-----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, Ty7ExUaXJomguNux4uL5GW5djbfYeYc87Bgjc8e4etAlpLBLiIRiu80sug4VaDaG fVm9Qf0fURXWyHWIKI/G5A== 0000950170-99-000834.txt : 19990518 0000950170-99-000834.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950170-99-000834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99625433 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 MARCH 31, 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 May 14, 1999. ================================================================================ MARGO CARIBE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE FIRST QUARTER ENDED MARCH 31, 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 14 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 20 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 March 31, 1999 and December 31, 1998 ASSETS
1999 1998 (UNAUDITED) (AUDITED) ----------- ----------- Current assets: Cash and equivalents $ 781,351 $ 747,390 Short-term investments 500,000 500,000 Accounts receivable, net 1,013,646 1,228,572 Inventories 2,353,115 2,264,372 Prepaid expenses and other current assets 204,091 190,804 ----------- ----------- Total current assets 4,852,203 4,931,138 Property and equipment, net 2,030,101 2,094,799 Due from shareholder 290,226 290,226 Notes receivable 620,413 620,413 Other assets 53,632 53,632 ----------- ----------- Total assets $ 7,846,575 $ 7,990,208 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 121,070 $ 158,468 Notes payable 500,000 500,000 Accounts payable 538,667 665,140 Accrued expenses 167,893 211,077 ----------- ----------- Total current liabilities 1,327,630 1,534,685 Long-term debt 85,880 85,880 ----------- ----------- Total liabilities 1,413,510 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 1,889,732 1,826,310 Treasury stock, 39,800 common shares,at cost (96,288) (96,288) ----------- ----------- Total shareholders' equity 6,433,065 6,369,643 ----------- ----------- Total liabilities and shareholders' equity $ 7,846,575 $ 7,990,208 =========== ===========
See accompanying notes to consolidated financial statements. 4 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months ended March 31, 1999 and 1998 (Unaudited)
1999 1998 ----------- ----------- Net sales $ 1,533,064 $ 1,309,465 Cost of sales 971,113 875,671 ----------- ----------- Gross profit 561,951 433,794 Selling, general and administrative expenses 525,800 549,322 Income (loss) from operations 36,151 (115,528) ----------- ----------- Other income (expense): Interest income 25,882 30,823 Interest expense (12,011) (16,619) Hurricane Georges assistance proceeds 12,800 -- Gain on sale of equipment -- 9,000 Miscellaneous income 600 1,130 ----------- ----------- 27,271 24,334 Income (loss) before provision for income tax 63,422 (91,194) Provision for income tax -- -- ----------- ----------- Net income (loss) $ 63,422 $ (91,194) =========== =========== Basic income (loss) per common share $ 0.03 $ (0.05) =========== =========== Diluted income per common share $ 0.03 $ -- =========== ===========
See accompanying notes to consolidated financial statements. 5 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Three Months ended March 31, 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 -- -- -- 63,422 -- 63,422 ---------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1999 1,875,322 $ 1,915 $4,637,706 $1,889,732 $ (96,288) $6,433,065 ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 6 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1999 and 1998 (Unaudited)
1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 63,422 $ (91,194) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 109,210 122,545 Provision for uncollectible accounts receivable 6,000 8,237 Provision for inventory valuation allowance -- 10,000 Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable 208,926 110,988 Inventories (88,743) 8,404 Prepaid expenses and other current assets (13,287) (14,499) Due from shareholder -- 8,845 Other assets -- 8,311 Accounts payable (126,473) (91,592) Accrued expenses (43,184) (13,809) ----------- ----------- Net cash provided by operating activities 115,871 66,236 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (44,512) (63,933) Collection of notes receivable -- 5,000 ----------- ----------- Net cash used in investing activities (44,512) (58,933) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (37,398) (36,879) Acquisition of treasury stock -- (47,500) ----------- ----------- Net cash used in financing activities (37,398) (84,379) ----------- ----------- NET INCREASE (DECREASE) IN CASH 33,961 (77,076) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 747,390 1,230,250 ----------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $ 781,351 $ 1,153,174 =========== ===========
See accompanying notes to consolidated financial statements. 7 MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 three months ended March 31, 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. 8 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. The inventory valuation allowance is an 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 March 31, 1999 and December 31, 1998 was $200,000. NOTE 3 - INVENTORIES At March 31, 1999 and December 31, 1998, inventories comprised the following: DESCRIPTION 1999 1998 - -------------------------- ----------- ----------- Plant material $ 2,053,545 $ 1,900,250 Lawn and garden products 330,693 347,637 Raw materials and supplies 168,877 216,485 ----------- ----------- 2,553,115 2,464,372 Less valuation allowance (200,000) (200,000) ----------- ----------- $ 2,353,115 $ 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. 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. 9 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 March 31, 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 Company personnel 19,082 19,082 -------- -------- $620,413 $620,413 ======== ======== NOTE 5 - PROPERTY AND EQUIPMENT At March 31, 1999 and December 31, 1998 property and equipment consisted of the following: DESCRIPTION 1999 1998 --------------------------------- ----------- ----------- Leasehold improvements $ 1,600,978 $ 1,590,145 Equipment and fixtures 1,627,916 1,618,312 Transportation equipment 431,341 407,266 Real estate property 224,327 224,327 ----------- ----------- 3,884,562 3,840,050 Less accumulated depreciation and amortization (1,854,461) (1,745,251) ----------- ----------- $ 2,030,101 $ 2,094,799 =========== =========== 10 NOTE 6 - NET INCOME (LOSS) PER COMMON SHARE In 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share ("EPS"). It replaces the presentation of primary EPS with basic EPS, and requires dual presentation of basic and diluted EPS on the face of the statement of operations. 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 at March 31, 1999 and 1998 were computed as follows: 1999 1998 ----------- ----------- BASIC INCOME (LOSS) PER COMMON SHARE: Net income (loss) available to common shareholders $ 63,422 $ (91,194) =========== =========== Weighted average number of common shares outstanding 1,875,322 1,888,211 =========== =========== Basic income (loss) per common share $ 0.03 $ (0.05) =========== =========== DILUTED INCOME PER COMMON SHARE: Net income (loss) available to common shareholders $ 63,422 $ (91,194) =========== =========== Weighted average number of common shares outstanding 1,875,322 1,888,211 Plus incremental shares from assumed conversions of stock options 142,000 -- ----------- ----------- Adjusted weighted average shares 2,017,322 1,888,211 =========== =========== Diluted income (loss) per common share $ 0.03 $ (0.05) =========== =========== The effect of the conversion of stock options determined by using the if-converted method was antidilutive, thus basic and dilutive loss per common share were the same in 1998. 11 NOTE 7 - SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board issued 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 internal management accounting system and are 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 as of and for the three months ended March 31, 1999 and 1998, is as follows:
1999 ----------------------------------------------------------- LAWN & GARDEN PLANTS PRODUCTS LANDSCAPING TOTALS ---------- ------------- ----------- ---------- Revenues from external customers $ 881,968 $ 247,911 $ 403,185 $1,533,064 Intersegment revenues 58,607 34,064 -- 92,671 Interest income 25,882 -- -- 25,882 Interest expense 12,011 -- -- 12,011 Depreciation and amortization 87,355 7,539 14,316 109,210 Segment income (loss) 86,316 (25,441) 2,547 63,422 Segment assets 6,512,442 764,444 569,689 7,846,575 Expenditures for segment assets 44,512 -- -- 44,512
12
1998 ---------------------------------------------------------------- LAWN & GARDEN PLANTS PRODUCTS LANDSCAPING TOTALS ----------- ------------- ----------- ----------- Revenues from external customers $ 761,315 $ 249,368 $ 298,782 $ 1,309,465 Intersegment revenues 74,109 11,089 -- 85,198 Interest income 30,823 -- -- 30,823 Interest expense 16,619 -- -- 16,619 Depreciation and amortization 102,448 5,378 14,719 122,545 Segment income (loss) 31,608 (95,620) (27,182) (91,194) Segment assets 7,315,190 812,307 564,253 8,691,750 Expenditures for segment assets 63,933 -- -- 63,933
NOTE 8 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF CASH FLOWS Other cash flow transactions for the three months ended March 31, 1999 and 1998, include interest payments amounting to approximately $12,000 and $17,000, respectively. There were no income tax payments for the three months ended March 31, 1999 and 1998. 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 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 the Municipality of 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 facility in the Municipality of 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. 14 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. Home Depot entered the Puerto Rico market with one store opening in September 1998, and has announced plans to open eight 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). The Company was recently 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, in progress during 1999. The Company was also awarded a landscaping project for the Puerto Rico Art Museum. This landscaping project is scheduled for commencement during 1999 at an approximate contract price of $650,000. 15 The Company is also exploring the possibility of diversifying into other activities within Puerto Rico, including but not limited to, real estate development. In this regard, during January 1998, the Company incorporated a new subsidiary, Margo Development Corporation. During 1999, the Company will be seeking to acquire options to purchase and/or purchase real estate sites for the development of residential projects in Puerto Rico. As of May 14, 1999, the Company was in process of formalizing an option agreement for the purchase of approximately 20 acres of land near the Municipality of Loiza, Puerto Rico for future real estate development. 16 RESULTS OF OPERATIONS FOR THE FIRST QUARTERS ENDED MARCH 31, 1999 AND 1998 During the first three months of 1999, the Company had net income of approximately $63,000, or $.03 per share, compared to a net loss of $91,000 for the same period in 1998, or $.05 per share. Net income generated during the three months ended March 31, 1999, when compared to the net loss incurred for the same period in 1998, is due to an increase in the Company's net sales, an increase in gross profit, and a decrease in selling, general and administrative expenses experienced during the first quarter of 1999. SALES The Company's consolidated net sales for the first three months of 1999 were approximately $1,533,000, compared to $1,309,000 for the same period in 1998, or an increase of approximately 17%. The increase in sales for the first three months of 1999 when compared to the same period in 1998 is due to a higher demand for the Company's plant material as well as an increase in the volume of landscaping services. These increases in sales include, but are not limited to, the increased demand by large retail chains and the rebuilding effort within Puerto Rico, both as a result of the damages caused by Hurricane Georges during September 1998. GROSS PROFITS The Company's gross profit for the first three months of 1998 was 37%, compared to 33% for the same period in 1998, or an increase of approximately 4%. Increase in gross profit of 4% for the first three months of 1999 when compared to the same period in 1998 is principally due to improved efficiency in landscaping services (gross profit of 31% on services of $403,000 in 1999 vs. gross profit of 12% on services of $299,000 in 1998) during the first quarter of 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (SG&A) were approximately $526,000 and $549,000 for the first three months of 1999 and 1998, respectively, resulting in a decrease of 4%. The decrease in SG&A for the first three months of 1999 when compared to the same period in 1998 is due, among other things, to decreases in repairs and maintenance expenses of landscaping equipment as well as decreases in other maintenance expenses. 17 As a result of the increase in sales and the decrease in operating expenses, SG&A as a percentage of sales decreased to 34% for the first three months of 1999, compared to 42% for the same period in 1998. OTHER INCOME AND EXPENSES The decrease in interest income for the first three months of 1999 when compared to the same period in 1998, is due to lower yields obtained during 1999 with similar investments. The decrease in interest expense for 1999 compared to 1998 is the result of reductions in the outstanding principal balances of long-term debt. FINANCIAL CONDITION The Company's financial condition at March 31, 1999 remains comparable with that of December 31, 1998. The Company's current ratio continues to be strong, with a ratio of 3.6 to 1 at March 31, 1999, compared to 3.2 to 1 at December 31, 1998. At March 31, 1999, the Company had cash of approximately $781,000 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 March 31, 1999 is principally due to cash flows provided by operations ($116,000), offset by cash outflows resulting from additions to property and equipment ($45,000) and repayment of long-term debt ($37,000). Due to favorable results of operations for the quarter ended March 31, 1999, and decreases in accounts payable and accrued expenses, as well as repayment of long-term debt at March 31, 1999, the Company's debt to equity ratio improved to 22% compared to 25% at December 31, 1998. Stockholders' equity at March 31, 1999 increased due to results of operations for the first quarter. There were no dividends declared nor issuance of capital stock during the first quarter of 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. 18 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 2000 compliance. The Company expects such testing to be complete by September 30, 1999. The testing for the Company's operating hardware has been completed and is Year 2000 compliant. All test results are being verified by an external consultant. While the Company has not initiated formal communications with its suppliers, management also 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 $30,000 had been incurred as of March 31, 1999. The cost of being Year 2000 compliant will be funded through operating cash flows. The Company anticipates being Year 2000 compliant by late September 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. 19 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 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 March 31, 1999: None 20 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: MAY 14, 1999 BY: /s/ MICHAEL J. SPECTOR ------------- ---------------------------- Michael J. Spector, President and Chief Executive Officer Date: MAY 14, 1999 BY: /s/ ALFONSO ORTEGA ------------- ---------------------------- Alfonso Ortega, Vice President, Treasurer, Principal Financial and Accounting Officer 21 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule EX-27 2
5 1 3-MOS DEC-31-1998 MAR-31-1999 1,281,351 0 1,106,096 (92,450) 2,353,115 4,852,203 3,884,562 (1,854,461) 7,846,575 1,327,630 85,880 1,915 0 0 6,431,150 7,846,575 1,533,064 1,572,346 971,113 1,496,913 0 0 12,011 63,422 0 0 0 0 0 63,422 0.03 0.03
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