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.
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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
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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
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<TABLE>
<CAPTION>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
------------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
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
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
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
---------- ------- ----------- ----------- --------- -----------
<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 -- -- -- (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
=========== ======= =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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<TABLE>
<CAPTION>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<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
Not applicable,
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
None.
22
<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: 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
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,556,055
<SECURITIES> 0
<RECEIVABLES> 1,349,260
<ALLOWANCES> (112,000)
<INVENTORY> 1,832,113
<CURRENT-ASSETS> 4,708,005
<PP&E> 3,678,644
<DEPRECIATION> (1,590,331)
<TOTAL-ASSETS> 7,745,930
<CURRENT-LIABILITIES> 1,685,134
<BONDS> 211,150
0
0
<COMMON> 1,915
<OTHER-SE> 5,847,731
<TOTAL-LIABILITY-AND-EQUITY> 7,745,930
<SALES> 3,789,737
<TOTAL-REVENUES> 3,913,994
<CGS> 2,726,391
<TOTAL-COSTS> 5,497,121
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,707
<INCOME-PRETAX> (1,632,834)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,632,834)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
