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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-15336
MARGO CARIBE, INC.
A PUERTO RICO CORPORATION - I.R.S. NO. 66-0550881
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
ROAD 690, KILOMETER 5.8
VEGA ALTA, PUERTO RICO 00692
REGISTRANT'S TELEPHONE NUMBER:
(787) 883-2570
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
---------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.001 par value,
held by non-affiliates of the registrant: $12,267,160 based on the last sales
price of $19 per share on March 15, 2000 and 645,640 shares held by
non-affiliates.
The registrant had 1,882,322 shares of common stock, $.001 par value,
outstanding as of March 15, 2000.
MARGO CARIBE, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS........................................................................................ 1
ITEM 2. PROPERTIES...................................................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... ................................. 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...................................................................... 11
ITEM 6. SELECTED FINANCIAL DATA........................................................................ 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION........................................................ 14
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK .................................................................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 21
ITEM 11. EXECUTIVE COMPENSATION......................................................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................... 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................................................29
PART I
ITEM 1. BUSINESS
GENERAL
The principal business of Margo Caribe, Inc. and its subsidiaries
(collectively, the "Company") is the production and distribution of tropical and
flowering plants, the sale and distribution of lawn and garden products as well
as landscaping design and installation services. The Company is also engaged in
seeking sites for the development of residential housing projects.
On February 9, 2000, the Company signed a letter of intent to merge with
iTract, LLC, a developmental stage internet company. To the extent the
transactions contemplated in the letter of intent are consumated, the Company
will cease being engaged in the current nursery and related businesses and would
be engaged in providing internet based marketing services. See "Proposed Merger
with iTract, LLC" herein.
PRINCIPAL OPERATIONS
During 1999 and 1998, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico"). During 1997, the Company also conducted
operations in South Florida. These operations are described below.
Puerto Rico Operations
The Company's operations in Puerto Rico are conducted at a 117 acre nursery
farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a
13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre
farm is leased from Michael J. Spector and Margaret D. Spector, who are
directors, officers and principal shareholders of the Company. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Lease and Option to Purchase Main
Nursery Farm" herein. The 13 acre facility in the Municipality of Barranquitas
is leased from Cali Orchids, Inc., an unrelated third party.
The Company's operations in Puerto Rico include Margo Caribe, Inc. (the
holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping
& Design, Inc. ("Landscaping"), Margo Garden Products, Inc. ("Garden Products"),
Rain Forest Products Group, Inc. ("Rain Forest"), and Margo Development
Corporation, all Puerto Rico corporations.
Nursery Farms, which operates under the trade name of Margo Farms del
Caribe, is engaged in the production and distribution of tropical and flowering
plants. Its products are primarily utilized for the interior and exterior
landscaping of office buildings, shopping malls, hotels and other commercial
sites, as well as private residences. In Vega Alta, Nursery Farms produces
various types of palms, flowering and ornamental plants, trees, shrubs, bedding
plants and ground covers. In Barranquitas, Nursery Farms produces orchids,
bromeliads, anthuriums, spathiphylum and poincettias. Its customers include
wholesalers, retailers, chain stores and
landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide
agricultural enterprise, Nursery Farms enjoys a 90% tax exemption under Puerto
Rico law from income derived from its nursery business in Puerto Rico.
The Company is a supplier of plants and lawn and garden products for The
Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and
garden products according to Nursery Retailer magazine. As of December 31, 1999,
Home Depot had opened two stores, and has announced plans to open seven
additional stores in Puerto Rico over the next three years.
During March 1999, the Company leased two additional parcels of land
(approximately 320 acres) from the Puerto Rico Land Authority with the intent of
relocating its existing Vega Alta facilities and corporate offices to this
property as well as to use this additional land to increase the Company's volume
of field grown material and to deversify within the nursery business by growing
turf (sod).
During the third quarter of 1999, the Company became the largest supplier
of live goods (plant material) to WalMart Stores, which presently has nine
stores throughout Puerto Rico.
Landscaping provides landscaping services to customers in Puerto Rico and
the Caribbean, including commercial as well as residential landscape design and
landscaping.
The Company was awarded a landscaping project for the Puerto Rico Art
Museum being constructed in San Juan, Puerto Rico. This landscaping project
commenced during the fourth quarter of 1999 at an approximate contract price of
$650,000.
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor of Sunniland Corporation's fertilizer and
pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico
and the Caribbean.
Rain Forest is engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock and gravels. Rain Forest's products are
marketed by Garden Products. The Company enjoys a tax exemption grant from the
Government of Puerto Rico for the manufacturing operations of Rain Forest.
Margo Development Corporation, incorporated in January 1998, has been
engaged in seeking real estate sites for the development of residential projects
in Puerto Rico.
On August 31, 1999, the Company entered into an option agreement to
purchase approximately 109 acres of land in the Municipality of Barceloneta,
Puerto Rico for possible development of a residential project. The Company paid
$47,500 for the option agreement, which will be applied to the purchase price of
the land of $950,000. This option expires on April 16, 2000.
2
South Florida Operations
On August 15, 1997, after a review of past and present performance of the
South Florida operation (Margo Bay Farms, Inc.), and in view of the strong
competition in that market, the Company's Board of Directors made the
determination to close this operation effective September 30, 1997, and dispose
of all related assets. On September 29 and November 28, 1997, the Company sold
the two nursery farms (a 54 acre and a 20 acre parcel) which comprised the
Company's facilities in South Florida.
Production
The Company's plants are propagated by using cuttings, plugs, liners, air
layers, seeds and tissue cultures. Cuttings are obtained from the Company's own
stock plants and from other nurseries for grow-out at the Company's facilities.
The newly planted cuttings take from two months to five years to mature into
finished products, depending on variety. Bedding plants and annuals take from
four to eight weeks to mature.
The Company's products are either field grown or container grown, depending
on the variety of plants and where they are grown. Most of these products start
out in small pots and are "stepped up" to larger pot sizes over time. The
Company produces both field and container grown material, as well as flowering,
bedding plants and hanging baskets.
Marketing
The Company's marketing efforts have been primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company targets construction and government projects which require extensive
landscaping. In addition, Landscaping provides landscaping design, installation
and maintenance services which complement the sales function. For large
retailers in Puerto Rico (such as The Home Depot, WalMart Stores, Kmart, and
Masso Expo), the Company develops promotional programs which include deliveries
to customer outlets and special pricing based on volume.
During 1999, the Company's two largest customers accounted for
approximately 26% of the Company's net sales. The first customer (The Home
Depot) accounted for 14% and the second customer (WalMart Stores) accounted for
12% of the Company's net sales.
During 1998 and 1997, the Company's single largest customer, Masso Expo
(formerly Builders Square) accounted for approximately 13% and 24%,
respectively, of the Company's net sales.
3
The Company does not have any significant long-term (over one year)
delivery contracts with customers, including landscaping contracts.
Financial Information Relating to Principal Operations
The following table sets forth information regarding operations at each of
the Company's operating locations for the years ended December 31, 1999, 1998
and 1997 as well as information regarding assets by location as of December 31,
1999, 1998 and 1997. The information is provided after the elimination of
intercompany transactions.
1999 1998 1997
------- ------- -------
(AMOUNTS IN 000'S)
SALES BY LOCATION:
Puerto Rico:
Plants $ 3,781 $ 3,019 $ 2,957
Lawn and garden products 1,120 862 1,390
Landscaping 1,300 1,468 1,724
South Florida -- -- 478
------- ------- -------
$ 6,201 $ 5,349 $ 6,549
======= ======= =======
OPERATING LOSS BY LOCATION:
Puerto Rico $ (165) $ (397) $ (722)
South Florida -- -- (517)
------- ------- -------
$ (165) $ (397) $(1,239)
======= ======= =======
IDENTIFIABLE ASSETS BY LOCATION:
Puerto Rico $ 8,917 $ 7,990 $ 8,952
South Florida -- -- --
------- ------- -------
$ 8,917 $ 7,990 $ 8,952
======= ======= =======
Trade Names and Trademark
The Company utilizes the Trade Names "Margo Farms" and "Margo Farms del
Caribe", and has registered the name "Margo Farms" as a trademark with the
United States Department of Commerce Patent and Trademark Office. In addition,
the Company has registered "Margo Farms del Caribe" (as a trade name) and "Rain
Forest" (as a trademark) with the Department of State of the Commonwealth of
Puerto Rico.
4
Competition
At the present time, the Company's sales efforts are primarily focused in
Puerto Rico and the Caribbean. The Company enjoys an advantage over its
competitors because it is the largest producer of quality nursery products in
Puerto Rico. The Company continues expanding its operations in Puerto Rico. Most
of the Company's competitors in Puerto Rico and the Caribbean are small
nurseries and landscapers.
Seasonality
The demand for plants in Puerto Rico is year round, with increased demand
during spring, late fall and winter.
Working Capital Requirements of the Industry
The nursery industry requires producers to maintain large quantities of
stock plants and inventory to meet customer demand and to assure a new source of
products in the future. As a result, producers need to invest significant
amounts of capital in stock plants and inventory. The Company believes that it
has sufficient working capital for its operations from cash flow generated from
operations and short-term borrowings.
Employees
At December 31, 1999, the Company had 144 full time employees, of which 124
were directly involved in nursery production activities, and 20 in sales,
accounting and administration. None of its employees are represented by a union.
Government Regulation
The United States Department of Agriculture ("USDA") inspects cuttings
imported into the United States by the Company. In addition, USDA regulations
control various aspects of the Company's plant production process, including
restrictions on the types of pesticides and fertilizers. All pesticides and
fertilizers utilized by the Company are approved by the Environmental Protection
Agency, as required by USDA regulations. The USDA prohibits the importation of
foreign soil into the United States and limits the size of plants that can be
imported into the United States. Puerto Rico is considered part of the United
States for purposes of the USDA regulations.
Shipments of products may also be subject to inspections by certain Puerto
Rico or state officials. These officials may quarantine or destroy plants that
are contaminated or infected by hazardous organisms.
The Company's operations are subject to the Fair Labor Standards Act which
governs such matters as minimum wage requirements, overtime and other working
conditions. A large
5
number of the Company's personnel are paid at or just above the federal minimum
wage level and, accordingly, changes in such minimum wage rate have an adverse
effect on the Company's labor costs.
Natural Hazards
The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of March 15, 2000, the Company had been unable to
obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities are
being constructed with fabricated steel in an attempt to reduce the damage from
any future storms. Each of the Company's locations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
Industry Segments
The Company has three reportable segments identified by line of business:
the production and marketing of tropical and flowering plants, the sale of
related lawn and garden products and the provision of landscaping services.
Certain financial information concerning this industry segment is set forth in
Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and in the Company's Consolidated Financial Statements
included as Item 8 to this Annual Report on Form 10-K.
INCOME TAXES
Federal Taxes
As a Florida corporation, through December 31, 1997, the Company was
subject to federal income taxes on its worldwide operations. For U.S. income tax
purposes, the Company had elected the benefits of Section 936 ("Section 936") of
the Internal Revenue Code (the "Code"), which provided a credit against the
Company's income tax liability based generally on a portion of wages paid by the
Company in Puerto Rico.
The Small Business Job Protection Act of 1996 (the "1996 Amendments")
enacted into law on August 20, 1996, amended Section 936 by repealing the credit
available under this Section subject to a ten-year grandfather rule applicable
only for corporations that were actively conducting a trade or business in
Puerto Rico on October 13, 1995. In light of the phase-out of the benefits of
Section 936, the Company decided to change its jurisdiction of incorporation to
Puerto Rico, where it enjoys substantial tax benefits as discussed below. As a
Puerto Rico corporation, effective January 1, 1998, the Company is generally
only subject to U.S. income
6
taxation to the extent it is engaged in a trade or business in the United States
or receives income from sources in the United States.
Puerto Rico Taxes
The Company is also subject to Puerto Rico income taxes from its Puerto
Rico operations. Subject to certain limitations, during 1997 the Company's
federal income tax liability was creditable against its Puerto Rico income tax
liability.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico
(Act. No. 225 of December 1, 1995, as amended) provides its nursery operations
with a 90% tax exemption for income derived from "bonafide" agricultural
activities within Puerto Rico, including sales within and outside Puerto Rico,
as well as a 100% exemption from property, municipal and excise taxes. The Act
defines "bona fide agricultural activity" to include the nursery business. The
Act became effective for taxable years commencing on or after December 1, 1995.
Rain Forest obtained a grant of tax exemption for its manufacturing
operations from the Puerto Rico Government under the Tax Incentives Act of 1987.
The grant provides a 90% tax exemption from income and property taxes and a 60%
exemption from municipal taxes. The grant is for a period of 15 years,
commencing January 1, 1997.
PROPOSED MERGER WITH iTRACT, LLC
On February 9, 2000 the Company announced that it entered into a
non-binding letter of intent to merge with iTract, LLC ("iTract"), a privately
held developmental stage internet company building a communication tool that is
designed to allow its users to deliver a targeted marketing campaign using
e-mail, fax and postal mail. To date, iTract has not earned any significant
revenues.
iTract will seek to address the needs of businesses that desire more
efficient, expedient and cost- effective ways to promote and communicate
products and services to their target audiences. iTract will target small to
medium sized businesses that want to reach potential customers at a lower cost
than traditional direct marketing. iTract's system is designed to allow users to
send out faxes, e-mails and postal mail in volume from the same document
directly off the computer at the same time. iTract is also building a
permission-based fax and e-mail list that is demographically organized and can
be custom configured to meet the client's marketing needs.
Under the proposed transaction, the Company would first reincorporate as a
Delaware corporation pursuant to a merger (the "Reincorporation Merger") with a
newly created Delaware corporation. A subsidiary of the new Delaware corporation
would then merge with iTract (the "iTract Merger"). As a result of the iTract
Merger, iTract members would receive 88% of the issued and outstanding shares of
common stock of the new Delaware corporation (on a fully diluted basis assuming
exercise of all outstanding stock options) in exchange for all the outstanding
membership interests of iTract. Thus, following the iTract Merger, iTract
members would control the new Delaware corporation, holding 88% of its common
stock, with the Company's current shareholders holding 12%. Prior to the
effective time of the iTract Merger, all outstanding stock
7
options held by officers, directors and employees of the Company would vest and
become immediately exercisable. Following the merger, the new corporation would
be named iTract, Inc. A majority of the Board of Directors of the merged company
would be composed of members designated by iTract, and iTract's management would
manage the merged company. The letter of intent does not provide for any
break-up fee. It is anticipated that the Reincorporation Merger will be a
taxable transaction for U. S. shareholders for federal income tax purposes.
It is a condition to the consummation of the iTract Merger that the Company
sell prior to the iTract Merger its nursery and other operating businesses. In
addition, as of the effective time of the merger, the Company must have at least
$5 million in cash and cash equivalents and not be subject to liabilities
exceeding $10,000 in the aggregate.
In connection with the execution of the letter of intent, Michael J.
Spector, President, Chief Executive Officer and the controlling shareholder of
the Company, and another major shareholder of the Company made a $2.0 million
loan to International Commerce Exchange Systems, Inc. ("ICES"), an indirect
parent company of iTract. The loan is payable in a single balloon payment on the
closing day of the iTract Merger. If the iTract Merger is not consummated, such
loan will be converted into common stock of ICES.
The parties anticipate that the transaction would close during the latter
part of the second quarter or early part of the third quarter of 2000, subject
to the negotiation of definitive agreements, the satisfactory completion of due
diligence examinations, and the satisfaction of various other conditions
customary and appropriate for this type of transaction, including the approval
of the merger by the majority of the Company's and iTract's equity holders, the
qualification of the iTract Merger as a tax-free reorganization for federal and
Puerto Rico income tax purposes, continued listing of the shares on the NASDAQ
Small Cap Market and obtaining an opinion from an investment banking firm
satisfactory to the Company that the transaction is fair to shareholders from a
financial point of view. The letter of intent provides that concurrent with the
execution of the merger agreement, Michael J. Spector will agree to vote his
Company shares, representing approximately 66% of the Company's outstanding
common stock, in favor of the merger. No assurance can be given that the Company
will reach a definitive merger agreement or that, if reached, the parties will
be able to satisfy the conditions to the consummation of the merger. If the
parties do not execute a merger agreement by April 14, 2000, the letter of
intent will be automatically terminated.
To the extent a definitive merger agreement is executed with iTract, the
Company plans to file a Registration Statement on SEC Form S-4 in connection
with the proposed transactions and mail a proxy statement/prospectus to the
Company's shareholders containing information about the proposed transactions.
Investors and shareholders are urged to carefully read the Registration
Statement and proxy statement/prospectus when they are available.
8
ITEM 2. PROPERTIES
During 1999, the Company conducted its operations from nursery facilities
located in Puerto Rico.
Vega Alta Nursery Facility
The Company leases a 117 acre nursery facility in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. The facility, which includes the
Company's corporate offices, consists of approximately 1,130,000 square feet of
shadehouses, propagation and mist facilities, as well as a 10,000 square foot
warehouse for the Company's lawn and garden products. The nursery facility also
has irrigation equipment and pump houses, shipping and storage areas, as well as
a home for a field supervisor.
The Vega Alta facility is leased from Michael J. Spector and Margaret D.
Spector (the "Spectors"), who are officers, directors and the major shareholders
of the Company, pursuant to a lease agreement dated January 1, 1993. The lease
provides for an initial term of five years subject to one additional renewal
term of five years at the option of the Company. During the initial term of the
lease, rent was $19,000 per month. The lease also provides that during the
renewal term, the rent increases to the greater of $24,000 per month, or the
original $19,000 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, 1993 to the WPI in effect on January 1, 1998. Under the lease, the Company
must pay all taxes on the property, maintain certain insurance coverage and
otherwise maintain and care for the property. The lease also contains an option
which permits the Company to purchase the property at its appraised value at any
time during the term of the lease. In consideration of the option, the Company
must pay $1,000 per month. On January 1, 1998, the Company exercised its renewal
option at a monthly rental of $24,000. The Spectors have committed to grant the
Company an option to extend the lease for an additional period of five years
ending December 31, 2007.
On January 1, 1994, the lease agreement was amended to include an
additional 27 acres of land adjacent to the nursery facility at a monthly rental
of $1,750. This amendment did not provide for renewal or purchase options for
this tract of land. Effective January 1, 1998, the Company and the Spectors
entered into an amendment to the lease agreement which grants the Company the
right to continue to lease the 27 acre parcel on a month to month basis. Either
party may terminate this portion of the lease upon 30 days prior written notice.
In connection with this amendment, the Spectors also agreed to reimburse the
Company by no later than March 1, 2001, the unamortized value (approximately
$45,000 at February 1, 2000) of the leasehold improvements applicable to such
parcel as of the date of termination. Effective February 1, 2000, the lease
agreement with respect to the 27 acre parcel terminated.
During the years ended December 31, 1999 and 1998, total lease payments to
the Spectors amounted to $309,000 (not including the monthly payments for the
option referred to above).
9
Barranquitas Nursery Facility
Effective January 1, 1997, the Company entered into a lease agreement with
Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial term of the lease, monthly payments amount to
$4,500. During the remaining four years of the initial term of the lease,
monthly payments amount to $5,000. During the first and second renewal terms,
monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
For the years ended December 31, 1999, and 1998 total lease payments
amounted to $60,000 and $45,000, respectively. Lease payments for 1998 reflect a
rent abatement of $15,000 due to damages caused by Hurricane Georges.
New Vega Alta Facility
On March 24, 1999, the Company leased two additional parcels of land from
the Puerto Rico Land Authority (an instrumentality of the Government of the
Commonwealth of Puerto Rico). The two parcels are adjacent to each other, have a
total capacity of 321 acres, and are located approximately one mile from the
Company's main nursery facility in Vega Alta. Among other things, the lease
agreement provides for an initial lease term of five years subject to three
additional renewal terms of five years, at the option of the Company. Lease
payments amount to $33,625 per year. During 1999, lease payments of $25,219 were
made. Lease payments for renewal terms are to be negotiated 90 days prior to
each renewal term.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market ("NASDAQ")
under the symbol MRGO.
The following table sets forth the high and low sales prices for the
Company's common stock, as reported by NASDAQ, for each of the calendar quarters
of 1999 and 1998. The last reported sales price for the Common Stock on March
15, 2000 was $19 per share.
1999 1998
-------------------- --------------------
QUARTER: HIGH LOW HIGH LOW
- -------- ---- --- ---- ---
First $ 4 $ 2 1/16 $ 3 $ 1 7/8
Second 3 1/2 2 1/16 2 1/2 1 5/16
Third 3 1/4 2 3/16 4 1 7/16
Fourth 2 7/8 1 15/16 3 2
There were approximately 78 holders of record of the common stock as of
December 31, 1999. This amount includes custodians, brokers and other
institutions which hold the common stock as nominees for an undetermined number
of beneficial owners.
On February 27, 1998, the Company purchased 20,000 shares of common stock
at a cost of $47,500. As of March 15, 2000, the Company had 1,882,322 shares of
common stock outstanding.
The Company did not pay any dividends on its common stock during 1999 or
1998. The payment of cash dividends in the future is dependent upon the
earnings, cash position and capital needs of the Company, as well as other
matters deemed relevant by the Company's Board of Directors.
Dividends paid on the Company's Common Stock are generally subject to a 10%
withholding tax at source under Puerto Rico tax laws. United States shareholders
may be entitled to a foreign tax credit, subject to certain limitations, in
connection with the imposition of the withholding tax.
Prior to the first dividend distribution for the taxable year, individuals
who are residents of Puerto Rico may elect to be taxed on the dividends at the
regular graduated rates, in which case the special 10% tax will not be withheld
from such year's distributions.
11
United States citizens who are non-residents of Puerto Rico may also make
such an election, except that notwithstanding the making of such election of the
10% withholding tax will still be made on any dividend distribution unless the
individual files with the Company prior to the first distribution date for the
taxable year a certificate to the effect that said individual's gross income
from sources within Puerto Rico during the taxable year does not exceed $1,300
if single, or $3,000 if married, in which case dividend distributions for said
year will not be subject to Puerto Rico taxes.
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for Margo Caribe, Inc. on a historical basis, for each of the five years ended
December 31, 1999. The selected financial data should be read in conjunction
with Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and the Company's Consolidated Financial Statements.
12
MARGO CARIBE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
Earnings Statement Data: 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Net sales $ 6,201,233 $ 5,349,244 $ 6,548,912 $ 6,108,865 $ 4,933,718
Gross profit 2,230,111 1,726,173 1,365,335 2,137,340 1,777,358
Selling, general and administrative expenses 2,395,350 2,122,976 2,604,106 2,130,114 2,110,380
Income (loss) from operations (165,239) (396,803) (1,238,771) 7,226 (333,022)
Loss before income tax provision (127,867) (1,112,837) (750,534) (553,722) (386,334)
Net loss (127,867) (1,112,837) (750,534) (577,214) (396,334)
Net loss per common share - basic and diluted ($ .07) ($ .59) ($ .40) ($ .30) ($ .21)
Weighted average number of common shares outstanding 1,875,322 1,878,655 1,895,322 1,895,322 1,895,322
Balance Sheet Data:
Working capital $ 4,306,446 $ 3,396,453 $ 4,151,894 $ 4,113,799 $ 5,020,099
Total assets 8,916,981 7,990,208 8,952,088 10,396,211 15,400,582
Long-term debt (excluding current portion) 338,597 85,880 252,883 427,078 354,707
Stockholders' equity 6,241,776 6,369,643 7,529,980 8,271,350 8,848,402
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
For the year ended December 31, 1999, the Company incurred a consolidated
net loss of approximately $128,000, compared to a net loss of $1,113,000 and
$751,000 in 1998 and 1997, respectively. These amounts represent a consolidated
net loss per common share of $.07, $.59 and $.40 for 1999, 1998 and 1997,
respectively.
The Company's net loss for the year ended December 31, 1999, was due to an
operating loss of approximately $165,000, which was offset by other income of
$37,000. The operating loss for the year ended December 31, 1999 was principally
due to an increase in selling, general and administrative expenses incurred
during the year.
The Company's net loss for the year ended December 31, 1998 was due to
three unrelated events experienced during the year. The first of these events
was a decrease in sales of approximately $1.2 million (when compared to 1997),
which precluded additional gross profit to absorb selling, general and
administrative expenses. The second and third events were non-operational in
nature. These included the write-down of approximately $202,000 to the carrying
value of a note receivable and a loss of $609,000 as a result of damages caused
by Hurricane Georges on September 21, 1998.
The Company believes that it currently maintains adequate insurance
coverage for its facilities and equipment. However, as of March 15, 2000, the
Company had been unable to obtain adequate crop insurance coverage at a
reasonable cost for its inventories nor business interruption coverage for its
operations. The Company intends to continue to seek to obtain crop insurance and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be successful in obtaining such
coverages.
During the year ended December 31, 1997, the Company closed its South
Florida operation and sold the major assets related to this operation,
represented by two parcels of land. Although the sale of these two properties
resulted in a gain of $474,574 for 1997, this gain was more than offset by a
loss from operations of approximately $1,239,000 of which $517,000 corresponded
to the South Florida operation, arising from storage and maintenance costs as
well as the write down associated with unsalable inventory and certain other
administrative costs related to the closing of the operation.
14
RESULTS OF OPERATIONS
Sales
Consolidated net sales for the year ended December 31, 1999 were
approximately $6,201,000, representing an increase of 16% over sales of
$5,349,000 in 1998. The increase in sales for 1999 was principally due to the
result of increased sales volume to chain stores such as The Home Depot and
WalMart Stores, as well as a sales contract of mature trees with the
Municipality of San Juan. Increases included sales of both plant material
($762,000) and lawn and garden products ($258,000), with Rain Forest products
representing the major increase. Sales of landscaping services decreased by
$168,000 due to higher volume of post-Hurricane Georges services performed
during the fourth quarter of 1998.
Consolidated net sales for the year ended December 31, 1998 were
approximately $5,349,000, representing a decrease of 18% from sales of
$6,549,000 in 1997. This decrease in sales for 1998 was principally due to a
reduction in sales of approximately $857,000 to one of the Company's major
customers (principally in sales of lawn and garden products), a decrease in the
volume of landscaping services of approximately $256,000 and the absence of
sales of the discontinued South Florida operation which had sales of
approximately $478,000 in 1997. These decreases were offset by increases from
new customer base as well as a sales contract with the Puerto Rico Department of
Transportation and Public Works of approximately $221,000.
Gross Profits
The following table sets forth certain information regarding the Company's
costs and expenses as a percentage of net sales.
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.0 67.8 79.2
------ ------ ------
Gross profit 36.0 32.2 20.8
Selling, general and administrative expenses 38.6 39.7 39.8
------ ------ ------
Loss from operations (2.6) (7.5) (19.0)
Interest income (expense), net .9 1.2 --
Other income (expenses), net (.4) (14.5) 7.5
Loss before income tax provision (2.1) (20.8) (11.5)
Income tax provision -- -- --
------ ------ ------
Net loss (2.1) (20.8) (11.5)
====== ====== ======
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 36%, 32%, and 21%, for the years ended December 31,
1999, 1998 and 1997, respectively.
15
The Company's consolidated gross profit for the year ended December 31,
1999 was 36% compared to 32% for 1998, representing an increase of 4%. This
increase in gross profit was spread among all business segments. Gross profit
from sales of plant material for 1999 was approximately 37% compared to 32% in
1998. This increase of 5% was due to higher margins under various sales
contracts during 1999, as well as sales of plant material during the Christmas
season. Gross profit from sales of lawn and garden products was approximately
38% for 1999, compared to 36% in 1998. This increase of 2% was due to higher
sales volume of Rain Forest products during 1999. Gross profit from sales of
landscaping services was approximately 25% for 1999 compared to 30% in 1998.
This decrease of 5% experienced during 1999 was directly related to an
unfavorable performance on a specific project during 1999.
The Company's consolidated gross profit for the year ended December 31,
1998 was 32% compared to 21% in 1997, representing an increase of 11%. This
increase in gross profit was directly related to the closing of the Company's
unprofitable South Florida operation during September 1997. To a lesser extent,
the Puerto Rico operation also had gross profit problems during 1997, arising
from excessive storage and maintenance costs of slow moving inventory.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses ("SG&A") for
1999 were approximately $2,395,000 compared to $2,123,000 in 1998, representing
an increase of 13% in dollar terms and a decrease of 1% as a percentage of sales
(due to increased sales in 1999). The increase in SG&A (in dollar terms) for
1999 was due to increases in shipping and selling costs (principally salaries)
as well as administrative salaries, a portion of which were classified as clean
up and debris removal in 1998, as a result of the damages caused by Hurricane
Georges.
The Company's SG&A for 1998 were approximately $2,123,000 compared to
$2,604,000 in 1997, representing a decrease of 18% in dollar terms. SG&A as a
percentage of sales remained at 40% in both 1998 and 1997. The decrease in
dollar terms was due to the non-recurrence of approximately $220,000 incurred at
the discontinued South Florida operation during 1997, as well as decreases in
shipping, travel and legal services during 1998.
Other Income and Expense
The decrease in interest income for the year ended December 31, 1999, when
compared to 1998, is due to lower yields obtained during 1999 on similar
investments.
The decrease in interest expense for the year ended December 31, 1999 when
compared to 1998, is due to reductions in the outstanding principal balances of
long-term debt, despite an increase in notes payable and long-term debt for in
the latter part of 1999.
16
Hurricane Georges
As previously mentioned, Hurricane Georges struck Puerto Rico on September
21, 1998. As with other hurricanes, the agricultural industry was the hardest
hit. At its Vega Alta facilities, the Company suffered moderate damage to all of
its fabricated steel structures (shadehouses) and near total destruction of all
its wooden shadehouses and its irrigation systems. Total property written down
as a result of the damages had a book value of approximately $171,000 at
December 31, 1998. At its Barranquitas facilities, moderate damage was also
sustained to a portion of its pull and cable shadehouses and its irrigation
system, however, all of the shadecloth covers were blown away. As of December
31, 1998 the Company had incurred expenses of approximately $696,000 in
connection with clean-up, restoration and debris removal at both locations.
The Company's inventory of lawn and garden products did not suffer any
damages. However, inventory of plant material sustained significant damages as a
result of damage and destruction to shadehouses at both Company locations.
Inventory destroyed at both of the Company's locations as of December 31, 1998
had a net realizable value of approximately $362,000. As of December 31, 1998,
the Company had received approximately $620,000 from its insurers for property
damages, for a loss of $609,000 from the damages caused by the hurricane.
During 1999, the Company received an assistance payment of $12,880 from the
Farm Service Agency of the United States Department of Agriculture for debris
removal from damages caused by the hurricane.
The Puerto Rico Department of Agriculture has committed to provide
assistance to bona-fide agricultural enterprises for damages caused by the
hurricane. At December 31, 1999, the Puerto Rico Department of Agriculture had
approved $111,885 in assistance, subject to the formalization of an agreement,
which among other things requires the facility to be operated as a nursery farm
for a minimum period of ten years from the date of the signing. Accordingly, the
Company recorded a receivable and a deferred revenue to account for the
assistance at December 31, 1999.
Write Down of Note Receivable
The Company owns a note receivable (refer to Note 5 to the accompanying
consolidated financial statements) from the sale of a former subsidiary to a
Dominican Republic company, which had a carrying value of approximately $302,000
at December 31, 1997. On February 12, 1997, the Company obtained a junior lien
on the borrower's property and equipment and modified the terms of the note by
waiving interest and principal payments until January 2000. On September 23,
1998, Hurricane Georges struck the Dominican Republic. The hurricane severely
damaged the former subsidiary's facilities. As a result of the damages caused by
the hurricane, the Company determined to write down the carrying value of the
note to $100,000 as of September 30, 1998. The write down, amounting to $201,621
was included as an other expense in the accompanying consolidated statement of
operations for the year ended December 31, 1998.
17
The borrower is now in default with certain modified repayment terms. As a
result, during the fourth quarter of 1999, the Company wrote down the carrying
value of the note to $20,000, and has included the $80,000 charge as an other
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1999.
Sale of Land in South Florida
During 1997, the Company sold two parcels of land in South Florida at an
aggregate gain of $474,574, arising from the Company's decision to close its
South Florida operation.
18
FINANCIAL CONDITION
At December 31, 1999, the Company had cash of approximately $1,083,000 and
short term investments of $500,000, compared to cash of $747,000 and short term
investments of $500,000 at December 31, 1998. The increase in cash at December
31, 1999 was principally due to cash flows from financing activities (with a net
increase of $824,000 in notes payable and long-term debt), offset by cash
outflows from operating activities ($151,000), and additions to property and
equipment ($395,000). At December 31, 1999, the Company's current ratio was 2.9
to 1 as compared to 3.2 to 1 at December 31, 1998.
The overall increase in total liabilities at December 31, 1999 (principally
notes payable and long-term debt) was due to increased production of plant
material inventory during 1999 as a result of inventory losses in 1998 from
damages caused by Hurricane Georges. As a result, the Company's debt to equity
ratio at December 31, 1999 was 43%, compared to 25% at December 31, 1998.
Stockholders' equity at December 31, 1999 decreased due to results of
operations for the year. There were no dividends declared nor issuance of
capital stock during the year ended December 31, 1999.
Significant Fourth Quarter Adjustments
During the third quarter of 1999, the Company recorded $150,000 in revenues
based on estimates of amounts to be received in hurricane assistance payments
from the Puerto Rico Department of Agriculture. During the fourth quarter, the
Company was informed by the Puerto Rico Department of Agriuclture that the
actual amount to be received in assistance payments was approximately $112,000.
Moreover, the Department of Agriculture informed the Company that the receipt of
the payments would be subject to an agreement that its nursery farm subsidiary
would remain operating as an agricultural business for ten years. Failure to
meet this requirement, could result in all or a portion of the amount received
as assistance payments being required to be repaid to the Department of
Agriculture. On the basis of this new information, during the fourth quarter of
1999, the Company took a charge against earnings of $150,000 to reverse the
revenue previously recognized during the third quarter of 1999 and recorded a
receivable and a deferred revenue of approximately $112,000 as of December 31,
1999.
Also, during the fourth quarter of 1999, the Company recorded a charge of
to earnings of $80,000 to write down the carrying value of a note receivable
from $100,000 to $20,000, see "Write Down of Note Receivable".
Inflation
The primary inflationary factors which may affect the Company's results of
operations and financial condition are the costs of labor and production
materials such as soil, pots, chemicals, fertilizer and plant cuttings. During
the last three years, the impact of inflation on the results of operations and
financial condition of the Company has been minimal due to the stability of wage
rates (except for the increase in minimum wage experienced during 1997) and the
availability of production materials from a wide variety of sources.
19
The Company does not anticipate that inflation will have a significant
effect on its future earnings or financial condition because increases caused by
inflation are ordinarily recovered through increases in prices.
Year 2000 Issue
The inability of computer hardware and software to recognize and properly
process data fields using a four-digit year to define the applicable year is
commonly referred to as the "Year 2000 Problem".
During 1999, the Company completed a review and evaluation of its hardware
and software programs and applications and modified and tested its software and
operating systems for Year 2000 compliance. As of the date of this report, the
Company's hardware and software systems were fully operational and the Company
had not experienced any material adverse effect on its operations as a result of
Year 2000 Problems, nor had the Company been aware of problems by either its
major suppliers or customers.
Future Developments
On February 9, 2000, the Company signed a letter of intent to merge with
iTract, LLC, a developmental stage internet company. To the extent the
transactions contemplated in the letter of intent are consumated, the Company
will cease being engaged in the current nursery and related businesses and would
be engaged in providing internet based marketing services (See Part 1, Item 1.
Business - "Proposed Merger with iTract, LLC").
Reclassifications
Certain reclassifications were made to the 1998 and 1997 consolidated
financial statements in order for them to be in conformity with the 1999
presentation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the
Company's Consolidated Financial Statements and Schedules and the Independent
Auditors' Report beginning on page F-1 of this Form 10-K. Supplementary data is
not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of March 15, 2000. The background and
experience of these persons are summarized in the paragraphs following the
table.
NAME (AGE AT MARCH 15, 2000) POSITIONS WITH THE COMPANY
- ---------------------------- --------------------------
Michael J. Spector (53) Chairman, President, Chief Executive Officer and Director
Margaret D. Spector (48) Secretary and Director
Blas R. Ferraiuoli (55) Director
Frederick D. Moss (71) Director
Michael A. Rubin (57) Director
Alfonso A. Ortega (46) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi (40) Vice President - Marketing
Each director of the Company holds office until the next annual meeting of
shareholders and until his or her successor has been elected and qualified.
Officers serve at the discretion of the Board of Directors. All of the executive
officers of the Company except Margaret D. Spector devote their full time to the
operations of the Company.
Background of Officers and Directors
Set forth below is a summary of the background of each person who was an
officer or director of the Company as of March 15, 2000.
MR. SPECTOR currently serves as the Chairman of the Board, Chief Executive
Officer and President of the Company. He has held these positions since the
organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary
and a director of the Company.
MRS. SPECTOR currently serves as the Secretary and as a director of the
Company. She has held these positions since the organization of the Company in
1981. Since July 1993, Mrs. Spector supervises the Company's lawn and garden
distribution business.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues
to hold that position. Since June 1994, he manages his own law firm in San Juan,
Puerto Rico. He was a partner in the law firm of Axtmayer, Adsuar, Muniz &
Goyco, San Juan, Puerto Rico from March 1994 to June 1994. Prior to March 1994,
he was a partner in the firm of Goldman, Antonetti, Cordova and Axtmayer. Mr.
Ferraiuoli practices civil, corporate and administrative law and has provided
services to the Company since 1987.
21
MR. MOSS was elected a director of the Company in 1988 and continues to
hold that position. Since 1986, he has been an independent financial consultant
in New York City. He has also served as the Chairman of the Board of Trustees of
the Cincinnati Stock Exchange since 1989.
MR. RUBIN was elected a director of the Company in 1995 and continues to
hold that position. Mr. Rubin is an attorney engaged in private practice. He has
been a partner in the law firm of Michael A. Rubin, P.A., Coral Gables, Florida,
for more than the past five years.
MR. ORTEGA currently serves as the Vice President, Treasurer and Chief
Financial Officer of the Company. He has held this position since he joined the
Company in January 1993.
MR. LLERANDI currently serves as Vice President of Marketing. He has held
this position since April 1993. He joined the Company in 1988 as Sales Manager
for Puerto Rico.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers to report their ownership of and
transactions in the Company's Common Stock to the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers.
Copies of these reports are also required to be supplied to the Company.
Specific dates for filing these reports have been established by the SEC, and
the Company is required to report in the annual report any failure of its
directors and executive officers to file by the relevant due date any of these
reports during the fiscal year ended December 31, 1999. Based solely on its
review of the copies of the report received by it, the Company believes that all
such filing requirements were satisfied, except that each of Blas R. Ferraiuoli,
Frederick D. Moss, Michael Rubin and Margaret D. Spector failed to timely file
one report each, related to receipt of stock options; Frederick D. Moss failed
to timely file two reports related to three purchases of common stock and Rene
Llerandi failed to timely file one report related to the purchase of common
stock.
22
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation of the
Company's chief executive officer during each of the three years ended December
31, 1999, 1998 and 1997. No other executive officer of the Company earned more
than $100,000 during 1999.
ANNUAL COMPENSATION
---------------------------------------
NUMBER OF
NAME OF INDIVIDUAL AND STOCK OPTIONS OTHER ANNUAL
POSITION WITH THE COMPANY SALARY BONUS GRANTED(2) COMPENSATION
------------------------- ------ ----- ------------- ------------
Michael J. Spector 1999 $104,000 $ - 2,500 $8,000(1)
Chairman, President, Chief 1998 104,000 - 2,500 8,000
Executive Officer and Director 1997 160,000 - - -
(1) Represents matching contribution under the Company's Salary Deferral
Retirement Plan.
(2) Includes 2,500 options granted to Mrs. Spector for each of 1998 and 1999.
Compensation of Directors
The directors of the Company who are not employees of the Company are paid
a quarterly retainer fee of $1,000 and an additional $1,000 for each meeting of
the board (or committee thereof) attended, plus any travel and out-of-pocket
expenses incurred in connection with the performance of their duties. No
separate fees are paid for committee meetings attended on the same day as a
regular Board meeting. The directors of the Company who are employed by the
Company do not receive additional compensation for serving as directors. The
Company also provides directors liability insurance for its directors.
As provided under the Company's 1998 Stock Option Plan ("the 1998 Plan")
adopted on April 23, 1998, any nonemployee director of the Company who is in
office on the first business day following any annual meeting of shareholders
shall automatically receive on such date an option to acquire 2,500 shares of
Common Stock at the market price on such date.
During 1999, Messrs. Ferraiuoli, Moss, Rubin and Mrs. Spector each received
options to acquire 2,500 shares of Common Stock at an exercise price of $2
1/2($23/4 for Mrs. Spector), expiring on May 17, 2009, in accordance with the
1998 Plan.
23
Grant of Stock Options
No stock options were granted to Mr. Michael J. Spector during the year
ended December 31, 1999. However, the table below provides certain information
regarding stock options granted to Mrs. Margaret D. Spector as discussed above,
which for SEC reporting purposes, Mr. Spector is deemed to beneficially own.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
# OF SHARES ----------------------
UNDERLYING % OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE PRICE EXPIRATION
NAME GRANTED(2) IN FISCALYEAR ($/SHARE)(3) DATE 5% 10%
- -------------------------- ---------- --------------- ------------ ------------ ------ ----
Michael J. Spector(1) 2,500 12.5% $2.75 05-17-09 $1,075 $3,200
(1) Represents options to acquire 2,500 shares granted to Margaret D. Spector.
(2) Options become exercisable at the rate of 20% on the first, second, third,
fourth and fifth anniversary of the grant date.
(3) The exercise price is based on the last sales price (at 110%) for the
Company's common stock on May 17, 1999, the date of grant.
Options Exercised During 1999 and Option Values at December 31, 1999
The following table sets information on outstanding options held by the
Company's chief executive officer and their value at December 31, 1999. There
were no exercises of options during 1999. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at
December 31, 1999, the last day the common stock traded during 1999. See Part 1,
Item 1. Business - "Proposed Merger with iTract, LLC" for a description of a
transaction that could cause all outstanding options to vest and become
immediately exercisable. The information in the table is based on the original
vesting schedule of the options without taking into account that such options
may become automatically exercisable as part of the iTract Merger.
24
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 12/31/99 AT 12/31/99 (1)(2)
SHARES ------------------- --------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector(1) - - 31,000 11,500 $331 $1,325
- ---------------
(1) Includes 12,500 options held by Margaret D. Spector, the wife of Michael J.
Spector.
(2) Based on the last sales price of $25/16 per share on December 31, 1999 and
an exercise price of $3.16, $3.44 and $1.65 for 20,000, 10,500 and 500
exercisable options, respectively, and an exercise price of $3.44 , $1.65
and $2.75 for 7,000, 2,000 and 2,500 of unexercisable options, respectively.
Employment Contracts
The Company does not have an employment contract with Michael J. Spector.
Salary Deferral Retirement Plan
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of the Puerto Rico Internal Revenue Code
of 1994. The retirement plan covers all employees of Margo Caribe, Inc. who are
at least 21 years of age and have completed one year of service. Under the terms
of the retirement plan, the Company matches up to 100% of the pre-tax
contributions made by employees in an amount equal to 10% of their basic salary
subject to a maximum of $8,000. For the year ended December 31, 1999, the
Company paid approximately $38,000 representing the matching contributions under
the retirement plan for all participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 15, 2000, the number of
shares of common stock of the Company owned beneficially by the following
persons: (a) each director of the Company; (b) all executive officers and
directors of the Company as a group; and (c) each person known to the Company
who owns more than 5% of the outstanding common stock of the Company. Unless
otherwise stated, all shares are held with sole investment and voting power.
25
SECURITY OWNERSHIP AS OF MARCH 15, 2000
NAME
(POSITION WITH THE COMPANY) AMOUNT BENEFICIALY OWNED(1) PERCENT OF CLASS(1)
-------------------------- --------------------------- ------------------
Michael J. Spector 1,279,182(2) 66.5%
(Executive Officer and Director)
Margaret D. Spector 1,279,182(2) 66.5%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis 185,249(3) 9.8%
D.H. Blair Holdings, Inc.
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 1005
(Five Percent Shareholder)
Frederick D. Moss (Director) 20,500 1.1%
Blas R. Ferraiuoli (Director) 11,000(4) (7)
Michael A. Rubin (Director) 11,000(5) (7)
All Executive Officers and 1,343,782(6) 68.9%
Directors as a Group
(7 persons)
- --------------------
(1) The percent of class held by each person includes the number of shares of
Common Stock the named person(s) has the right to acquire upon exercise of
stock options that are exercisable within 60 days of March 15, 2000 (except
in the case of Mr. and Mrs. Spector in which case all shares issuable upon
exercise of stock options are included whether or not exercisable within 60
days of March 15, 2000), but does not include shares of Common Stock
issuable upon exercise of stock options held by other persons.
(2) Includes 939,394 shares held directly by Mr. Spector and 297,288 shares held
by Mrs. Spector. Also includes stock options to acquire 30,000 and 12,500
shares held by Mr. Spector and Mrs. Spector, respectively. The Spectors
share voting and investment power over the shares owned by each other.
(3) This amount consists of 184,149 shares held in the name of D.H. Blair
Investment Banking Corp., a registered broker-dealer which is wholly-owned
by D.H. Blair Holdings, Inc., which in turn is wholly-owned by J. Morton
Davis and of 1,100 shares owned by Rosalind Davidowitz, the spouse of Mr.
Davis. This amount is based upon a Schedule 13G dated February 9, 1995, as
amended, filed with the Securities and Exchange Commission.
(4) Includes 7,000 shares issuable upon stock options exercisable on or within
60 days of March 15, 2000.
(5) Includes 3,500 shares issuable upon stock options exercisable on or within
60 days of March 15, 2000.
(6) Includes 42,500 shares issuable upon exercise of stock options granted to
Mr. and Mrs. Spector as described in footnote (1) above and 26,800 shares
issuable upon exercise of stock options granted to other officers and
directors that are exercisable on or within 60 days of March 15, 2000.
(7) Less than one percent.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Amount due from/to Principal Shareholder
In connection with the settlement of litigation with the Company's
former principal lender ("the Bank"), on May 29, 1996 the Company advanced
$340,158 on behalf of Michael J. Spector, which was the portion of the
settlement that corresponded to claims made by the Bank against Mr. Spector in
his individual capacity. This amount was reduced by $66,506 that was due to Mr.
Spector in connection with the purchase in 1996 of a residence from a
partnership controlled by Mr. Spector. During 1997, the Company charged Mr.
Spector for certain expenses paid on his behalf. During March 1998, the amount
owed by Mr. Spector was converted into a non-interest bearing note due on March
2001. At December 31, 1999 and 1998, Mr. Spector owed the Company $290,226.
Lease and Option to Purchase Main Nursery Farm
Effective January 1, 1993, the Company and the Spectors entered into a
lease agreement with respect to the main Puerto Rico nursery farm. The lease had
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 was set at
$19,000 per month. During the renewal term, the rent increases to the greater of
(x) $24,000 per month or (y) the original $19,000 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, 1993 to the WPI in effect on January 1, 1998.
Additionally, the Company must pay all taxes on the property, maintain certain
insurance coverages and otherwise maintain and care for the property. The lease
also contains an option which permits the Company to purchase the property at
its appraised value at any time during the term of the lease. In consideration
of the option, the Company must pay the Spectors $1,000 per month. On January 1,
1998, the Company exercised its renewal option at a monthly rental of $24,000.
The Spectors have committed to grant the Company an option to extend the lease
for an additional period of five years ending December 31, 2007.
Effective January 1, 1994, the lease agreement was amended to include an
additional 27-acre tract of land adjacent to the existing nursery facility for
$1,750 per month. The lease terms for this additional tract did not include
renewal or purchase options. Effective January 1, 1998, the Company and the
Spectors entered into an amendment to the lease agreement which grants the
Company the right to continue to lease the 27 acre parcel on a month to month
basis. Either party may terminate this portion of the lease upon 30 days prior
written notice. In connection with this amendment, the Spectors also agreed to
reimburse the Company by no later than March 1, 2001, the unamortized value
(approximately $45,000 at February 1, 2000) of the leasehold improvements
applicable to said parcel as of the date of termination. This agreement
terminated effective February 1, 2000. See "Item 2 - Properties."
27
Certain Other Relationships
During 1999, the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
Investment by Michael J. Spector in International Commerce Exchange
Systems, Inc.
On February 24, 2000, Michael J. Spector together with another major
shareholder of the Company, made a $2.0 million loan to International Commerce
Exchange Systems, Inc. ("ICES"), the indirect parent company of iTract, LLC
("iTract"). The loan bears interest at 1% over Prime Rate and is payable in a
single balloon payment on the closing date of the merger of the Company with
iTract. If the merger with iTract is not consummated, said loan will be
converted into common stock of ICES. For more information regarding the iTract
transaction, see Part 1, Item 1. Business - "Proposed Merger with iTract, LLC".
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this subsection of Item 14 is set forth
in the Financial Statements and Independent Auditors' Report,
beginning on page F-1 of this Form 10-K. The index to Financial
Statements is set forth on page F-2 of this Form 10-K.
(2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts is included on page
F-31 of this Form 10-K. All other financial schedules have been
omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
(a)(1) and Financial Statements and Financial Statement Schedules.
(a)(2)
The information called for by this section of Item 14 is set
forth in the Financial Statements and Auditor's Report
beginning on page F-1 of this Form 10-K. The index to
Financial Statements and Schedules is set forth on page F-2
of this Form 10-K.
(a)(3) Exhibits. The Exhibits set forth in the following Index of the Exhibits are filed as a part of this
report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between Margo Nursery Farms, Inc. and Margo
Transition Corp., (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated December 31,
1997).
(2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo Transition Corp., dated December 15, 1997,
(incorporated by reference to Exhibit 2(a) to the Company's Form 8-K dated December 31, 1997).
(2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into Margo Transition Corp., dated December 15,
1997, (incorporated by reference to Exhibit 2(b) to the Company's Form 8-K dated December 31, 1997).
(3)(a) Certificate of Incorporation as currently in effect, filed herewith.
(3)(b) Certificate of Amendment to Certificate of Incorporation is incorporated by reference to the
Company's Form 8-K dated June 1, 1998.
29
(3)(c) By-Laws as of January 1, 1998 are incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
(4)(a) Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 of Form S-8 Registration
Statement (No. 333-59619).
(4)(b) 1998 Stock Option Agreement (Incorporated by reference to Exhibit No. 4.2 of Form S-8 Registration
Statement (No. 333-59619).
(4)(c) Form of Stock Option Agreement (Incorporated by reference to Exhibit No. 4.3 of Form S-8 Registration
Statement (No. 333-59619).
(10) (a) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 filed April 15,1993:
(i) Lease Agreement dated January 1, 1993 between the Company and the Spectors.
(b) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed April 15, 1994:
(i) First Amendment to Lease Agreement dated January 1, 1994 between the Company and the Spectors.
(c) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994:
(i) Loan Commitment Agreement, dated December 15, 1994 between Puerto Rico Farm Credit ACA and the
Company.
(d) Material contract incorporated by reference from Form 8-K dated November 28, 1997
(i) Mortgage Note, dated November 28, 1997, in the amount of $475,000
(e) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 31, 1997:
(i) Lease and Purchase Agreement, dated October 31, 1996 among Cali Orchids, Inc. and the
Company.
(ii) Stock Option Agreement, dated August 9, 1996, with Frederick D. Moss.
(iii) Stock Option Agreement, dated August 9, 1996, with Blas R. Ferraiuoli.
(iv) Stock Option Agreement, dated August 9, 1996, with Michael A. Rubin.
(v) Stock Option Agreement, dated July 9, 1993, with Frederick D. Moss.
(vi) Stock Option Agreement, dated July 9, 1993, with Margaret D. Spector.
(vii) Stock Option Agreement, dated July 9, 1993, with Blas R. Ferraiuoli.
(viii) Stock Option Agreement, dated August 9, 1996, with Margaret D. Spector.
30
(f) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed March 31, 1998.
(i) Promissory note of the Spectors dated as of March 1, 1998.
(ii) Second Amendment to lease Agreement dated as of January 1, 1998,
between the Company and the Spectors.
(g) Material Contracts filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, filed
March 31, 1999:
(i) Lease agreement dated March 24, 1999 with the Puerto
Rico Land Authority.
(ii) Lease agreement dated March 24, 1999 with the Puerto
Rico Land Authority.
(21) List of Registrant's Subsidiaries (incorporated by reference to
Exhibit 21 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
(23) Consent of Deloitte & Touche
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K ("Form 8-K") dated February 8,
2000, reporting on Item 5 - "Other Items" the execution of a
letter of intent to merge with iTract, LLC.
(ii) Form 8-K dated March 14, 2000, reporting under Item
5 - "Other Items" the extension of the letter of intent with
iTract, LLC, until April 14, 2000.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 2000 By: /s/ Michael J. Spector, President
----------------------------------
Michael J. Spector, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 27, 2000 By: /s/ Michael J. Spector
-------------------------------------
Michael J. Spector, Chairman
of the Board and Chief Executive Officer
Dated: March 27, 2000 By: /s/ Margaret D. Spector
-------------------------------------
Margaret D. Spector, Director
Dated: March 27, 2000 By: /s/ Blas R. Ferraiuoli
-------------------------------------
Blas R. Ferraiuoli, Director
Dated: March 27, 2000 By: /s/ Michael A. Rubin
-------------------------------------
Michael A. Rubin, Director
Dated: March 27, 2000 By: /s/ Frederick D. Moss
-------------------------------------
Frederick D. Moss, Director
Dated: March 27, 2000 By: /s/ Alfonso A. Ortega
-------------------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Chief Financial and
Accounting Officer
32
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1999
MARGO CARIBE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE
---------------
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
SCHEDULES
Schedule II - Valuation and Qualifying Accounts F-31
All other schedules have been omitted since the required information is not
presented or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Margo Caribe, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheets of Margo Caribe,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index as Schedule II for
each of the three years in the period ended December 31, 1999. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Margo Caribe, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As discussed in Note 22, on February 9, 2000, the Company entered into a letter
of intent concerning a proposed merger after divesting its current core
business.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 3, 2000
Stamp No. 1634930
affixed to original.
F-2
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
---------- ----------
Current Assets:
Cash and equivalents $1,082,592 $ 747,390
Short term investments 500,000 500,000
Accounts receivable, net 1,101,722 1,228,572
Inventories 3,108,408 2,264,372
Current portion of notes receivable 475,000 -
Prepaid expenses 263,447 190,804
---------- ----------
Total current assets 6,531,169 4,931,138
Property and equipment, net 1,902,863 2,094,799
Due from shareholder 290,226 290,226
Notes receivable, net of current portion 67,915 620,413
Other assets 124,808 53,632
---------- ----------
Total assets $8,916,981 $7,990,208
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 129,656 $ 158,468
Notes payable 1,100,000 500,000
Accounts payable 812,672 665,140
Accrued expenses 182,395 211,077
---------- ----------
Total current liabilities 2,224,723 1,534,685
Deferred revenue 111,885 -
Long-term debt, net of current portion 338,597 85,880
---------- ----------
Total liabilities 2,675,205 1,620,565
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 250,000
shares authorized, no shares issued - -
Common stock, $.001 par value; 10,000,000
shares authorized, 1,915,122 shares issued,
1,875,322 shares outstanding 1,915 1,915
Additional paid-in capital 4,637,706 4,637,706
Retained earnings 1,698,443 1,826,310
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
---------- ----------
Total shareholders' equity 6,241,776 6,369,643
---------- ----------
Total liabilities and shareholders' equity $8,916,981 $7,990,208
========== ==========
See accompanying notes to consolidated financial statements.
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
1999 1998 1997
----------- ----------- ----------
Net Sales $6,201,233 $ 5,349,244 $6,548,912
Cost of Sales 3,971,122 3,623,071 5,183,577
---------- ----------- ----------
Gross profit 2,230,111 1,726,173 1,365,335
Selling, general and administrative expenses 2,395,350 2,122,976 2,604,106
---------- ----------- ----------
Loss from operations (165,239) (396,803) (1,238,771)
---------- ---------- ----------
Other income (expense):
Interest income 105,914 122,683 73,060
Interest expense (46,876) (62,020) (73,274)
Write-down of note receivable (80,000) (201,621) -
Recovery of loss (loss) from
damages caused by Hurricane
Georges, net of insurance proceeds 12,880 (609,009) -
Gain on sale of land in South Florida - - 474,574
Other income 45,454 33,933 13,877
---------- ---------- ----------
37,372 (716,034) 488,237
---------- ---------- ----------
Net loss $ (127,867) $(1,112,837) $ (750,534)
========== =========== ==========
Basic and diluted loss per common share $ (.07) $ (.59) $ (.40)
========== =========== ==========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
OUTSTANDING
COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
------------ ------ --------- -------- -------- ----------- ------
Balance at December 31, 1996 1,895,322 $1,915 $4,637,706 $3,689,681 $(48,788) $(9,164) $8,271,350
Realized loss on translation
adjustment
- - - - - 9,164 9,164
Net loss - - - (750,534) - - (750,534)
--------- ------ ---------- ---------- -------- -------- ----------
Balance at December 31, 1997 1,895,322 1,915 4,637,706 2,939,147 (48,788) - 7,529,980
Net loss - - - (1,112,837) - - (1,112,837)
Acquisition of treasury stock,
at cost
(20,000) - - - (47,500) - (47,500)
--------- ------ ---------- ---------- -------- -------- ----------
Balance at December 31, 1998 1,875,322 1,915 4,637,706 1,826,310 (96,288) - 6,369,643
Net loss - - - (127,867) - - (127,867)
--------- ------ ---------- ---------- -------- -------- ----------
Balance at December 31, 1999 1,875,322 $1,915 $4,637,706 $ 1,698,443 $(96,288) $ - $ 6,241,776
========= ====== ========== ========== ======== ======== ==========
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
Cash flows operating activities:
Net loss $ (127,867) $(1,112,837) $ (750,534)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 543,165 527,791 491,634
Write-down of note receivable 80,000 201,621 -
Loss on disposal of property and equipment
related to Hurricane Georges - 171,039 -
Realized loss on translation adjustment - - 9,164
Gain on sale of land in South Florida - - (474,574)
Provision for bad debts 86,000 35,900 37,515
Gain on sale of equipment (16,451) - -
Changes in assets and liabilities affecting cash flows from operating
activities:
Accounts receivable 152,735 (213,523) (80,517)
Inventories (844,036) 173,756 298,981
Prepaid expenses (72,643) (89,012) 14,244
Advances from (to) shareholder - 1,255 (17,829)
Other assets (71,176) 5,279 8,238
Accounts payable 147,532 276,822 (242,254)
Accrued expenses (28,682) 46,812 (12,421)
Income taxes payable - - (23,492)
---------- ---------- -----------
Net cash provided by (used in) operating activities (151,423) 24,903 (741,845)
---------- ---------- -----------
Cash flows from investing activities:
Decrease in short term investments - - 504,000
Purchases of property and equipment (394,688) (374,034) (109,639)
Proceeds from sale of equipment 59,910 - -
Proceeds from sale of land in South Florida - - 812,630
Increase in notes receivable (5,611) - (6,800)
Collection on notes receivable 3,109 40,000 -
---------- ---------- -----------
Net cash provided by (used in) investing activities (337,280) (334,034) 1,200,191
---------- ---------- -----------
Cash flows from financing activities:
Increase in notes payable 600,000 - -
Acquisition of treasury stock - (47,500) -
Proceeds from long-term debt 395,418 - -
Repayments of long-term debt (171,513) (126,229) (174,586)
---------- ---------- -----------
Net cash provided by (used in) financing activities 823,905 (173,729) (174,586)
---------- ---------- -----------
Net increase (decrease) in cash and equivalents 335,202 (482,860) 283,760
Cash and equivalents at beginning of year 747,390 1,230,250 946,490
---------- ---------- -----------
Cash and equivalents at end of year $1,082,592 $ 747,390 $ 1,230,250
========== ========== ===========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note 1 - Business and Summary of Significant Accounting Policies
Margo Caribe, Inc. and subsidiaries (all Commonwealth of Puerto Rico
corporations and collectively, the "Company") are primarily engaged in the
production and distribution of a wide range of tropical plants for sale to
interior and exterior landscapers, wholesalers and retailers. The Company is
also engaged in the manufacturing and distribution of its own line ("Rain
Forest") of planting media, sales and distribution of lawn and garden products,
and provides landscaping design installation and maintenance services. The
Company is also engaged in seeking real estate sites for the development of
residential housing projects.
The Company's primary facility is located in Vega Alta, Puerto Rico. From this
facility, the Company sells principally to customers in Puerto Rico and the
Caribbean.
Effective June 1, 1998, the Company adopted a holding company structure. The
restructuring was accomplished by means of Margo Nursery Farms, Inc. ("Margo")
transferring substantially all of its assets and liabilities to a newly formed
Puerto Rico subsidiary ("Newco") in return for all the outstanding stock of
Newco. Newco continued to conduct the business previously operated by Margo as a
wholly-owned subsidiary of Margo and operates under the name of Margo Nursery
Farms, Inc. Margo now acts as the holding company for Newco as well as the other
existing subsidiaries of Margo. In connection with the holding company
restructuring, Margo changed its corporate name to Margo Caribe, Inc.
As further described in Note 22, during 2000 the Company may dispose of all of
its operating businesses as part of a proposed merger.
(a) Principles of Consolidation
For the years ended December 31, 1999 and 1998, the accompanying consolidated
financial statements include the financial statements of Margo Caribe, Inc. and
its wholly-owned subsidiaries, Margo Nursery Farms, Inc., Margo Landscaping and
Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc. and
Margo Development Corporation. For the year ended December 31, 1997, the
consolidated financial statements
F-7
also include the financial statements of Margo Bay Farms, Inc. and its wholly
owned subsidiaries, Tropiflower, Inc. and Margo Imports, B.V. (a Netherlands
company). These entities were merged with and into Margo Bay Farms, Inc. in
1997, in connection with the Company's decision to close operations in South
Florida. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months of
less to be cash equivalents. At December 31, 1999 and 1998, cash and equivalents
include $500,000 invested in a certificate of deposit bearing interest at 5.3%
and 4.6%, respectively, which has been pledged as collateral for notes payable
(refer to Note 8).
(c) Inventories
Inventory of plant material includes the cost of seeds, cuttings, pots, soil,
chemicals, fertilizers, direct labor and an allocation of overhead costs such as
depreciation and rent, among others. Inventories of plant material are stated at
the lower of cost (first-in, first-out) or market. Inventories of lawn and
garden products are stated at the lower of average cost of market.
(d) Property and Equipment and Related Depreciation and Amortization
Property and equipment are carried at acquisition cost. Depreciation and
amortization are provided over the estimated useful lives of the respective
assets on a straight-line basis. Such useful lives range from four to twenty
years.
The Company considers depreciation of certain facilities and equipment as a
direct cost of production of inventory. As inventory is sold, such cost is
charged to cost of sales.
F-8
(e) Foreign Currency Translation
Assets and liabilities outside the United States and Puerto Rico are translated
to U.S. Dollars using exchange rates at the balance sheet date. Revenues and
expenses are translated at the average rates of exchange during the applicable
period. Effects of translation adjustments are deferred and included as a
separate component of shareholders' equity. There were no balances or
transactions involving foreign currency translation as of December 31, 1999 and
1998, or for the years then ended.
(f) Revenue Recognition
The Company recognizes sales of foliage and lawn and garden products upon
shipment from its facilities to customers. Revenues from landscaping services
are recognized as plants are installed at the customers' facilities. Certain
hurricane-related government assistance has been deferred and will be recognized
into income on a straight-line basis over a ten-year period during which certain
conditions must be complied with.
(g) Income Tax
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the use of the asset and liability method in accounting for income taxes.
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities.
Through December 31, 1997, the Company was a Florida corporation and filed a
final federal corporate income tax return for the taxable year then ended.
However, the Company elected to be treated as a possessions corporation under
Section 936 of the Internal Revenue Code, and accordingly, received a credit of
federal income tax payable for operations in Puerto Rico. Margo Bay Farms, Inc.,
a former wholly-owned Florida subsidiary, filed a final federal income tax
return for the year ended December 31, 1997.
F-9
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico ("Act No.
225" of December 1, 1995, as amended) provides the Company with a 90% tax
exemption for income derived from "bonafide" agricultural business, including
sales of nursery plants within Puerto Rico and outside Puerto Rico, as well as a
100% exemption from property, municipal and excise taxes.
(h) Loss per Common Share
The Company reports its earnings per share ("EPS") using Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires dual presentation of basic and diluted EPS. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
(i) Fair Value of Financial Instruments
The amounts included in the consolidated financial statements for cash and
equivalents, short term investments, accounts receivable, notes payable,
accounts payable and accrued expenses reflect their fair value due to the
short-term maturity of these instruments. The fair values of the Company's other
financial instruments are discussed in Notes 5 and 9.
(j) Impairment of Long-Lived Assets
The carrying value of property and equipment is evaluated periodically for
recoverability when considered in relation to the expected future undiscounted
cash flows of the underlying business over the estimated remaining useful life
of the asset.
(k) Accounting for Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans pursuant to the
provisions of Accounting Principles Board Opinion 25 and related
interpretations, which generally require that compensation cost be recognized to
the extent the market price of the related stock exceeds the exercise price at
the
F-10
measurement date. However, Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", provides an alternative
method for measuring compensation cost by measuring the fair value of the option
at the award date. Although the compensation cost measurement criteria is not
required to be adopted, SFAS 123 requires disclosure of pro forma information
regarding the effects of the application of its compensation cost measurement
criteria and of other information.
(l) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb estimated losses on existing accounts receivable that may
become uncollectible based on evaluations of collectibility and prior credit
experience. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the existing accounts
receivable and related allowance may change in the near term.
The Company has recorded a deferred tax asset of approximately $608,000 which is
offset in full by a valuation allowance. Realization of the deferred tax asset
is dependent on generating sufficient taxable income in the future. The amount
of the deferred tax asset considered realizable could change in the near term if
estimates of future income are increased.
F-11
Note 2 - Inventories
At December 31, 1999 and 1998, inventories comprised the following:
Description 1999 1998
- -------------------------------- ---------- -------
Plant material $2,417,102 $1,700,250
Lawn and garden products 485,017 347,637
Raw material and supplies 206,289 216,485
---------- ----------
$3,108,408 $2,264,372
Note 3 - Accounts Receivable
At December 31, 1999 and 1998, accounts receivable comprised the following:
Description 1999 1998
- --------------------------- ---------- -------
Trade receivables $1,054,120 $1,260,629
Hurricane assistance(Note 10) 111,885 -
Government reimbursement 50,000 57,887
Accrued interest 13,823 6,140
Employee advances 12,180 16,063
Other accounts receivable 17,714 11,553
---------- ----------
1,259,722 1,352,272
Less allowance for doubtful
accounts (158,000) (123,700)
---------- ----------
$1,101,722 $1,228,572
========== ==========
Note 4 - Short Term Investments
At December 31, 1999 and 1998, short term investments consisted of a $500,000
certificate of deposit bearing interest at 5.4% and 4.5%, respectively, which
was pledged as collateral for notes payable (refer to Note 8).
F-12
Note 5 - Notes Receivable
The Company owns a note receivable with an outstanding principal balance of
$996,962, from the sale of Cariplant S.A. ("Cariplant") a former Dominican
Republic subsidiary, to Altec International C. por A. ("Altec"), another
Dominican Republic company. The note is collateralized by the common stock and
personal guarantee of the major shareholder of Cariplant.
From the inception of the note in March 1993, the Company received several
payments through December 1995. However, Altec has been unable to comply with
the terms of the note.
Due to the unfavorable collection experience as well as the difficulties of
operating in the Dominican Republic, in 1994 Company management wrote down the
carrying amount of the note to $316,000, representing the estimated value of
Cariplant's land and related improvements, including buildings, shadehouses, and
fixed and installed equipment.
On February 12, 1997, the Company obtained a junior lien in Cariplant's property
and equipment and entered into an agreement with Altec to modify the repayment
terms of the unpaid principal balance of $996,962, with payments of principal
and interest commencing in the year 2000. Payment of interest on the note was
waived through January 1, 2000.
On September 23, 1998, the Dominican Republic was struck by Hurricane Georges
severely damaging Cariplant's facilities. As a result of the damages caused by
the hurricane, the Company determined to write down the carrying value of the
note to $100,000. The write down, amounting to $201,621 was included as an other
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1998.
Altec is now in default with the modified repayment terms. As a result, the
Company wrote down the carrying value of the note to $20,000, and has included
the $80,000 charge as other expense in the accompanying consolidated statement
of operations for the year ended December 31, 1999.
F-13
At December 31, 1999 and 1998, notes receivable comprised the following:
Description 1999 1998
- --------------------------------------------------------------------- -------------- -----------
Note receivable from Altec $ 20,000 $100,000
8% mortgage note, collateralized by land in South Florida with
interest payments due monthly and principal due in a balloon
payment on November 28, 2000 (refer to Note 17(a)) 475,000 475,000
10% note, collateralized by real
property 26,331 26,331
Non-interest bearing notes, due on demand,
Personally guaranteed by present Company personnel
21,584 19,082
-------- --------
542,915 620,413
Less current portion (475,000) -
-------- --------
$ 67,915 $620,413
======== ========
Amounts reflected in the balance sheet for notes receivable approximate their
current fair values based on market interest rates for comparable risks,
maturities and collateral. With respect to the Altec note, management believes
it is not practicable to estimate its fair value because of the difference
between the face value of the note and its carrying amount, as well as other
factors.
Note 6 - Property and Equipment
At December 31, 1999 and 1998, property and equipment comprised the following:
1999 1998
---- ----
Leasehold improvements $1,609,137 $1,590,145
Equipment and fixtures 1,534,280 1,618,312
Transportation equipment 326,422 407,266
Real estate property 224,327 224,327
---------- ----------
3,694,166 3,840,050
Less accumulated depreciation
and amortization (1,791,303) (1,745,251)
---------- ----------
$1,902,863 $2,094,799
========== ==========
F-14
During the years ended December 31, 1999, 1998 and 1997, depreciation expense
charged to production was approximately $293,000, $276,000, and $258,000,
respectively.
Note 7 Due from Shareholder
At December 31, 1999 and 1998, amounts due from shareholder principally arise
from the settlement of litigation with the Company's former principal lender as
well as other advances of $4,688 made by the Company on his behalf. In March
1998, the Company's major shareholder signed a non-interest bearing note due in
March 2001 for $285,538 of the outstanding balance.
Note 8 - Notes Payable
At December 31, 1999 and 1998, the Company had short-term borrowings with a
commercial bank in Puerto Rico, comprised of the following:
Description 1999 1998
- ------------------------------------ ---- ----
Unsecured commercial line of credit
of $1 million, bearing interest at
2% over Libor rate (8.15% at
December 31,1999)due in February 2000 $ 100,000 $ -
Note payable, collateralized by cash
equivalent invested in a certifi-
cate of deposit, bearing interest
at 1% over interest earned by the
certificate (6.3% at December 31,
1999)due on demand 500,000 -
Note payable, collateralized by short
term borrowings invested in a
certificate of deposit, bearing
interest at 1% over interest earned
by the certificate (6.4% and 5.5% at
December 31, 1999
and 1998, respectively)due on demand 500,000 500,000
---------- --------
$1,100,000 $500,000
========== ========
F-15
Note 9 - Long-Term Debt
At December 31, 1999 and 1998, long-term debt comprised the following:
Description 1999 1998
- ------------------------------------ ---- ----
Five-year term loans, bearing interest
at 2% over Libor rate (8.15% at
December 31, 1999), payable in
quarterly installments of $19,781,
through December 2004 $395,418 $ -
Five-year term loans, variable
interest rate, 8.25% and 8.0%
at December 31, 1999 and 1998,
respectively, payable in quarterly
installments of approximately
$31,000 through January 2000 and
$8,000 through October 2001,
including interest. The loans are
collateralized by transportation
and farm equipment 72,835 214,871
9.25% commercial loan, payable in
monthly installments of $2,000,
including interest, through April
2000, collateralized by real estate
property (prepaid during 1999) - 29,477
-------- --------
468,253 244,348
Less current portion (129,656) (158,468)
-------- --------
Long-term debt $338,597 $ 85,880
======== ========
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of long-term debt approximates the
recorded amounts.
The annual aggregate maturities of long-term debt are as follows:
Year Ending
December 31, Amount
------------ ------
2000 $129,656
2001 103,403
2002 79,128
2003 79,128
2004 76,938
-------
$468,253
========
F-16
Note 10 - Hurricane Georges
On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3
hurricane on the Saffir/Simpson scale. The hurricane severely damaged a portion
of the Company's facilities (shadehouses) and inventory of plant material.
For the year ended December 31, 1998, as a result of the damages caused by the
hurricane, the Company recorded the following loss:
Description Amount
----------- ------
Inventory damaged or destroyed $ 361,767
Restoration, clean-up and debris removal 696,373
Net carrying value of property destroyed 171,039
----------
1,229,179
Less: Proceeds from insurance claims (620,170)
----------
Loss from damages caused by the hurricane $ 609,009
==========
During 1999, the Company received an assistance payment of $12,880 from the Farm
Service Agency of the United States Department of Agriculture for debris removal
from damages caused by the hurricane. This assistance was recorded as other
income in the accompanying consolidated statement of operations for the year
ended December 31, 1999.
The Puerto Rico Department of Agriculture has committed to provide assistance to
bona-fide agricultural enterprises for damages caused by the hurricane. At
December 31, 1999, the Puerto Rico Department of Agriculture had approved
$111,885 in assistance, subject to the formalization of an agreement, which
among other things requires the facility to be operated as a nursery farm for a
minimum period of ten years from the date of signing. Accordingly, the Company
recorded a receivable and a deferred revenue to account for the assistance at
December 31, 1999.
Note 11 - Income Taxes
The Company provides for income taxes using the applicable statutory tax rates
in the related jurisdiction where it operates.
F-17
Set forth below are explanations for the differences between the income tax
provision (benefit) and the amount computed by applying the Puerto Rico
statutory income tax rate of 39% (for 1997, the federal statutory income tax
rate of 34% was used) to loss before income tax provision:
1999 1998 1997
----- ---- ----
Income tax benefit computed by applying
tax rate $(49,870) $(434,005) $(255,181)
(Increase) decrease in income
tax benefit resulting from:
Puerto Rico tax exemption (66,519) 334,951 141,706
Effect of Florida and Puerto
Rico taxes (benefits) - - (11,807)
Increase (decrease) in
valuation allowances 116,389 99,054 (469,100)
Federal tax attributes lost
as result of reorganization,
including net operating loss
carryforwards - - 580,960
Other differences - - 13,422
---------- ---------- ----------
$ - $ - $ -
========= ========== ==========
Deferred income taxes were recognized in the consolidated balance sheet at
December 31, 1999 and 1998 due to the tax effect of temporary differences and
loss carryforwards as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $603,048 $352,880
Valuation allowance for accounts
receivable 5,371 5,029
-------- -------
608,419 357,909
Less valuation allowance (608,419) (357,909)
-------- -------
Net deferred tax asset $ - $ -
======== ========
F-18
Note 12 - Loss Per Common Share
Basic and diluted loss per common share for the years ended December 31, 1999,
1998 and 1997 were determined as follows:
Basic loss per common share: 1999 1998 1997
- --------------------------- --------- ----------- --------
Net loss available to common
shareholders $(127,867) $(1,112,837) $(750,534)
========= =========== =========
Weighted average number of common
shares outstanding 1,875,322 1,878,655 1,895,322
========= =========== =========
Basic loss per common share $ (.07) $ .59) $ (.40)
========= =========== =========
Diluted loss per common share:
- -----------------------------
Net loss available to common
shareholders $(127,867) $(1,112,837) $(750,534)
========= =========== =========
Weighted average number of common
shares outstanding 1,875,322 1,878,655 1,895,322
Plus incremental shares from assumed
exercise of stock options - - -
---------- ----------- ---------
Adjusted weighted average shares 1,875,322 1,878,655 1,895,322
========== =========== =========
Diluted loss per common share $ (.07) $ (.59) $ (.40)
========== =========== =========
For the years ended December 31, 1999, 1998 and 1997, the effect of the assumed
exercise of stock options determined by using the treasury stock method was
antidilutive; thus no incremental shares were added to the weighted average
number of common shares outstanding.
Note 13 - Commitments and Contingencies
The Company is 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.
On August 31, 1999, the Company entered into an option agreement to purchase
approximately 109 acres of land in the Municipality of Barceloneta, Puerto Rico.
The Company paid $47,500 for the option agreement, which will be applied to the
purchase price of the land of $950,000. The option expires on April 16, 2000.
F-19
Note 14 - Shareholders' Equity
(a) Preferred stock
The certificate of incorporation of the Company authorizes the issuance of
250,000 shares of one cent ($0.01) par value serial preferred stock, and the
Board of Directors is authorized from time to time to divide the preferred stock
into series and to determine the number of shares of each series and the
relative rights, preferences and limitations of each such series.
(b) Treasury Stock
At December 31, 1999, the Company had 39,800 shares of common stock in treasury,
of which 19,800 shares were acquired in 1988 at a cost of $48,788, and 20,000
shares were acquired in 1998 at a cost of $47,500.
Note 15 - Lease and Option Agreements
(a) Property in Vega Alta, Puerto Rico
The primary Puerto Rico facility is leased from Michael J. Spector and Margaret
D. Spector (the "Spectors"), who are officers, directors and major shareholders
of the Company.
Effective January 1, 1993, the Company entered into a lease agreement with the
Spectors for an initial five year period at a monthly rental of $19,000. In
addition, the Spectors have released the Company from responsibility from any
claims arising from the Company's use of a defective fungicide in its operations
at the nursery facility. The Company had an option to renew this lease for an
additional five year period at the greater of $24,000 per month, or the original
$19,000 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, 1993 to the WPI
in effect on January 1, 1998. On January 1, 1998, the Company exercised its
option to renew the lease agreement with the Spectors at a monthly rental of
$24,000. The Spectors have committed to grant the Company an option to extend
the lease for an additional period of five years ending December 31, 2007.
F-20
Under the above lease agreement, the Company has the option to purchase the
nursery facility at any time during the term of the lease, based on the
property's appraised value. The Company pays $1,000 per month for this purchase
option, which amount is expensed when paid.
Effective January 1, 1994, the Company amended the lease agreement with the
Spectors to include an additional 27 acres of land adjacent to the nursery
facility at a monthly rental of $1,750. This amendment did not provide for
renewal nor purchase options towards the additional 27 acres of land. Effective
January 1, 1998, the Company and the Spectors entered into an amendment to the
lease agreement which grants the Company the right to continue to lease the 27
acre parcel on a month to month basis. Either party may terminate this portion
of the lease upon 30 days prior written notice. In connection with this lease
amendment, the Spectors also agreed to reimburse the Company by no later than
March 1, 2001 for the unamortized value (approximately $45,000 at February 1,
2000) of the leasehold improvements applicable to said parcel as of the date of
termination. Effective February 1, 2000, the lease agreement with respect to the
27 acre parcel terminated.
Total rental payments amounted to approximately $309,000 in 1999 and 1998 and
$249,000 in 1997.
(b) Property in Barranquitas, Puerto Rico
Effective January 1, 1997, the Company entered into a lease agreement with Cali
Orchids, Inc. to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial five-year term of the lease, monthly payments
amount to $4,500. During the remaining four years of the initial term of the
lease, monthly payments amount to $5,000. During the first and second renewal
terms, monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
F-21
Total rental payments amounted to $60,000, $45,000 and $54,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Lease payments for 1998
reflect a rent abatement of $15,000 due to damages caused by Hurricane Georges.
(c) Other Properties in Vega Alta, Puerto Rico
On March 24, 1999, the Company leased two additional parcels of land from the
Puerto Rico Land Authority (an instrumentality of the Commonwealth of Puerto
Rico). The two parcels are adjacent to each other, have a total area of 321
acres, and are located approximately one mile from the Company's main nursery
facility in Vega Alta. Among other things, the lease agreement provides for an
initial lease term of five years subject to three additional renewal terms of
five years, at the option of the Company. During the initial term, total lease
payments amount to $33,625 per year. During 1999, lease payments of $25,219 were
made. Lease payments for renewal terms are to be negotiated 90 days prior to
each renewal term.
(d) Aggregate Lease Obligations and Expenses
The Company's obligations under the above and other non-cancelable operating
lease agreements in force at December 31, 1999, assuming the Company exercises
its renewal option on the Barranquitas, Puerto Rico property and excluding the
monthly payments for the purchase option previously mentioned, are as follows:
Year ending Minimum
December 31, Lease Payments
------------ --------------
2000 $ 416,500
2001 415,700
2002 426,700
2003 132,200
2004 99,400
Thereafter 600,500
---------
$2,091,000
==========
Total rental expense under all operating lease agreements amounted to
approximately $400,000, $354,000 and $303,000, for the years ended December 31,
1999, 1998 and 1997, respectively.
F-22
Note 16 - Stock Option and Salary Deferral Plans
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan").
Outstanding options granted under the previous plan, including all related
obligations and commitments, will continue to be honored by the Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can
award options to purchase up to 200,000 shares of common stock (exclusive of
outstanding options under the previous plan) to eligible employees at 100% of
the fair market value at the time 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 2,500 shares of
common stock to each non-employee director on the first business day following
every annual meeting of shareholders.
Options vest ratably over a period of five years, become exercisable one year
from the date of grant and expire ten years after the date of grant. The status
of the stock options granted under the 1998 Plan and the prior 1988 Plan as of
December 31, 1997, 1998 and 1999, and changes during the years ended on those
dates, are as follows:
Price per Share
---------------------------------------
Weighted
Average
Description Shares Range Price
- ----------------------------------------------- --------------- ----------------------- -----
Outstanding, January 1, 1997 113,750 $2.00 to $3.44 $3.06
Granted - - -
Exercised - - -
Forfeited (27,500) 2.00 to 3.13 2.88
-------- -------------- ----
Outstanding, December 31, 1997 86,250 2.00 to 3.44 3.12
Granted 31,000 1.50 to 1.94 1.81
Exercised - - -
Forfeited (1,250) 2.00 2.00
-------- -------------- ----
Outstanding, December 31, 1998 116,000 1.50 to 3.44 2.78
Granted 20,000 2.25 to 2.75 2.41
Exercised - - -
Forfeited (1,500) 1.94 to 3.13 2.73
-------- -------------- ----
Outstanding, December 31, 1999 134,500 $1.50 to $3.44 $2.72
======== ============== =====
F-23
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Excercisable
-------------------------------------------- -- ---------------------------------
Weighted Average Weighted
Remaining Average Weighted Average
Range of Contractual Exercise Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ------------- -------- ----------- --------------
$2.88 - $3.16 43,500 3.5 $ 3.01 43,500 $3.01
3.13 - 3.44 40,500 6.6 3.26 24,300 3.26
1.50 - 1.94 30,500 8.4 1.81 6,100 1.81
2.25 - 2.75 20,000 9.4 2.41 - -
- ---------------- --------- ----------- ------- -------- ------
$1.50 - $3.44 134,500 6.4 $2.72 73,900 $2.99
=============== ========= =========== ======= ======== ======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in measuring stock based
compensation, including options. Accordingly, no compensation expense has been
recognized for options granted under both plans. Had compensation expense been
determined based upon the fair value at the grant date for awards under any plan
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS
No. 123") the Company's net loss and net loss per share, on a pro forma basis,
would not have significantly changed from those reported. The Company did not
recognize compensation cost for the options granted to non-employees pursuant to
the requirements of SFAS No. 123 because its effect was not significant.
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations
under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers
all employees who are at least 21 years old and have completed one year of
service. The Company did not make any cash contributions to the retirement plan
during 1998. For the year ended December 31, 1999, the Company paid
approximately $38,000, representing the matching contributions under the
retirement plan for all participants.
F-24
Note 17 - Supplemental Disclosures for the Statements of Cash Flows
(a) Non-Cash Investing Activities
During the year ended December 31, 1999, fully depreciated equipment with a cost
of $454,877 was written off, and equipment with a cost of $66,129 and a book
value of $43,459 was sold at a gain of $16,451. Also, during 1999, an account
receivable and a deferred revenue in the amount of $111,885 were established in
connection with certain government assistance.
During the year ended December 31, 1998, the Company wrote off fully depreciated
equipment with a cost of $505,070. Also during 1998, the Company wrote off
leasehold improvements with a cost of $365,278 and a book value of $171,039, as
a result of damages caused by Hurricane Georges.
During the year ended December 31, 1997, the Company wrote off stock plants with
a cost of $97,277 and a book value of $72,951. The write off was charged to an
accrual made as of December 31, 1996, for the possible impairment of assets at
the Company's South Florida location.
During 1997, the Company sold two properties at its South Florida location with
a cost of $1,088,594 and a book value of $990,105. Included in the determination
of the $474,574 gain on the sale of the property sold were $177,049 representing
the remaining balance of the accrual made at December 31, 1996 for the possible
impairment of assets at the Company's South Florida location. In connection with
the sale of one of the properties, the Company received a $475,000 mortgage note
from the buyer as part of the sales price.
(b) Other Cash Flow Transactions
During the years ended December 31, 1999, 1998 and 1997, the Company made
interest payments of approximately $44,400, $62,000, and $75,500, respectively.
During the years ended December 31, 1999, 1998 and 1997, the Company did not
make any income tax payments.
F-25
Note 18 - Major Customers
During 1999, the Company's two largest customers accounted for approximately 26%
($1,592,000) of the Company's net sales. The first customer accounted for 14%
($864,000) and the second customer accounted for 12% ($728,000) of the Company's
net sales.
During 1998 and 1997 the Company's single largest customer accounted for
approximately 13% ($683,000) and 24% ($1,540,000), respectively, of the
Company's net sales.
Note 19 - Disposal of Margo Bay Farms, Inc.
On August 15, 1997, after a review of past and present performance of the
Company's South Florida operation, and in view of the strong competition in that
market, inadequate sales levels and lack of profitability, the Company's Board
of Directors made the determination to close this operation effective September
30, 1997, and dispose of all related assets. On September 29 and November 28,
1997, the Company sold the two nursery farms (a 54 acre and a 20 acre parcel)
which comprised the Company's facility in South Florida, resulting in a gain of
$474,574.
The South Florida operation which closed effective September 30, 1997, accounted
for net sales of approximately $478,000, and incurred a net loss of $27,000 for
the year ended December 31, 1997.
Note 20 - Significant Concentration of Risk
As discussed in Note 1, the Company's operations are principally concentrated in
Puerto Rico. The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of December 31, 1999, the Company had been unable
to obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
F-26
The Company believes it has taken reasonable precautions to protect its plants
and operations from natural hazards. The Company's newer facilities are being
constructed with fabricated steel in an attempt to reduce the damage from any
future storms. Each of the Company's operations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico.
Concentration of credit risk with respect to accounts receivable is mitigated by
monitoring the operations and financial strength of the Company's customers.
Certain short-term certificates of deposit are placed with local financial
institutions. Such credit risk is mitigated by depositing the funds with high
credit quality financial institutions and limiting the amount of credit exposure
in any financial institution.
Note 21 - Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS 131").
SFAS 131 establishes standards for the way an enterprise reports information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS 131 requires a
reconciliation of total segment revenue and expense items and segment assets to
the amount in the enterprise's financial statements. SFAS 131 also requires a
descriptive report on how the operating segments were determined, the products
and services provided by the operating segments, and any measurement differences
used for segment reporting and financial statement reporting.
The Company's management monitors and manages the financial performance of three
primary business segments: the production and distribution of plants, sales of
lawn and garden products and landscaping services. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income or
loss.
F-27
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
segments' financial condition and results of operations as if they were
independent entities.
1999
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
------------------ -------------------- ----------------- ---------------
Revenue from external customers $3,780,645 $1,120,342 $1,300,246 $6,201,233
Intersegment revenues 186,453 24,727 - 211,180
Interest income 105,914 - - 105,914
Interest expense 46,876 - - 46,876
Depreciation and amortization 444,765 33,868 64,532 543,165
Segment income (loss) 167,844 (132,515) (163,196) (127,867)
Segment assets 7,472,038 939,588 505,355 8,916,981
Expenditures for segment assets 296,380 53,015 45,293 394,688
1998
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
------------------ -------------------- ----------------- ---------------
Revenue from external customers $3,019,406 $ 862,050 $1,467,788 $5,349,244
Intersegment revenues 247,785 26,736 - 274,521
Interest income 122,683 - - 122,683
Interest expense 62,020 - - 62,020
Depreciation and amortization 447,285 22,436 58,070 527,791
Segment loss 899,698 142,692 70,447 1,112,837
Segment assets 6,405,425 761,623 823,160 7,990,208
Expenditures for segment assets 374,034 - - 374,034
1997
-------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
------------------ -------------------- ----------------- ---------------
Revenue from external customers $3,435,291 $1,389,617 $1,724,004 $6,548,912
Intersegment revenues 415,896 57,487 - 473,383
Interest income 73,060 - - 73,060
Interest expense 73,274 - - 73,274
Depreciation and amortization 412,716 22,652 56,266 491,634
Segment loss 331,731 239,249 179,554 750,534
Segment assets 7,411,884 827,389 712,815 8,952,088
Expenditures for segment assets 66,826 7,304 35,509 109,639
F-28
Note 22 - Subsequent Event
On February 9, 2000 the Company announced that it entered into a non-binding
letter of intent to merge with iTract, LLC ("iTract"), a privately held
developmental stage internet company building a communication tool that is
designed to allow its users to deliver a targeted marketing campaign using
e-mail, fax and postal mail. To date, iTract has not earned any significant
revenues.
iTract will seek to address the needs of businesses that desire more efficient,
expedient and cost- effective ways to promote and communicate products and
services to their target audiences. iTract will target small to medium sized
businesses that want to reach potential customers at a lower cost than
traditional direct marketing. iTract's system is designed to allow users to send
out faxes, e-mails and postal mail in volume from the same document directly off
the computer at the same time. iTract is also building a permission-based fax
and e-mail list that is demographically organized and can be custom configured
to meet the client's marketing needs.
Under the proposed transaction, the Company would first reincorporate as a
Delaware corporation pursuant to a merger (the "Reincorporation Merger") with a
newly created Delaware corporation. A subsidiary of the new Delaware corporation
would then merge with iTract (the "iTract Merger"). As a result of the iTract
Merger, iTract members would receive 88% of the issued and outstanding shares of
common stock of the new Delaware corporation (on a fully diluted basis assuming
exercise of all outstanding stock options) in exchange for all the outstanding
membership interests of iTract. Thus, following the iTract Merger, iTract
members would control the new Delaware corporation, holding 88% of its common
stock, with the Company's current shareholders holding 12%. Prior to the
effective time of the iTract Merger, all outstanding stock options held by
officers, directors and employees of the Company would vest and become
immediately exercisable. Following the merger, the new corporation will be named
iTract, Inc. A majority of the Board of Directors of the merged company would be
composed of members designated by iTract, and iTract's management would manage
the merged company. The letter of intent does not provide for any break-up fee.
It is anticipated that the Reincorporation Merger will be a taxable transaction
for U. S. shareholders for federal income tax purposes.
F-29
It is a condition to the consummation of the iTract Merger that the Company sell
prior to the iTract Merger its nursery and other operating businesses. In
addition, as of the effective time of the merger, the Company must have at least
$5 million in cash and cash equivalents and not be subject to liabilities
exceeding $10,000 in the aggregate.
In connection with the execution of the letter of intent, Michael J. Spector,
President, Chief Executive Officer and the controlling shareholder of the
Company, and another major shareholder of the Company made a $2.0 million loan
to International Commerce Exchange Systems, Inc. ("ICES"), an indirect parent
company of iTract. The loan is payable in a single balloon payment on the
closing day of the iTract Merger. If the iTract Merger is not consummated, such
loan will be converted into common stock of ICES.
The parties anticipate that the transaction would close during the latter part
of the second quarter or early part of the third quarter of 2000, subject to the
negotiation of definitive agreements, the satisfactory completion of due
diligence examinations, and the satisfaction of various other conditions
customary and appropriate for this type of transaction, including the approval
of the merger by the majority of the Company's and iTract's equity holders, the
qualification of the iTract Merger as a tax-free reorganization for federal and
Puerto Rico income tax purposes, continued listing of the shares on the NASDAQ
Small Cap Market and obtaining an opinion from an investment banking firm
satisfactory to the Company that the transaction is fair to shareholders from a
financial point of view. The letter of intent provides that concurrent with the
execution of the merger agreement, Michael J. Spector will agree to vote his
Company shares, representing approximately 66% of the Company's outstanding
common stock, in favor of the merger. No assurance can be given that the Company
will reach a definitive merger agreement or that, if reached, the parties will
be able to satisfy the conditions to the consummation of the merger. If the
parties do not execute a merger agreement by April 14, 2000, the letter of
intent will be automatically terminated.
Note 23 - Reclassifications
Certain reclassifications were made to the 1998 and 1997 consolidated financial
statements in order for them to be in conformity with the 1999 presentation.
F-30
SCHEDULE II
MARGO CARIBE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLLUMN D COLLUMN E
--------- --------- ---------------------------------- ----------------- -------------
BALANCE CHARGED TO COSTS CHARGED TO
BEGINNING AND OTHER BALANCE
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- --------- ---------------- ---------- ---------- ------------
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts $123,700 $86,000 $ - $(51,700) $158,000
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $ 76,000 $35,900 $11,800 $ - $123,700
======== ======= ======= ========== ========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 79,000 $37,515 $ - $(40,515) $ 76,000
======== ======= =========== ======== ========
F-31
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.(a) Certificate of Incorporation as currently in effect
23 Consent of Deloitte & Touche
27 Financial Data Schedule