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, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-15336
MARGO CARIBE, INC.
A Puerto Rico Corporation - I.R.S. No. 66-0550881
Address of Principal Executive Offices:
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
Registrant's Telephone Number:
(787) 883-2570
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days.
YES X NO
----- -----
The registrant had 1,875,322 shares of common stock, $.001 par value,
outstanding as of August 13, 1999.
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SECOND QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statement of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 15
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 SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
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 circumstance after the date of such statements.
3
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
(UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents $ 684,260 $ 747,390
Short-term investments 500,000 500,000
Accounts receivable, net 1,051,880 1,228,572
Inventories 2,615,337 2,264,372
Prepaid expenses and other current assets 179,658 190,804
---------- ----------
Total current assets 5,031,135 4,931,138
Property and equipment, net 1,976,404 2,094,799
Due from shareholder 290,226 290,226
Notes receivable 620,413 620,413
Other assets 72,224 53,632
---------- ----------
Total assets $7,990,402 $7,990,208
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 45,588 $ 158,468
Notes payable 700,000 500,000
Accounts payable 510,135 665,140
Accrued expenses 229,243 211,077
---------- ----------
Total current liabilities 1,484,966 1,534,685
Long-term debt 85,880 85,880
---------- ----------
Total liabilities 1,570,846 1,620,565
---------- ----------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, $0.01 par value; 250,000
shares authorized, no shares issued - -
Common stock, $.001 par value; 10,000,000
shares authorized; 1,915,122 shares issued,
and 1,875,322 shares outstanding 1,915 1,915
Additional paid-in capital 4,637,706 4,637,706
Retained earnings 1,876,223 1,826,310
Treasury stock, 39,800 common shares,at cost (96,288) (96,288)
Total shareholders' equity 6,419,556 6,369,643
---------- ----------
Total liabilities and shareholders' equity $7,990,402 $7,990,208
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,464,463 $1,467,550 $2,997,527 $2,777,015
Cost of sales 927,593 955,321 1,898,706 1,830,992
---------- ---------- ---------- ----------
Gross profit 536,870 512,229 1,098,821 946,023
Selling, general and administrative expenses 593,650 513,087 1,119,450 1,062,409
---------- ---------- ---------- ----------
Loss from operations (56,780) (858) (20,629) (116,386)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 24,743 29,154 50,625 59,977
Interest expense (8,613) (16,860) (20,624) (33,479)
Hurricane Georges assistance proceeds - - 12,800 -
Miscellaneous income 27,141 23,803 27,741 33,933
---------- ---------- ---------- ----------
43,271 36,097 70,542 60,431
---------- ---------- ---------- ----------
Income (loss) before provision for income tax (13,509) 35,239 49,913 (55,955)
Income tax provision - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (13,509) $ 35,239 $ 49,913 $ (55,955)
========== ========== ========== ==========
Basic and diluted income (loss) per common share $ (.01) $ .02 $ .03 $ (.03)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
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, 1998 1,875,322 $1,915 $4,637,706 $1,826,310 $(96,288) $6,369,643
Net income - - - 49,913 - 49,913
--------- ------ ---------- ---------- --------- ----------
Balance at June 30, 1999 1,875,322 $1,915 $4,637,706 $1,876,223 $(96,288) $6,419,556
========= ====== ========== ========== ========= ==========
</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, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 49,913 $ (55,955)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 238,626 247,418
Provision for uncollectible accounts
receivable 19,700 17,591
Provision for inventory valuation allowance - 16,000
Gain on sale of equipment (2,746) -
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable 156,992 35,658
Inventories (350,965) 104,920
Prepaid expenses and other current assets 20,953 1,477
Due from shareholder - 1,455
Other assets (18,592) 8,311
Accounts payable (155,005) (185,512)
Accrued expenses 18,166 (26,595)
---------- ----------
Net cash provided by (used in) operating
activities (22,958) 164,768
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (141,292) (162,813)
Proceeds from sale of equipment 14,000 -
Collection of notes receivable - 40,000
---------- ----------
Net cash used in investing activities (127,292) (122,813)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (112,880) (74,278)
Increase in notes payable 200,000 -
Acquisition of treasury stock - (47,500)
---------- ----------
Net cash provided by (used in) financing
activities 87,120 (121,778)
---------- ----------
NET DECREASE IN CASH (63,130) (79,823)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 747,390 1,230,250
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 684,260 $1,150,427
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
These interim consolidated financial statements include the financial statements
of Margo Caribe, Inc. and its wholly-owned subsidiaries (collectively "the
Company"), Margo Nursery Farms, Inc., Margo Landscaping and Design, Inc., Margo
Garden Products, Inc., Rain Forest Products Group, Inc. and Margo Development
Corporation.
These interim consolidated financial statements are unaudited, but include all
adjustments that, in the opinion of management, are necessary for a fair
statement of the Company's financial position, results of operations and cash
flows for the periods covered. These statements have been prepared in accordance
with the United States Securities and Exchange Commission's instructions to Form
10-Q, and therefore, do not include all information and footnotes necessary for
a complete presentation of financial statements in conformity with generally
accepted accounting principles.
The preparation of interim financial statements relies on estimates. Therefore,
the results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 1999. These statements should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included in
the Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
NOTE 2 - USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb possible losses on existing accounts receivable that may
become uncollectible based on evaluations of collectibility and prior credit
experience. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the existing accounts
receivable and related allowance may change in the near term.
8
<PAGE>
The inventory valuation allowance is an estimate which is established through
charges to cost of sales. Management's judgement in determining the adequacy of
the allowance is based on several factors which include, but are not limited to,
costs of specific inventory items, sales histories of these items and
management's judgement with respect to future marketability of the inventory.
Based on the above, it is possible that the Company's estimate of the inventory
valuation allowance could change in the near term. The valuation allowance at
June 30, 1999 and December 31, 1998 was $175,000 and $200,000, respectively.
Set forth below is the movement of the inventory valuation allowance for the six
months ended June 30, 1999:
DESCRIPTION AMOUNT
- --------------------------------- --------
Beginning balance, January 1, 1999 $200,000
Write downs (25,000)
Ending balance, June 30, 1999 $175,000
========
NOTE 3 - INVENTORIES
At June 30, 1999 and December 31, 1998, inventories included the following:
DESCRIPTION 1999 1998
- --------------------------- ---------- ----------
Plant material $2,292,482 $1,900,250
Lawn and garden products 278,330 347,637
Raw materials and supplies 219,525 216,485
---------- ----------
2,790,337 2,464,372
Less valuation allowance (175,000) (200,000)
---------- ----------
$2,615,337 $2,264,372
========== ==========
NOTE 4 - NOTES RECEIVABLE
The Company owns a note receivable with an outstanding principal balance of
$996,962, from the sale of Cariplant S.A. (a former Dominican Republic
subsidiary) to Altec International, C. por A. ("Altec"), another Dominican
Republic company. The note is collateralized by the common stock and personal
guarantee of the major shareholder of Cariplant.
From the inception of the note in March 1993, the Company received several
payments through December 1995. However, Altec has been unable to comply with
the terms of the note.
9
<PAGE>
Due to the unfavorable collection experience as well as the difficulties of
operating in the Dominican Republic, in 1994 Company management wrote down the
carrying amount of the note to $316,000, representing the estimated value of
Cariplant's land and related improvements, including buildings, shadehouses, and
fixed and installed equipment.
On February 12, 1997, the Company obtained a junior lien on Cariplant's property
and equipment and entered into an agreement with Altec to modify the repayment
terms of the unpaid principal balance of $996,962, with payments of principal
and interest commencing in the year 2000. Payment of interest on the note was
waived through January 1, 2000.
On September 23, 1998, the Dominican Republic was struck by Hurricane Georges
severely damaging Cariplant's facilities. As a result of the damages caused by
the hurricane, the Company wrote down the carrying value of the note to
$100,000. The write down, amounting to $201,621 was included as an other expense
in the consolidated statements of operations for the year ended December 31,
1998.
At June 30, 1999 and December 31, 1998, notes receivable included the following:
DESCRIPTION 1999 1998
- ---------------------------------- -------- --------
Note receivable from Altec $100,000 $100,000
8% mortgage note, collateralized by
land in South Florida, with interest
payments due monthly and principal
due in a balloon payment on November
28, 2000. 475,000 475,000
10% note, collateralized by real
property 26,331 26,331
8% notes, due on demand, personally
guaranteed by Company personnel 19,082 19,082
-------- --------
$620,413 $620,413
======== ========
10
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
At June 30, 1999 and December 31, 1998 property and equipment included of the
following:
DESCRIPTION 1999 1998
--------------------------------- ---------- ---------
Leasehold improvements $1,470,737 $1,590,145
Equipment and fixtures 1,518,133 1,618,312
Transportation equipment 295,781 407,266
Real estate property 224,327 224,327
---------- ----------
3,508,978 3,840,050
Less accumulated depreciation and
amortization (1,532,574) (1,745,251)
---------- ----------
$1,976,404 $2,094,799
========== ==========
NOTE 6 - INCOME (LOSS) PER COMMON SHARE
The Company reports its earnings per share (EPS) using Financial Accounting
Standards Board Statement No. 128, Earnings Per Share ("SFAS 128"). SFAS 128
requires dual presentation of basic and diluted EPS. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Basic and diluted income (loss) per common share for the periods ended June 30,
1999 and 1998 were determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
BASIC INCOME (LOSS) PER COMMON SHARE: 1999 1998 1999 1998
- ------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) available to
common shareholders $ (13,509) $ 35,239 $ 49,913 $ (55,955)
========== ========== ========== ==========
Weighted average number of common
shares outstanding 1,875,322 1,875,322 1,875,322 1,881,989
========== ========== ========== ==========
Basic income (loss) per common share $ (.01) $ .02 $ .03 $ (.03)
========== ========== ========== ==========
DILUTED INCOME (LOSS) PER COMMON SHARE:
Net income (loss) available to
common shareholders $ (13,509) $ 35,239 $ 49,913 $ (55,955)
========== ========== ========== ==========
Weighted average number of common
shares outstanding 1,875,322 1,875,322 1,875,322 1,881,989
Plus incremental shares from assumed
exercise of stock options - - 7,714 -
---------- ---------- ---------- ----------
Adjusted weighted average shares 1,875,322 1,875,322 1,883,036 1,881,989
========== ========== ========== ==========
Diluted income (loss) per common
share $ (.01) $ .02 $ .03 $ (.03)
========== ========== ========== ==========
</TABLE>
11
<PAGE>
For the three months ended June 30, 1999 and 1998, and the six months ended June
30, 1998 the effect of the assumed exercise of stock options determined by using
the treasury stock method was antidilutive, thus no incremental shares were
added to the weighted average number of common shares outstanding.
NOTE 7 - SEGMENT INFORMATION
The Company reports its segment information pursuant to Financial Accounting
Standards Board Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way
an enterprise reports information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Statement requires a reconciliation of total segment revenue
and expense items and segment assets to the amounts in the enterprise's
financial statements. SFAS 131 also requires a descriptive report on how the
operating segments were determined, the products and services provided by the
operating segments, and any measurement differences used for segment reporting
and financial statement reporting.
The Company's management monitors and manages the financial performance of three
primary business segments: the production and distribution of plants, sales of
lawn and garden products and landscaping services. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income or
loss.
The financial information presented below was derived from the Company's
accounting system and is based on internal management accounting policies. The
information presented does not necessarily represent each segments's financial
condition and results of operations as if they were independent entities.
The Company's segment information for the three months ended June 30, 1999 and
1998, is as follows:
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 856,038 $ 343,733 $ 264,692 $1,464,463
Intersegment revenues 62,359 (17,410) - 44,949
Interest income 24,743 - - 24,743
Interest expense 8,613 - - 8,613
Depreciation and amortization 105,040 8,314 16,062 129,416
Segment income (loss) 86,147 (53,165) (46,491) (13,509)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 984,771 $ 217,637 $ 265,142 $1,467,550
Intersegment revenues 52,973 4,443 - 57,416
Interest income 29,154 - - 29,154
Interest expense 16,860 - - 16,860
Depreciation and amortization 104,585 5,569 14,719 124,873
Segment income (loss) 120,724 27,652 (113,137) 35,239
</TABLE>
The Company's segment information as of and for the six months ended June 30,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $1,738,006 $ 591,644 $ 667,877 $2,997,527
Intersegment revenues 120,966 16,654 - 137,620
Interest income 50,625 - - 50,625
Interest expense 20,624 - - 20,624
Depreciation and amortization 192,395 15,853 30,378 238,626
Segment income (loss) 172,463 (78,606) (43,944) 49,913
Segment assets 6,640,593 793,460 556,349 7,990,402
Expenditures for segment assets 141,292 - - 141,292
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $1,746,086 $ 467,005 $ 563,924 $2,777,015
Intersegment revenues 127,082 15,532 - 142,614
Interest income 59,977 - - 59,977
Interest expense 33,479 - - 33,479
Depreciation and amortization 207,033 10,947 29,438 247,418
Segment income (loss) 152,332 (67,968) (140,319) (55,955)
Segment assets 7,349,973 726,555 473,771 8,550,299
Expenditures for segment assets 162,813 - - 162,813
</TABLE>
NOTE 8 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF
CASH FLOWS
a) NON-CASH INVESTING ACTIVITIES
During the six months ended June 30, 1999, fully depreciated
equipment amounting to $429,964 was written off, and equipment
with a cost of $32,593 and a book value of $11,254 was sold at
a gain of $2,746.
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
1999 and 1998, include interest payments amounting to
approximately $20,600 and $33,500, respectively. There were no
income tax payments for the six months ended June 30, 1999 and
1998.
14
<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. During 1999 and 1998, the Company has also been engaged
in seeking sites for the development of residential housing projects.
PRINCIPAL OPERATIONS
The Company's operations are focused in the Commonwealth of Puerto Rico ("Puerto
Rico") and the Caribbean.
These operations are conducted at a 117 acre nursery farm in Vega Alta, Puerto
Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in
Barranquitas, Puerto Rico. The 117 acre farm is leased from Michael J. Spector
and Margaret Spector, who are directors, officers and principal shareholders of
the Company. The 13 acre nursery in Barranquitas is leased from Cali Orchids,
Inc., an unrelated third party.
The Company's operations include Margo Caribe, Inc. (the holding company), Margo
Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc.
("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest
Products Group, Inc. ("Rain Forest"), and Margo Development Corporation, all
Puerto Rico corporations.
Nursery Farms, which operates under the trade name of Margo Farms del Caribe, is
engaged in the production and distribution of tropical and flowering plants. Its
products are primarily utilized for the interior and exterior landscaping of
office buildings, shopping malls, hotels and other commercial sites, as well as
private residences. In Vega Alta, Nursery Farms produces various types of palms,
flowering and ornamental plants, trees, shrubs, bedding plants and ground
covers. In Barranquitas, Nursery Farms produces orchids, bromeliads, anthuriums,
spathiphylum and poincettias. Its customers include wholesalers, retailers,
chain stores and landscapers primarily located in Puerto Rico and the Caribbean.
As a bona fide agricultural enterprise, Nursery Farms enjoys a 90% tax exemption
under Puerto Rico law from income derived from its nursery business in Puerto
Rico.
Landscaping provides landscaping services to customers in Puerto Rico and the
Caribbean, including commercial as well as residential landscape design and
landscaping.
15
<PAGE>
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor of Sunniland Corporation's fertilizer and
pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico
and the Caribbean.
Rain Forest is engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock and gravels. Rain Forest's products are
marketed by Garden Products. The Company enjoys a tax exemption grant from the
Government of Puerto Rico for the manufacturing operations of Rain Forest.
Margo Development Corporation has been engaged in seeking real estate sites for
the development of residential projects in Puerto Rico.
FUTURE OPERATIONS
The Company will continue to concentrate its economic and managerial resources
in expanding and improving its present operations in Puerto Rico. The Company's
Board of Directors has determined that these operations present the Company's
most attractive opportunities for the near future. The Board believes that the
Company should continue to capitalize its advantage as one of the largest, full
service nurseries in the region.
The Company is a supplier of plants and lawn and garden products for The Home
Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and
garden products according to NURSERY RETAILER magazine. As of August 13, 1999,
Home Depot had opened two stores, and has announced plans to open seven
additional stores in Puerto Rico over the next three years.
During March 1999, the Company leased two additional parcels of land
(approximately 320 acres) from the Puerto Rico Land Authority. The Company
intends to eventually relocate its existing Vega Alta facilities and corporate
offices to this property. The Company also intends to use this additional land
to increase the Company's volume of field grown material and to diversify within
the nursery business by growing turf (sod).
The Company was awarded a contract for approximately $668,000 by the
Municipality of San Juan for the purchase of trees in connection with an ongoing
reforestation program. The Company expects the delivery process to be
substantially complete by the end of the third quarter of 1999.
The Company was also awarded a landscaping project for the Puerto Rico Art
Museum. This landscaping project is scheduled for commencement during late 1999
at an approximate contract price of $650,000.
16
<PAGE>
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 1999, the
Company will continue seeking to acquire options to purchase and/or purchase
real estate sites for the development of residential projects in Puerto Rico. As
of August 13, 1999, the Company had identified several sites for possible future
development, however, no formal agreements had been reached.
17
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS AND SECOND QUARTERS ENDED JUNE 30, 1999
AND 1998
During the first six months of 1999, the Company had net income of approximately
$50,000, or $.03 per share, compared to a net loss of $56,000 for the same
period in 1998, or $.03 per share.
For the quarter ended June 30, 1999, the Company incurred a net loss of
approximately $14,000 or $.01 per share, compared to net income of approximately
$35,000, or $.02 per share for the same period in 1998.
SALES
The Company's consolidated net sales for the first six months of 1999 were
approximately $2,998,000, compared to $2,777,000 for the same period in 1998,
representing an increase of 8%.
Consolidated net sales for the second quarters of 1999 and 1998 remained
comparable ($1,464,000 in 1999 versus $1,468,000 in 1998).
The increase of 8% in sales for the first six months of 1999 when compared to
the same period in 1998, was due to increases in sales of lawn and garden
products (27%) and landscaping services (18%). Sales of plant material remained
comparable.
Although sales for the second quarters ended June 30, 1999 and 1998 remained
comparable, sales of plant material decreased by 13% during the second quarter
of 1999 principally due to the fact that sales for the second quarter of 1998
included sales of approximately $221,000 to the Puerto Rico Department of
Transportation and Public Works. Sales of lawn and garden products increased by
58% during the second quarter of 1999, principally due to increased sales of the
Company's Rain Forest product line. Sales of landscaping services remained
comparable during both periods.
GROSS PROFITS
The Company's consolidated gross profit for the first six months of 1999 was
37%, compared to 34% for the same period in 1998, or an increase of 3%.
Consolidated gross profit for the second quarter of 1999 was also 37%, compared
to 35% for the same period in 1998, or an increase of 2%.
Increase in gross profit for the first six months and second quarter of 1999,
when compared to the same periods in 1998 was due to a combination of two
separate factors.
18
<PAGE>
The first factor was the increase in gross profit arising from improved
efficiency in landscaping services, as well as increased sales of the Company's
Rain Forest product line.
The second factor, adversely affecting gross profit (due to a related charge to
cost of sales), was a physical inventory performed as of June 30, 1999. During
1998, a physical inventory was performed at a later date, and related results
were reflected in results of operations for the third quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were approximately
$1,119,000 and $1,062,000 for the first six months of 1999 and 1998,
respectively. This represented a 5% increase in dollar terms and a 1% decrease
as a percentage of sales (due to increase in sales during 1999). The increase in
SG&A for the first six months of 1999, when compared to the same period in 1998
is principally due to increases in shipping & warehousing costs (from increased
sales of the Rain Forest product line), increase in landscaping management
personnel and the establishment of a salary deferral retirement plan to which
the Company has contributed during 1999.
SG&A for the second quarter of 1999 were approximately $594,000 compared to
$513,000 for the same period in 1998. This represented a 16% increase in dollar
terms and a 5% increase over 1998 as a percentage of sales. The increase in SG&A
for the second quarter of 1999 when compared to the same period in 1998 is also
principally due to increases in shipping and warehousing costs, landscape
management and contributions to the retirement plan.
OTHER INCOME AND EXPENSES
The decrease in interest income for the first six months as well as the second
quarter ended June 30, 1999, when compared to the same periods in 1998, is due
to lower yields obtained during 1999 on similar investments.
The decrease in interest expense for the six months as well as the second
quarter ended June 30, 1999 when compared to the same periods in 1998, is due to
reductions in the outstanding principal balances of long-term debt.
FINANCIAL CONDITION
The Company's financial condition at June 30, 1999 remains comparable with that
of December 31, 1998. The Company's current ratio continues to be strong, with a
ratio of 3.4 to 1 at June 30, 1999, compared to 3.2 to 1 at December 31, 1998.
19
<PAGE>
At June 30, 1999, the Company had cash of approximately $684,000 and short term
investments of $500,000, compared to cash of $747,000 and short term investments
of $500,000 at December 31, 1998. The decrease in cash at June 30, 1999 is
principally due to cash out flows from operations ($23,000), additions to
property and equipment ($141,000) and repayment of long-term debt ($113,000),
offset by cash flows from proceeds of notes payable ($200,00).
As a result of the Company's net income for the six months ended June 30, 1999
and an overall decrease in current liabilities at June 30, 1999, the Company's
debt to equity ratio improved to 24% compared to 25% at December 31, 1998.
Stockholders' equity at June 30, 1999 increased due to results of operations for
the six month period. There were no dividends declared nor issuance of capital
stock during the first six months of 1999.
CURRENT LIQUIDITY AND CAPITAL RESOURCES
The Company is presently current on all its obligations. Excess funds have been
invested in short-term bank instruments. The Company believes it has adequate
resources to meet its current and anticipated liquidity and capital
requirements.
YEAR 2000 ISSUE
The inability of computer hardware and software to recognize and properly
process data fields using a four-digit year to define the applicable year is
commonly referred to as the "Year 2000 Issue". As the year 2000 approaches,
computer systems using a two-digit year data field may be unable to accurately
process certain information.
The Company has completed a review and evaluation of its hardware and software
programs and applications and is in the process of modifying and testing its
software and operating systems for Year 2000 compliance. The testing for the
Company's operating hardware has been completed and is Year 2000 compliant. The
Company expects the testing for its other systems to be complete by September
30, 1999. All test results are being verified by an external consultant.
While the Company has not initiated formal communications with its suppliers,
management also anticipates there will not be any major Year 2000 compliance
issues with them due to the nature of the Company's operations and due to the
fact that the Company does not order or communicate with its suppliers using any
computer based information system.
20
<PAGE>
The Company estimates that the total cost of being Year 2000 compliant will not
exceed $75,000, of which approximately $40,000 had been incurred as of June 30,
1999. The cost of being Year 2000 compliant will be funded through operating
cash flows. The Company anticipates being Year 2000 compliant by late September
1999. The costs of and completion date on which the Company believes it will be
year 2000 compliant are based on management's best estimates. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
While the Company is taking steps to ensure that its systems are Year 2000
compliant, Year 2000 problems sufferred by third parties, including providers of
basic services, such as telephone, water and electricity, could have an adverse
impact on the daily operations of the Company. The Company does not have a
formal contingency plan to deal with disruptions that may be caused by Year 2000
problems. In the event of any such disruptions, the Company intends to perform
most operational functions manually.
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
The Company held its annual meeting of shareholders on May 14, 1999. At this
meeting, shareholders were asked to vote on two proposals. Quorum at the meeting
consisted of 1,826,954 shares or 97% 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 1,826,754 200 0 0
(each of the following nominees
received the same number of
votes: Michael J. Spector,
Margaret D. Spector, Blas
Ferraiuoli, Frederick Moss
and Michael Rubin)
2. Ratification of Deloitte &
Touche LLP as external
auditors 1,826,954 0 0 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY).
(b) REPORTS ON FORM 8-K. The Company filed the following Reports on
Form 8-K during the quarter ended June 30, 1999:
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 NURSERY FARMS, INC.
Date: AUGUST 13, 1999 BY: /S/ MICHAEL J. SPECTOR
---------------- ----------------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: AUGUST 13, 1999 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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,184,260
<SECURITIES> 0
<RECEIVABLES> 1,157,844
<ALLOWANCES> (105,964)
<INVENTORY> 2,615,337
<CURRENT-ASSETS> 5,031,135
<PP&E> 3,508,978
<DEPRECIATION> (1,532,574)
<TOTAL-ASSETS> 7,990,402
<CURRENT-LIABILITIES> 1,484,996
<BONDS> 85,880
1,915
0
<COMMON> 0
<OTHER-SE> 6,417,641
<TOTAL-LIABILITY-AND-EQUITY> 7,990,402
<SALES> 2,997,527
<TOTAL-REVENUES> 3,088,693
<CGS> 1,898,706
<TOTAL-COSTS> 3,018,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,624
<INCOME-PRETAX> 49,913
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,913
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
