UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended
March
31, 2006
o
|
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 00692
(Address
of Principal Executive Offices)
|
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 past 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.
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 2,862,481shares 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).
MARGO
CARIBE, INC. AND SUBSIDIARIES
FORM
10-Q
FOR
THE FIRST QUARTER ENDED MARCH 31, 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 Stockholders’ Equity
|
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
|
27
|
PART
II – OTHER INFORMATION
|
28
|
Item
1
|
Legal
Proceedings
|
28
|
Item
2
|
Unregistered
Sales of Equity Securities and Proceeds
|
28
|
Item
3
|
Defaults
Upon Senior Securities
|
28
|
Item
4
|
Submission
of Matters to a Vote of Securities Holders
|
28
|
Item
5
|
Other
Information
|
28
|
Item
6
|
Exhibits
|
29
|
SIGNATURES
|
30
|
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, all statements that are not clearly historical in
nature are forward-looking, and the words or phrases “would be,” “will allow,”
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “believes,” “estimate,” “project,” and future or conditional verbs
such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar
expressions are generally 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
circumstances 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 March 31, 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.
Concurrently
with this Form 10-Q, the Company is filing its Quarterly Reports of Form 10-Q
for the quarters ended June30, 2006 and September 30, 2006 and, as soon as
practicable following the filing of this 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 and the Annual Reports on Form 10-K for the years ended
December 31, 2006 and 2007.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
March
31, 2006
(Unaudited)
ASSETS
|
|
2006
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
|
$
|
416,034
|
|
Accounts
receivable, net
|
|
|
1,364,885
|
|
Current
portion of inventories
|
|
|
2,133,058
|
|
Due
from equity investee
|
|
|
410,690
|
|
Due
from shareholder
|
|
|
62,475
|
|
Prepaid
expenses and other current assets
|
|
|
294,165
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,681,307
|
|
|
|
|
|
|
Non-current
portion of inventories
|
|
|
471,294
|
|
Property
and equipment, net
|
|
|
4,133,280
|
|
Land
held for future development
|
|
|
1,161,870
|
|
Investment
in unconsolidated subsidiary
|
|
|
693,934
|
|
Notes
receivable
|
|
|
67,095
|
|
Goodwill
|
|
|
1,063,495
|
|
Other
assets
|
|
|
90,130
|
|
|
|
|
|
|
Total
assets
|
|
$
|
12,362,405
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Current
portion of long-term debt
|
|
$
|
172,346
|
|
Notes
payable
|
|
|
166,085
|
|
Accounts
payable
|
|
|
722,882
|
|
Accrued
expenses
|
|
|
565,585
|
|
Deferred
tax liability
|
|
|
17,417
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,644,315
|
|
|
|
|
|
|
Other
liabilities
|
|
|
66,814
|
|
Long-term
debt, net of current portion
|
|
|
3,705,627
|
|
Line-of-credit,
long-term
|
|
|
3,499,711
|
|
Notes
payable to major stockholder
|
|
|
2,771,867
|
|
|
|
|
|
|
Total
liabilities
|
|
|
11,688,334
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
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 and 2,812,731 shares outstanding
|
|
|
2,862
|
|
Additional
paid-in capital
|
|
|
5,632,044
|
|
Accumulated
deficit
|
|
|
(4,864,547
|
)
|
Treasury
stock, 49,750 common shares at cost
|
|
|
(96,288
|
)
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
674,071
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
12,362,405
|
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
Three
Months Ended March 31, 2006 and 2005
(Unaudited)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,994,394
|
|
|
$
|
2,069,046
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,525,990
|
|
|
|
1,202,655
|
|
Non
recurring inventory write-down
|
|
|
1,000,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,525,990
|
|
|
|
1,202,655
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
(531,596
|
)
|
|
|
866,391
|
|
Selling,
general and administrative expenses
|
|
|
1,188,978
|
|
|
|
870,998
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,720,574
|
)
|
|
|
(4,607
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
–
|
|
|
|
2,022
|
|
Interest
expense
|
|
|
(151,301
|
)
|
|
|
(64,099
|
)
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
5,260
|
|
|
|
22,722
|
|
Commissions
from unconsolidated subsidiary
|
|
|
55,064
|
|
|
|
46,718
|
|
Miscellaneous
income
|
|
|
16,683
|
|
|
|
6,035
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses), net
|
|
|
(74,294
|
)
|
|
|
13,398
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(1,794,868
|
)
|
|
|
8,791
|
|
Income
(loss) from discontinued operations
|
|
|
(58,093
|
)
|
|
|
15,854
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,852,961
|
)
|
|
$
|
24,645
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share, from continuing
operations
|
|
$
|
(0.64
|
)
|
|
$
|
0.00
|
|
Basic
income (loss) per common share, from discontinued
operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
Total
net income (loss) per common share
|
|
$
|
(0.66
|
)
|
|
$
|
0.01
|
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three
Months Ended March 31, 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
|
|
|
–
|
|
|
|
–
|
|
|
|
21,825
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
21,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,852,961
|
)
|
|
|
–
|
|
|
|
(1,852,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2006
|
|
|
2,812,731
|
|
|
$
|
2,862
|
|
|
$
|
5,632,044
|
|
|
$
|
–
|
|
|
$
|
(4,864,547
|
)
|
|
$
|
(96,288
|
)
|
|
$
|
674,071
|
|
See
accompanying notes to consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
The Three Months Ended March 31, 2006 and 2005
(Unaudited)
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,852,961
|
)
|
|
$
|
24,645
|
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
131,085
|
|
|
|
112,151
|
|
Provision
for bad debts
|
|
|
180,000
|
|
|
|
–
|
|
Inventory
write-down
|
|
|
1,000,000
|
|
|
|
–
|
|
Non-competition
agreement amortization
|
|
|
–
|
|
|
|
11,905
|
|
Deferred
stock compensation
|
|
|
21,825
|
|
|
|
9,705
|
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
(5,260
|
)
|
|
|
(22,722
|
)
|
Gain
on sale of equipment
|
|
|
(61,021
|
)
|
|
|
–
|
|
Changes
in assets and liabilities affecting cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(414,421
|
)
|
|
|
195,628
|
|
Inventories
|
|
|
(62,897
|
)
|
|
|
(306,085
|
)
|
Due
from related entity
|
|
|
(80,177
|
)
|
|
|
(73,634
|
)
|
Prepaid
expenses and other current assets
|
|
|
74,743
|
|
|
|
(41,453
|
)
|
Other
assets
|
|
|
(787
|
)
|
|
|
(36,119
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(144,220
|
)
|
|
|
(154,485
|
)
|
Accrued
expenses
|
|
|
114,089
|
|
|
|
34,955
|
|
Due
to major stockholder
|
|
|
(94,198
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,194,200
|
)
|
|
|
(245,509
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash
disbursed relating to business acquisition
|
|
|
–
|
|
|
|
(2,600,000
|
)
|
Proceeds
from the sale of property and equipment
|
|
|
119,000
|
|
|
|
–
|
|
Purchase
of property and equipment
|
|
|
(77,383
|
)
|
|
|
(49,468
|
)
|
Investment
in land for future development
|
|
|
(22,775
|
)
|
|
|
(8,000
|
)
|
Investment
in unconsolidated subsidiary
|
|
|
(70,000
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(51,160
|
)
|
|
|
(2,657,468
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable issued to major stockholder
|
|
|
1,500,000
|
|
|
|
3,500,000
|
|
Proceeds
from long-term debt
|
|
|
3,144,801
|
|
|
|
–
|
|
Repayment
of notes payable to major stockholder
|
|
|
(3,178,134
|
)
|
|
|
(49,489
|
)
|
Issuance
of common stock from exercise of stock options and stock
grants
|
|
|
–
|
|
|
|
13,828
|
|
Repayments
of long-term debt and notes payable
|
|
|
(82,973
|
)
|
|
|
(337,830
|
)
|
Net
cash provided by financing activities
|
|
|
1,383,694
|
|
|
|
3,126,509
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and equivalents
|
|
|
138,334
|
|
|
|
223,532
|
|
Cash
and equivalents at beginning of period
|
|
|
277,700
|
|
|
|
234,872
|
|
Cash
and equivalents at end of period
|
|
$
|
416,034
|
|
|
$
|
458,404
|
|
See
accompanying notes to condensed consolidated financial
statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
The Three Months Ended March 31, 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 Nursery
Farms, Inc., Margo Landscaping and Design, Inc. (which ceased operating on
February 28, 2006), Margo Garden Products, Inc., Rain Forest Products Group,
Inc., 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 March 31, 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 year 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 deferred compensation expense recorded in
the balance sheet at December 31, 2005, of $168,410, 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 March 31, 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”).
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
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 statement 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
Ended
March
31, 2006
|
|
|
|
Stock-based
compensation expense:
|
|
|
Selling,
general and administrative
|
|
$
|
21,825
|
|
Income
tax benefit
|
|
|
–
|
|
|
|
|
|
|
Net
Compensation expense
|
|
$
|
21,825
|
|
|
|
|
|
|
Effect
on earnings per share:
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
0.01
|
|
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 nonemployees 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 and net income per share, on a pro forma
basis would have been as follows:
|
|
Quarter
Ended
March
31, 2005
|
|
|
|
Net
income as reported
|
|
$
|
24,645
|
|
Total
stock based compensation expense determined under fair value based method
for all awards
|
|
|
(4,570)
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
20,075
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted – as reported
|
|
$
|
0.01
|
|
|
|
|
|
|
Basic
and diluted – pro forma
|
|
$
|
0.01
|
|
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
March
31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
Risk-free
interest rate
|
|
N/A
|
|
5.26%
|
|
|
|
|
|
Average
life of options
|
|
N/A
|
|
10
yrs.
|
|
|
|
|
|
Volatility
|
|
N/A
|
|
17.29%
|
|
|
|
|
|
Dividend
yield
|
|
N/A
|
|
0%
|
There
were no stock options granted in 2006, therefore, no information is provided in
the above table for 2006.
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no restrictions and are fully transferable and
negotiable in a free-trading market. The Black-Scholes option-pricing model does
not consider the employment, transfer or vesting restrictions that are inherent
in the Company’s employee stock options.
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 the 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 collectibles 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 March 31, 2006, the
allowance for doubtful accounts was $490,000.
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 palms and trees
sold at commercial levels) for which there is currently a very limited market,
due to the slow down of 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 loss from possible plant
disease and pests, weather issues, and excessive growth also increase.
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
carry-forward 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 its investment in Salinas Holdings, Inc., an entity 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, totaling $49,567, 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, FASB issued Statement 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 under other accounting pronouncements. 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, if 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.
Management does not expect that 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”). FIN 48
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. SFAS 154 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 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”). 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,
SFAS 151 requires that allocation of fixed overhead to the cost of conversion be
based on the normal capacity of the production facilities. The adoption this
statement had no significant effect on the Company’s results of
operations.
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 $23,000 (approximately $0.01 per share), during the three months
ended March 31, 2006.
Note 6 -
Inventories
At March
31, 2006, inventories included the following:
Description
|
|
2006
|
|
|
|
|
|
Plant
material – current portion
|
|
$
|
768,147
|
|
Lawn
and garden products
|
|
|
511,422
|
|
Mulch
finished products
|
|
|
509,681
|
|
Raw
materials and supplies
|
|
|
343,808
|
|
|
|
|
|
|
Current
inventory
|
|
|
2,133,058
|
|
Plant
material – non current portion
|
|
|
471,294
|
|
|
|
|
|
|
|
|
$
|
2,604,352
|
|
During
2006, the Company noted a continued deterioration of the Puerto Rico economy
combined with significant consumer price increases that have affected the sale
of plants for consumer markets. Because management did not foresee a significant
positive change in this trend in the near-term, the Company wrote down
inventories by $1,000,000, which was the best management estimate at that point
in time. See Note 18 Subsequent Events.
Note 7 - Property and
Equipment
At March
31, 2006, property and equipment included the following:
Description
|
|
2006
|
|
|
|
|
|
Real
estate property, including land of $450,000
|
|
$
|
1,041,763
|
|
Leasehold
improvements
|
|
|
1,242,041
|
|
Shade
and green houses
|
|
|
1,521,642
|
|
Equipment
and fixtures
|
|
|
3,259,615
|
|
Transportation
equipment
|
|
|
415,231
|
|
|
|
|
|
|
|
|
|
7,480,292
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,347,012
|
)
|
|
|
|
|
|
|
|
$
|
4,133,280
|
|
As of
March 31, 2006, the accumulated amortization of leasehold improvements
(including shade and green houses) was approximately $1,136,070. Related
amortization expense for the three month periods ended March 31, 2006 amounted
to approximately $21,000.
As of
March 31, 2006, leasehold improvements (including shade and green houses) at the
Plants Division had an unamortized book value of $1,627,613. The
realization of these assets was predicated on a turn around of these operations.
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 March 31, 2006 and for the three months ended March 31, 2006 and 2005,
Salinas’ unaudited statements of financial position and results of operations
information were as follows:
Assets
|
|
2006
|
|
|
|
|
|
Current
assets
|
|
$
|
2,555,812
|
|
Property
and equipment, net
|
|
|
573,521
|
|
|
|
|
|
|
|
|
$
|
3,129,333
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
737,329
|
|
Long-term
liabilities
|
|
|
–
|
|
|
|
|
|
|
Total
liabilities
|
|
|
737,329
|
|
Shareholders’
equity
|
|
|
2,392,004
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,129,333
|
|
|
|
|
|
|
Company’s
share of equity
|
|
$
|
693,934
|
|
Results
of Operations
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
305,434
|
|
|
$
|
310,574
|
|
Cost
of sales
|
|
|
168,541
|
|
|
|
145,448
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
136,893
|
|
|
|
165,126
|
|
General
and administrative expenses
|
|
|
121,096
|
|
|
|
96,890
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,797
|
|
|
$
|
68,236
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
5,260
|
|
|
$
|
22,722
|
|
For the
three months ended March 31, 2006, the change in the Company’s investment in
Salinas Holdings was as follows:
Description
|
|
Amount
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
618,674
|
|
Additional
investment
|
|
|
70,000
|
|
Equity
in earnings of unconsolidated subsidiary for 2006
|
|
|
5,260
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
$
|
693,934
|
|
As of
March 31, 2006, each of the three stockholders of Salinas had committed to
contribute an additional $230,000 of which the Company had contributed $70,000
as of such date and will contribute $160,000 thereafter.
The
balance due from Salinas of $410,690 as of March 31, 2006, was substantially
collected subsequently.
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 effected 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 March 31, 2005 have been retroactively
adjusted to reflect the effect of the stock dividend.
|
|
Quarter
Ended
|
|
|
Quarter
Ended
|
|
Basic
income per common share:
|
|
March
31, 2006
|
|
|
March
31, 2005
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(1,794,868
|
)
|
|
$
|
8,791
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
$
|
(58,093
|
)
|
|
$
|
15,854
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,852,961
|
)
|
|
$
|
24,645
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average shares
|
|
$
|
2,812,510
|
|
|
$
|
2,271,980
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share, from continuing
operations
|
|
$
|
(0.64
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share, form discontinued
operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
For the
three months ended March 31, 2006 and 2005, the effect of the assumed exercise
of stock options determined by using the treasury stock method was anti-dilutive
or not significant; 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) form
discontinued operations. The segment information for 2005 has been
restated to reflect these changes and to reclassify certain general corporate
overhead expenses of $86,230, originally charged to the now discontinued
landscaping segment to the continuing segments.
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 March 31, 2006
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
$
|
548,979
|
|
|
$
|
827,351
|
|
|
$
|
618,064
|
|
|
$
|
–
|
|
|
$
|
1,994,394
|
|
Inter-segment
revenues
|
|
2,931
|
|
|
|
–
|
|
|
|
80,334
|
|
|
|
–
|
|
|
|
83,265
|
|
Interest
income
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest
expense
|
|
40,963
|
|
|
|
22,537
|
|
|
|
87,801
|
|
|
|
–
|
|
|
|
151,301
|
|
Depreciation
and amortization
|
|
77,235
|
|
|
|
12,609
|
|
|
|
26,440
|
|
|
|
–
|
|
|
|
116,284
|
|
Segment
loss (1)
|
|
(1,329,781
|
)
|
|
|
(268,443
|
)
|
|
|
(196,644
|
)
|
|
|
–
|
|
|
|
(1,794,868
|
)
|
Segment
assets
|
|
4,938,950
|
|
|
|
1,057,158
|
|
|
|
5,052,931
|
|
|
|
1,261,697
|
|
|
|
12,310,736
|
|
Expenditures
for segment assets
|
|
836
|
|
|
|
–
|
|
|
|
76,549
|
|
|
|
22,775
|
|
|
|
100,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2005
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
(2)
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
$
|
591,412
|
|
|
$
|
854,316
|
|
|
$
|
623,318
|
|
|
$
|
–
|
|
|
$
|
2,069,046
|
|
Inter-segment
revenues
|
|
46,451
|
|
|
|
14,501
|
|
|
|
–
|
|
|
|
–
|
|
|
|
60,952
|
|
Interest
income
|
|
2,022
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,022
|
|
Interest
expense
|
|
48,163
|
|
|
|
31
|
|
|
|
15,905
|
|
|
|
–
|
|
|
|
64,099
|
|
Depreciation
and amortization
|
|
71,406
|
|
|
|
16,516
|
|
|
|
10,435
|
|
|
|
–
|
|
|
|
98,357
|
|
Segment
income (loss)
|
|
16,278
|
|
|
|
(81,886
|
)
|
|
|
74,399
|
|
|
|
–
|
|
|
|
8,791
|
|
Segment
assets
|
|
6,912,340
|
|
|
|
1,485,455
|
|
|
|
3,784,186
|
|
|
|
1,139,127
|
|
|
|
13,321,108
|
|
Expenditures
for segment assets
|
|
10,797
|
|
|
|
–
|
|
|
|
10,247
|
|
|
|
8,000
|
|
|
|
29,044
|
|
(1) The
Plants segment includes a non-recurring inventory write-down of
$1,000,000.
(2) Since
inception on February 16, 2005.
See Note
17 for segment information related to the discontinued landscaping
segment.
Note 11 - Supplemental
Disclosures for the Condensed 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 three months ended March 31, 2006 and 2005,
include interest payments amounting to approximately $121,000 and $64,000,
respectively. There were no income tax payments for the three months ended March
31, 2006 and 2005.
Note 12 - Major
Customers
During
the three months ended March 31, 2006 and 2005, the Company’s single largest
customer accounted for approximately 36% ($710,000) and 37% ($772,000),
respectively, of the Company’s net consolidated sales. There were no other
customers accounting for 10% or more of the Company’s net consolidated
sales.
For the
Puerto Rico operations during the three months ended March 31, 2006 and 2005,
the Company’s two largest customers accounted for approximately 52% ($710,000)
and 13% ($185,000), and 53% ($772,000) and 17% ($243,000), respectively, of the
net sales from Puerto Rico operations. There were no other customers accounting
for 10% or more of the area’s net sales.
For State
Line’s operations during the three months ended March 31, 2006 and 2005, the
Company’s single largest customer accounted for approximately 33% ($207,000) and
22% ($140,000), respectively of this segment’s net sales. There were no other
customers accounting for 10% or more of this segment’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 severe
weather. 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
At March
31, 2006, notes payable to the Company’s principal stockholder include three
notes totaling to $2,771,867, due on January 31, 2008. These notes bear interest
at the then current prime rate and are unsecured obligations of the
Company. See Note 18 for disclosure about the subsequent
restructuring of this indebtedness.
For the
three months periods ended March 31, 2006 and 2005, interest expense on
indebtedness to the Company’s principal stockholder amounted to $32,196 and
$34,020, respectively.
Note 15 - Notes Payable to
Financial Institution
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 amount of $3,500,000, of which $3,499,711 was outstanding as of March
31, 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 certain real estate (parcels of land in
Garrochales, Puerto Rico and in Folkston, Georgia) and certain equipment of the
Company. 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.
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. The note evidencing the
financial agreement 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, of which $453,844 was outstanding
as of March 31, 2006. The proceeds from the financing were used for the
acquisition of grinding equipment. The note has a maturity date of September 30,
2012 and bears interest at a rate equal to 6.50% and is secured with the
grinding equipment acquired by the Company.
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 of which $256,480 was outstanding as of March 31, 2006 and was used
for the acquisition of distribution equipment and to refinance certain machinery
acquired in connection with 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.
Note 16 – Other Related
Party Transactions
During
the three months ended March 31, 2006 and for the year ended December 31, 2005,
the Company provided certain services on behalf of its principal stockholders
and to a company owned by such stockholders. These payments amounted to $ 76,000
in 2006 and $30,000 in 2005. The Company did not charge any fee for these
services. These amounts were settled prior to September 30, 2006, and the
practice of providing payments directly or indirectly on behalf of the principal
stockholders was terminated. See PART II ITEM 5.
On
January 1, 2004, but retroactively to January 1, 2003, the Company and the
Company’s 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 this 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
three months ended March 31, 2006 and 2005 amounted to $75,000,
respectively.
In
connection with this lease, the Spectors 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 three month ended March 31, 2006 and 2005, $15,129 and $19,066,
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 was not expected to return to
profitability in the foreseeable future and therefore was
discontinued.
The
following represents summarized financial information of such subsidiary, which
was consolidated within the Company totals for the quarters ended March 31,
2006, and 2005:
|
|
Quarter
Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Net
sales and other income of $44,000 in 2006
|
|
$
|
119,514
|
|
|
$
|
405,350
|
|
Cost
of sales
|
|
|
101,500
|
|
|
|
327,446
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
18,014
|
|
|
|
77,904
|
|
SG&A
expenses
|
|
|
76,107
|
|
|
|
62,050
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(58,093
|
)
|
|
$
|
15,854
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets
|
|
$
|
–
|
|
|
$
|
28,424
|
|
Cost of
sales of the discontinued segment includes depreciation expense of $14,801 in
2006 and $13,794 in 2005.
As of
March 31, 2006, assets of the discontinued segment were $51,669.
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 be
involved 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
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 to be used for the
acquisition and installation of automated packing equipment at Margo State
Line’s mill, located in Folkston, Georgia. Margo State Line also entered into a
one-year revolving credit agreement for an aggregate principal amount of
$1,000,000 to be used for general working capital.
During
December 2006, management determined that efforts to turn around the Plants
segment has not reserved in any significant improvements and accordingly
recorded an approximate $1,000,000 write down of leasehold improvements. The
Company also wrote down Plant inventories by an additional
$500,000.
As of
December 31, 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 same.
On May
23, 2007, the Company restructured $3.9 million of outstanding debt with its
principal stockholders. The parties agreed to exchange 15,600 newly-issued
shares of the Company’s 6.5% cumulative convertible preferred stock with an
aggregate liquidation value of $3.9 million in return for the cancellation of an
equivalent amount outstanding indebtedness. For additional
information relating to the terms of the preferred stock please refer to the
Company’s current Report on Form 8-K 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
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 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 terms substantially similar to those described in Note 16, above. The
agreement was approved by the independent directors.
On
September 26, 2008, the Company filed a Form 15 with the SEC to voluntarily
deregister its common stock under the Securities and Exchange Act of
1934.
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 waivers on the remaining three loan
defaults. The Company has always been and remains current on all loan
payments on the three remaining loans.
ITEM
2.
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 discontinue 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, Green Fence Company, Fiskars
Consumer Product Division, Terro Products, Crysalia plastic pottery, Lambert
Peat Moss, and DEROMA Italian terracotta pottery.
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 26,
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 housing
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 stockholders 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 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 industry (mainly premium mulch, soil,
and compost) in the Southeast and Southwest 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 the 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 has downsized the Nursery Farms
operations in line with the decrease in business, and continues 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.
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 September 2006,
the Company received the final endorsement from the Puerto Rico Aqueduct 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 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 THREE MONTHS AND FIRST QUARTERS ENDED MARCH 31, 2006 AND
2005
SUMMARY
For the
three months ended March 31, 2006, the Company had a net income (loss) of
approximately ($1,853,000) compared to a net income of approximately $25,000 for
the comparable period in 2005, including immaterial amounts reported from
discontinued operations. These amounts represent a basic and diluted loss per
common share of ($0.66) in 2006 and a basic and diluted income per common share
of $0.01 in 2005.
Of the
total operating (losses) from continuing operations for 2006, approximately
($1,598,000) or 89% relate to Puerto Rico operations. This was primarily the
direct effect of adverse economic trends together with rate increases in the
basic services offered by the government such as water, electricity, which has
forced customers to reduce their discretionary spending. Also included in the
Puerto Rico results for 2006 are non-recurring inventory write downs of
$1,000,000 and an $180,000 increase in the provision for uncollectible
accounts.
SALES
The
Company’s consolidated net sales from continuing operations for the three months
ended March 31, 2006 were approximately $1,994,000, compared to approximately
$2,069,000 for the same period in 2005, representing an overall decrease of
approximately $75,000 or 4%.
Net sales
by segment for the three month periods ended March 31, 2006 and 2005, excluding
inter-segment sales, are shown below:
|
|
Quarter
Ended
March
31, 2006
|
|
|
Quarter
Ended
March
31, 2005
|
|
Continuing
Segments
|
|
|
|
|
|
|
State
Line
|
|
$
|
618,000
|
|
|
$
|
623,000
|
|
Lawn
& Garden
|
|
|
827,000
|
|
|
|
855,000
|
|
Plants
|
|
|
549,000
|
|
|
|
591,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,994,000
|
|
|
|
2,069,000
|
|
Discontinued
Segment
|
|
|
|
|
|
|
|
|
Landscaping
|
|
|
120,000
|
|
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,114,000
|
|
|
$
|
2,474,000
|
|
GROSS
PROFIT
The
consolidated gross profit from continuing operations for the three months ended
March 31, 2006, was a negative margin of approximately 27% of net sales compared
to approximately 42% for the same period in the year 2005. The overall decrease
in the combined gross profit from continuing operations was impacted primarily
by changes in the product mix and non-recurring inventory write-downs of
$1,000,000 in the Plants segment. Gross profits (loss) by segment for
the three months ended March 31, 2006 and 2005 are shown below:
|
|
Quarter
Ended
March
31, 2006
|
|
Quarter
Ended
March
31, 2005
|
Continuing
Segments
|
|
|
|
|
State
Line
(1)
|
|
12%
|
|
31%
|
Lawn
& Garden
|
|
42%
|
|
45%
|
Plants
(2)
|
|
(174%)
|
|
28%
|
|
|
|
|
|
Discontinued
Segment
|
|
|
|
|
Landscaping
|
|
15%
|
|
19%
|
|
(1)
For 2005, State Line gross profit had been charged to reflect a
reclassification of certain expenses, totaling $49,567, originally
classified as administrative to cost of sales.
|
|
(2)
Plant’s gross profit includes non-recurring inventory write-off of
$1,000,000 recorded in 2006.
|
STATE LINE
SEGMENT
State
Line’s net loss was approximately $196,000 for the three months ended March 31,
2006, compared to a net income of approximately $74,000 for the three months
ended March 31, 2005.
During
the first quarter of 2006, sales were in line with the same period in 2005.
However, this segment’s gross profit margin was adversely affected during the
period by certain changes made in the production process while still in the
development stage, and higher freight-in and raw material costs. As a
result, gross profit for this segment during the three months periods ended
March 31, 2006 and 2005, decreased to 12% from 31%. As sale volumes improve in
2007, gross margins are also expected to improve.
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 $88,000 was paid associated to the debt obtained
for the acquisition of fixed assets for this segment.
LAWN & GARDEN
SEGMENT
The Lawn
& Garden segment’s net loss was approximately $268,000 and $82,000 for the
three months ended March 31, 2006 and 2005, respectively. The increase in net
loss for the three month period ended March 31, 2006, as compared to the same
period in the prior year, resulted from an increase in expenses allocated to
this segment during 2006 related to the decrease in sales of both the Plants and
Landscaping segments, increase of $90,000 in bad debt reserves and a slight
decrease in gross profit margin during the period. The gross profit decrease is
related to promotional campaigns with major chain stores in Puerto Rico and the
US Virgin Islands during the first quarter of the year 2006.
Total net
sales from the Lawn & Garden segment were approximately $827,000 for the
three months ended March 31, 2006, compared to approximately $855,000 for the
same period in 2005. The decrease reflects the effects of the continued economic
slowdown in Puerto Rico, which resulted in a decrease in discretionary spending
by consumers.
The gross
profit for this segment for the three-months ended March 31, 2006 decreased by
three percentage points when compared to the same period in 2005. Gross profit
for the first quarter of 2005 was 45% compared to 42% during the same period in
2006.
PLANTS
SEGMENT
The
Plants segment’s net loss was approximately $1,330,000 for the three months
ended March 31, 2006, compared to net income of $16,000 for the same period in
2005. This segment’s results were affected by the continued reduction in sales
experienced during the first quarter of 2006, non-recurring inventory
write-downs of $1,000,000, and increase in the allowance for uncollectible
accounts of $90,000.
Plant’s
segment sales for the first quarter ended March 31, 2006 were approximately
$549,000, compared to $591,000 during the same period in 2005. This represents a
reduction in sales of approximately $42,000 or 7%. Additionally, sales to large
retailers were affected by the adverse economic situation in Puerto Rico, which
resulted in increased purchases of bedding plants and certain plants, which
usually have very low average selling prices.
Commissions
and equity in earnings from, which are reported in this segment, were $60,000,
compared to $69,000 for the same period in 2005.
LANDSCAPING SEGMENT
(DISCONTINUED)
The
Landscaping segment’s net loss was approximately $58,000 for the three months
ended March 31, 2006, compared to a net income of approximately $16,000 for the
three months ended March 31, 2006. The net loss of the landscaping segment for
the three months ended March 31, 2006 was primarily related to a reduction in
revenues of approximately $285,000 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 (SG&A) were approximately $1,189,000 and
$871,000 for the three months ended March 31, 2006 and 2005, respectively. This
represents an increase of approximately 36% or $318,000 when compared to the
same period in 2005. Included as part of the first quarter 2006 expenses are
$180,000 of additional reserve for uncollectible accounts, and also three months
of expense relating to State Line’s operations compared to two for the first
quarter 2005. State Line was acquired effective February 16, 2005, thus, in
2006, it has a full three-month period.
OTHER INCOME AND
EXPENSES
Interest
income for the three months ended March 31, 2005 was approximately $2,000 (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 three months ended March 31, 2006 and 2005, was approximately
$151,000 and $64,000, respectively. The increase in interest expense is related
to the increase in borrowings used to fund the Company’s operations and for the
acquisition of State Line effective February 16, 2005.
Participation
in income of unconsolidated subsidiary and commissions’ income from
unconsolidated subsidiary for the three-months ended March 31, 2006 and 2005 was
approximately $60,000 and $69,000, respectively.
FINANCIAL
CONDITION
During
2005 and 2006, the Company funded its operations principally with financing
obtained from its principal stockholder. As of March 31, 2006, the Company owed
its principal stockholder $2.8 million. This indebtedness, together with further
advances, was restructured in 2007 as disclosed in Note 18. The Company’s
ability to continue as a going concern is still dependent upon its ability to
improve profitability above the break-even point, generate cash from its
receivables on a timely basis and to retain continued support from its
suppliers. The Company’s prior independent public accountants expressed doubt
about the Company’s ability to continue as a going concern in their report on
our 2005 annual audited financial statements.
The
Company's current ratio was 2.85 to 1 on March 31, 2006, compared to 1.23 to 1
on March 31, 2005. (Refer to CURRENT LIQUIDITY AND CAPITAL RESOURCES and FUTURE
OPERATIONS).
On March
31, 2006, total assets were approximately $12,362,000, compared to approximately
$12,924,000 in total assets on December 31, 2005. Decrease in total assets is
primarily due to inventory write-downs, increased bad debt reserves and sale of
certain fixed assets.
As of
March 31, 2006, the Company had approximately $416,000 in cash and cash
equivalents, compared to approximately $278,000 as of December 31,
2005.
Accounts
receivable increased by approximately $234,000 primarily as a result of slower
collections from major chain customer’s accounts.
Inventories
decreased by approximately $937,000, which is primarily the result of a
$1,000,000 inventory write down relating to the Plants segment.
Investment
in unconsolidated subsidiary increased by approximately $75,000, compared to
December 31, 2005, as a result of the equity on earnings for the period and a
$70,000 capital investment made during the first quarter.
Shareholders’
equity as of March 31, 2006, decreased by $1,831,000 mainly as a result of the
net loss for the three-month period then ended of approximately
$1,853,000.
During
the three months ended March 31, 2006, the Company issued 19,950 shares of
common stock in connection with awards of restricted stocks. The
awards did not result in net proceeds to the Company.
LIQUIDITY AND CAPITAL
RESOURCES
During
the quarters ended March 31, 2006 and 2005, the Company received advances from
its principal stockholder amounting to $1,500,000 and $3,500,000, respectively,
of which $2,917,000 were repaid with the proceeds of a bank loan obtained during
the first quarter of 2006, which is guaranteed by the principal stockholder. The
remaining indebtedness to the principal stockholder bears interest at the
then-current 90-day LIBOR plus 1.50%. The Company did not pay any commitment fee
or commission in connection with these loans. The Company’s Board of Directors
believes that the terms and conditions of the 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 shareholder
was exchanged for convertible preferred stock, as disclosed in Note 18 to the
accompanying financial statements
The
Company also finances its working capital needs from cash flow of operations as
well as from borrowings under facilities with commercial banks. As of March 31,
2006, the Company had a $3,500,000 long-term credit facility, all of which was
drawn as of such date. This credit facility is secured by certain real estate
(parcels of land in Garrochales, Puerto Rico and in Folkston, Georgia) and
certain equipment of the Company.
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 not normally high. Previously, the Nursery
operations required high quantities of plants in stock; however, as operations
have been reduced the inventory levels have also been
reduced.
ITEM
3.
CONTROLS AND
PROCEDURES
Disclosure Control 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 March 31, 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 March 31, 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.
Internal Control over
Financial Reporting
Not
Applicable.
PART II -
OTHER
INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
The
Company is a party to a number of 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 stock, 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 annually, for up to
five years, under similar terms.
ITEM
6.
EXHIBITS
Exhibits
No.
|
Exhibit
Description
|
|
|
10.1
|
Promissory
Note, dated January 27, 2006, in the amount of $1,500,000 payable to Mr.
and Mrs. Spector
(incorporated by reference to
the Company’s Current Report on Form 8-K dated February 2,
2006).
|
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
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
By:
|
/s/
Michael J. Spector
|
Michael
J. Spector, Chairman of the Board
and
Chief Executive
Officer
|
Date: January
15, 2009
By:
|
/s/ John
Upchurch
|
John
Upchurch, CPA
Chief
Financial Officer
|
Margo Caribe (PK) (USOTC:MRGO)
Historical Stock Chart
From May 2024 to Jun 2024
Margo Caribe (PK) (USOTC:MRGO)
Historical Stock Chart
From Jun 2023 to Jun 2024