000 from one of its insurers for property damages, thereby reducing the loss by that amount as of September 30, 1998. During April 1999, the Company received an assistance payment of $12,880 from the Farm Service Agency of the United States Department of Agriculture for debris removal arising from damages caused by Hurricane Georges. The Puerto Rico Department of Agriculture has also committed to provide assistance to bona-fide agricultural enterprises for damages caused by the hurricane to agricultural infrastructure not covered by insurance. The Company applied for approximately $214,000 in assistance from the Puerto Rico Department of Agriculture. During the quarter ended September 30, 1999, the Company recorded estimated assistance revenues of $150,000 based on preliminary indications from the Puerto Rico Department of Agriculture of the amount the Company may be eligible to receive. The assistance to be ultimately received, however, may vary from this estimate and the difference may be material. 21 WRITE DOWN OF NOTE RECEIVABLE On September 23, 1998, Hurricane Georges struck the Dominican Republic. The Company owns a note receivable from the sale of a former subsidiary to a Dominican Republic company, with a carrying value of approximately $302,000 as of June 30, 1998. The note has been in dafault since December 1995 and is collateralized by a second morgage on property and equipment. It is the Company's understanding that those facilities were severely damaged or destroyed. As a result of the damages cuased by the hurricane, the Company determined to write down the carrying value of the note to $100,000. The write down, amounting to $201,621 was included as an other expense in the consolidated statements of operations for the quarter and nine months ended September 30,1998. FINANCIAL CONDITION The Company's financial condition at September 30, 1999 remains comparable with that of December 31, 1998. The Company's current ratio continues to be strong, with a ratio of 3.1 to 1 at September 30, 1999, compared to 3.2 to 1 at December 31, 1998. At September 30, 1999, the Company had cash of approximately $809,000 and short term investments of $500,000, compared to cash of $747,000 and short term investments of $500,000 at December 31, 1998. The increase in cash at September 30, 1999 is principally due to cash flows from proceeds of notes payable ($500,000) offset by cash outflows form operations ($54,000), additions to property and equipment ($289,000) an repayment of long-term debt ($119,000). Stockholders' equity at September 30, 1999 increased due to results of operations for the nine month period. There were no dividends declared nor issuance of capital stock during the nine months ended September 30, 1999. CURRENT LIQUIDITY AND CAPITAL RESOURCES The Company is presently current on all its obligations. Excess funds have been invested in short-term bank instruments. The Company believes it has adequate resources to meet its current and anticipated liquidity and capital requirements. YEAR 2000 ISSUE The inability of computer hardware and software to recognize and properly process data fields using a four-digit year to define the applicable year is commonly referred to as the "Year 2000 Issue". As the year 2000 approaches, computer systems using a two-digit year data field may be unable to accurately process certain information. The Company has completed a review and evaluation of its hardware and software programs and applications and is in the process of modifying and testing its software and operating systems for Year 22 2000 compliance. The testing for the Company's operating hardware has been completed and is Year 2000 compliant. The Company has also completed testing of all software systems except for final testing of the core accounting application, which it expects to be Year 2000 compliant by November 30, 1999. All tests are being performed and verified by an external consultant. The Company has already initiated formal communications with its suppliers, however, management anticipates there will not be any major Year 2000 compliance issues with them due to the nature of the Company's operations and due to the fact that the Company does not order or communicate with its suppliers using any computer based information system. The Company estimates that the total cost of being Year 2000 compliant will not exceed $75,000, of which approximately $50,000 had been incurred as of September 30, 1999. The cost of being Year 2000 compliant will be funded through operating cash flows. The Company anticipates being Year 2000 compliant by late November 1999. The costs of and completion date on which the Company believes it will be year 2000 compliant are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. While the Company is taking steps to ensure that its systems are Year 2000 compliant, Year 2000 problems sufferred by third parties, including providers of basic services, such as telephone, water and electricity, could have an adverse impact on the daily operations of the Company. The Company does not have a formal contingency plan to deal with disruptions that may be caused by Year 2000 problems. In the event of any such disruptions, the Company intends to perform most operational functions manually. 23 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 27 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY). (b) REPORTS ON FORM 8-K. The Company filed the following Reports on Form 8-K during the quarter ended September 30, 1999: None 24 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 NURSERY FARMS, INC. Date: NOVEMBER 12, 1999 BY: /S/ MICHAEL J. SPECTOR ------------------ ---------------------------- Michael J. Spector, President and Chief Executive Officer Date: NOVEMBER 12, 1999 BY: /S/ ALFONSO ORTEGA ------------------ ---------------------------- Alfonso Ortega, Vice President, Treasurer, Principal Financial and Accounting Officer 25 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 FINANCIAL DATA SCHEDULE EX-27 2
5 9-MOS DEC-31-1999 SEP-30-1999 1,309,478 0 1,161,476 (143,000) 2,888,599 5,445,174 3,623,169 (1,620,182) 8,484,811 1,764,060 85,880 1,915 0 0 6,632,956 8,484,811 4,584,454 4,866,368 2,877,185 4,564,788 0 0 36,352 265,228 0 0 0 0 0 265,228 0.14 0.14
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