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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 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 August 14, 1998.
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<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SECOND QUARTER ENDED JUNE 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 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
PART II
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 19
OF SECURITIES HOLDERS
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES
2
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,150,427 $ 1,230,250
Short term investments 500,000 500,000
Accounts receivable, net 997,700 1,050,949
Inventories 2,317,208 2,438,128
Prepaid expenses and other current assets 100,315 101,792
----------- -----------
Total current assets 5,065,650 5,321,119
Property and equipment, net 2,334,990 2,419,595
Non-interest bearing note due from shareholder 290,026 291,481
Notes receivable 809,034 860,982
Other assets 50,600 58,911
----------- -----------
Total assets $ 8,550,300 $ 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 202,806 388,318
Accrued expenses 124,670 163,213
----------- -----------
Total current liabilities 874,676 1,169,225
Long-term debt 249,099 252,883
----------- -----------
Total liabilities 1,123,775 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 2,883,192 2,939,147
Treasury stock, 39,800 common shares in 1998
(19,800 in 1997), at cost (96,288) (48,788)
----------- -----------
Total shareholders' equity 7,426,525 7,529,980
----------- -----------
Total liabilities and shareholders' equity $ 8,550,300 $ 8,952,088
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods ended June 30, 1998 and 1997
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,467,550 $ 1,865,715 $ 2,777,015 $ 3,726,025
Cost of sales 955,321 1,837,023 1,830,992 3,092,961
----------- ----------- ----------- -----------
Gross profit 512,229 28,692 946,023 633,064
Selling, general and administrative expenses 513,087 734,539 1,062,409 1,299,911
----------- ----------- ----------- -----------
Income (loss) from operations (858) (705,847) (116,386) (666,847)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 29,154 16,505 59,977 35,793
Interest expense (16,860) (20,615) (33,479) (39,887)
Miscellaneous income (expense) 23,803 (7,829) 33,933 (6,589)
----------- ----------- ----------- -----------
36,097 (11,939) 60,431 (10,683)
----------- ----------- ----------- -----------
Income (loss) before provision for income tax 35,239 (717,786) (55,955) (677,530)
Income tax provision -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 35,239 $ (717,786) $ (55,955) $ (677,530)
=========== =========== =========== ===========
Net income (loss) per common share $ .02 $ (.38) $ (.03) $ (.36)
=========== =========== =========== ===========
Weighted average number of common shares 1,875,322 1,895,322 1,881,989 1,895,322
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months ended June 30, 1998
(Unaudited)
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- ------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 - - - (55,955) - (55,955)
--------- ------ ---------- ---------- -------- ----------
Balance at June 30, 1998 1,875,322 $1,915 $4,637,706 $2,883,192 $(96,288) $7,426,525
========= ====== ========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $ (55,955) $ (677,530)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 247,418 244,305
Provision for uncollectible receivables 17,591 --
Increase in inventory valuation reserve 16,000 125,000
Write-off of inventory -- 340,000
Realized loss on translation adjustment -- 9,164
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable 35,658 (189,687)
Inventories 104,920 (190,507)
Prepaid expenses and other current assets 1,477 (5,766)
Decrease in note due from shareholder 1,455 --
Other assets 8,311 9,957
Accounts payable (185,512) (62,958)
Accrued expenses (26,595) (6,740)
Income tax payable -- (23,492)
----------- -----------
Net cash provided by (used in) operating
activities 164,768 (428,254)
----------- -----------
Cash flows from investing activities:
Decrease in short term investments -- 504,000
Additions to property, plant and equipment (162,813) (84,852)
Decrease (increase) in notes receivable 40,000 (6,800)
----------- -----------
Net cash provided by (used in) financing
activities (122,813) 412,348
----------- -----------
Cash flows from financing activities:
Acquisition of treasury stock (47,500) --
Repayment of long-term debt (74,278) (76,395)
----------- -----------
Net cash used in financing activities (121,778) (76,395)
----------- -----------
Net decrease in cash (79,823) (92,301)
Cash and equivalents at beginning of year 1,230,250 946,490
----------- -----------
Cash and equivalents at end of period $ 1,150,427 $ 854,189
=========== ===========
See accompanying notes to consolidated financial statements.
7
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
For the six months ended June 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, Interim Margo, Inc. (now Margo Nursery Farms, Inc.), Margo
Landscaping and Design, Inc., Margo Garden Products, Inc. and Rain
Forest Products Group, Inc. See "REINCORPORATION AS PUERTO RICO
CORPORATION AND HOLDING COMPANY" under ITEM 2, herein. For the six
months ended June 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 six months ended June 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.
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<PAGE>
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
June 30, 1998 and December 31, 1997 were $316,000 and $300,000,
respectively.
Set forth below is the movement of the inventory valuation allowance for
the six months ended June 30, 1998:
DESCRIPTION AMOUNT
---------------------------------- --------
Beginning balance, January 1, 1998 $300,000
Provisions 16,000
--------
Ending balance, June 30, 1998 $316,000
========
NOTE 3 - 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 4 - NOTES RECEIVABLE
At December 31, 1993, the Company had 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 was
originally due in 180 equal monthly installments of $9,638, including
interest at 8%, through April 2008. The note is collateralized by the
common stock and personal guarantee of the major shareholder of
Cariplant.
9
<PAGE>
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. The
write-down, amounting to $680,962 was included as an other expense in
the consolidated statements of operations for the year ended December
31, 1994.
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.
At June 30, 1998 and December 31, 1997, notes receivable included the
following:
DESCRIPTION 1998 1997
---------------------------------- -------- --------
Note receivable from Altec $301,621 $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
-------- --------
$809,034 $860,982
======== ========
10
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
At June 30, 1998 and December 31, 1997 property and equipment consisted of the
following:
DESCRIPTION 1998 1997
--------------------------------- ---------- ----------
Leasehold improvements $1,917,919 $1,860,754
Equipment and fixtures 1,476,901 1,504,103
Transportation equipment 374,960 747,180
Buildings 224,327 224,327
---------- ----------
3,994,107 4,336,364
Less accumulated depreciation and
amortization (1,659,117) (1,916,769)
---------- ----------
$2,334,990 $2,419,595
========== ==========
NOTE 6 - NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share of common stock is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the relevant periods. For the six months ended June 30, 1998 and 1997,
weighted average number of common shares outstanding were 1,881,989 and
1,895,322, respectively. For the three months ended June 30, 1998 and 1997,
weighted average number of common shares outstanding were 1,875,322 and
1,895,322, respectively.
NOTE 7 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF CASH FLOWS
a) NON-CASH INVESTING ACTIVITIES
During the six months ended June 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 six months ended June 30 1998 and
1997, include interest payments amounting to approximately $33,500 and
$40,500, respectively. There were no income tax payments for the six
months ended June 30, 1998 and 1997.
11
<PAGE>
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.
REINCORPORATION AS PUERTO RICO CORPORATION AND HOLDING COMPANY
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 will continue to conduct the
nursery business previously conducted by Margo as a wholly-owned subsidiary of
Margo and will operate under the name of Margo Nursery Farms, Inc. Margo will
act 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.
PRINCIPAL OPERATIONS
For the six months ended June 30, 1998, the Company's business was conducted at
two locations in Puerto Rico. For the six months ended June 30, 1997, the
Company also operated at another location in South Florida. These operations are
described below:
12
<PAGE>
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"), and Rain Forest Products Group, Inc. ("Rain Forest"), 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, poincettias 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 enjoys a tax exemption grant from the
Government of Puerto Rico for the manufacturing operations of Rain Forest.
13
<PAGE>
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 has become 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 will enter
the Puerto Rico market with one store opening in early 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 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.
14
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS AND SECOND QUARTERS ENDED JUNE 30, 1998
AND 1997
OVERVIEW
During the first six months of 1998, the Company incurred a net loss of
approximately $56,000, or $.03 per share, compared to a net loss of $678,000 or
$.36 per share for the same period in 1997.
For the quarter ended June 30, 1998, the Company had net income of approximately
$35,000, or $.02 per share, compared to a net loss of $718,000, or $.38 per
share for the same period in 1997.
The decreases in net losses for the first six months as well as the quarter
ended June 30, 1998 when compared to the same periods in 1997 is principally due
to significant charges to cost of sales recorded during the second quarter of
1997. These charges included a substantial write down of inventory due to the
anticipated closing of the Company's South Florida operation, effective
September 30, 1997. Another significant charge to cost of sales recorded during
the second quarter of 1997 was an increase in the Puerto Rico inventory
valuation reserve.
SALES
The Company's consolidated net sales for the first six months of 1998 were
approximately $2,777,000, compared to $3,726,000 for the same period in 1997,
representing a decrease of 25%.
Consolidated net sales for the second quarter of 1998 were approximately
$1,468,000, compared to $1,866,000 for the same period in 1997, representing a
decrease of 21%.
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 $413,000 (42%) and
$205,000 (44%) for the six months and the quarter ended June 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 $318,000 (40%) and
$185,000 (45%) for the six months and the quarter ended June 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.
15
<PAGE>
Sales at the discontinued South Florida operation for the six months and quarter
ended June 30, 1997 were approximately $380,000 and $245,000, respectively.
Sales of the South Florida operation did not provide any gross profit during
1997.
Conversely, sales of plant material increased by approximately $162,000 (10%)
and $237,000 (32%) for the six months and the quarter ended June 30, 1998,
respectively, when compared to the same periods 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.
GROSS PROFITS
The Company's gross profit for the first six months of 1998 was 34%, compared to
17% for the same period in 1997, or an increase of 17%. Gross profit for the
second quarter of 1998 was 35%, compared to 2% for the same period in 1997, or
an increase of 33%.
The significant increases in gross profit experienced during the six months and
the quarter ended June 30, 1998, when compared to the same periods 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 first six months of 1998, as a result of
increases to the inventory valuation allowance were not significant ($16,000),
when compared to the same period in 1997 ($125,000).
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were approximately
$1,062,000 and $1,300,000 for the first six months of 1998 and 1997,
respectively. This represented an 18% decrease in dollar terms and a 3% increase
as a percentage of sales (due to decrease in sales during 1998). The decrease in
SG&A for the first six months of 1998, when compared to the same period in 1997
is due to significant decreases in shipping and warehousing costs. The
discontinued South Florida operation incurred approximately $65,000 in SG&A
during the first six months of 1997.
16
<PAGE>
SG&A for the second quarter of 1998 were approximately $513,000, compared to
$735,000 for the same period in 1997. This represented a 30% decrease in dollar
terms and a 4% decrease over 1997 as a percentage of sales. The decrease in SG&A
for the second quarter of 1998 when compared to the same period in 1997 is also
due to decreases in shipping and warehousing costs. The discontinued South
Florida operation incurred approximately $39,000 in SG&A during the second
quarter of 1997.
OTHER INCOME AND EXPENSES
The increase in interest income for the first six months and the second quarter
ended June 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.
FINANCIAL CONDITION
The Company's financial condition at June 30, 1998 remains comparable with that
of December 31, 1997. The Company's current ratio continues to be strong, with a
ratio of 5.8 to 1 at June 30, 1998, compared to 4.6 to 1 at December 31, 1997.
At June 30, 1998, the Company had cash of approximately $1,150,000 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 June 30,
1998 is principally due to cash flows provided by operations ($165,000), offset
by cash outflows resulting from additions to property and equipment ($163,000),
repayment of long-term debt ($74,000) and acquisition of treasury stock
($47,500).
As a result of decreases in trade payables and long-term debt at June 30, 1998,
the Company's debt to equity ratio improved to 15.1% compared to 18.9% at
December 31, 1997.
Stockholders' equity at June 30, 1998 decreased due to results of operations for
the first six months of 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 six months ended June 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.
17
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its annual meeting of shareholders on May 29, 1998. At this
meeting, shareholders were asked to vote on five proposals. Quorum at the
meeting consisted of 1,799,231 shares or 96% of 1,875,322 total outstanding
common shares. The proposals, together with voting results were as follows:
BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
- ------------------------- --------- ------- ------- ---------
1. Election of five Directors 1,798,781 450 0 0
2. Plan of Reorganization for
holding company structure 1,455,682 2,450 1,900 339,199
3. Change in corporate name 1,797,431 100 1,700 0
4. 1998 Stock Option Plan 1,455,682 600 3,900 339,049
5. Ratification of Deloitte &
Touche LLP as external
auditors 1,797,381 350 1,500 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(i) Form of Common Stock Certificate (incorporated herein by
reference to exhibit number 4.1 of the Company's Registration
Statement on Form S-8 (No. 333-59619) filed with SEC on July
22, 1998.
19
<PAGE>
(ii) 1998 Stock Option Plan (incorporated herein by reference to
exhibit number 4.2 of the Company's Registration Statement on
Form S-8 (No. 333-59619) filed with the SEC on July 22, 1998.
(iii) Form of Stock Option Agreement (incorporated herein by
reference to exhibit number 4.3 of the Company's Registration
Statement on Form S-8 (No. 333-59619) filed with the SEC on
July 22, 1998.
(iv) 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 June 30, 1998:
(i) Report on Form 8-K, dated June 1, 1998, reporting under Items
2 and 5 completion of holding company reorganization and
change of corporate name to Margo Caribe, Inc.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARGO CARIBE, INC.
Date: AUGUST 14, 1998 BY: /s/ MICHAEL J. SPECTOR
---------------- ----------------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: AUGUST 14, 1998 BY: /s/ ALFONSO ORTEGA
---------------- ----------------------------
Alfonso Ortega,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
21
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,650,427
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<RECEIVABLES> 1,103,700
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