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
June 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 00962
(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 SECOND QUARTER ENDED JUNE 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 Stockholders’ 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
|
28
|
PART
II – OTHER INFORMATION
|
29
|
Item
1
|
Legal
Proceedings
|
29
|
Item
2
|
Unregistered
Sales of Equity Securities and Proceeds
|
29
|
Item
3
|
Defaults
Upon Senior Securities
|
29
|
Item
4
|
Submission
of Matters to a Vote of Securities Holders
|
29
|
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 contemplated by such forward-looking
statements.
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 June 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.
Concurrently
with this Form 10-Q, the Company is filing its Quarterly Reports on Form 10-Q
for the quarters ended September 30, 2006 and as soon as practicable following
the filing of this Form 10-Q, will file its Quarterly Reports 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
June
30, 2006
(Unaudited)
ASSETS
|
|
2006
|
|
Current
assets:
|
|
|
|
Cash
and equivalents
|
|
$
|
273,805
|
|
Accounts
receivable, net
|
|
|
973,243
|
|
Accounts
receivable from major stockholder
|
|
|
89,453
|
|
Current
portion of inventories
|
|
|
1,952,661
|
|
Due
from equity investee
|
|
|
34,330
|
|
Prepaid
expenses and other current assets
|
|
|
217,058
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,540,550
|
|
|
|
|
|
|
Non-current
portion of inventories
|
|
|
458,176
|
|
Property
and equipment, net
|
|
|
4,024,617
|
|
Land
held for future development
|
|
|
1,182,833
|
|
Investment
in unconsolidated subsidiary
|
|
|
877,983
|
|
Notes
receivable
|
|
|
67,094
|
|
Goodwill
|
|
|
1,063,495
|
|
Other
assets
|
|
|
75,500
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,290,248
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
Current
liabilities:
|
|
|
|
Current
portion of long-term debt
|
|
$
|
168,686
|
|
Notes
payable
|
|
|
69,822
|
|
Accounts
payable
|
|
|
513,237
|
|
Accrued
expenses
|
|
|
382,988
|
|
Due
to related entity
|
|
|
41,496
|
|
Deferred
tax liability
|
|
|
17,417
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,193,646
|
|
|
|
|
|
|
Other
liabilities
|
|
|
66,813
|
|
Long-term
debt, net of current portion
|
|
|
3,679,454
|
|
Line-of-credit,
long-term
|
|
|
3,499,711
|
|
Notes
payable to major stockholder
|
|
|
2,921,866
|
|
|
|
|
|
|
Total
liabilities
|
|
|
11,361,490
|
|
|
|
|
|
|
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
|
|
|
5,656,345
|
|
Accumulated
deficit
|
|
|
(5,634,161
|
)
|
Treasury
stock, 49,750 common shares
|
|
|
(96,288
|
)
|
|
|
|
|
|
Total
stockholders’ deficiency
|
|
|
(71,242
|
)
|
|
|
|
|
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
11,290,248
|
|
See
accompanying notes to condensed consolidated financial
statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Quarter and Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
|
Quarter
Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
2,085,615
|
|
|
$
|
2,819,643
|
|
|
$
|
4,080,009
|
|
|
$
|
4,888,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,679,180
|
|
|
|
1,930,652
|
|
|
|
3,205,170
|
|
|
|
3,133,307
|
|
Non-recurring
inventory write-down
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
|
1,679,180
|
|
|
|
1,930,652
|
|
|
|
4,205,170
|
|
|
|
3,137,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
406,435
|
|
|
|
888,991
|
|
|
|
(125,161
|
)
|
|
|
1,755,382
|
|
Selling,
general and administrative expenses
|
|
|
1,093,838
|
|
|
|
729,837
|
|
|
|
2,282,816
|
|
|
|
1,600,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(687,403
|
)
|
|
|
159,154
|
|
|
|
(2,407,977
|
)
|
|
|
154,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
–
|
|
|
|
2,850
|
|
|
|
–
|
|
|
|
4,873
|
|
Interest
expense
|
|
|
(127,403
|
)
|
|
|
(101,738
|
)
|
|
|
(278,704
|
)
|
|
|
(165,837
|
)
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
24,049
|
|
|
|
21,512
|
|
|
|
29,309
|
|
|
|
44,234
|
|
Commissions
from unconsolidated subsidiary
|
|
|
29,730
|
|
|
|
37,233
|
|
|
|
84,794
|
|
|
|
83,950
|
|
Miscellaneous
|
|
|
4,498
|
|
|
|
(3,907
|
)
|
|
|
21,181
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses, net
|
|
|
(69,126
|
)
|
|
|
(44,050
|
)
|
|
|
(143,420
|
)
|
|
|
(30,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(756,529
|
)
|
|
|
115,104
|
|
|
|
(2,551,397
|
)
|
|
|
123,895
|
|
Income
(loss) from discontinued operations
|
|
$
|
(13,085
|
)
|
|
$
|
46,654
|
|
|
$
|
(71,178
|
)
|
|
$
|
62,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(769,614
|
)
|
|
$
|
161,758
|
|
|
$
|
(2,622,575
|
)
|
|
$
|
186,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share, from continuing
operations
|
|
$
|
(0.27
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.91
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share, from discontinued
operations
|
|
$
|
–
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net income (loss) per common share
|
|
$
|
(0.27
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.93
|
)
|
|
$
|
0.07
|
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
Six
Months Ended June 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
|
|
|
–
|
|
|
|
–
|
|
|
|
46,126
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46,126
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,622,575
|
)
|
|
|
–
|
|
|
|
(2,622,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2006
|
|
|
2,812,731
|
|
|
$
|
2,862
|
|
|
$
|
5,656,345
|
|
|
$
|
–
|
|
|
$
|
(5,634,161
|
)
|
|
$
|
(96,288
|
)
|
|
$
|
(71,242
|
)
|
See
accompanying notes to condensed consolidated financial statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,622,575
|
)
|
|
$
|
186,403
|
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
246,124
|
|
|
|
215,181
|
|
Provision
for bad debts
|
|
|
180,000
|
|
|
|
–
|
|
Non-recurring
inventory write-down
|
|
|
1,000,000
|
|
|
|
–
|
|
Non-competition
agreement amortization
|
|
|
–
|
|
|
|
36,905
|
|
Deferred
stock compensation
|
|
|
46,125
|
|
|
|
19,199
|
|
Equity
in earnings of unconsolidated subsidiary
|
|
|
(29,309
|
)
|
|
|
(44,234
|
)
|
(Gain)
on sale of equipment
|
|
|
(54,580
|
)
|
|
|
–
|
|
Changes
in assets and liabilities affecting cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(22,778
|
)
|
|
|
780,735
|
|
Accounts
receivable from related party
|
|
|
(36,676
|
)
|
|
|
–
|
|
Inventories
|
|
|
130,618
|
|
|
|
(738,851
|
)
|
Due
from related entity
|
|
|
337,679
|
|
|
|
(201,169
|
)
|
Prepaid
expenses and other current assets
|
|
|
151,850
|
|
|
|
19,032
|
|
Other
assets
|
|
|
13,843
|
|
|
|
(58,129
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(353,865
|
)
|
|
|
(271,431
|
)
|
Accrued
expenses
|
|
|
(68,509
|
)
|
|
|
(29,713
|
)
|
Due
to major stockholder
|
|
|
(84,500
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,166,553
|
)
|
|
|
(86,072
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash
disbursed relating to business acquisition
|
|
|
–
|
|
|
|
(2,600,000
|
)
|
Purchase
of property and equipment
|
|
|
(90,204
|
)
|
|
|
(142,279
|
)
|
Investment
in land for future development
|
|
|
(43,736
|
)
|
|
|
(8,000
|
)
|
Collection
of note receivable
|
|
|
–
|
|
|
|
3,050
|
|
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
|
|
|
(244,940
|
)
|
|
|
(2,247,229
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable issued to major stockholder
|
|
|
1,650,000
|
|
|
|
3,725,000
|
|
Proceeds
from long-term debt
|
|
|
3,144,801
|
|
|
|
(108,333
|
)
|
Repayment
of notes payable to major stockholder
|
|
|
(3,178,134
|
)
|
|
|
2,810,912
|
|
Repayment
of notes payable
|
|
|
(143,377
|
)
|
|
|
(2,787,983
|
)
|
Issuance
of common stock from exercise of stock options and stock
grants
|
|
|
–
|
|
|
|
16,522
|
|
Repayments
of long-term debt
|
|
|
(65,692
|
)
|
|
|
(575,578
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,407,598
|
|
|
|
3,080,540
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and equivalents
|
|
|
(3,895
|
)
|
|
|
747,239
|
|
Cash
and equivalents at beginning of period
|
|
|
277,700
|
|
|
|
234,872
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents at end of period
|
|
$
|
273,805
|
|
|
$
|
982,111
|
|
See
accompanying notes to
condensed
consolidated financial
statements.
MARGO
CARIBE, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Months Ended June 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 stopped 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 condensed
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 six months ended June 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-K for the fiscal year ended December 31,
2005.
The
accompanying unaudited condensed 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 June 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”).
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”) are 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
|
|
Six
Months
|
|
|
Ended
|
|
Ended
|
|
|
June
30, 2006
|
|
June
30, 2006
|
|
Stock-based
compensation expense:
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
24,301
|
|
|
$
|
46,126
|
|
|
|
|
|
|
|
|
|
|
Net
Compensation expense
|
|
$
|
24,301
|
|
|
$
|
46,126
|
|
|
|
|
|
|
|
|
|
|
Effect
on earnings per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(.01
|
)
|
|
$
|
(.02
|
)
|
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
|
|
Six
Months
|
|
|
Ended
|
|
Ended
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
161,758
|
|
|
$
|
186,403
|
|
|
|
|
|
|
|
|
|
|
Total
stock based compensation
expense
determined under fair value
based
method for all awards
|
|
|
(4,307
|
)
|
|
|
(10,156
|
)
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
157,451
|
|
|
$
|
176,247
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted – as reported
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted – pro forma
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
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
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
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
|
|
12.46%
|
|
N/A
|
|
24.45%
|
|
|
|
|
|
|
|
|
|
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 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 June 30, 2006, the allowance for doubtful accounts was $460,510.
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 loss 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
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 ($111,921 for the quarter and $161,488 for the
six 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 Financial Accounting Standards Board (FASB) issued Statement
No. 157 “Fair Value Measurement”. This Statement defines fair value, establishes
a framework for measuring fair value and provides guidance in determining fair
value measurements presently used in the preparation of financial statements
under other accounting pronouncements and expands disclosures about fair value
measurements. This Statement does not require any new fair value measurements.
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. 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”). 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”). SFAS 154 changes the requirements for
the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires retrospective application to prior
periods’ 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 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 of SFAS
151 had no significant effect on the Company’s result 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 $46,000 (approximately $0.02 per share),
during the six months ended June 30, 2006.
Note 6 -
Inventories
At June
30, 2006, inventories included the following:
Description
|
|
2006
|
|
|
|
|
|
Plant
material - current portion
|
|
$
|
640,281
|
|
Lawn
and garden products
|
|
|
451,451
|
|
Mulch
finished products
|
|
|
298,221
|
|
Raw
materials and supplies
|
|
|
562,708
|
|
|
|
|
|
|
Current
inventory
|
|
|
1,952,661
|
|
Plant
material – non-current portion
|
|
|
458,176
|
|
|
|
|
|
|
|
|
$
|
2,410,837
|
|
During
the first quarter of 2006, the Company noted a continued deterioration of the
Puerto Rico economy combined with significant consumer price increases that have
adversely 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 management’s best
estimate at that point in time. See Note 18 Subsequent
Events.
Note 7 - Property and
Equipment
At June
30, 2006, property and equipment included the following:
Description
|
|
2006
|
|
|
|
|
|
Real
estate property, including $450,000 in land
|
|
$
|
1,021,339
|
|
Leasehold
improvements
|
|
|
1,242,041
|
|
Shade
and green houses
|
|
|
1,521,642
|
|
Equipment
and fixtures
|
|
|
3,232,223
|
|
Transportation
equipment
|
|
|
353,353
|
|
|
|
|
|
|
|
|
|
7,370,598
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,345,981
|
)
|
|
|
|
|
|
|
|
$
|
4,024,617
|
|
As of
June 30, 2006 the accumulated amortization of leasehold improvements (including
shade and green houses) was approximately $950,000. Related
amortization expense for the six months period ended June 30, 2006 and 2005
amounted to approximately $46,000 and $48,000, respectively.
As of
June 30, 2006, leasehold improvements (including shade and green houses) at the
Plants Division had an unamortized book value of $1,606,613. 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” being
approximately .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 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 June 30,
2006 and for the six months ended June 30, 2006 and 2005, Salinas’ unaudited
statements of financial position and results of operations information were as
follows:
Assets
|
|
2006
|
|
|
|
|
|
Current
assets
|
|
$
|
2,366,470
|
|
Property
and equipment, net
|
|
|
546,691
|
|
|
|
|
|
|
|
|
|
2,913,161
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
173,745
|
|
Long-term
liabilities
|
|
|
108,334
|
|
|
|
|
|
|
Total
liabilities
|
|
|
282,079
|
|
Shareholders’
equity
|
|
|
2,631,082
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,913,161
|
|
|
|
|
|
|
Company’s
share of equity
|
|
$
|
877,983
|
|
Results
of Operations
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
615,057
|
|
|
$
|
550,660
|
|
Cost
of sales
|
|
|
326,436
|
|
|
|
242,940
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
288,621
|
|
|
|
307,720
|
|
General
and administrative expenses
|
|
|
200,607
|
|
|
|
174,884
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
88,014
|
|
|
$
|
132,834
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
29,309
|
|
|
$
|
44,234
|
|
For the
six months ended June 30, 2006, the change in the Company’s investment in
Salinas was as follows:
Description
|
|
Amount
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
618,674
|
|
Additional
investment
|
|
|
230,000
|
|
Equity
in earnings of unconsolidated subsidiary for 2006
|
|
|
29,309
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
$
|
877,983
|
|
The
balance due from Salinas, of $34,330 as of June 30, 2006, was substantially
collected subsequently.
Note 9 - Income per Common
Share
The
Company reports its earnings per share (EPS) using SFAS Statement No. 128,
“Earnings per Share” (“SFAS No. 128”). SFAS 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 June 30, 2005 have been
retroactively adjusted to reflect the effect of the stock
dividend.
|
|
Quarter
Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Basic
and diluted income (loss) per common share:
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(756,529
|
)
|
|
$
|
115,104
|
|
|
$
|
(2,551,397
|
)
|
|
$
|
123,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) discontinued operations
|
|
$
|
(13,085
|
)
|
|
$
|
46,654
|
|
|
$
|
(71,178
|
)
|
|
$
|
62,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(769,614
|
)
|
|
$
|
161,758
|
|
|
$
|
(2,622,575
|
)
|
|
$
|
186,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
$
|
2,812,731
|
|
|
$
|
2,791,923
|
|
|
$
|
2,812,620
|
|
|
$
|
2,787,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
incremented shares from assumed exercise of stock options
|
|
|
-
|
|
|
$
|
65,268
|
|
|
$
|
-
|
|
|
$
|
60,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average shares
|
|
|
2,812,731
|
|
|
$
|
2,857,191
|
|
|
$
|
2,812,620
|
|
|
$
|
2,848,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share, from
continuing operations
|
|
$
|
(0.27
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.91
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share, from discontinued
operations
|
|
$
|
–
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net income (loss) per common share
|
|
$
|
(0.27
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.93
|
)
|
|
$
|
0.06
|
|
For the
three and six months ended June 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 distribution of plants, sales of lawn and
garden products, production and sale of mulch and other related products, and
real estate. These segments were determined by the 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 loss associated with the discontinued landscaping
segment was reclassified to loss form discontinued operations. The
segment information for 2005 has been restated to reflect these changes and to
reclassify to the continuing segments certain general corporate overhead
expense, of $64,252 and $150,482 for the three an six months ended June 30,
2005, respectively, originally charged to the now discontinued landscaping
segment.
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 June 30, 2006
|
|
|
|
Plants
|
|
|
Lawn
& Garden Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
578,401
|
|
|
$
|
762,540
|
|
|
$
|
744,674
|
|
|
$
|
–
|
|
|
$
|
2,085,615
|
|
Inter-segment
revenues
|
|
|
–
|
|
|
|
–
|
|
|
|
45,701
|
|
|
|
–
|
|
|
|
45,701
|
|
Interest
income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest
expense
|
|
|
18,008
|
|
|
|
15,299
|
|
|
|
94,096
|
|
|
|
–
|
|
|
|
127,403
|
|
Depreciation
and amortization
|
|
|
74,709
|
|
|
|
11,273
|
|
|
|
29,057
|
|
|
|
–
|
|
|
|
115,039
|
|
Segment loss
|
|
|
(301,956
|
)
|
|
|
(224,037
|
)
|
|
|
(230,536
|
)
|
|
|
–
|
|
|
|
(756,529
|
)
|
Expenditures
for segment assets
|
|
|
1,630
|
|
|
|
–
|
|
|
|
11,189
|
|
|
|
20,961
|
|
|
|
33,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended June 30, 2005
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
609,106
|
|
|
$
|
1,137,498
|
|
|
$
|
1,073,039
|
|
|
$
|
–
|
|
|
$
|
2,819,643
|
|
Inter-segment
revenues
|
|
|
22,434
|
|
|
|
4,341
|
|
|
|
37,701
|
|
|
|
–
|
|
|
|
64,476
|
|
Interest
income
|
|
|
2,851
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,850
|
|
Interest
expense
|
|
|
63,449
|
|
|
|
–
|
|
|
|
38,289
|
|
|
|
–
|
|
|
|
101,738
|
|
Depreciation
and amortization
|
|
|
53,184
|
|
|
|
20,457
|
|
|
|
15,596
|
|
|
|
–
|
|
|
|
89,237
|
|
Segment
income (loss)
|
|
|
(9,888
|
)
|
|
|
(86,265
|
)
|
|
|
211,257
|
|
|
|
–
|
|
|
|
115,104
|
|
Expenditures
for segment assets
|
|
|
30,403
|
|
|
|
–
|
|
|
|
48,736
|
|
|
|
–
|
|
|
|
79,139
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
(1)
|
|
|
State
Line
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
1,127,380
|
|
|
$
|
1,589,891
|
|
|
$
|
1,362,738
|
|
|
$
|
–
|
|
|
$
|
4,080,009
|
|
Inter-segment
revenues
|
|
|
2,931
|
|
|
|
–
|
|
|
|
126,035
|
|
|
|
–
|
|
|
|
128,966
|
|
Interest
income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest
expense
|
|
|
58,971
|
|
|
|
37,836
|
|
|
|
181,897
|
|
|
|
–
|
|
|
|
278,704
|
|
Depreciation
and amortization
|
|
|
151,944
|
|
|
|
23,882
|
|
|
|
55,497
|
|
|
|
–
|
|
|
|
231,323
|
|
Segment
loss (1)
|
|
|
(1,631,737
|
)
|
|
|
(492,480
|
)
|
|
|
(427,180
|
)
|
|
|
–
|
|
|
|
(2,551,397
|
)
|
Segment
assets
|
|
|
4,432,582
|
|
|
|
917,629
|
|
|
|
4,755,078
|
|
|
|
1,184,959
|
|
|
|
11,290,248
|
|
Expenditures
for segment assets
|
|
|
2,466
|
|
|
|
–
|
|
|
|
87,738
|
|
|
|
43,736
|
|
|
|
133,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2005
|
|
|
|
Plants
|
|
|
Lawn
&
Garden
Products
|
|
|
State
Line
(2)
|
|
|
Real
Estate
|
|
|
Totals
|
|
Revenue
from external customers
|
|
$
|
1,200,518
|
|
|
$
|
1,991,814
|
|
|
$
|
1,696,357
|
|
|
$
|
–
|
|
|
$
|
4,888,689
|
|
Inter-segment
revenues
|
|
|
68,885
|
|
|
|
18,842
|
|
|
|
37,701
|
|
|
|
–
|
|
|
|
125,428
|
|
Interest
income
|
|
|
4,873
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,873
|
|
Interest
expense
|
|
|
111,612
|
|
|
|
31
|
|
|
|
54,194
|
|
|
|
–
|
|
|
|
165,837
|
|
Depreciation
and amortization
|
|
|
124,590
|
|
|
|
36,973
|
|
|
|
26,031
|
|
|
|
–
|
|
|
|
187,594
|
|
Segment
income (loss)
|
|
|
6,390
|
|
|
|
(168,151
|
)
|
|
|
285,656
|
|
|
|
–
|
|
|
|
123,895
|
|
Segment
assets
|
|
|
7,058,546
|
|
|
|
1,182,256
|
|
|
|
3,994,192
|
|
|
|
1,139,127
|
|
|
|
13,374,121
|
|
Expenditures
for segment assets
|
|
|
41,200
|
|
|
|
–
|
|
|
|
58,983
|
|
|
|
8,000
|
|
|
|
108,183
|
|
(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 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 six months ended June 30, 2006 and 2005, include
interest payments amounting to approximately $270,270 and $296,567,
respectively. There were no income tax payments for the six months ended June
30, 2006 and 2005.
Note 12 - Major
Customers
During
the six months ended June 30, 2006 and 2005, the Company’s two largest customers
accounted for approximately 38% ($150,000) and 11% ($427,000), and 39%
($1,100,000) and 7% ($200,000), 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 six months ended June 30, 2006 and 2005, the
Company’s two largest customers accounted for approximately 50% ($1,400,000) and
14% ($388,000) and 59% ($1,900,000) and 14% ($445,000) respectively of 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 six months ended June 30, 2006 and 2005, the
Company’s single largest customer accounted for approximately 31% ($427,000) and
20% ($346,000), respectively of the area’s net sales. 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 a 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 June
30, 2006, notes payable to the Company’s principal stockholder include four
notes totaling to $2,921,866 respectively, 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 debt.
For the
three months ended June 30, 2006 and 2005, interest expense on major stockholder
debt amounted to $34,593 and $73,960, respectively, and $66,790 and $107,981 for
the six months then ended.
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 agreement provides for
a maximum credit amount of $3,500,000 (of which $3,499,711 outstanding as of
June 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 2.75 basis points. The note is secured with 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. 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 ($439,737 outstanding as of June
30, 2006). The proceeds from the financing were used for the
acquisition of grinding equipment. The note has a maturity date of
September 30, 2012. The note bears interest at 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 ($246,494 outstanding as of June 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.
Note 16 – Other Related
Party Transactions:
During
the six months ended June 30, 2006 and for the year ended December 31, 2005, the
Company provided certain services on behalf of the principal stockholders and to
a Company owned by them. 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 services directly or indirectly on behalf of the
principal stockholders was terminated. See ITEM 5.
On
January 1, 2004, but retroactive to January 1, 2003, the Company and the
Spectors entered into a new lease agreement with respect to the main Puerto Rico
nursery farm. The lease has an initial term of five years 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 six months ended June 30, 2006 and 2005 amount to $125,000 and
$150,000, respectively.
In
connection with this lease, the Spectors also agreed to reimburse the Company
for the unamortized value of the leasehold improvements applicable to the Vega
Alta facility as of the date of termination of the lease.
During
the six months ended June 30, 2006 and 2005, $20,575 and $41,008, 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’s financial statements, for the three and
six months periods ended June 30, 2006, and 2005:
|
|
Quarter
Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales and other income
|
|
$
|
–
|
|
|
$
|
459,008
|
|
|
$
|
119,514
|
|
|
$
|
864,358
|
|
Cost
of sales
|
|
|
9,600
|
|
|
|
338,180
|
|
|
|
111,100
|
|
|
|
665,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(9,600
|
)
|
|
|
120,828
|
|
|
|
8,414
|
|
|
|
198,732
|
|
SG&A
expenses
|
|
|
3,485
|
|
|
|
138,426
|
|
|
|
79,592
|
|
|
|
136,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(13,085
|
)
|
|
$
|
(17,598
|
)
|
|
$
|
(71,178
|
)
|
|
$
|
62,508
|
|
Expenditures
for segment assets
|
|
$
|
–
|
|
|
$
|
13,672
|
|
|
$
|
–
|
|
|
$
|
42,096
|
|
Cost of
sales of the discontinued segment for the six month periods includes
depreciation expense of $14,801 in 2006 and $27,587 in 2005.
As of
June 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
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.
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 by an additional
$500,000.
Also in
December 2006 the Company foresaw that the market conditions for its State Line
products 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 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
October 19, 2007, the due date of the term loan with a principal balance of
$3,144,801 was extended to October 24, 2009 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 similar terms to those described in Note 16 above.
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
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 on all loan
payments on the remaining three 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
decided to 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,
Greenes 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 28,
2006.
Margo
Development was created for the development of residential projects in Puerto
Rico. To date, Margo Development’s operations and 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 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 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 consolidate financial
statements presented in this form.
RESULTS OF OPERATIONS FOR
THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
SUMMARY
For the
second quarters ended June 30, 2006 and 2005, the Company had a net income
(loss) from continuing operations of approximately ($757,000) and $115,000,
respectively which represents a income (loss) per common share from continuing
operations of ($0.27) and to $0.04, respectively. Also, for the
quarter ended June 2006 and 2005, the Company reported income (loss) of
($13,085) and $46,654 from discontinued operations,
respectively. This resulted in an income (loss) per common share from
discontinued operations of zero in 2006 and $0.02 in 2005.
For the
six months periods ended June 30, 2006, the Company had a net loss from
continuing operations of approximately ($2,551,000), compared to a net income of
approximately $124,000 for the same period in 2005. These amounts represent a
loss per common share of ($0.91) in 2006 and net income per common share of
$0.04 in 2005. For the same periods net income (losses) from discontinued
operations were ($71,000) in 2006 and $62,509 in 2005, which represents a (loss)
and net income per share of ($0.03) and $0.02, respectively.
Of the
total operating losses reported for the six months ended June 30, 2006
approximately ($2,124,000) relate to the 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, and tolls, which has forced customers to reduce their discretionary
spending. Also included in the Puerto Rico results are a non-recurring inventory
write-down of $1,000,000 and a $180,000 increase in the provision for doubtful
accounts recorded during the first quarter of 2006.
SALES
For the
quarter ended June 30, 2006, the Company's consolidated net sales from
continuing operations were approximately $2,086,000, compared to approximately
$2,820,000 for the same period in 2005, representing an overall decrease of
approximately $734,000 or 26%. For the six months ended June 30,
2006, the Company's consolidated net sales from continuing operations were
approximately $4,080,000, compared to approximately $4,889,000 for the same
period in 2005, representing an overall decrease of approximately $809,000 or
17%.
Net sales
by segment for the quarter and six month periods and the quarters ended June 30,
2006 and 2005, excluding inter-segment sales, are shown below:
|
|
Quarter Ended
June
30, 2006
|
|
|
Quarter Ended
June
30, 2005
|
|
|
Six
Months Ended
June
30, 2006
|
|
|
Six
Months Ended
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
State
Line
|
|
$
|
745,000
|
|
|
$
|
1,073,000
|
|
|
$
|
1,363,000
|
|
|
$
|
1,696,000
|
|
Plants
|
|
|
578,000
|
|
|
|
609,000
|
|
|
|
1,127,000
|
|
|
|
1,201,000
|
|
Lawn
& Garden
|
|
|
763,000
|
|
|
|
1,138,000
|
|
|
|
1,590,000
|
|
|
|
1,992,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,086,000
|
|
|
$
|
2,820,000
|
|
|
$
|
4,080,000
|
|
|
$
|
4,889,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landscaping
|
|
|
–
|
|
|
|
459,000
|
|
|
|
120,000
|
|
|
|
864,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,086,000
|
|
|
$
|
3,279,000
|
|
|
$
|
4,200,000
|
|
|
$
|
5,753,000
|
|
GROSS
PROFIT
For the
quarter ended June 30, 2006 the consolidated gross profit form continuing
operations was approximately 19% of net sales compared to appropriately 32% for
the same period in 2005.
For the
six months ended June 30, 2006, the consolidated gross profit from continuing
operations was approximately minus 3% of net sales compared to approximately 36%
for the same period in 2005.
Gross
profits (loss) by segments for the quarters and six months ended June 30, 2006
and 2005, excluding intercompany sales are as followed:
|
|
Quarter Ended
June
30, 2006
|
|
Quarter Ended
June
30, 2005
|
|
Six
Months Ended
June
30, 2006
|
|
Six
Months Ended
June
30, 2005
|
|
|
|
|
|
|
|
|
|
Continuing
Segments
|
|
|
|
|
|
|
|
|
State
Line
|
|
8%
|
|
37%
|
|
10%
|
|
35%
|
Lawn
& Garden
|
|
44%
|
|
32%
|
|
43%
|
|
37%
|
Plants (1)
|
|
3%
|
|
30%
|
|
(83%)
|
|
29%
|
|
|
|
|
|
|
|
|
|
Discontinued
Segment
|
|
|
|
|
|
|
|
|
Landscaping
|
|
–
|
|
26%
|
|
(31%)
|
|
23%
|
(1)
|
For
2005, State Line gross profit had been charged to reflect a
reclassification of certain expenses, totaling $111,920 for the quarter
and $161,487 for the six-month period, originally classified as
administrative to cost of sales.
|
(2)
|
Plants’
gross profits for the six months ended June 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 ($231,000) for the quarter ended
June 30, 2006, compared to a net income of approximately $211,000 for the
quarter ended June 30, 2005. During the second quarter of 2006, sales
were $375,000 below the same period of 2005.
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
$94,000 was incurred associated to the debt obtained for the acquisition of
fixed assets for this segment.
Total net
sales for the quarter ended June 30, 2006 and 2005 were approximately $745,000
and $1,073,000, respectively. Gross profit for this segment during
the quarter ended June 30, 2006 and 2005 was approximately 8% and 37%,
respectively. The fluctuations in sales and gross profits are
explained under the six months caption below.
Six
Months
State
Line segment’s net losses were approximately ($427,000) for the six months ended
June 30, 2006, compared to a net income of approximately $286,000 for the six
months ended June 30, 2005.
Total net
sales from State Line for the six month periods ended June 30, 2006 and 2005
were approximately $1,363,000 and $1,696,000, respectively. Gross
profit for this segment during the six months ended June 30, 2006 and 2005 was
approximately 10% and 35%, respectively. This segment’s gross profit
margin was adversely affected during the 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. Improvement in sales volumes should also result in improved
gross margins.
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
$182,000 were incurred associated to the debt obtained for the acquisition of
fixed assets for the improvement of this segment production.
State
Line segment reflected a decrease in net sales for the six month period and for
the quarter ended June 30, 2006 of $333,000 or (20%) when compared to the same
period in the prior year. This decrease results principally from the
fact that during 2006 this segment was in the process of negotiating contracts
with national hardware stores and its client base consisted mostly of
independent local stores and shops.
LAWN & GARDEN
SEGMENT
Quarter
The Lawn
& Garden segment’s net losses were approximately ($224,000) and ($86,000)
for the quarters ended June 30, 2006 and 2005, respectively. The
increase in net loss for the three months ended June 30, 2006, as compared to
the same period in the prior year, resulted from a decrease in sales of
approximately $375,000 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.
Total net
sales from the Lawn & Garden segment were approximately $763,000 for the
quarter ended June 30, 2006, compared to approximately $1,138,000 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.
The gross
profit for this segment for the three months ended June 30, 2006 increased by
twelve percentage points when compared to the same period in
2005. Gross profit for the second quarter of 2005 was 32% compared to
44% during the same period in 2006.
Six
Months
The Lawn
& Garden segment’s net losses were approximately ($492,000) and ($168,000)
for the six months ended June 30, 2006 and 2005, respectively. The
increase in net loss for the six months ended June 30, 2006, as compared to the
same period in the prior year, resulted from a decrease in sales of
approximately $402,000 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 bad debt
reserves.
Total net
sales from the Lawn & Garden segment were approximately $1,590,000 for the
six months ended June 30, 2006, compared to approximately $1,992,000 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.
PLANTS
SEGMENT
Quarter
The
Plants segment’s net loss was approximately ($302,000) for the quarter ended
June 30, 2006, compared to a net loss of approximately ($10,000) for the same
period in 2005.
Plant’s
segment sales for the second quarter ended June 30, 2006 were approximately
$578,000, compared to $609,000 during the same period in 2005. This
represents a reduction in sales of approximately $31,000 or
5%. 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. As a result, gross margins were 3% compared to 30%
during the same period last year.
Commissions
and equity in earnings from Salinas Holdings reported in this segment were
$54,000, compared to $59,000 for the same period in 2005.
Six
Months
The
Plants segment’s net loss was approximately ($1,632,000) for the six months
ended June 30, 2006, compared to a net income of approximately $6,000 for the
same period in 2005. This segment’s results were affected by the
reduction in sales experienced during the first and second quarters of 2006,
inventory write-downs of $1,000,000 and increase in uncollectible reserves of
approximately $90,000.
Plant’s
segment sales for the second quarter ended June 30, 2006 were approximately
$1,127,000, compared to $1,201,000 during the same period in
2005. This represents a reduction in sales of approximately $74,000
or 6%. Additionally, sales to large retailers were affected by the
adverse economic situation of Puerto Rico, which resulted in increased purchases
of bedding plants and certain plants which usually have low average selling
prices. This resulted in a decrease in gross margins from 29% in 2005
to a gross loss of (83%) in 2006.
Commissions
and equity in earnings from Salinas Holdings reported in this segment were
$114,000, compared to $128,000, for the same period in 2005.
LANDSCAPING SEGMENT
(DISCONTINUED)
The
Landscaping segment’s net loss was approximately ($71,000) for the six months
ended June 30, 2006 compared to a net income of approximately $63,000 for the
six months ended June 30, 2005. The net loss of the landscaping
segment for the six month period ended June 30, 2006 was primarily related to a
reduction in revenues of approximately $744,000 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 $2,283,000 and
$1,601,000 for the six months ended June 30, 2006 and 2005, respectively, and
$1,094,000 and $730,000 for the quarter ended June 30, 2006 and 2005,
respectively, representing increases of approximate 33% to 31% when compared to
the same periods in 2005. Included as part of the year-to-date 2006
expenses are $180,000 of additional reserve for uncollectible accounts, and six
months of expenses relating to State Line’s operations compared to four and one
half in same period of 2005. State Line was acquired effective
February 16, 2005, thus, in 2006, it has a full six-month period.
Also,
operating expenses for the first half of 2006 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 six month-impact of increase in
gas prices compared to approximately three months in 2005.
OTHER INCOME AND
EXPENSES
Interest
income for the six months ended June 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 six months ended June 30, 2006 and 2005, was approximately
$279,000 and $166,000, 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.
Participation
in income of unconsolidated subsidiary and commissions’ income from
unconsolidated subsidiary for the six month periods ended June 31, 2006 and 2005
was approximately $54,000 and $59,000, respectively. This decrease is
due to a reduction in sales of the unconsolidated subsidiary (Salinas Holdings,
Inc.) driven by reduced levels of production of sod during 2006 and the slowdown
in sales due to the economic situation of Puerto Rico.
FINANCIAL
CONDITION
The
Company's current ratio improved to 2.97 to 1 on June 30, 2006, compared to 2.27
to 1 on June 30, 2005. The improvement in the current ratio is principally due
to the funds received from the new long term debt agreement, which were used to
repay notes payable to bank, previously classified as current
liabilities.
On June
30, 2006, total assets were approximately $11,290,000, compared to approximately
$13,521,000 in total assets on December 31, 2005. The major
fluctuations in assets were:
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§
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As
of June 30, 2006, the Company had approximately $274,000 in cash and
equivalents, compared to approximately $278,000 as of December 31, 2005,
as decrease of $4,000.
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§
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Account
receivable decreased by approximately $157,000 primarily as a result of an
increase in the allowance.
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§
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Inventory
decreased by approximately $1,131,000 which is primarily the result of
inventory reductions and write-downs relating to the Plants
segment.
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§
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Investment
in unconsolidated subsidiary increased by approximately $259,000 as a
result of capital investment of $230,000 made during the six months and
approximately $29,000 of equity on earnings for the
period.
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Shareholders'
equity as of June 30, 2006, decreased by approximately $2,576,000, as a result
of the net losses for the six month period then ended of approximately
$2,623,000.
During
the six months ended June 30, 2006, the Company issued 19,950 shares of common
stock in connection with awards of restricted stock. The awards did
not result in net proceeds to the Company.
Liquidity and Capital
Resources
Since
January 1, 2005, the Company has received advances from its major stockholder of
$5,75,000, of which $2,917,000 were refinanced in the first quarter of 2006,
with a loan from a commercial bank with personal guarantees provided by the
principal stockholder. The Company did not pay any commitment fee or
commission in connection with the shareholder 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 major shareholder was converted into convertible preferred stock, as
disclosed in Note 18 to the accompanying financial statements.
The
Company also finances its working capital needs with borrowings under short-term
and long-term credit facilities with commercial banks, in addition to the loans
provided by its major stockholder. As of June 30, 2006, the Company
had a $3,500,000 revolving credit facility, all of which was drawn as of such
date. This credit facility is secured by real estate consisting of
parcels of land in Garrochales, Puerto Rico and in Folkston, Georgia and is also
personally guaranteed by the major stockholder. The Company is also obtaining
long-term financing for the expansion of its State Line operations.
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 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 June 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 June 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.
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 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.
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Exhibit
Description
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31.1
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CEO
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
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31.2
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CFO
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
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32.1
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CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act.
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32.2
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CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act.
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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.
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MARGO CARIBE,
INC.
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Date: January
15, 2009
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By:
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/s/
Michael J. Spector
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Michael
J. Spector, Chairman of the Board and Chief Executive
Officer
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Date: January
15, 2009
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By:
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/s/
John Upchurch
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John
Upchurch, Senior Vice President and Chief Financial
Officer
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