-----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, H6xADJOAetbieeK2VyaOVCHNZjWm/162A+Lq6RRm/ups/Ue6Lq5VSWNPJCjVSmDf ACaRfONbtZraSfiLiViR6Q== 0000950170-98-002206.txt : 19981118 0000950170-98-002206.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950170-98-002206 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750804 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, 1998 [ ] 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 13, 1998. MARGO CARIBE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1998 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 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 PART II ITEM 1. LEGAL PROCEEDINGS 22 ITEM 2. CHANGES IN SECURITIES 22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE 22 OF SECURITIES HOLDERS ITEM 5. OTHER INFORMATION 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 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 circumstances after the date of such statements. 3
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1998 and December 31, 1997 ASSETS SEPTEMBER 30, DECEMBER 31, 1998 1997 (UNAUDITED) (AUDITED) ------------- ----------- Current assets: Cash and equivalents $ 1,056,005 $ 1,230,250 Short term investments 500,000 500,000 Accounts receivable, net (including $367,000 in 1998 related to claims arising from Hurricane Georges) 1,237,260 1,050,949 Inventories 1,832,113 2,438,128 Prepaid expenses and other current assets 82,627 101,792 ----------- ----------- Total current assets 4,708,005 5,321,119 Property and equipment, net 2,088,313 2,419,595 Non-interest bearing note due from shareholder 290,226 291,481 Notes receivable 607,413 860,982 Other assets 51,973 58,911 ----------- ----------- Total assets $ 7,745,930 $ 8,952,088 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 47,200 $ 117,694 Notes payable 500,000 500,000 Accounts payable 566,075 388,318 Accrued expenses (including $424,457 in 1998 related to Hurricane Georges) 571,859 163,213 ----------- ----------- Total current liabilities 1,685,134 1,169,225 Long-term debt 211,150 252,883 ----------- ----------- Total liabilities 1,896,284 1,422,108 ----------- ----------- 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 in 1998 (1,895,322 in 1997) 1,915 1,915 Additional paid-in capital 4,637,706 4,637,706 Retained earnings 1,306,313 2,939,147 Treasury stock, 39,800 common shares in 1998 (19,800 in 1997), at cost (96,288) (48,788) ----------- ----------- Total shareholders' equity 5,849,646 7,529,980 ----------- ----------- Total liabilities and shareholders' equity $ 7,745,930 $ 8,952,088 =========== ===========
See accompanying notes to consolidated financial statements. 4
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods ended September 30, 1998 and 1997 (Unaudited) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 1,012,722 $ 1,355,690 $ 3,789,737 $ 5,081,715 Cost of sales 895,399 1,111,651 2,726,391 4,204,612 ----------- ----------- ----------- ----------- Gross profit 117,323 244,039 1,063,346 877,103 Selling, general and administrative expenses 497,661 724,999 1,560,070 2,024,910 ----------- ----------- ----------- ----------- Loss from operations (380,338) (480,960) (496,724) (1,147,807) ----------- ----------- ----------- ----------- Other income (expense): Interest income 30,347 15,852 90,324 51,645 Interest expense (16,228) (19,821) (49,707) (59,708) Loss from damages caused by Hurricane Georges (1,009,039) -- (1,009,039) -- Gain on sale of land -- 402,257 -- 402,257 Write-down of note receivable (201,621) -- (201,621) -- Miscellaneous income -- 15,733 33,933 9,144 ----------- ----------- ----------- ----------- (1,196,541) 414,021 (1,136,110) 403,338 ----------- ----------- ----------- ----------- Loss before provision for income tax (1,576,879) (66,939) (1,632,834) (744,469) Income tax provision -- -- -- -- ----------- ----------- ----------- ----------- Net loss $(1,576,879) $ (66,939) $(1,632,834) $ (744,469) =========== =========== =========== =========== Net loss per common share $ (.84) $ (.04) $ (.87) $ (.39) =========== =========== =========== =========== Weighted average number of common shares 1,875,322 1,895,322 1,879,767 1,895,322 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 5
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Nine Months ended September 30, 1998 (Unaudited) COMMON COMMON ADDITIONAL STOCK STOCK PAID-IN RETAIN TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL ---------- ------- ----------- ----------- --------- ----------- Balance at December 31, 1997 1,895,322 $ 1,915 $ 4,637,706 $ 2,939,147 $ (48,788) $ 7,529,980 Acquisition of treasury stock, at cost (20,000) -- -- -- (47,500) (47,500) Net loss -- -- -- (1,632,834) -- (1,632,834) ----------- ------- ----------- ----------- --------- ----------- Balance at September 30, 1998 1,875,322 $ 1,915 $ 4,637,706 $ 1,306,313 $ (96,288) $ 5,849,646 =========== ======= =========== =========== ========= ===========
See accompanying notes to consolidated financial statements. 6
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months ended September 30, 1998 and 1997 (Unaudited) 1998 1997 ----------- ------------ Cash flows from operating activities: Net loss $(1,632,834) $ (744,469) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 372,871 362,961 Provision for uncollectible receivables 36,000 -- Increase in inventory valuation reserve 30,000 158,000 Write-off of inventory -- 340,000 Realized loss on translation adjustment -- 9,164 Write-down of note receivable 201,621 -- Gain on sale of land -- (402,257) Estimated loss of unsalable and damaged inventory from hurricane 650,000 -- Estimated costs of clean-up, restoration and debris removal 424,457 -- Insurance proceeds receivable on claims related to hurricane (367,000) -- Loss on property destroyed by hurricane 171,039 -- Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable 144,689 4,941 Inventories (73,985) (258,733) Prepaid expenses and other current assets 19,165 16,579 Other assets 6,938 8,355 Accounts payable 177,757 (147,585) Accrued expenses (3,863) (17,601) Income tax payable -- (23,492) ----------- ----------- Net cash provided by (used in) operating activities 156,855 (694,137) ----------- ----------- Cash flows from investing activities: Proceeds from sale of land -- 784,612 Decrease in short term investments -- 504,000 Additions to property, plant and equipment (212,628) (87,708) Decrease (increase) in notes receivable 40,000 (6,800) Decrease in note due from shareholder 1,255 -- ----------- ----------- Net cash provided by (used in) financing activities (171,373) 1,194,104 ----------- ----------- Cash flows from financing activities: Acquisition of treasury stock (47,500) -- Repayment of long-term debt (112,227) (111,648) ----------- ----------- Net cash used in financing activities (159,727) (111,648) ----------- ----------- Net increase (decrease) in cash (174,245) 388,319 Cash and equivalents at beginning of year 1,230,250 946,490 ----------- ----------- Cash and equivalents at end of period $ 1,056,005 $ 1,334,809 =========== ===========
See accompanying notes to consolidated financial statements. 7 MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (Unaudited) NOTE 1 - BASIS OF PRESENTATION For the nine months ended September 30, 1998, these interim consolidated financial statements include the financial statements of Margo Caribe, Inc. (formerly Margo Nursery Farms, Inc.) and its wholly owned subsidiaries, Margo Nursery Farms, Inc. (formerly Interim Margo, Inc.), Margo Landscaping and Design, Inc., Margo Garden Products, Inc., Margo Development Corporation and Rain Forest Products Group, Inc. See "REINCORPORATION AS PUERTO RICO CORPORATION AND HOLDING COMPANY REORGANIZATION" under ITEM 2, herein. For the nine months ended September 30, 1997, these interim financial statements also include the financial statements of Margo Bay Farms, Inc., a former wholly owned subsidiary which operated in South Florida through September 30, 1997. See "PRINCIPAL OPERATIONS" under ITEM 2, herein. 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, 1998 are not necessarily indicative of the operating results to be expected for the year ending December 31, 1998. 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, 1997. 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 allowances at September 30, 1998 and December 31, 1997 were $330,000 and $300,000, respectively. Set forth below is the movement of the inventory valuation allowance for the nine months ended September 30, 1998: DESCRIPTION AMOUNT ---------------------------------- ------ Beginning balance, January 1, 1998 $300,000 Provisions 30,000 -------- Ending balance, September 30, 1998 $330,000 ======== At September 30, 1998, the Company also recorded a provision for estimated losses of unsalable and damaged inventory of $650,000, as a result of Hurricane Georges (see Note 3). NOTE 3 - HURRICANE GEORGES On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3 hurricane on the Saffir/Simpson scale. The hurricane severely damaged a portion of the Company's facilities (shadehouses) and 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 ========== 9 At September 30, 1998, the Company had one claim under review by an insurer and various pending claims which were not subject to a reasonable estimate. NOTE 4 - COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". Comprehensive income is any change in shareholders' equity during a period, arising from transactions, events or circumstances through nonowner sources. SFAS 130 establishes standards for disclosing the elements and amounts of comprehensive income. The adoption of SFAS 130 did not have any effect on the accompanying consolidated financial statements. NOTE 5 - 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 ($301,621 at June 30, 1998), 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 second mortgage 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. It is the Company's understanding that Cariplant's facilities were severely damaged or destroyed. As a result of the damages caused 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 accompanying consolidated statements of operations for the quarter and the nine months ended September 30, 1998. 10 At September 30, 1998 and December 31, 1997, notes receivable included the following: DESCRIPTION 1998 1997 - ---------------------------------- -------- -------- Note receivable from Altec $100,000 $301,621 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. See "PRINCIPAL OPERATIONS" under ITEM 2, herein 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 6,082 58,030 -------- -------- $607,413 $860,982 ======== ======== NOTE 6 - PROPERTY AND EQUIPMENT At September 30, 1998 and December 31, 1997 property and equipment consisted of the following: DESCRIPTION 1998 1997 --------------------------------- ----------- ----------- Leasehold improvements $ 1,585,240 $ 1,860,754 Equipment and fixtures 1,492,911 1,504,103 Transportation equipment 376,166 747,180 Buildings 224,327 224,327 ----------- ----------- 3,678,644 4,336,364 Less accumulated depreciation and amortization (1,590,331) (1,916,769) ----------- ----------- $ 2,088,313 $ 2,419,595 =========== =========== NOTE 7 - NET LOSS PER COMMON SHARE Net loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the relevant periods. For the nine months ended September 30, 1998 and 1997, weighted average number of common shares outstanding were 1,879,767 and 1,895,322, respectively. For the three months ended September 30, 1998 and 1997, weighted average number of common shares outstanding were 1,875,322 and 1,895,322, respectively. 11 NOTE 8 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF CASH FLOWS a) NON-CASH INVESTING ACTIVITIES 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 1998 and 1997, include interest payments amounting to approximately $49,700 and $60,300, respectively. Income tax payments for the nine months ended September 30, 1997 amounted to approximately $23,500. 12 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 1998, the Company has also been engaged in seeking sites for the development of residential housing projects. REINCORPORATION AS PUERTO RICO CORPORATION AND HOLDING COMPANY REORGANIZATION Effective December 31, 1997, after obtaining shareholder approval, the Company changed its jurisdiction of incorporation from Florida to the Commonwealth of Puerto Rico. The reincorporation was accomplished by means of the merger of Margo Nursery Farms, Inc., a Florida corporation ("Old Margo") into a newly created Puerto Rico corporation, Margo Transition, Inc. ("New Margo") with New Margo being the surviving corporation of such merger. As part of the merger, New Margo then changed its name to Margo Nursery Farms, Inc., and continued to operate the business previously operated by Old Margo with the same officers and directors. Prior to the consummation of the above reincorporation, Margo Bay Farms, Inc., a wholly-owned subsidiary operating in South Florida, was merged with and into Old Margo. Prior to this merger, the Company had closed its South Florida operations due to its lack of profitability, and sold the two nursery farms which comprised its operation (see "South Florida Operations" under "Principal Operations" herein). Furthermore, effective June 1, 1998, following shareholder approval, the Company adopted a holding company structure. The restructuring was accomplished by means of Margo Nursery Farms, Inc. ("Margo", the parent company before the restructuring), transferring substantially all of its assets and liabilities to Interim Margo, Inc. ("Newco", a newly formed Puerto Rico subsidiary) in return for all the outstanding stock of Newco. Newco continued to conduct the nursery business previously conducted by Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as the other existing subsidiaries of Margo. In connection with the holding company restructuring, Margo changed its corporate name to Margo Caribe, Inc. 13 PRINCIPAL OPERATIONS For the nine months ended September 30, 1998 and 1997, the Company's business was conducted at two locations in Puerto Rico. For the nine months ended September 30, 1997, the Company also operated at another location in South Florida. These operations are described below: PUERTO RICO OPERATIONS The Company's operations include 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 ("Development") all Puerto Rico corporations. The Company's principal operation in Puerto Rico is conducted at a 117 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan. This farm is leased from Michael J. Spector and Margaret D. Spector, who are directors, officers and principal shareholders of the Company. The Company also leases a 13 acre nursery facility in Barranquitas, Puerto Rico, where it grows orchids, bromeliads, anthuriums, poinsettias and ornamental foliage. 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. The Company produces various types of palms, flowering and ornamental plants, trees, shrubs, bedding plants and ground covers. Its customers include wholesalers, retailers, chain stores and landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, the Company 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. 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 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 14 enjoys a tax exemption grant from the Government of Puerto Rico for the manufacturing operations of Rain Forest. Development is presently engaged in seeking sites for future development of residential housing projects. SOUTH FLORIDA OPERATIONS Effective September 30, 1997, the Company's South Florida operation (Margo Bay Farms, Inc.) was closed due to the strong competition, inadequate sales levels and continued lack of profitability. On September 29 and November 28, 1997, the Company sold two nursery farms (a 54 acre and a 20 acre tract) which comprised the Company's South Florida operation. In connection with the sale of one of the properties, the Company received a $475,000 mortgage note from the buyer as part of the sales price. 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. The Company was recently awarded a contract for approximately $579,000 by the Municipality of San Juan for the purchase of trees in connection with an ongoing reforestation program. The Company was also awarded a landscaping project for the Museum of Art of San Juan (Puerto Rico). This landscaping project is scheduled for commencement during 1999 at an approximate contract price of $650,000. 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 the remainder of 1998, 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. At November 13, 1998, 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. 15 RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THIRD QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997 OVERVIEW During the nine months ended September 30, 1998, the Company incurred a net loss of approximately $1,633,000, or $.87 per share, compared to a net loss of $744,000 or $.39 per share for the same period in 1997. For the quarter ended September 30, 1998, the Company incurred a net loss of approximately $1,577,000, or $.84 per share, compared to a net loss of $67,000, or $.04 per share for the same period in 1997. The increase in net losses for the nine months as well as the quarter ended September 30, 1998 is principally due to losses sustained as a result of Hurricane Georges, which struck Puerto Rico on September 21, 1998. At September 30, 1998, the Company estimated these losses at approximately $1,376,000 (including facilities and inventory of plant material) reduced by proceeds of $367,000 received from one of the Company's insurers during October 1998. SALES The Company's consolidated net sales for the nine months ended September 30, 1998 were approximately $3,790,000, compared to $5,082,000 for the same period in 1997, representing a decrease of 25%. Consolidated net sales for the third quarter of 1998 were approximately $1,013,000, compared to $1,356,000 for the same period in 1997, also representing a decrease of 25%. The sharp decreases in sales for 1998 when compared to the respective periods in 1997 was principally due to significant decreases in sales of landscaping services, reduction in sales volume to one of the Company's major customers and the closing of the Company's South Florida operation. Sales of landscaping services decreased by approximately $513,000 (39%) and $100,000 (30%) for the nine months and the quarter ended September 30, 1998, respectively, when compared to the same periods in 1997. This decrease was due to a reduction in the amount of contracts in progress during 1998. Sales of lawn and garden products decreased by approximately $529,000 (44%) and $211,000 (51%) for the nine months and the quarter ended September 30, 1998, respectively, when compared to the same periods in 1997. The decrease in sales of lawn and garden products was principally due to a reduction in sales volume to one of the Company's major customers (Masso Expo Corp.). 16 Sales at the discontinued South Florida operation for the nine months and quarter ended September 30, 1997 were approximately $496,000 and $85,000, respectively. Sales of the South Florida operation did not provide any gross profit during 1997. Conversely, sales of plant material increased by approximately $215,000 (10%) for the months ended September 30, 1998, when compared to the same period in 1997. This increase is directly related to a sales contract with the Puerto Rico Department of Transportation and Public Works for approximately $221,000 during the second quarter of 1998. Sales of plant material for the third quarter of 1998 were comparable to those of the third quarter of 1997. GROSS PROFITS The Company's gross profit for the nine months ended September 30, 1998 was 28%, compared to 17% for the same period in 1997, or an increase of 11%. The significant increase in gross profit experienced during the nine months ended September 30, 1998, when compared to the same period in 1997 is due to a combination of several factors discussed below. Sales of plant material during the second quarter of 1998 included the sales contract to the Department of Transportation and Public Works, which yielded a favorable profit. Charges to cost of sales during the nine months ended September 30, 1998, as a result of increases to the inventory valuation allowance were significantly lower ($30,000), when compared to the same period in 1997 ($158,000). During the second quarter of 1997, the Company charged approximately $340,000 to cost of sales (in addition to $170,000 which had been previously included in the inventory valuation reserve at December 31, 1996) representing a substantial write down of inventory at the now discontinued South Florida location. Gross profit for the quarter ended September 30, 1998 was 12% compared to 18% for the same period in 1997. The decrease in gross profit of 6% for the quarter ended September 30, 1998 was due in part, to the disposition of unsalable plant material as a result of a physical inventory performed as of August 31, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (SG&A) were approximately $1,560,000 and $2,025,000 for the nine months ended September 30, 1998 and 1997, respectively. This represented a 23% decrease in dollar terms and a 1% increase as a percentage of sales 17 (due to decrease in sales during 1998). The decrease in SG&A for the nine months ended September 30, 1998, when compared to the same period in 1997 is principally due to significant decreases in shipping and warehousing costs. The discontinued South Florida operation incurred approximately $209,000 in SG&A during the nine months ended September 30, 1997. SG&A for the third quarter of 1998 were approximately $498,000, compared to $725,000 for the same period in 1997. This represented a 31% decrease in dollar terms and a 4% decrease over 1997 as a percentage of sales. The decrease in SG&A for the third quarter of 1998 when compared to the same period in 1997 is also due in part, to decreases in shipping and warehousing costs. The discontinued South Florida operation incurred approximately $143,000 in SG&A during the third quarter of 1997. OTHER INCOME AND EXPENSES The increase in interest income for the nine months and the third quarter ended September 30, 1998 when compared to the same periods in 1997, is due to higher yields obtained during 1998 with similar investments. The decrease in interest expense for 1998 compared to 1997 is the result of reductions in the outstanding principal balances of long-term debt. In connection with closing of the Company's South Florida operation, on September 29, 1997, the Company sold a 54 acre nursery farm at this location for $800,000, resulting in a gain of approximately $402,000. HURRICANE GEORGES As previously mentioned, Hurricane Georges struck Puerto Rico on September 21, 1998. As with other hurricanes, the agricultural industry was the hardest hit. At its Vega Alta facilities, the Company suffered moderate damage to all of its fabricated steel structures (shadehouses) and near total destruction of all its wooden shadehouses and its irrigation systems. Total property written down as a result of the damages had a book value of approximately $171,000 at September 30, 1998. At its Barranquitas (leased) facilities, moderate damage was also sustained to a portion of its pulling cable shadehouses and its irrigation system, however, all of the shadecloth covers were blown away. As of November 13, 1998, the Company was still in the process of restoring both of its facilities, and has estimated clean-up, restoration and debris removal at approximately $555,000. The Company's inventory of lawn and garden products did not suffer any damages. However, inventory of plant material sustained significant damages as a result of damage and destruction to shadehouses at both Company locations. The Company has determined it is not practical nor feasible to perform a physical inventory at this time in order to determine losses of plant material, since damage to various varieties is not yet fully visible. However, based on preliminary reviews and evaluations of the plant material 18 inventories at both locations, the Company has estimated the loss of plant material at approximately $650,000 as of September 30, 1998. The Company has been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages. As of November 13, 1998, the Company had received $367,000 from one of its insurers for property damages. The Company also has another claim of approximately $300,000 which is in the process of being reviewed by another insurance company for payment. In addition, the Company has filed claims with the Puerto Rico Department of Agriculture as well as the United States Department of Agriculture for monetary assistance regarding infrastructure, uninsured crops and debris removal at both locations. However, a reasonable estimate of assistance to be provided cannot be made at this time. WRITE DOWN OF NOTE RECEIVABLE On September 23, 1998, Hurricane Georges struck the Dominican Republic. The Company owns a note receivable (refer to Note 5 to the accompanying consolidated financial statements) 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 default since December 1995 and is collateralized by a second mortgage on property and equipment. It is the Company's understanding that those facilities were severely damaged or destroyed. As a result of the damages caused 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 accompanying consolidated statements of operations for the quarter and nine months ended September 30, 1998. FINANCIAL CONDITION Although, the Company's financial condition at September 30, 1998 was affected by the damages caused by Hurricane Georges, the Company's current ratio continues to be strong, with a ratio of 2.8 to 1 at September 30, 1998, compared to 4.6 to 1 at December 31, 1997. At September 30, 1998, the Company had cash of approximately $1,056,000 and short term investments of $500,000, compared to cash of $1,230,000 and short term investments of $500,000 at December 31, 1997. The decrease in cash at September 30, 1998 is principally due to cash flows provided by operations ($158,000) and collection of notes receivable ($40,000), offset by cash outflows resulting from additions to property and equipment ($213,000), repayment of long-term debt ($112,000), and acquisition of treasury stock ($47,500). 19 Increase in current liabilities resulted from the accrual of approximately $424,500 in estimated expenses incurred in connection with Hurricane Georges. As a result the Company's debt to equity ratio at September 30, 1998 was 31%, compared to 19% at December 31, 1997. Stockholders' equity at September 30, 1998 decreased due to results of operations for the nine months ended September 30, 1998. Stockholders' equity also decreased by $47,500 from the acquisition of treasury stock as a result of the exercise of statutory dissenters rights by shareholders in connection with the reincorporation of the Company. There were no dividends declared nor issuance of capital stock during the nine months ended September 30, 1998. 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. Due to the nature of the Company's operations, management as well as the Company's external consultant both understand that year 2000 compliance will not pose significant operational problems for its computer system. The Company has completed a review and evaluation of its hardware and software systems, and is in process of performing modifications to its software programs and applications. 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, and 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. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 21 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 27 Financial Data Schedule None. 22 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 13, 1998 BY: /s/ MICHAEL J. SPECTOR ------------------ ------------------------------ Michael J. Spector, President and Chief Executive Officer Date: NOVEMBER 13, 1998 BY: /s/ ALFONSO ORTEGA ------------------ ----------------------------- Alfonso Ortega, Vice President, Treasurer, Principal Financial and Accounting Officer 23 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule EX-27 2
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,556,055 0 1,349,260 (112,000) 1,832,113 4,708,005 3,678,644 (1,590,331) 7,745,930 1,685,134 211,150 0 0 1,915 5,847,731 7,745,930 3,789,737 3,913,994 2,726,391 5,497,121 0 0 49,707 (1,632,834) 0 0 0 0 0 (1,632,834) (0.87) (0.87)
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