UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[
X ]
|
QUARTERLY
REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended
September 30,
2006
[ ]
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
Commission
File No. 0-15336
MARGO
CARIBE, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
Puerto
Rico
(State
of Other Jurisdiction of Incorporation or Organization)
|
66-0550881
(I.R.S.
Employer
Identification
No.)
|
Road
690, Kilometer 5.8
Vega
Alta, Puerto Rico
(Address
of Principal Executive Offices)
|
00692
(Zip
Code)
|
Issuer’s
Telephone Number, Including Area Code: (787)
883-2570.
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days.
YES
o
NO
x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: The registrant had 2,862,481 shares of common
stock, $.001 par value, outstanding as of September 30, 2008.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
YES
o
NO
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
Smaller
reporting company
x
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO
x
MARGO
CARIBE, INC. AND SUBSIDIARIES
FORM
10-Q
FOR
THE THIRD QUARTER ENDED SEPTEMBER 30, 2006
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
|
3
|
Item
1
|
Financial
Statements (unaudited)
|
3
|
|
Condensed
Consolidated Balance Sheet
|
3
|
|
Condensed
Consolidated Statements of Operations
|
4
|
|
Condensed
Consolidated Statements of Shareholders’ Deficiency
|
5
|
|
Condensed
Consolidated Statements of Cash Flows
|
6
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
Item
2
|
Management’s
Discussion and Analysis or Plan of Operation
|
21
|
Item
3
|
Controls
and Procedures
|
29
|
PART
II – OTHER INFORMATION
|
31
|
Item
1
|
Legal
Proceedings
|
30
|
Item
2
|
Unregistered
Sales of Equity Securities and Proceeds
|
30
|
Item
3
|
Defaults
Upon Senior Securities
|
30
|
Item
4
|
Submission
of Matters to a Vote of Securities Holders
|
30
|
Item
5
|
Other
Information
|
30
|
Item
6
|
Exhibits
|
31
|
SIGNATURES
|
32
|
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, legislative
changes and regulatory or judicial proceedings, 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.
EXPLANATORY
NOTE
Margo
Caribe, Inc. (the “Company”) was unable to timely file with the Securities and
Exchange Commission (“SEC”) this Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2006, because of delays in the preparation of the company’s
unaudited financial statements for the period as a result of a number of
management changes, including turnover in the Chief Financial Officer position
which have delayed the Company’s financial reporting schedule.
As soon
as practicable following the filing of this Form 10-Q, the Company will also
file its Annual Reports on Form 10-K for the years ended December 31, 2006 and
2007 and Form 10-Q for the quarters ended March 31, 2007, June 30, 2007,
September 30, 2007, March 31, 2008, June 30, 2008 and September 30,
2008
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
September
30, 2006
(Unaudited)
ASSETS
|
|
2006
|
|
Current
assets:
|
|
|
|
Cash
and equivalents
|
|
$
|
105,542
|
|
Accounts
receivable, net
|
|
|
1,103,377
|
|
Current
portion of inventories
|
|
|
1,703,265
|
|
Prepaid
expenses and other current assets
|
|
|
213,419
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,125,603
|
|
|
|
|
|
|
Non-current
portion of inventories
|
|
|
433,074
|
|
Property
and equipment, net
|
|
|
3,971,774
|
|
Land
held for future development
|
|
|
1,184,958
|
|
Investment
in unconsolidated subsidiary
|
|
|
896,693
|
|
Notes
receivable
|
|
|
16,913
|
|
Goodwill
|
|
|
1,063,495
|
|
Other
assets
|
|
|
72,429
|
|
|
|
|
|
|
Total
assets
|
|
$
|
10,764,939
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
Current
liabilities:
|
|
|
|
Current
portion of long-term debt
|
|
$
|
268,687
|
|
Line-of-credit
|
|
|
100,000
|
|
Notes
payable
|
|
|
3,588
|
|
Accounts
payable
|
|
|
1,076,284
|
|
Accrued
expenses
|
|
|
261,984
|
|
Due
to related entity
|
|
|
28,213
|
|
Deferred
tax liability
|
|
|
17,417
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,756,173
|
|
|
|
|
|
|
Other
liabilities
|
|
|
66,813
|
|
Line-of-credit,
long-term
|
|
|
3,499,711
|
|
Long-term
debt, net of current portion
|
|
|
3,552,624
|
|
Notes
payable to major stockholder
|
|
|
3,021,866
|
|
|
|
|
|
|
Total
liabilities
|
|
|
11,897,187
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
Preferred
stock, $0.01 par value; 250,000 shares authorized, no shares
issued
|
|
|
–
|
|
Common
stock, $.001 par value; 10,000,000 shares authorized, 2,862,481 shares
issued, 2,812,731 shares outstanding
|
|
|
2,862
|
|
Additional
paid-in capital
|
|
|
5,669,622
|
|
Accumulated
deficit
|
|
|
(6,708,444
|
)
|
Treasury
stock, 49,750 common shares at cost
|
|
|
(96,288
|
)
|
|
|
|
|
|
Total
stockholders’ deficiency
|
|
|
(1,132,248
|
)
|
|
|
|
|
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
10,764,939
|
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Quarter and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,553,016
|
|
|
$
|
1,506,500
|
|
|
$
|
5,633,025
|
|
|
$
|
6,395,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,461,763
|
|
|
|
1,180,752
|
|
|
|
4,666,906
|
|
|
|
4,314,058
|
|
Non-recurring
inventory write-down
|
|
|
–
|
|
|
|
–
|
|
|
|
1,000,000
|
|
|
|
–
|
|
|
|
|
1,461,763
|
|
|
|
1,180,752
|
|
|
|
5,666,906
|
|
|
|
4,314,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
91,280
|
|
|
|
325,748
|
|
|
|
( 33,881
|
)
|
|
|
2,081,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
1,111,791
|
|
|
|
895,953
|
|
|
|
3,394,607
|
|
|
|
2,508,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,020,511
|
)
|
|
|
(570,205
|
)
|
|
|
(3,428,488
|
)
|
|
|
(427,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
–
|
|
|
|
110
|
|
|
|
–
|
|
|
|
4,983
|
|
Interest
expense
|
|
|
(178,329
|
)
|
|
|
(130,730
|
)
|
|
|
(457,033
|
)
|
|
|
(296,567
|
)
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
18,710
|
|
|
|
25,572
|
|
|
|
48,019
|
|
|
|
69,806
|
|
Commissions
from unconsolidated subsidiary
|
|
|
36,565
|
|
|
|
35,577
|
|
|
|
121,359
|
|
|
|
148,734
|
|
Miscellaneous
|
|
|
69,282
|
|
|
|
3,321
|
|
|
|
90,463
|
|
|
|
(11,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses, net
|
|
|
(53,772
|
)
|
|
|
(66,150
|
)
|
|
|
(197,192
|
)
|
|
|
(84,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,074,283
|
)
|
|
|
(636,355
|
)
|
|
|
(3,625,680
|
)
|
|
|
(512,457
|
)
|
Income
(loss) from discontinued operations
|
|
|
–
|
|
|
|
116,713
|
|
|
|
(71,178
|
)
|
|
|
179,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,074,283
|
)
|
|
$
|
(519,642
|
)
|
|
$
|
(3,696,858
|
)
|
|
$
|
(333,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share, from continuing
operations
|
|
$
|
(0.38
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(1.29
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share, from discontinued
operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loss per common share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.12
|
)
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
Nine
Months Ended September 30, 2006
(Unaudited)
|
|
Common
Stock
Outstanding
|
|
|
Common
Stock
Account
|
|
|
Additional
Paid-in
Capital
|
|
|
Deferred
Stock
Compensation
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
|
2,792,781
|
|
|
$
|
2,842
|
|
|
$
|
5,778,649
|
|
|
$
|
(168,410
|
)
|
|
$
|
(3,011,586
|
)
|
|
$
|
(96,288
|
)
|
|
$
|
2,505,207
|
|
Reversal
of deferred compensation upon 123R adoption
|
|
|
–
|
|
|
|
–
|
|
|
|
( 168,410
|
)
|
|
|
168,410
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Issuance
of common stock under restricted stock plan
|
|
|
19,950
|
|
|
|
20
|
|
|
|
( 20
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Deferred
stock compensation recognized in operations
|
|
|
–
|
|
|
|
–
|
|
|
|
59,
403
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
59,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,696,858
|
)
|
|
|
–
|
|
|
|
(3,696,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
September 30, 2006
|
|
|
2,812,731
|
|
|
$
|
2,862
|
|
|
$
|
5,669,622
|
|
|
$
|
–
|
|
|
$
|
(6,708,444
|
)
|
|
$
|
(96,288
|
)
|
|
$
|
(1,132,248
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,696,858
|
)
|
|
$
|
(333,236
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of debt issuance costs
|
|
|
–
|
|
|
|
7,302
|
|
Depreciation
and amortization
|
|
|
355,735
|
|
|
|
324,733
|
|
Provision
for bad debts
|
|
|
180,000
|
|
|
|
–
|
|
Non-recurring
inventory write-down
|
|
|
1,000,000
|
|
|
|
–
|
|
Non-competition
agreement amortization
|
|
|
–
|
|
|
|
61,905
|
|
Deferred
stock compensation
|
|
|
59,403
|
|
|
|
14,092
|
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
(48,019
|
)
|
|
|
(69,806
|
)
|
Gain
on sale of equipment
|
|
|
(56,288
|
)
|
|
|
–
|
|
Changes
in assets and liabilities affecting cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(152,912
|
)
|
|
|
1,091,410
|
|
Inventories
|
|
|
405,116
|
|
|
|
(676,980
|
)
|
Due
from related entity
|
|
|
411,504
|
|
|
|
(323,502
|
)
|
Prepaid
expenses and other current assets
|
|
|
155,489
|
|
|
|
(44,330
|
)
|
Other
assets
|
|
|
16,914
|
|
|
|
(54,763
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
209,182
|
|
|
|
(904,333
|
)
|
Accrued
expenses
|
|
|
(189,572
|
)
|
|
|
36,149
|
|
Due
to major stockholder
|
|
|
(84,500
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,434,746
|
)
|
|
|
(871,359
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash
disbursed relating to business acquisition
|
|
|
–
|
|
|
|
(2,600,000
|
)
|
Investment
in land for future development
|
|
|
(43,635
|
)
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(504,549
|
)
|
|
|
(741,170
|
)
|
Collection
of note receivable
|
|
|
50,079
|
|
|
|
6,170
|
|
Proceeds
from the sale of property and equipment
|
|
|
119,000
|
|
|
|
–
|
|
Investment
in unconsolidated subsidiary
|
|
|
(230,000
|
)
|
|
|
–
|
|
Decrease
in restricted cash
|
|
|
–
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(609,005
|
)
|
|
|
(2,835,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable issued to major stockholder
|
|
|
1,750,000
|
|
|
|
3,725,000
|
|
Proceeds
from long-term debt
|
|
|
3,603,936
|
|
|
|
3,925,725
|
|
Repayment
of notes payable to major stockholder
|
|
|
(3,178,134
|
)
|
|
|
(258,333
|
)
|
Debt
issuance costs
|
|
|
–
|
|
|
|
(97,189
|
)
|
Repayment
of notes payable
|
|
|
(211,688
|
)
|
|
|
(2,870,471
|
)
|
Issuance
of common stock from exercise of stock options and stock
grants
|
|
|
–
|
|
|
|
18,305
|
|
Repayments
of long-term debt and notes payable
|
|
|
(
92,521
|
)
|
|
|
(752,279
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,871,593
|
|
|
|
3,690,758
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and equivalents
|
|
|
(172,158
|
)
|
|
|
(15,601
|
)
|
Cash
and equivalents at beginning of period
|
|
|
277,700
|
|
|
|
234,872
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents at end of period
|
|
$
|
105,542
|
|
|
$
|
219,271
|
|
See
accompanying notes to condensed consolidated financial
statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
Note 1 - Basis of
Presentation
These
interim condensed consolidated financial statements include the financial
statements of Margo Caribe, Inc. and its wholly-owned subsidiaries (collectively
“the Company”); Margo State Line, Inc. (since February 17, 2005), Margo Garden
Products, Inc., Rain Forest Products Group, Inc. Margo Nursery Farms, Inc.,
Margo Landscaping and Design, Inc. (which ceased operating on February 28,
2006), and Margo Development Corporation.
These
interim condensed consolidated financial statements are unaudited, but include
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the periods covered. All significant intercompany balances
and transactions have been eliminated in the accompanying unaudited consolidated
financial statements. 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 accounting principles generally accepted in the United States of
America.
The
results of operations for the three months ended September 30, 2006, are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 2006. These statements should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included in
its Annual Report on Form 10-KSB for the fiscal years ended December 31,
2005.
The
accompanying unaudited financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of
business. However, our prior independent public accountants have
expressed doubt about our ability to continue as a going concern in their report
on our annual audited financial statements as of December 31,
2005. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Note 2 - Accounting for
Stock-Based Compensation Plans
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based
Payments” (“SFAS 123R”), which replaced SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and changed the Company’s previous
accounting under Accounting Principles Board No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”). In March 2005, the Securities and
Exchange Commission (“SEC”) issued Staff Accounting Bulleting No. 107 (“SAB
107”) relating to the adoption of SFAS 123R.
Effective
January 1, 2006, the Company adopted the provisions of SFAR 123R and SAB 107
using the modified prospective method, which results in the provisions of SFAS
123R only being applied to the consolidated financial statements on a going
forward basis. Under the modified prospective recognition method,
restatement of consolidated income from prior interim and annual periods is not
required, and accordingly, the Company has not provided such restatement for
prior interim periods or fiscal years. Under the modified prospective
provisions of SFAS 123R, compensation expense is recorded for the unvested
portion of previously granted awards that remained outstanding on January 1,
2006 and all subsequent awards. This pronouncement also amends SFAS
No. 95, “Statement of Cash Flows”, to require that excess tax benefits related
to stock-based compensation be reflected as cash flows from financing activities
rather than as cash flows from operating activities. The balance of
any deferred compensation expense recorded in the balance sheet at December 31,
2005 was reclassified as Additional Paid-in Capital upon implementation of the
standard.
Effective
May 2, 2003, the Company adopted the Margo Caribe, Inc. 2003 Restricted Stock
Plan (the “Restricted Stock Plan”). Under the terms of the Restricted
Stock Plan, the Compensation Committee of the Board of Directors is authorized
to grant up to 275,000 shares of common stock to officers and other key
employees of the Company, subject to adjustments for stock splits, stock
dividends and other similar events. The restricted stock grants may be subject
to time-based or performance-based restrictions.
During
the quarter ended March 31, 2006, the Company granted 19,950 shares of
restricted common stock with a market value of $7.25 per share on the date of
grant under the Restricted Stock Plan to members of management and certain other
employees. The shares of restricted stock vest at the rate of 20% per
year over a five-year period. These shares are subject to forfeiture if
employment terminates prior to vesting. Under the terms of the Restricted Stock
Plan, recipients of restricted shares are entitled to dividends and to vote
their respective shares. The value of all of the restricted shares is
established based on the market price of the Company’s common stock option on
the date of grant. As of September 30, 2006, 56,000 shares issued under this
Plan were outstanding but not vested.
In April
1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”) to
replace the Company’s 1988 Stock Benefits Plan (the “1988
Plan”). Outstanding options granted under the 1988 Plan, including
all related obligations and commitments, will continue to be honored by the
Company.
Under the
1998 Plan, the Company’s Board of Directors, through a committee thereof may
award options to purchase up to 302,500 shares of common stock, subject to
adjustments for stock splits, stock dividends and other similar events, to
eligible employees at 100% of the fair market value at the date of the grant,
except that options granted to persons owning 10% or more of the outstanding
common stock carry an exercise price equal to 110% of the fair market value at
the date of grant. The 1998 Plan also provides for the automatic
grant of options to purchase 3,348 shares of common stock to each non-employee
director serving on the Company’s Board of Directors on the first business day
following each annual meeting of shareholders. Options granted under
the 1988 Plan and the 1998 Plan vest ratably over a period of five years. Vested
options become exercisable one year from the date of grant and expire ten years
after the date of grant.
Under the
fair value recognition provision of SFAS 123R, stock-based compensation cost is
measured at the grant date on the value of the award and is recognized as
expense over the requisite service period, which generally represents the
vesting period. The fair value of stock options is calculated using
the Black-Scholes option-pricing model. The fair value of the
Company’s grants of non-vested stock (“Restricted Stock”) is based on the
intrinsic value. Restricted Stock and stock options granted under the
Plan typically expire at the earlier of five years or termination of the
holder’s employment with the Company, unless otherwise determined by the
Compensation Committee of the Board of Directors.
In 2006,
the Company recognized the impact of all stock-based compensation in its
consolidated statements of operations, and did not capitalize any amounts on the
consolidated balance sheet. The following table presents the
stock-based compensation included in the Company’s consolidated statements of
income and the effect on earnings per share:
|
Quarter
|
|
Nine
Months
|
|
|
Ended
|
|
Ended
|
|
|
September
30,
2006
|
|
September
30,
2006
|
|
Stock-based
compensation expense:
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
13,291
|
|
|
$
|
59,403
|
|
|
|
|
|
|
|
|
|
|
Net
Compensation expense
|
|
$
|
13,291
|
|
|
$
|
59,403
|
|
|
|
|
|
|
|
|
|
|
Effect
on earnings per share:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.32
|
)
|
Diluted
loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.32
|
)
|
Prior to
the adoption of SFAS 123R and SAB 107, the Company followed APB 25, and the
compensation costs related to the employee stock options was generally not
recognized because options are granted with exercise prices equal to or greater
than the fair market value at the date of grant. The Company
accounted for options granted to non employees using the fair value method, in
accordance with the provisions of SFAS 123, as amended by SFAS No. 48,
“Accounting for Stock-Based Compensation-Transition and
Disclosure”. Had compensation costs for the stock option plans been
determined based on the fair value at the grant date for awards under any plan
consistent with the provisions of SFAS 123, the Company’s net income
(loss) and net income (loss) per share, on a pro forma basis would have been as
follows:
|
Quarter
|
|
Nine
Months
|
|
|
Ended
|
|
Ended
|
|
|
September
30, 2005
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
Net
loss as reported
|
|
$
|
(519,642
|
)
|
|
$
|
(333,236
|
)
|
Total
stock based compensation expense determined under fair value based method
for all awards
|
|
|
(5,132
|
)
|
|
|
(9,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
(524,774
|
)
|
|
$
|
(342,419
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted as reported
|
|
$
|
(0.19
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted pro forma
|
|
$
|
(0.19
|
)
|
|
$
|
(0.12
|
)
|
The fair
value of each stock option granted was estimated on the date of the grant using
the Black-Scholes option pricing model using the weighted average assumptions in
the schedule below (expected volatility is based upon the historical volatility
of the Company’s stock price).
|
|
Quarter
Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
N/A
|
|
5.26%
|
|
N/A
|
|
5.26%
|
|
|
|
|
|
|
|
|
|
Average
life of options
|
|
N/A
|
|
10
yrs.
|
|
N/A
|
|
10
yrs.
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
N/A
|
|
25.15%
|
|
N/A
|
|
17.61%
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
N/A
|
|
0%
|
|
N/A
|
|
0%
|
There
were no stock options granted in 2006, therefore, no information is provided in
the above table for 2006.
Note 3 – Significant
Accounting Policies
Use of
Estimates
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of such financial statements and the reported amounts of
revenues and expenses during the relevant reporting period. Actual
results could differ from those estimates.
Significant
estimates include receivables, inventory and goodwill valuation, useful lives of
depreciable assets and value of equity based awards.
Allowance for Doubtful
Accounts
The
allowance for doubtful accounts is an amount that management believes will be
adequate to absorb estimated losses on existing accounts receivable that become
uncollectible based on evaluations of collectibility of specific customers and
such customers’ prior credit experience. In addition, the Company
evaluates the prior years' experience of the allowance as a whole. As
of September 30, 2006, the allowance for doubtful accounts was
$448,113.
Goodwill
The
Company accounts for its acquired goodwill (related to the State Line
acquisition in 2005) in accordance with the provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets.” SFAS No. 142 eliminates the
amortization of goodwill and requires an annual review for impairment. See Note
18 Subsequent Events.
Impairment of Other
Long-Lived Assets
The
Company evaluates for impairment the long-lived assets to be held and used, and
long-lived assets to be disposed of whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Amortizable intangible assets are tested for impairment
based on undiscounted cash flows, and, if impaired, written down to fair value
based on discounted cash flows. See Note 18 Subsequent Events.
Inventories
Plant
material is charged with direct and indirect costs, based on normal capacity,
until the plant is readily available for sale. Plant material is periodically
written down, if necessary, when cost is not expected to be realized.
Manufactured products, raw materials, and supplies are stated at the lower of
cost or market.
The
Company has also identified certain plant inventory (principally palm and trees
sold at commercial levels) for which there is currently a very limited market,
due to the slow down in major hotel and other real estate developments. This
inventory has been classified as non-current and it has been valued based on
management’s best current estimate of its future realization. As the
holding period of these products increases, the risks of losses from possible
plant disease and pests, weather issues, and excessive growth also
increases. Accordingly, actual losses may differ from management’s
estimates. See Note 18 Subsequent Events.
Property and
Equipment
Owned
property and equipment, and leasehold improvements are stated at cost. Equipment
and vehicles under capital leases are stated at the lower of fair market value
or net present value of the minimum lease payments at the inception of the
leases. Depreciation of owned assets, and amortization of assets under capital
leases and leasehold improvements, is provided using the straight-line basis
over the shorter of the estimated useful lives of the assets or lease
term.
Deferred
Taxes
The
Company has significant deferred tax assets (principally from available
carryforward losses) which are entirely offset by a valuation allowance.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income in the future, by the individual entities, as under the Puerto
Rico and Federal Codes, entities engaged in business in different jurisdictions
or within Puerto Rico cannot file consolidate income tax returns. The amount of
the deferred tax asset that is considered by management to be realizable could
change in the near term depending on future levels of taxable income projected
to be reported by the individual entities.
Investment in Unconsolidated
Subsidiary
The
Company accounts for the investment in which it owns less than 50% and does not
have a controlling financial interest using the equity method. The Company has
determined that this investment is not a variable interest entity as defined in
Fin 46 (R) and does not require consolidation.
Reclassifications
Certain
balances in the 2005 financial statements have been reclassified to conform to
the current period presentation. Significant reclassifications were: 1)
manufacturing costs and expenses ($69,354 for the quarter and $230,842 for the
nine months) that have been reclassified from selling, general administrative to
cost of sales; and 2) discontinued operations more fully disclosed in Notes 10
and 17.
Note 4 – New Accounting
Pronouncements
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
Financial Statements – Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. This SAB
provides guidance on the consideration of prior year misstatements in
determining whether the current year’s financial statements are materially
misstated. In providing this guidance, the SEC staff references both the “iron
curtain” and “rollover” approaches to quantifying a current year misstatement
for purposes of determining materiality. The iron curtain approach focuses on
how the current year’s statement of financial condition would be affected in
correcting misstatements without considering the year in which the misstatement
originated. The rollover approach focuses on the amount of the misstatements
that originated in the current year’s income statement. The SEC staff indicates
that registrants should quantify the impact of correcting all misstatements,
including both the carryover and reversing effects of prior year misstatements,
on the current year financial statements. This SAB was effective for fiscal
years ending after November 15, 2006. Registrants may either restate their
financials for any material misstatements arising from the application of this
SAB or recognize a cumulative effect of applying SAB No. 108 within the current
year opening balance in retained earnings. Management does not expect that the
adoption of this SAB will have a significant effect on the Company’s
consolidated financial statements.
In
September 2006, FASB issued SFAS No. 157 “Fair Value Measurement”. This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This Statement does not
require any new fair value measurements, but provides guidance in determining
fair value measurements presently used in the preparation of financial
statements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
financial statements for an interim period within that fiscal year. The
provisions of this Statement should be applied prospectively as of the beginning
of the fiscal year in which this Statement is initially applied, except for
certain exceptions stated in the Statement. The implementation of this Statement
will have no significant effect on the Company’s financial
statements.
In June
2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. Earlier application of the provisions of this Interpretation is encouraged
if the enterprise has not yet issued financial statements, including interim
financial statements, in the period this Interpretation is adopted. Management
does not expect that the application of this standard will have any effect on
the Company's results of operations or its financial condition.
During
the first quarter of 2006, the Company implemented SFAS No. 154, “Accounting
Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB
Statement No. 3”. SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 requires retrospective
application to prior period financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or cumulative effect of the change. This statement applies to
all voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. The adoption of
SFAS No. 154 did not have a material effect on the Company’s financial position,
results of operations, or cash flows.
During
the first quarter of 2006, the Company implemented SFAS No. 151, “Inventory
Costs.” SFAS 151 clarifies the accounting for abnormal amounts of idle
facilities expense, freight, handling costs and wasted material. SFAS 151
requires that those items be recognized as current-period expense. In addition
the statement requires that allocation of fixed overhead to the cost of
conversion be based on the normal capacity of the production facilities. The
adoption of this statement resulted in an increase in current period costs at
the Plant Division that is operating below normal capacity.
Other
recently issued FASB Statements or Interpretations, SEC Staff Accounting
Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been
implemented or are not applicable to the Company.
Note 5 – Change in
Accounting Estimate
Effective
January 1, 2006, the Company reduced the estimated useful life of certain
assets, to better match the estimated future benefits inherent in the
assets. The effect of this change was to increase the loss from
continuing operations by approximately $69,000 (approximately $0.03 per share),
during the nine months ended September 30, 2006.
Note 6 -
Inventories
At
September 30, 2006, inventories included the following:
Description
|
|
2006
|
|
|
|
|
|
Plant
material - current portion
|
|
$
|
591,222
|
|
Lawn
and garden products
|
|
|
339,643
|
|
Mulch
finished products
|
|
|
298,221
|
|
Raw
materials and supplies
|
|
|
474,179
|
|
|
|
|
|
|
Current
inventory
|
|
|
1,703,265
|
|
Plant
material – non-current portion
|
|
|
433,074
|
|
|
|
|
|
|
|
|
$
|
2,136,339
|
|
During
2006, the Company noted a continued softening of the Puerto Rico economy
combined with significant consumer price increases that has affected the sale of
plants for consumer markets. Because management did not foresee a significant
change in this trend in the near-term, the Company wrote down inventories by
$1,000,000, during the first quarter of 2006, which was management’s best
estimate at that point in time. See Note 18 Subsequent Events.
Note 7 - Property and
Equipment
At
September 30, 2006, property and equipment included the following:
Description
|
|
2006
|
|
|
|
|
|
Real
estate property, including $450,000 in land
|
|
$
|
1,065,642
|
|
Leasehold
improvements
|
|
|
1,242,041
|
|
Shade
and green houses
|
|
|
1,521,642
|
|
Equipment
and fixtures
|
|
|
3,244,688
|
|
Transportation
equipment
|
|
|
353,353
|
|
|
|
|
|
|
|
|
|
7,427,366
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,455,592
|
)
|
|
|
|
|
|
|
|
$
|
3,971,774
|
|
As of
September 30, 2006, the accumulated amortization of leasehold improvements
(including shade and green houses) was approximately
$1,260,000. Related amortization expense for the nine-month period
ended September 30, 2006 and 2005 amounted to approximately $62,000 and $65,000,
respectively.
As of
September 30, 2006, leasehold improvements (including shade and green houses) at
the Plants Division had an unamortized book value of $1,503,683. See Note 18
Subsequent Events.
Note 8 – Investment in
Unconsolidated Subsidiary
The
Company, through its wholly-owned subsidiary Margo Nursery Farms, Inc. (“Margo
Nursery”), owns a 33.33% equity interest in Salinas Holdings, Inc.
(“Salinas”), a Puerto Rico corporation engaged in the growing of sod (turf),
palms and trees on a leased farm of approximately 262 “cuerdas” (one “cuerda”
approximates 0.97 of an acre) located in the Municipality of Salinas, Puerto
Rico. Salinas has also entered into a management agreement with Margo Nursery
whereby Margo Nursery provides certain management services to Salinas and is
responsible for all sales and marketing activities of Salinas. Under
the management agreement, the Company earns $2,000 per month for management
services and commissions on the gross collected revenue of Salinas ranging from
15% to 17%. Salinas commenced operations on November 1,
2002.
The
investments in, and the results of operations of, Salinas are not consolidated
with the financial statements of the Company, but instead the Company has
accounted for its investment in Salinas using the equity method of accounting.
At September 30, 2006 and for the nine months ended September 30, 2006 and 2005,
Salinas’ unaudited condensed statements of financial position and results of
operations information were as follows:
Assets
|
|
2006
|
|
|
|
|
|
Current
assets
|
|
$
|
2,452,190
|
|
Property
and equipment, net
|
|
|
546,435
|
|
|
|
|
|
|
|
|
$
|
2,998,625
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
308,187
|
|
Long-term
liabilities
|
|
|
–
|
|
|
|
|
|
|
Total
liabilities
|
|
|
308,187
|
|
Shareholders’
equity
|
|
|
2,690,438
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,998,625
|
|
|
|
|
|
|
Company’s
share of equity
|
|
$
|
896,693
|
|
Results
of Operations
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
Sales
|
|
$
|
914,290
|
|
|
$
|
847,212
|
|
Cost
of sales
|
|
|
501,082
|
|
|
|
371,852
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
413,208
|
|
|
|
475,360
|
|
General
and administrative expenses
|
|
|
265,837
|
|
|
|
265,941
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
147,371
|
|
|
$
|
209,419
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
48,019
|
|
|
$
|
69,806
|
|
For the
nine months ended September 30, 2006, the change in the Company’s investment in
Salinas Holdings, Inc., was as follows:
Description
|
|
Amount
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
$
|
618,674
|
|
Additional
investment
|
|
|
230,000
|
|
Equity
in earnings of unconsolidated subsidiary for 2006
|
|
|
48,019
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
$
|
896,693
|
|
Note 9 - Income per Common
Share
The
Company reports its earnings per share (EPS) in accordance with SFAS No. 128,
“Earnings per Share” (“SFAS No. 128”). SFAS No. 128 requires dual
presentation of basic and diluted EPS. Basic EPS is computed by dividing net
income attributable 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.
On May
25, 2005, the Board of Directors of the Company approved a five-for-four stock
split held in the form of a stock dividend. The stock dividend was issued on
July 8, 2005 to all common shareholders of record at the close of business on
June 17, 2005. The stock dividend resulted in 558,456 additional shares being
issued. Accordingly, the weighted average number of shares
outstanding (and stock options) for the periods ended September 30, 2005 have
been retroactively adjusted to reflect the effect of the stock
dividend.
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders, from continuing
operations
|
|
$
|
(1,074,287
|
)
|
|
$
|
(636,355
|
)
|
|
$
|
(3,625,682
|
)
|
|
$
|
(512,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders, from discontinued
operations
|
|
$
|
–
|
|
|
$
|
116,713
|
|
|
$
|
(71,178
|
)
|
|
$
|
179,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
$
|
2,800,023
|
|
|
$
|
2,788,531
|
|
|
$
|
2,800,023
|
|
|
$
|
2,789,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share from continuing
operations
|
|
$
|
(0.38
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(1.29
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share, from discontinued
operations
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net loss per share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.12
|
)
|
For the
period presented herein the effect of assumed exercised of stock option
determined by using the treasury stock was anti-dilutive; thus no incremental
shares were added to the weighted average number of common shares outstanding
for the period.
For the
quarter ended and the nine-months period ended September 30, 2006, the effect of
the assumed exercise of stock options determined by using the treasury stock
method was anti-dilutive; thus, no incremental shares were added to the weighted
average number of common shares outstanding for the period.
Note 10 - Segment
Information
Following
the discontinuation of the landscaping segment in February 2006, the Company’s
management monitors and manages the financial performance of four primary
business segments: the production and sale of mulch and other related products,
the production and distribution of plants, sales of lawn and garden products and
other related products, and real estate. These segments were determined by
management based on the internal reporting used to evaluate performance and
allocate resources as well as the nature of the products and services offered by
the respective segments.
Segment
income (loss) associated with the discontinued landscaping segment was
reclassified to income (loss) from discontinued operations. The
segment information for 2005 has been restated to reflect these changes and to
reclassify certain general corporate overhead expenses, of $98,917 and $249,399,
for the three and nine months ended September 30, 2005, respectively, originally
charged to the now discontinued Landscaping segment to the continuing
segments.
In
addition, effective February 16, 2005, the Company acquired substantially all
the assets and assumed certain liabilities and the operations of State Line Bark
and Mulch, Inc., through its wholly-owned subsidiary, Margo State Line, Inc.
(“State Line”), a Florida corporation. State Line is dedicated to the production
and sale of mulch and other related products.
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. Please refer to “Note 3 –
Significant Accounting Policies,” above, for additional information on the
Company’s accounting policies.
The
financial information presented below was derived from the internal management
accounting system and is based on internal management accounting
policies. The information presented does not necessarily represent
each segment’s financial condition and results of operations as if they were
independent entities.
|
|
Quarter
Ended September 30, 2006
|
|
|
|
Plants
|
|
|
Lawn
& Garden Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
370,841
|
|
|
$
|
654,747
|
|
|
$
|
527,428
|
|
|
$
|
–
|
|
|
$
|
1,553,016
|
|
Inter-segment
revenues
|
|
|
–
|
|
|
|
–
|
|
|
|
43,114
|
|
|
|
–
|
|
|
|
43,114
|
|
Interest
income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest
expense
|
|
|
14,473
|
|
|
|
15,101
|
|
|
|
148,755
|
|
|
|
–
|
|
|
|
178,329
|
|
Depreciation
and amortization
|
|
|
71,194
|
|
|
|
9,116
|
|
|
|
29,301
|
|
|
|
–
|
|
|
|
109,611
|
|
Segment
loss
|
|
|
(442,601
|
)
|
|
|
(290,637
|
)
|
|
|
(341,045
|
)
|
|
|
–
|
|
|
|
(1,074,283
|
)
|
Expenditures
for segment assets
|
|
|
–
|
|
|
|
–
|
|
|
|
392,957
|
|
|
|
21,287
|
|
|
|
414,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended September 30, 2005
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
483,813
|
|
|
$
|
638,474
|
|
|
$
|
384,213
|
|
|
$
|
–
|
|
|
$
|
1,506,500
|
|
Inter-segment
revenues
|
|
|
575
|
|
|
|
3,251
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,826
|
|
Interest
income
|
|
|
110
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
110
|
|
Interest
expense
|
|
|
78,591
|
|
|
|
–
|
|
|
|
52,139
|
|
|
|
–
|
|
|
|
130,730
|
|
Depreciation
and amortization
|
|
|
64,154
|
|
|
|
12,246
|
|
|
|
18,206
|
|
|
|
–
|
|
|
|
94,606
|
|
Segment
loss
|
|
|
(204,536
|
)
|
|
|
(106,149
|
)
|
|
|
(325,670
|
)
|
|
|
–
|
|
|
|
(636,355
|
)
|
Expenditures
for segment assets
|
|
|
9,779
|
|
|
|
–
|
|
|
|
527,176
|
|
|
|
–
|
|
|
|
536,955
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
1,498,221
|
|
|
$
|
2,244,638
|
|
|
$
|
1,890,166
|
|
|
$
|
–
|
|
|
$
|
5,633,025
|
|
Inter-segment
revenues
|
|
|
2,931
|
|
|
|
–
|
|
|
|
169,149
|
|
|
|
–
|
|
|
|
172,080
|
|
Interest
income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest
expense
|
|
|
65,616
|
|
|
|
52,937
|
|
|
|
338,480
|
|
|
|
–
|
|
|
|
457,033
|
|
Depreciation
and amortization
|
|
|
223,138
|
|
|
|
32,998
|
|
|
|
84,798
|
|
|
|
–
|
|
|
|
340,934
|
|
Segment
loss (1)
|
|
|
(2,074,338
|
)
|
|
|
(783,117
|
)
|
|
|
(768,225
|
)
|
|
|
–
|
|
|
|
(3,625,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
3,608,294
|
|
|
|
902,979
|
|
|
|
5,046,423
|
|
|
|
1,207,243
|
|
|
|
10,764,939
|
|
Expenditures
for segment assets
|
|
|
2,466
|
|
|
|
–
|
|
|
|
480,695
|
|
|
|
65,023
|
|
|
|
548,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The Plants segment includes a non-recurring inventory write-down of
$1,000,000 recorded during the first quarter of
2006.
|
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
(1)
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
1,684,331
|
|
|
$
|
2,584,113
|
|
|
$
|
2,126,746
|
|
|
$
|
–
|
|
|
$
|
6,395,190
|
|
Inter-segment
revenues
|
|
|
69,460
|
|
|
|
13,618
|
|
|
|
46,176
|
|
|
|
–
|
|
|
|
129,254
|
|
Interest
income
|
|
|
4,610
|
|
|
|
–
|
|
|
|
373
|
|
|
|
–
|
|
|
|
4,983
|
|
Interest
expense
|
|
|
190,203
|
|
|
|
–
|
|
|
|
106,364
|
|
|
|
–
|
|
|
|
296,567
|
|
Depreciation
and amortization
|
|
|
192,515
|
|
|
|
45,448
|
|
|
|
44,237
|
|
|
|
–
|
|
|
|
282,200
|
|
Segment
income (loss)
|
|
|
(198,143
|
)
|
|
|
(274,300
|
)
|
|
|
40,014
|
|
|
|
–
|
|
|
|
(512,457
|
)
|
Segment
assets
|
|
|
6,600,664
|
|
|
|
1,017,773
|
|
|
|
4,424,598
|
|
|
|
1,139,127
|
|
|
|
13,182,162
|
|
Expenditures
for segment assets
|
|
|
50,979
|
|
|
|
–
|
|
|
|
640,137
|
|
|
|
8,000
|
|
|
|
699,116
|
|
(1) Since
inception on February 16, 2005.
See Note
17 for segment information related to the discontinued landscaping
segment.
Note 11 - Supplemental
Disclosures for the Consolidated Statements of Cash Flows
a)
Non-Cash Investing and
Financing Activities
There
were no significant non-cash transactions to exclude from the Company’s
consolidated statements of cash flows.
b)
Other Cash Flow
Transactions
Other
cash flow transactions for the nine months ended September 30, 2006 and 2005,
include interest payments amounting to approximately $466,000 and $297,000,
respectively. There were no income tax payments for the nine months ended
September 30, 2006 and 2005.
Note 12 - Major
Customers
During
the nine months ended September 30, 2006 and 2005, the Company’s single largest
customer accounted for approximately 41% ($2,333,000) and 38% ($2,440,000),
respectively, of the Company’s consolidated net sales. There were no
other customers accounting for 10% or more of the Company’s consolidated net
sales.
For the
Puerto Rico operations during the nine months ended September 30, 2006 and 2005
the Company’s two largest customers accounted for approximately 51% ($1,916,000)
and 58% ($2,483,000) and 14% ($531,000) and 15% ($621,000), respectively, of the
net sale from Puerto Rico’s operations. There were no other customers
accounting for 10% or more of the area’s net sales.
For State
Line’s operations during the nine months ended September 30, 2006 and 2005, the
Company’s single largest customer accounted for approximately 24% ($452,000) and
67% ($259,333) of the net sales from the State Line operations. Another customer
accounted for approximately 18% ($340,000) of net sales from the State Line
operations in 2006. No sales were reported for this customer in
2005. There were no other customers accounting for 10% or more of the
area’s net sales.
Note 13 –
Contingencies
The
Company’s plant operations are vulnerable to severe weather, such as hurricanes,
floods, and storms and, to a lesser extent, plant disease and
pests. In recent years, the Company has been unable to obtain crop
and business interruption insurance coverage at reasonable cost. No
assurance can be given that the Company will be able to obtain such insurance
coverage in the foreseeable future. The Company believes it has taken reasonable
precautions to protect its plants and operations from natural
hazards. The Company’s newer facilities were constructed with
fabricated steel in an attempt to reduce the damage from any future
storms. The Company’s nursery farm currently has access to a
plentiful water supply and facilities for the protection of many of their
weather sensitive plants.
The
Company is also a party to various legal actions arising in the ordinary course
of business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial condition or
results of operations of the Company.
Note 14 - Notes Payable to
Principal Stockholder
Various
notes payable to principal stockholder amounting to $3,021,866 are due on
January 31, 2008. These notes bear interest at the then current prime
rate and are unsecured. See Note 18 for disclosure about the
subsequent restructuring of this debt.
For the
nine months ended September 30, 2006 and 2005, interest expense on principal
stockholder debt amounted to $108,758 and $174,527, respectively, and $41,968
and $66,546, for the three months then ended.
Note 15 - Notes Payable to
Financial Institutions
Revolving
Facilities:
On June
14, 2005, the Company entered into a long-term secured credit facility with a
commercial financial institution. The note evidencing the facility provides for
a maximum credit amount of $3,500,000 of which $3,499,711 outstanding as of
September 30, 2006. Of this amount approximately $2,811,000 was used to
refinance certain notes payable to another financial institution. The
credit facility is a revolving line-of-credit with a maturity date of September
13, 2007. The note bears interest at a rate equal to the published
90-day LIBOR rate plus 275 basis points. The note is secured with
real estate consisting of parcels of land in Garrochales, Puerto Rico and in
Folkston, Georgia. This note was refinanced on August 17,
2007. The interest rate was changed to a fixed 8% and its
maturity date extended to August 17, 2009.
On August
9, 2006, Margo State Line also entered into a one-year revolving credit
agreement for an aggregate principal amount of $1,000,000 ($100,000 outstanding
as of September 30, 2006) to be used for general working capital. The
revolving credit facility has a maturity of August 9, 2007, and bears interest
at a rate equal to the published 90-day LIBOR rate plus 200 basis
points. The note is secured by accounts receivable and inventory of
State Line and is guaranteed by the principal stockholder.
Term
Loans:
On March
24, 2006, the Company entered into a long-term financing agreement with a
commercial financial institution for $3,144,801. The proceeds from
the financing were used to pay-off higher interest rate financing. This note has
a maturity of September 23, 2007. The note bears interest at 5.50%
and is secured by personal assets of the Company’s principal stockholder. See
Note 18 Subsequent Events.
On August
31, 2005, the Company entered into a long-term financing agreement with a
commercial financial institution for $486,000 ($430,206 outstanding as of
September 30, 2006). The proceeds from the financing were used for
the acquisition of mulch grinding equipment. The note has a maturity
date of September 30, 2012. The note bears interest at 6.50% and is
secured with the equipment acquired.
On
October 17, 2005, the Company entered into a long-term financing agreement with
a commercial financial institution. The note evidencing the agreement amounted
to $279,000 ($234,200 outstanding as of September 30, 2006) and was used for the
acquisition of distribution equipment and to refinance certain machinery
acquired upon the acquisition of State Line. The note has a maturity
date of September 17, 2010. The note bears interest at 6.95% and is
secured with the equipment.
On August
9, 2006 Margo State Line, Inc. (“Margo State Line”), the Company’s wholly owned
subsidiary, obtained a seven year $800,000 term loan used for the acquisition of
and installation of robotics equipment at Margo State Line’s mill located in
Folkston, Georgia. The loan has a maturity of January 9, 2014 and
bears interest at 6.88% and is secured with the equipment.
Note 16 – Other Related
Party Transactions
For the
nine months ended September 30, 2006 and for the year ended December 31, 2005,
the Company provided certain services on behalf of the Spectors and to a company
owned by them. These payments amounted to $76,000 in 2006 and $30,000
in 2005. These amounts were settled prior to September 30, 2006, and the
practice of providing services directly or indirectly on behalf of the principal
stockholders was terminated. See Part II, ITEM 5 of this Quarterly
Report on Form 10-Q.
On
January 1, 2004, but retroactive to January 1, 2003, the Company and the
principal stockholders entered into a new lease agreement with respect to the
Company’s main Puerto Rico nursery farm. The lease has an initial
term of five years and is renewable for one additional term of five years at the
option of the Company. During the initial term of the lease, rent is
set at $24,000 per month. During the renewal term, the rent increases
to the greater of (x) $24,000 per month or (y) the original $24,000
per month adjusted on the basis of the increase in the Wholesale Price Index
(“WPI”) published by the United States Department of Labor, Bureau of Labor
Statistics, from the WPI which was in effect on January 1, 2003 to the WPI
in effect on January 1, 2008. Additionally, the Company was required
to pay all taxes on the property, maintain certain insurance coverage and
otherwise maintain and care for the property. The lease also contains
an option that permits the Company to purchase the property at its appraised
value in the event of the death of both Mr. and Mrs. Spector. In
consideration of the option, the Company is required to pay the Spectors an
additional $1,000 per month. The independent directors approved the
new lease agreement. Rental payments made during the nine months
ended September 30, 2006 and 2005
amounted to $225,000 for
both years.
In
connection with this lease, the principal stockholders also agreed to reimburse
the Company for the unamortized value of the leasehold improvements to the
property as of the date of termination of the lease.
During
the nine months ended September 30, 2006 and 2005, $31,933 and $53,541,
respectively, was purchased from a supplier which has one member of its Board of
Directors in common with the Company.
Note 17-Discontinued
Operations – Landscaping Division
In
February 2006, the Company decided to discontinue the Landscaping operations and
to dispose of the assets of such subsidiary. After a careful
evaluation of the results of the operations of such division, the cancellation
of various important maintenance contracts, and the slow down of the Puerto Rico
economy, management concluded that this operation is not expected to return to
profitability in the foreseeable future.
The
following represents summarized financial information of such subsidiary, which
was consolidated within the Company totals for the nine months ended September
30, 2006, and 2005:
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales and other income
|
|
$
|
–
|
|
|
$
|
412,226
|
|
|
$
|
119,514
|
|
|
$
|
1,276,584
|
|
Cost
of sales
|
|
|
–
|
|
|
|
222,678
|
|
|
|
111,100
|
|
|
|
888,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
–
|
|
|
|
189,548
|
|
|
|
(8,414
|
)
|
|
|
388,280
|
|
SG&A
expenses
|
|
|
–
|
|
|
|
72,835
|
|
|
|
79,592
|
|
|
|
209,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
–
|
|
|
$
|
116,713
|
|
|
$
|
(71,178
|
)
|
|
$
|
179,221
|
|
Expenditures
for segment assets
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
42,054
|
|
Cost of
sales of the discontinued segment includes depreciation expense of $14,801 and
$40,743 for the nine months ended September 30, 2006 and 2005,
respectively.
As of
September 30, 2006, the discontinued segment had no assets.
This
segment did not have any commitments or contingencies as of the measurement
date, other than two operating leases for operations vehicles. After
negotiations with the lessor, the Company was able to cancel these lease
agreements without any material penalties. The Company does not
expect to have any involvement in the discontinued or similar operations in the
future.
The
discontinuation of this operation reduced the Company’s consolidated net sales,
costs and expenses. However, based on the operating results of this
segment and the cancellation of certain maintenance contracts effective 2006,
the decision is expected to result in a reduction of the Company’s consolidated
net operating loss. No impact is foreseen on the financial condition
of the Company, as a whole, nor negative effects on the continuing
operations.
Note 18 – Subsequent
Events
In
December 2006, management determined that efforts to turn around the Plants
segment had not resulted in any significant improvements and accordingly
recorded an approximate $1,000,000 write down of leasehold improvements. The
Company also wrote down plant inventories an additional $500,000.
Also in
December 2006, the company foresaw that the market conditions for its State Line
segment would prevent growth at the projected levels and accordingly determined
that its goodwill was impaired and wrote off the balance.
On May
23, 2007, the Company restructured $3.9 million of outstanding of debt with its
principal shareholder exchanging 15,600 of shares of its 6.5% cumulative
convertible preferred stock with an aggregate liquidation value of $3.9 million
for the consolidation of an equivalent amount of debt. For additional
information relating to the terms of the preferred stock please refer to the
Company’s current Report on Form 8-E filed with the SEC on June 1,
2007.
On August
16, 2007, Margo State Line, Inc. obtained a term loan for $700,000 secured
by land at its State Line’s mill in Folkston, Georgia. The loan
document called for monthly payments of principal and interest at 7.54% and
matured on August 16, 2012. On December 24, 2008, the Company paid
the loan in full and the security deed on the land was cancelled.
On March
4, 2008 but retroactive to January 1, 2008, the Company negotiated with the
Spectors an option to renew the lease agreement annually, for up to five years,
under similar terms.
On
September 26, 2008, the Company filed a Form 15 with the SEC to voluntarily
deregister its common stock under the Securities Exchange Act of
1934.
On
October 19, 2007, the due date of the term loan with a principal balance of
$3,144,801 was extended to October 24, 2009 by the commercial financial
institution with similar terms of the original note agreement.
On
November 17, 2008, Margo State Line, Inc. was notified by a secured lender
that four of their term loans were in technical default for failure to maintain
certain financial ratio covenants. One of the loans was subsequently
paid in full and the Company has requested a waiver on the three remaining loan
defaults. The Company has always been and remains current with all
loan payments on the three remaining loans.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
Margo
Caribe, Inc. and its subsidiaries (collectively, the “Company”) are principally
engaged in the business of manufacturing, growing and distributing lawn and
garden products. The Company is engaged in the manufacturing and distribution of
its own line of planting media and aggregates (including bark and premium
mulch), growing and distributing of tropical plants and trees and the
distribution of lawn and garden products. In addition, since 2000,
the Company holds real estate for future development of housing projects, and
since 2003, the Company acts as sales representative for several consumer goods
brands in Puerto Rico. Effective February 28, 2006, the Company
discontinued its landscaping operations which were conducted by Margo
Landscaping & Design, Inc. (“Landscaping”).
The
Company’s continuing operations include Margo Caribe, Inc., Margo State Line,
Inc.(“State Line”), Margo Garden Products, Inc. (“Garden Products”), Rain Forest
Products Group, Inc. (“Rain Forest”), Margo Nursery Farms, Inc. (“Nursery
Farms”), Margo Development Corporation (“Margo Development”), and a one-third
equity interest in Salinas Holdings, Inc. (“Salinas”), all Puerto Rico
corporations, except State Line which is a Florida corporation.
State
Line is engaged in the manufacturing and sale of bark and premium cypress and
pine mulch, as well as several composted and potting soils. State
Line operates out of a facility in Folkston, Georgia and its products are
primarily marketed in the United States, directly by the Company, and in Puerto
Rico and the Caribbean, through Garden Products.
Garden
Products is engaged in the sale 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 (for Puerto Rico and
the Caribbean) of Sunniland Corporation’s fertilizer and pesticide products,
Greenes Fence Company, Fiskars Consumer Product Division, Terro
Products, Crysalia plastic pottery, Oldcastle Products Inc, Lambert Peat Moss,
DEROMA Italian terracotta pottery and North American Outdoor
Products.
Rain
Forest is engaged in the manufacturing of potting soils, professional growing
mixes, river rock, gravel and related aggregates. 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.
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 its nursery facility located in Vega Alta,
Puerto Rico, Nursery Farms produces various types of palms, flowering and
ornamental plants, trees, shrubs, bedding plants and ground covers. Its
customers include wholesalers, big box retailers, garden stores, chain stores,
municipalities, and landscapers primarily located in Puerto Rico and the
Northeast 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
previously provided landscaping, maintenance and design services to customers in
Puerto Rico until its operations were discontinued effective February 28,
2006.
Margo
Development was created for the development of residential housing projects in
Puerto Rico. To date, Margo Development’s operations activities have
been limited to requesting permits for the development of a new residential
project in the Municipality of Arecibo, Puerto Rico.
Salinas,
of which the Company owns a one third equity interest, is a joint venture to
grow and sell sod, palms and trees on a farm of approximately 262 “cuerdas” (a
“cuerda” equals approximately 0.97 of an acre) located in the Municipality of
Salinas, Puerto Rico. The farm is leased by Salinas from Criaderos de Salinas,
S.E., an entity controlled by Mr. Luis A. Rubí, for an initial 10-year term with
renewal options for an additional 20-year period.
PRINCIPAL
OPERATIONS
The
Company’s operations, except for State Line’s operations, are focused in the
Commonwealth of Puerto Rico (“Puerto Rico”) and the Caribbean. These
operations are conducted at a 92-“cuerdas” nursery farm in Vega Alta, Puerto
Rico, approximately 25 miles west of San Juan. This farm is leased
from Michael J. Spector and Margaret Spector, who are executive officers
and principal shareholders of the Company.
The
operations of State Line are located on a 100-acre parcel of land owned in
Folkston, Georgia.
FUTURE
OPERATIONS
In the
future the Company intends to continue to concentrate its economic and
managerial resources in expanding the operations in the mainland United States
through State Line. Through the end of 2008 however, the Company had
not been able to return to profitability.
The
Company continues to expand State Line’s operations and is striving to become
one of the leaders in the lawn and garden (mainly premium mulch, soil, and
compost) industry in the Midwest, Northeast and Southeast U.S and, Puerto
Rico. However, through the end of 2008, most of the segment’s
business was with a national hardware and home improvement chain to which the
Company supplies the Jacksonville and Gainesville/Ocala markets.
As a
result of the slowdown in the Puerto Rico economy, plant sales in this market
continue to decline. Accordingly, the Company will downsized the
Nursery Farms operations in line with the decrease in business, and continued to
closely monitor these operations to determine its future viability. In May 2007,
management decided to significantly reduce these operations based on continued
deteriorating economic trends in Puerto Rico. By the end of 2007,
substantially all operations of this segment had been discontinued.
In
December 2000, the Company purchased approximately 109 “cuerdas” of land in the
Municipality of Arecibo, Puerto Rico, for the development of a residential
housing project. On October 28, 2005, the Company received an endorsement from
the Municipality of Arecibo favorably endorsing the project. In June
2006, the Company received the final endorsement from the Puerto Rico Aqueducts
and Sewer Authority. The Company is currently in the process of
designing a master development plan, as well as in the process of obtaining the
final permit for the development of this site from the Planning Board of Puerto
Rico. The Company is considering various strategies related to these
properties.
In
February 2006, the Board of Directors approved management’s plans to discontinue
landscaping operations. This decision was based on management’s determination
that because of projected trends in the construction sector and the Puerto Rico
economy in general, this division would not be able to significantly improve its
performance in the foreseeable future. Management will focus its
efforts on the development of additional markets for State Line’s products, in
order to reduce the impact of the discontinuance of this
operation.
CRITICAL ACCOUNTING
POLICIES
For a
discussion regarding Margo Caribe Inc.’s critical accounting policies, please
refer to “Management’s Discussion and Analysis or Plan of Operation,” under Item
6 of Margo Caribe, Inc.’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and Notes 2 and 3 of the condensed consolidated financial
statements presented in this Form.
RESULTS OF OPERATIONS FOR
THE QUARTERS ENDED SEPTEMBER 30, 2006 AND 2005
SUMMARY
For the
third quarter ended September 30, 2006, the Company had a net loss from
continuing operations of approximately ($1,074,000), compared to a net loss of
approximately ($636,000) for the same period in 2005. These amounts represent a
basic and diluted loss per common share of ($0.38) for the quarter ended
September 30, 2006 and a basic and diluted loss per share of ($0.23) for the
same period in 2005. During this period in 2005, the Company also
reported an income from discounted operations of $116,000. This represents an
income per share of $0.04.
For the
nine months ended September 30, 2006, the Company had a net loss from continuing
operations of approximately ($3,626,000) compared to a net loss of approximately
($512,000) for the same period in 2005. These amounts represent a
basic and diluted loss per common share of ($1.29) for the nine months ended
September 30, 2006, and a basic and diluted loss per share of ($0.18) for the
comparable period in 2005. For the same periods net income (loss) from
discontinued operations were ($71,000) in 2006 and $179,000 in 2005, which
represent a basic income (loss) per share of ($0.03) and $0.06,
respectively.
Of the
total operating losses reported for the nine month period September 30, 2006,
approximately ($2,857,000) relate to the Puerto Rico operations. This
was primarily the direct effect of deteriorating economic trends in Puerto Rico
together with rate increases in the basic services offered by the government
such as water, electricity, and tolls, which has forced customers to reduce
their discretionary spending. Also included in the Puerto Rico
results is a non-recurring inventory write-down of $1,000,000 and an $180,000
increase in the provision for doubtful accounts, both recorded during the first
quarter of 2006.
SALES
For the
quarter ended September 30, 2006, the Company's consolidated net sales from
continuing operations were approximately $1,553,000, compared to approximately
$1,507,000 for the same period in 2005, representing an overall increase of
approximately $46,000, or 3%. For the nine months ended September 30,
2006, the Company's consolidated net sales from continuing operations were
approximately $5,633,000, compared to approximately $6,395,000 for the same
period in 2005, representing an overall decrease of approximately $762,000 or
12%.
Net sales
by segment for the quarter and nine months ended September 30, 2006 and 2005,
excluding inter-segment sales, are shown below:
|
|
Quarter
Ended
September
30, 2006
|
|
|
Quarter
Ended
September
30, 2005
|
|
|
Nine
Months
Ended
September
30, 2006
|
|
|
Nine
Months
Ended
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
State
Line
|
|
$
|
527,000
|
|
|
$
|
384,000
|
|
|
$
|
1,890,000
|
|
|
$
|
2,127,000
|
|
Plants
|
|
|
371,000
|
|
|
|
484,000
|
|
|
|
1,498,000
|
|
|
|
1,684,000
|
|
Lawn
& Garden
|
|
|
655,000
|
|
|
|
638,000
|
|
|
|
2,245,000
|
|
|
|
2,584,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,553,000
|
|
|
$
|
1,506,000
|
|
|
$
|
5,633,000
|
|
|
$
|
6,395,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landscaping
|
|
|
–
|
|
|
|
412,000
|
|
|
|
120,000
|
|
|
|
1,277,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,553,000
|
|
|
$
|
1,918,000
|
|
|
$
|
5,753,000
|
|
|
$
|
7,672,000
|
|
GROSS
PROFIT
For the
quarter ended September 30, 2006, the consolidated gross profit from continuing
operations was approximately 6% of consolidated net sales compared to
approximately 22% for the same period in 2005.
For the
nine months ended September 30, 2006, the consolidated gross profit from
continuing operations was approximately minus 1% of net consolidated sales
compared to approximately 33% for the same period in the year 2005.
Gross
profits by segments for the quarter and nine months ended September 30, 2006 and
2005, excluding inter-segment sales, are shown below:
|
|
Quarter Ended
September 30, 2006
|
|
Quarter Ended
September 30, 2005
|
|
Nine
Months Ended September 30, 2006
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
Continuing
Segments
|
|
|
|
|
|
|
|
|
State
Line
|
|
9%
|
|
(6%)
|
|
9%
|
|
27%
|
Lawn
& Garden
|
|
34%
|
|
49%
|
|
40%
|
|
40%
|
Plants
(1)
|
|
(48%)
|
|
17%
|
|
(75%)
|
|
26%
|
|
|
|
|
|
|
|
|
|
Discontinued
Segment
|
|
|
|
|
|
|
|
|
Landscaping
|
|
–
|
|
46%
|
|
(31%)
|
|
30%
|
(1)
|
For
2005, State Line gross profit had been charged to reflect a
reclassification of certain expenses, totaling $69,354 for the quarter and
$230,841 for the nine months period, originally classified as
administrative to cost of sales.
|
(2)
|
Plant’s
gross profits for the nine months ended September 30, 2006, includes
non-recurrent inventory write-offs of $1,000,000 recorded during the first
quarter of 2006.
|
STATE LINE
SEGMENT
Quarter
State
Line segment’s net losses were approximately ($341,000) for the quarter ended
September 30, 2006, compared to a net loss of approximately ($326,000) for the
same period in 2005. During the quarter ended September 30, 2006,
sales were $143,000 higher the same period last year.
Total net
sales for the quarter ended September 30, 2006 and 2005 were approximately
$527,000 and $384,000, respectively.
For the
quarters ended on September 30, 2006 and 2005 the gross profit was 9% and minus
6%, respectively.
Operating
expenses remained at the same level reflecting their fixed
nature. However, due to the reduction in sales of the Puerto Rico
segments, more selling, general and administrative expenses were allocated to
this segment. Lastly, during 2006, interest expense amounting to
$149,000 was incurred associated to the debt obtained for the acquisition of
fixed assets for this segment, compared to $52,000 in the same period last
year.
Nine
Months
State
Line segment’s net losses were approximately ($768,000) for the nine months
ended September 30, 2006, compared to a net income of approximately $40,000 for
the same period last year. During the nine months period ended
September 30, 2006, sales were $237,000 below the same period last
year.
Operating
expenses remained basically at the same level reflecting their fixed nature,
although, due to the reduction in sales of the Puerto Rico segments, more
selling, general and administrative expenses were allocated to this
segment. Lastly, during 2006, interest amounting to $338,000 was
incurred associated to the debt issued for the acquisition of fixed assets for
the modernization of this segment’s production line.
Total net
sales for the nine months ended September 30, 2006 and 2005 were approximately
$1,890,000 and $2,127,000, respectively. Gross profit for the nine
months period ended September 30, 2006 and 2005 was approximately 9% and 27%,
respectively. This segment’s gross profit margin was adversely
affected during the 2006 period by lack of adequate sale volumes to maintain
production efficiency, certain changes made in the production process while
still in the development process, and higher raw material
costs. Improvements in sales volumes in the future should also result
in improved gross margins.
LAWN & GARDEN
SEGMENT
Quarter
The Lawn
& Garden segment’s net losses were approximately ($291,000) and ($106,000)
for the three months periods ended September 30, 2006 and 2005,
respectively. The increase in net loss is as compared to the same
period in last year, resulted from an increase in expenses allocated to this
segment during 2006 driven by the decrease in sales in both the Plants and
Landscaping segments and an increase of $90,000 in the bad debts
provision.
Total net
sales from the Lawn & Garden segment were approximately $655,000 for the
three months ended September 30, 2006, compared to approximately $638,000 for
the same period in 2005.
Gross
profit for the three months ended September 30, 2006 and 2005 was approximately
34% and 49%, respectively.
Nine
Months
The Lawn
& Garden segment’s net losses were approximately ($783,000) and ($274,000)
for the nine months ended September 30, 2006 and 2005,
respectively. The increase in net loss is, as compared to the same
period last year, resulted from a decrease in sales of approximately $339,000
combined with an increase in expenses allocated to this segment during 2006
driven by the decrease in sales in both the Plants and Landscaping segments, and
an increase of $90,000 in the provisions for bad debts.
Total net
sales from the Lawn & Garden segment were approximately $2,245,000 for the
nine months ended September 30, 2006, compared to approximately $2,584,000 for
the same period in 2005. The decrease reflects the effects of the
deteriorating economic trends in Puerto Rico, which resulted in a decrease in
discretionary spending by consumers.
Gross
profit for the nine months ended September 30, 2006 and 2005 was 40% for both
periods. This is an indication that even with a decrease in volume
this segment is able to sustain reasonable gross profits.
PLANTS
SEGMENT
Quarter
The
Plants segment’s net loss was approximately ($443,000) for the three months
ended September 30, 2006, compared to a net loss of approximately ($205,000) for
the three months ended September 30, 2005, principally the result of
lower sales and lower margins.
Plant’s
segment sales for the three months ended September 30, 2006 were approximately
$371,000, compared to $484,000 during the same period in 2005. This
represents a reduction in sales of approximately $113,000 or 23%. Sales, to
large retailers were affected by the deteriorating economic trends in Puerto
Rico.
For the
three months ended September 30, 2006 and 2005, commissions and equity in
earnings from an investment in an unconsolidated joint venture (Salinas
Holdings) were $55,000 and $61,000, respectively.
Nine
Months
The
Plants segment’s net loss was approximately ($2,074,000) for the nine months
ended September 30, 2006, compared to a net loss of approximately ($198,000) for
the nine months ended September 30, 2005. This segment’s results were
adversely affected by the continued reduction in sales experienced during 2005,
inventory write-downs of $1,000,000 recorded during the first quarter of 2006,
and increased provision for losses on uncollectible receivables of approximately
$90,000.
Plant’s
segment sales for the nine months ended September 30, 2006 were approximately
$1,498,000, compared to $1,684,000 during the same period in
2005. This represents a reduction in sales of approximately $186,000
or 11%. Additionally, sales to large retailers were affected by the
deteriorating economic trends in Puerto Rico, which resulted in increased
purchases of bedding plants and certain plants which usually have low average
selling prices.
For the
nine months ended September 30, 2006 and 2005, commissions and equity in
earnings from an investment in an unconsolidated joint venture (Salinas
Holdings) were $169,000, compared to $219,000, respectively.
LANDSCAPING SEGMENT
(DISCONTINUED)
The
Landscaping segment’s net loss was approximately ($71,000) for the nine month
period ended September 30, 2006 compared to a net income of approximately
$179,000 for the nine months ended September 30, 2005. The net loss of the
landscaping segment for the nine month period ended September 30, 2006 was
primarily related to a reduction in revenues of approximately $1,157,070 when
compared to the same period in the prior year, due to the termination of this
segment on February 28, 2006.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling,
general and administrative expenses were $1,112,000 and $896,000 for the
quarters ended September 30, 2006 and 2005, respectively. This
represents an increase of 24% or $216,000.
For the
nine months ended September 30, 2006 and 2005, these expenses were approximately
$3,395,000 and $2,509,000, respectively. This represents an increase
of approximately 35% or $886,000.
Included
as part of the year-to-date 2006 expenses are $180,000 of additional reserve for
uncollectible accounts, and nine months of expenses relating to State Line’s
operations compared to seven months in 2005. State Line was acquired
effective February 16, 2005, thus, in 2006, it has full nine-months of
expenses.
Operating
expenses for the nine months ending September 30, 2006 also reflect the full
impact of increases in primary services offered by the Puerto Rico government
such as power, water and tolls among others which were not fully in place during
2005. Also, 2006 figures reflect a nine month impact of increase in
gas prices compared to approximately six months in 2005. This has presented a
challenge to management to further implement cost containment programs and more
aggressive cost resource management strategies.
OTHER INCOME AND
EXPENSES
Interest
income for the nine month period ended September 30, 2005 was approximately
$5,000 (none in 2006). Interest income was mainly derived from a
$500,000 certificate of deposit and cash balances of State Line during the first
quarter of 2005.
Interest
expense for the nine month periods ended September 30, 2006 and 2005, was
approximately $457,000 and $297,000, respectively. The increase in
interest expense is related to the increase in borrowings used to fund the
Company’s operations, for the acquisition of State Line effective February 16,
2005, and for the investment in equipment for State Line to increase
production.
Participation
in income of the unconsolidated subsidiary and commission income from the same
entity for the nine months ended September 30, 2006 and 2005 was approximately
$169,000 and $219,000, respectively. This decrease is due to a
reduction in sales of the unconsolidated subsidiary (Salinas Holdings, Inc.)
caused by reduced levels of production of sod during 2006 and the slowdown in
sales due to the economic deteriorating condition in Puerto Rico.
FINANCIAL
CONDITION
The
Company's current ratio showed a decrease to 1.78 to 1 on September 30, 2006,
compared to 2.52 to 1 on September 30, 2005. This decrease is mostly
attributable to the inventory write downs and the losses incurred during
2006.
On
September 30, 2006, total assets were approximately $10,765,000, compared to
approximately $13,521,000 in total assets on December 31, 2005. The major
fluctuations in assets were:
|
·
|
Due
from related entities decreased by approximately $359,000, from
collections received.
|
|
·
|
Inventories
decreased by approximately $1,405,000, primarily the result of inventory
reductions and write-downs relating to the Plants
segment.
|
|
·
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Investment
in unconsolidated subsidiary increased by approximately $278,000 as a
result of the capital investment of $230,000 made during the nine month
period and approximately $48,000 equity on earnings for the
period.
|
Shareholders'
equity as of September 30, 2006, decreased by approximately $3,637,000,
principally as a result of the net losses for the nine month period then ended
of approximately $3,697,000.
During
the nine months ended September 30, 2006, the Company issued 19,950 shares of
common stock. The awards did not result in any net proceeds to the
Company.
LIQUIDITY AND CAPITAL
RESOURCES
Since
January 1, 2005, the Company has received advances from its principal
stockholder of $5,475,000, of which $2,917,000 were refinanced in the first
quarter of 2006 with a loan from a commercial bank guaranteed by assets provided
by the principal stockholder. The Company did not pay any commitment fee or
commission in connection with the stockholder loans. The Company’s
Board of Directors believes that the terms and conditions of the stockholder
loans are at least as favorable to the Company as those that could have been
obtained from an unaffiliated third party. During 2007, the Company’s
debt to its principal stockholder was converted into convertible preferred stock
as disclosed in Note 18.
The
Company also finances its working capital needs with borrowings under credit
facilities with commercial banks. As of September 30, 2006, the
Company had two revolving credit facilities totaling $4,500,000, of which
$3,600,000 were drawn. These credit facilities are secured by real estate
consisting of parcels of land in Garrochales, Puerto Rico and in Folkston,
Georgia, other assets of the Company, and personally by the principal
stockholder.
The
Company’s State Line operations are involved in the expansion of its operations
and including among other things, the purchase of an automated packing line.
This investment has been substantially financed with five-year bank
loans.
Due to
the nature of the State Line operations, where a limited number of products are
manufactured, inventory levels are normally not high. Previously, the Nursery
operations required high quantities of plants in stock; however, as Nursery
operations have been reduced the inventory levels have also been
reduced.
ITEM
3.
CONTROLS AND
PROCEDURES
Disclosure Controls and
Procedures
The
Company’s management, with the participation of its Chief Executive Officer
(“CEO”), Chief Operating Officer (“COO”) and Chief Financial Officer (“CFO”),
has evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of September 30, 2006. Disclosure controls
and procedures are defined under SEC rules as controls and other procedures that
are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within required time periods.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Securities Exchange Act of 1934 is
accumulated and communicated to the issuer’s management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
The
Company did not maintain a sufficient complement of personnel to maintain an
appropriate accounting and financial reporting structure commensurate with the
activities of the Company. Also, the Company’s limited number of
personnel does not allow for an appropriate level of segregation of duties. In
addition, the Company does not have an appropriate fraud detection program to
address the risk that the consolidated financial statements may be materially
misstated as a result of fraud. The Company also did not maintain adequate
controls and procedures to assure the identification and reporting of certain
transactions with related parties.
In light
of the material weaknesses described above, in preparing our condensed
consolidated financial statements at and for the period ended September 30,
2006, we performed additional procedures in an attempt to ensure that such
financial statements include all adjustments that, in the opinion of management,
are necessary for a fair presentation of the Company’s financial condition,
results of operations and cash flows for the periods and dates
presented.
Changes in Internal Control
over Financial Reporting
Not
Applicable
PART II -
OTHER
INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
The
Company is a party to several legal proceedings in the ordinary course of its
business, none of which, in the opinion of management, will have a material
adverse effect on the Company’s Financial Condition or Results of
Operations.
ITEM
2.
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
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
During 2006 and 2007, the Company
experienced a number of significant events that are discussed below, including
significant turnover in personnel responsible for financial accounting
matters.
On May
29, 2006, the Company received a letter from Luis R Carrasquillo Ruiz notifying
the Company of his resignation from the position of Senior Vice President and
Chief Financial Officer, effective on June 15, 2006.
On June
13, 2006, the Board of Directors confirmed Mr. José Vázquez as the new Chief
Financial Officer and Vice President of the Company.
On
October 2, 2006, the Company received a letter from Juan B. Medina notifying the
Company of his resignation from the position of President and Chief Operating
Officer, effective on October 27, 2006. In connection with this resignation, the
Board of Directors appointed Michael J. Spector, the Company’s Chief Executive
Officer, as President and Chief Operating Officer.
On
October 3, 2006, Margo Caribe, Inc. received a notification from The NASDAQ
Stock Market delisting the Company’s common stock, which resulted in the
suspension of trading the common stocks, effective October 5, 2006. The decision
was based on the Company’s failures to timely file quarterly reports (10QSB from
March 31, 2006 to September 30, 2007 and the December 31, 2006
10KSB).
On April
18, 2007, the Company received a letter from José R. Vázquez notifying the
Company of his resignation from the position of Vice-President and Chief
Financial Officer of Margo Caribe, Inc., effective April 30, 2007.
On April
23, 2007, Roberto J. Luciano resigned as a member of the Board of Directors and
as Chairman of the Audit Committee. In connection with the resignation, the
Board of Directors appointed Evan H. Berger, an existing member of the Board, as
Chairman of the Audit Committee.
On May 8,
2007, the Securities and Exchange Commission issued a letter closing an informal
investigation by the Commission, without recommending any enforcement action
against the Company. The investigation was focused on certain payments made
directly or indirectly to the Spectors, as more fully explained in the Note 16,
to the financial statements presented herein.
On May
23, 2007, the Company was involved in an agreement for the restructuring of debt
to the Company’s principal shareholder. See Note 18 for a discussion
of this transaction.
On
September 27, 2007, the Company named John Upchurch as Senior Vice-President and
Chief Financial Officer upon the resignation of Alison Witkovich, who had
assumed the position of Chief Financial Officer on May 1, 2007.
On March
4, 2008 but retroactive to January 1, 2008, the Company negotiated with the
Spectors an option to renew the lease agreement annually, for up to five years,
under similar terms.
ITEM
6.
EXHIBITS
Exhibits No.
|
Exhibit Description
|
|
|
31.1
|
CEO
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
31.2
|
CFO
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
32.1
|
CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
32.2
|
CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
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.
|
|
|
|
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|
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|
|
|
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Date: January
15, 2009
|
By:
|
/s/ Michael J. Spector
|
|
Michael
J. Spector, Chairman of the
|
|
Board
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Date: January
15, 2009
|
By:
|
/s/ John Upchurch
|
|
John
Upchurch, Vice President and
|
|
Chief
Financial Officer
|
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