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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, 2000
[_] 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: $1,936,920 based on the last sales
price of $3.00 per share on March 27, 2001 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 27, 2001.
MARGO CARIBE, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
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ITEM 1. BUSINESS................................................................ 1
ITEM 2. PROPERTIES.............................................................. 8
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.............. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................... 21
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 22
ITEM 11. EXECUTIVE COMPENSATION.................................................. 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 28
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......... 30
PART I
------
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains certain "forward looking statements" concerning the
Company's economic future performance. The words "expect", "anticipate" and
similar expressions are meant to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward
looking statements, which speak only as of the date made, and to advise readers
that various factors, including regional and national economic conditions,
natural disasters, competitive and regulatory factors and legislative changes,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligation, to update any forward looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
GENERAL
- -------
The principal business of Margo Caribe, Inc. and its subsidiaries
(collectively, the "Company") is the production and distribution of a wide range
of both indoor and outdoor tropical foliage 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 obtaining development
permits on a new site for the development of a residential housing project.
TERMINATION OF MERGER AGREEMENT WITH iTRACT, LLC
- ------------------------------------------------
On April 11, 2000, the Company entered into an agreement (the "iTract
Merger Agreement") to merge with iTract, LLC, a privately held developmental
stage internet company. The iTract Merger Agreement provided for the sale of all
the operating assets (subsidiaries) prior to the consummation of the merger.
Accordingly, on June 30, 2000, the Company entered into an agreement with
Empresas Margo, a wholly-owned company of Michael J. Spector (the principal
shareholder of the Company) to sell all of its assets. Because several of the
conditions necessary for the merger to proceed did not occur by the agreed upon
date of March 1, 2001, the Company's Board of Directors decided that it was not
in the best interest of the Company or its shareholders to continue with the
transaction and on March 5, 2001, voted to terminate the iTract Merger
Agreement. The Company also terminated the agreement with Empresas Margo.
Following the termination of the iTract Merger Agreement, the Company will
continue to focus on expanding and developing its existing businesses.
PRINCIPAL OPERATIONS
- --------------------
During 2000 and 1999, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico"). These operations are described below.
1
Puerto Rico Operations
- ----------------------
The Company's operations are conducted at a 92 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 92 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 Flora, Inc.
("Margo Flora"), Margo Landscaping & Design, Inc. ("Landscaping"), Margo Garden
Products, Inc. ("Garden Products"), Rain Forest Products Group, Inc. ("Rain
Forest"), Margo Development Corporation ("Margo Development"), and Garrochales
Construction and Development Corporation ("Garrochales Construction"), 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 (operating as Margo
Flora) produces orchids, bromeliads, anthuriums, spathiphylum, poincettias and
other interior potted plants. Its customers include wholesalers, retailers,
chain stores and landscapers primarily located in Puerto Rico and the Caribbean.
As a bona fide agricultural enterprise, both Nursery Farms and Margo Flora
enjoy a 90% tax exemption under Puerto Rico law from income derived from its
nursery business in Puerto Rico.
Landscaping provides landscaping, maintenance and design services to
commercial, industrial and residential customers in Puerto Rico and the
Caribbean.
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. Garden Products also markets and merchandises Ortho and
Round-up brand products for the Scotts Company at all Home Depot stores
operating in Puerto Rico.
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.
2
Margo Development and Garrochales Construction have been engaged in
obtaining development permits on a new site for the development of a residential
housing project in the municipality of Arecibo, Puerto Rico.
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 the 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 are 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, Wal*Mart Stores, Sam's Club
and Kmart), the Company develops promotional programs which include deliveries
to customer outlets and special pricing based on volume.
During 2000 and 1999, the Company's two largest customers accounted for
approximately 30% and 26% of the Company's net sales, respectively. The first
customer (The Home Depot) accounted for 17% in 2000 and 14% in 1999, and the
second customer (Wal*Mart Stores) accounted for 13% in 2000 and 12% in 1999 of
the Company's net sales.
During 1998, the Company's single largest customer, Masso Expo (formerly
Builders Square) accounted for approximately 13% of the Company's net sales.
The Company does not have any significant long-term (over one year)
delivery contracts with customers, including landscaping contracts.
3
Financial Information Relating to 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. The
following table sets forth sales for industry segments for the years ended
December 31, 2000, 1999 and 1998. The information is provided after the
elimination of intercompany transactions.
2000 1999 1998
---- ---- ----
(Amounts in 000's)
----------------
Plants $3,827 $3,781 $3,019
Lawn and garden products 2,104 1,120 862
Landscaping 2,372 1,300 1,468
------ ------ ------
$8,303 $6,201 $5,349
====== ====== ======
Certain financial information concerning industry segments is set forth in
Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and in Note 21 to the Company's Consolidated Financial
Statements included as Item 8 to this Annual Report on Form 10-K.
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.
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.
4
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, 2000, the Company had 179 full time employees, of which 159
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 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.
5
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, 2001,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, the
Company has been unsuccessful in obtaining such insurance coverages during the
past three years, and no assurance can be given that the Company will be able to
obtain such insurance coverages in the foreseeable future.
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities 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.
FUTURE OPERATIONS
- -----------------
Following the termination of the iTract Merger Agreement, the Company will
continue to concentrate its economic and managerial resources in expanding and
improving its present operations in Puerto Rico. The Company's Board of
Directors has determined that these operations present the Company's most
attractive opportunities for the near future. The Board believes that the
Company should continue to capitalize its advantage as one of the largest, full
service nurseries in the region.
The Company is a supplier of plants and lawn and garden products for The
Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and
garden products according to Nursery Retailer magazine. As of December 31,
----------------
2000, Home Depot had opened three stores in Puerto Rico. During 2000, Masso Expo
(a former competitor of Home Depot) sold their stores to Home Depot. These
stores have been closed for remodeling. Four of the six Masso Expo's locations
are expected to open as Home Depots during the Company's third and fourth
quarters of 2001.
During the third quarter of 1999, the Company became the largest supplier
of live goods (plant material) to Wal*Mart Stores, which presently has nine
stores throughout Puerto Rico and will open a new "super center" during the
second quarter of 2001.
During the second quarter of 2000, the Company commenced sales of plant
material and lawn and garden products to Sam's Club, which has six stores
throughout Puerto Rico. The Company intends to continue servicing Sam's Club
during 2001.
The Company increased sales to Kmart in Puerto Rico during the first
quarter of 2001. Kmart has 24 stores throughout Puerto Rico and 2 stores in the
U.S. Virgin Islands, and is
6
promoting its garden centers' sales with the Company's plant material as well as
lawn and garden products.
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 diversify within the nursery business by growing
turf (sod).
During the first quarter of 2001, the Company commenced the landscaping of
a large commercial shopping center for approximately $586,000, and is presently
concluding a landscaping project at another shopping center. The Company
continues to pursue other large projects for 2001 and beyond.
On December 13, 2000, the Company purchased approximately 109 acres of land
in the Municipality of Arecibo, Puerto Rico for the development of a residential
project. The Company paid $950,000 plus incidental expenses for this land. The
Company is currently in the process of surveying this property, in order to
prepare a master development plan, as well as obtaining initial development
permits for future development.
PUERTO RICO TAXES
- -----------------
The Company's operations of lawn and garden products as well as landscaping
services are fully taxable and subject to Puerto Rico income, property,
municipal and other taxes.
The Company's nursery operations are covered under the Agricultural Tax
Incentives Act of the Commonwealth of Puerto Rico (Act. No. 225 of December 1,
1995, as amended) which provides 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.
7
ITEM 2. PROPERTIES
During 2000, the Company conducted its operations from nursery facilities
located in Puerto Rico.
Vega Alta Nursery Facility
- --------------------------
The Company leases a 92 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. Under the
lease, the Company is required to pay rent of $24,000 per month and 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. The lease is scheduled to terminate on December 31, 2002,
but 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 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 March 2001, the Spectors paid the unamortized value ($45,384)
of said improvements to the Company.
During the years ended December 31, 2000 and 1999, total lease payments to
the Spectors amounted to approximately $290,000 and $309,000, respectively (not
including the monthly payments for the option referred to above).
8
The Vega Alta facility is subject to a mortgage securing a $1 million line of
credit facility of the Company with a local commercial bank. The Vega Alta
facility is also subject to a mortgage securing a personal line of credit of
Michael J. Spector.
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, 2000 and 1999, total lease payments amounted to $60,000.
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. For the years ended December 31, 2000 and
1999, lease payments amounted to approximately $34,000 and $25,000,
respectively. Lease payments for renewal terms are to be negotiated 90 days
prior to each renewal term.
Land held for Future Development
- --------------------------------
On December 13, 2000, the Company purchased approximately 109 acres of land in
the Municipality of Arecibo, Puerto Rico for the development of a residential
project. The Company paid $950,000 plus incidental expenses for this land. The
Company is currently in the process of surveying this property, in order to
prepare a master development plan, as well as obtaining initial development
permits for future development.
9
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
The Company held its annual meeting of shareholders on December 21, 2000. At
this meeting, shareholders were asked to vote on two proposals. Quorum at the
meeting was obtained with 1,487,129 shares or 79% of the 1,882,322 total
outstanding common shares represented in person or by proxy at the meeting. The
proposals, together with the voting results were as follows:
Broker
Proposal For Against Abstain Non-Votes
- ------------------------------------- --------- ------- ------- ---------
1. Election of five Directors
(each of the following nominees
received the same number of
votes: Michael J. Spector
Margaret D. Spector, Blas
Ferraiuoli, Frederick Moss
and Michael Rubin) 1,486,929 200 0 0
2. Ratification of Deloitte &
Touche, LLP as external
auditors 1,487,129 0 0 0
10
PART II
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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 2000
and 1999. The last reported sales price for the Common Stock on March 27, 2001
was $3.00 per share.
2000 1999
-------------------------- -------------------------
Quarter: High Low High Low
-------- ------------ ------------ ----------- ------------
First $29 1/2 $2 3/10 $ 4 $ 2 1/16
Second 29 8 3 1/2 2 1/16
Third 9 3/4 5 1/2 3 1/4 2 3/16
Fourth 5 1/2 1 3/4 2 7/8 1 15/16
There were approximately 63 holders of record of the common stock as of
December 31, 2000. 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 27, 2001, the Company had 1,882,322 shares of
common stock outstanding.
The Company did not pay any dividends on its common stock during 2000 or 1999.
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, 2000. 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: 2000 1999 1998 1997 1996
----------- ----------- ------------ ----------- ------------
Net sales $ 8,302,810 $6,201,233 $ 5,349,244 $ 6,548,912 $ 6,108,865
Gross profit 2,134,463 2,230,111 1,726,173 1,365,335 2,137,340
Selling, general and administrative expenses 2,583,012 2,395,350 2,122,976 2,604,106 2,130,114
Income (loss) from operations (448,549) (165,239) (396,803) (1,238,771) 7,226
Loss before income tax provision (1,022,733) (127,867) (1,112,837) (750,534) (553,722)
Net loss (1,022,733) (127,867) (1,112,837) (750,534) (577,214)
Net loss per common share - basic and diluted ($.54) ($.07) ($.59) ($.40) ($.30)
Weighted average number of common shares outstanding 1,881,440 1,875,322 1,878,655 1,895,322 1,895,322
Balance Sheet Data:
Working capital $ 2,290,314 $4,306,446 $ 3,396,453 $ 4,151,894 $ 4,113,799
Total assets 9,375,396 8,916,981 7,990,208 8,952,088 10,396,211
Long-term debt (excluding current portion) 239,482 338,597 85,880 252,883 427,078
Stockholders' equity 5,238,888 6,241,776 6,369,643 7,529,980 8,271,350
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
- --------
The Company entered into an agreement to merge with iTract, LLC, a
privately held development stage internet company. Certain conditions for the
Company's obligation to proceed with the merger were not met as of March 1,
2001, and the Company's Board of Directors decided that it was not in the best
interest of the Company or its shareholders to proceed with the transaction. The
merger called for the sale of the Company's operating businesses and effective
June 30, 2000, the Company presented its assets, liabilities, results of
operations and cash flows as discontinued operations. The Company has decided to
continue to focus on expanding and developing its existing business, and the
agreement for the sale of the Company's operating businesses has also been
terminated. As a result, the Company has changed the presentation of its assets,
liabilities, results of operations and cash flows for the years ended December
31, 2000, 1999 and 1998 from discontinued operations to continuing operations.
For the year ended December 31, 2000, the Company incurred a consolidated net
loss of approximately $1,023,000, compared to a net loss of $128,000 and
$1,113,000 in 1999 and 1998, respectively. These amounts represent a
consolidated net loss per common share of $.54, $.07 and $.59 for 2000, 1999 and
1998, respectively.
The Company's net loss for the year ended December 31, 2000 was principally
due to the write off of unsalable inventory to cost of sales, with an
approximate net carrying amount of $439,000, resulting in a loss from operations
of approximately $449,000. This loss from operations was further increased by
non-recurring expenses related to the terminated iTract Merger Agreement of
approximately $553,000, charged as other expenses.
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 that year.
The Company's net loss for the year ended December 31, 1998 was due to three
unrelated events experienced during that 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, 2001, the Company had
been unable to obtain adequate crop insurance coverage at a reasonable cost for
its inventories nor business
14
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, the Company has been unsuccessful in obtaining such
insurance coverages during the past three years and no assurance can be given
that the Company will be successful in obtaining such coverages in the
foreseeable future.
RESULTS OF OPERATIONS
- ---------------------
Sales
- -----
Consolidated net sales for the year ended December 31, 2000 were approximately
$8,303,000, representing an increase of 34% over sales of $6,201,000 in 1999.
The increase in sales for 2000 was principally due to an increase in the sales
volume of landscaping services ($1,072,000), and an increase in sales of lawn
and garden products ($984,000) to chain stores such as The Home Depot, Wal*Mart
and Sam's Club, with Rain Forest products representing the major increase. Sales
of plant material only increased marginally during 2000.
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 to chain 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). Sales of landscaping
services decreased by $168,000 due to higher volume of post-Hurricane Georges
services performed during the fourth quarter of 1998.
15
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,
---------------------------------
2000 1999 1998
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.3 64.0 67.8
----- ----- -----
Gross profit 25.7 36.0 32.2
Selling, general and administrative expenses 31.1 38.6 39.7
----- ----- -----
Loss from operations (5.4) (2.6) (7.5)
Interest income (expense), net (.4) .9 1.2
Other income (expenses), net (6.5) (.4) (14.5)
----- ----- -----
Loss before income tax provision (12.3) (2.1) (20.8)
Income tax provision - - -
----- ----- -----
Net loss (12.3) (2.1) (20.8)
===== ===== =====
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 26%, 36%, and 32%, for the years ended December 31,
2000, 1999 and 1998, respectively.
The Company's consolidated gross profit for the year ended December 31, 2000
was 26% compared to 36% for 1999, representing an overall decrease of 10%. This
decrease in gross profit was spread among all business segments. Gross profit
from sales of plant material during 2000 was approximately 25% compared to 37%
in 1999. This decrease resulted from significant charges to cost of sales during
the year from storage and maintenance of unsalable inventory, as well as a year-
end write-off of unsalable inventory with a net carrying amount of approximately
$283,000 charged to cost of sales. Gross profit from sales of lawn and garden
products during 2000 was approximately 31% compared to 38% for 1999. This
decrease was also due to a year-end write-off of unsalable inventory of
approximately $156,000. Gross profit from landscaping services also decreased in
2000 to 22% from 25% in 1999. This 3% decrease in gross profit during 2000 was
due to a low gross profit from a project which accounted for 26% of landscaping
revenues for 2000.
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%. During 1999,
gross profit increased in all business segments, except for landscaping
services. 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
16
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.
Selling, General and Administrative Expenses
- --------------------------------------------
The Company's selling, general and administrative expenses ("SG&A) for 2000
were approximately $2,583,000 compared to $2,395,000 in 1999, representing an
increase of 8% in dollar terms, and a decrease of 8% as a percentage of sales.
The increase in SG&A (in dollar terms) for 2000 was due to increases in
shipping, selling and landscaping costs and expenses, principally from increased
sales volume in lawn and garden products and landscaping services.
The Company's 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.
Other Income and Expense
- ------------------------
Other expenses for the year ended December 31, 2000 were approximately
$574,000 compared other income of $37,000 for 1999. The increase in other
expenses for 2000 was principally related to merger related expenses of $553,000
in connection with the terminated iTract Merger Agreement.
Interest income for the year ended December 31, 2000 remained comparable to
that of 1999, as a result of similar investments yielding similar interest
income.
Interest expense for the year ended December 31, 2000 increased by
approximately $94,000 to that of 1999 due to increased borrowings of notes
payable to finance terminated merger plan expenses, as well as to finance on a
short-term basis the acquisition of land held for future development.
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.
17
Hurricane Georges
- -----------------
On September 21, 1998, Hurricane Georges struck Puerto Rico. Total property
written down as a result of the damages caused to the Company's wooden and
fabricated steel structures at both of the Company's locations had a book value
of approximately $171,000 at December 31, 1998. The Company had also incurred
expenses of approximately $696,000 in connection with clean-up, restoration and
debris removal at both locations as of December 31, 1998.
The Company's 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. During 2000, as a result of a dispute with the
lessor of the leased property, the Company was not able to formalize the
agreement referred to above and therefore reversed the amounts previously
recorded (without any effect on results of operations).
Write Down of Note Receivable
- -----------------------------
The Company owns a note receivable 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.
The borrower did not comply with any of the 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 included the $80,000 charge as an other
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1999.
18
FINANCIAL CONDITION
- -------------------
At December 31, 2000, the Company had cash of approximately $973,000 and
short term investments of $500,000, compared to cash of $1,083,000 and short
term investments of $500,000 at December 31, 1999. The decrease in cash at
December 31, 2000 was principally due to cash flows from financing activities of
$1,250,000, offset by cash outflows from operating activities ($600,000), and
other cash outflows from investing activities (including purchases of property
and equipment and the acquisition of land for future development of $1,241,000).
At December 31, 2000, the Company's current ratio was 1.6 to 1 as compared to
2.9 to 1 at December 31, 1999.
The overall increase in total liabilities at December 31, 2000 (principally
notes payable) was due to the acquisition of land for future development and the
financing of the terminated merger plan expenses. As a result, the Company's
debt to equity ratio at December 31, 2000 was 79%, compared to 43% at December
31, 1999.
Stockholders' equity at December 31, 2000 decreased principally due to
results of operations for the year. During the year ended December 31, 2000, the
Company issued 7,000 shares of common stock in connection with the conversion of
stock options. There were no dividends declared during the year ended December
31, 1999.
CURRENT LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------
The Company believes it has adequate resources to meet its current and
anticipated liquidity and capital requirements. The Company finances its working
capital from cash flows from operations as well as borrowings under two lines of
credit with two local commercial banks. The Company currently has available $2
million of credit under these facilities, of which approximately $545,000 were
available at December 31, 2000.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- --------------------------------------
During the fourth quarter of 2000, the Company wrote off unsalable
inventory with an approximate carrying value of $439,000, which were charged to
cost of sales.
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 Agriculture 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
19
receivable and a deferred revenue of approximately $112,000 as of December 31,
1999. During 2000, as a result of a dispute with the lessor of the leased
property, the Company was not able to formalize the agreement referred to above
and therefore reversed the amounts previously recorded as receivable and
deferred revenue.
During the fourth quarter of 1999, the Company also 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 and the availability of production materials from a wide variety of
sources.
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.
RISK MANAGEMENT
- ---------------
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, 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, the
Company has been unsuccessful in obtaining such insurance coverage during the
past three years and no assurance can be given that the Company will be able to
obtain such insurance coverages in the foreseeable future.
The Company believes it has taken reasonable precautions to protect its plants
and operations from natural hazards. The Company's newer facilities 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.
20
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.
21
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, 2001. The background and
experience of these persons are summarized in the paragraphs following the
table.
Name (Age at March 15, 2001) Positions with the Company
- ---------------------------- --------------------------
Michael J. Spector (54) Chairman of the Board, Chief Executive Officer and Director
Margaret D. Spector (49) Secretary and Director
Blas R. Ferraiuoli (56) Director
Frederick D. Moss (72) Director
Michael A. Rubin (58) Director
J. Fernando Rodriguez (37) President and Chief Operating Officer
Alfonso A. Ortega (47) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi (41) 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, 2001.
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. Mr. Ferraiuoli practices civil, corporate and
administrative law in his own law firm since June 1994.
22
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. RODRIGUEZ commenced as President and Chief Operating Officer on March
5, 2001. From March 1995 to March 2000, Mr. Rodriguez served as executive vice
president of Retail Banking for Banco Santander Puerto Rico.
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, 2000. 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
two reports each, related to receipt of stock options.
23
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, 2000, 1999 and 1998. No other executive officer of the Company earned more
than $100,000 during 2000.
Annual Compensation
-------------------
Number of
Name of Individual and Stock Options Other Annual
Position with the Company Salary Bonus Granted/(2)/ Compensation
------------------------- ----- ----- -------------- ------------
Michael J. Spector 2000 $104,000 $ - 2,500 $8,000/(1)/
Chairman, Chief Executive 1999 104,000 - 2,500 8,000
Officer and Director 1998 104,000 - 2,500 8,000
(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, 1999 and
2000.
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 2000, Messrs. Ferraiuoli, Moss, Rubin and Mrs. Spector each received
options to acquire 2,500 shares of Common Stock at an exercise price of $1.75
($1.93 for Mrs. Spector), expiring on December 22, 2010, in accordance with the
1998 Plan.
24
Grant of Stock Options
- ----------------------
No stock options were granted to Mr. Michael J. Spector during the year
ended December 31, 2000. However, the table below provides certain information
regarding stock options granted to Mrs. Margaret D. Spector as discussed above,
which for SEC reporting purposes, Mr. Spector is deemed to beneficially own.
Potential realizable
value at assumed
annual rates of stock
price appreciation
for option term
------------------
# of shares % of total
underlying options
options granted in Exercise Price Expiration
Name granted/(2)/ Fiscal Year ($/share)/(3)/ Date 5% 10%
- ------------------------ ------------ ----------- -------------- ---------- --- ---
Michael J. Spector/(1)/ 2,500 25% $1.93 12-22-10 $2,300 $6,500
(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 December 22, 2000, the date of grant.
Options Exercised During 2000 and Option Values at December 31, 2000
- --------------------------------------------------------------------
The following table sets information on outstanding options held by the
Company's chief executive officer and their value at December 31, 2000. There
were no exercises of options during 2000. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at
December 31, 2000, the last day the common stock traded during 2000.
Number of Shares Value of Unexercised
Underlying In-The-Money
Unexercised Options Options at
at 12/31/00 At 12/31/00 (1)(2)
------------------------------ ------------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector/(1)/ - - 35,500 9,500 $230 $345
_______________
(1) Includes 15,000 options held by Margaret D. Spector, the wife of Michael J.
Spector.
(2) Based on the last sales price of $1..88 per share on December 29, 2000, and
an exercise price of $3.16, $3.44, $1.65 and $2.75 for 20,000, 14,000, 1,000
and 500 exercisable options, respectively, and an exercise price of $3.44 ,
$1.65, $2.75 and $1.93 for 3,500, 1,500, 2,000 and 2,500 of unexercisable
options, respectively.
25
Employment Contracts
- --------------------
The Company does not have an employment contract with Michael J. Spector.
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, 2000, the
Company paid approximately $50,000 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, 2001, 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.
26
Security Ownership as of March 15, 2001
---------------------------------------
Name
----
(Position with the Company) Amount Beneficialy Owned/(1)/ Percent of Class/(1)/
--------------------------- ----------------------------- ---------------------
Michael J. Spector 1,281,682/(2)/ 66.5%
(Executive Officer and Director)
Margaret D. Spector 1,281,682/(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) 22,500 1.2%
Blas R. Ferraiuoli (Director) 12,500 /(4)/
Michael A. Rubin (Director) 13,000 /(4)/
All Executive Officers and 1,354,482/(1)/ 69.0%
Directors as a Group
(7 persons)
____________________
(1) For each person or group, includes the number of shares of common stock the
named person(s) has the right to acquire upon exercise of stock options
within 60 days of March 15, 2001, as shown below:
- Michael J. Spector and Margaret D. Spector * 45,000 shares
- Frederick D. Moss * 1,500 shares
- Blas Ferraiuoli * 8,500 shares
- Michael A. Rubin * 5,500 shares
- All Executive Officers and Directors, as a group * 79,900 shares
(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
15,000 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) Less than one percent.
27
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. During
March 2001, this note was renewed for an additional period of one year. At
December 31, 2000 and 1999, Mr. Spector owed the Company $394,269 and $290,226,
respectively.
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 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." During March 2001, the Spectors repaid $45,384, representing the
unamortized value of said improvements.
28
Certain Other Relationships
- ---------------------------
During 2000, 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 was payable in a
single balloon payment on the closing date of the merger of the Company with
iTract. Pursuant to its terms, the loan is convertible into common stock of ICES
since the itract, LLC Merger Agreement has been terminated. For more information
regarding the iTract transaction, see Part 1, Item 1. Business - "Termination of
Merger Agreement with itract, LLC".
29
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-2 of this Form 10-K. The index to Financial Statements is set
forth on page F-1 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.
30
Exhibit
Number Description
-----------
(a)(1) Financial Statements and Financial Statement Schedules.
------------------------------------------------------
and
(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-2 of this Form 10-K. The index to Financial Statements
and Schedules is set forth on page F-1 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 (incorporated
by reference to same exhibit number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999).
(3)(b) Certificate of Amendment dated May 29, 1998 to Certificate of
Incorporation (incorporated by reference to the Company's Form 8-K
dated June 1, 1998)
(3)(c) By-Laws as of January 1, 1998(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).
31
(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.
32
(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 incorporated by reference from 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.
(h) Material Contracts incorporated by reference from the
Company's Quarterly report on Form 10-Q for the quarter ended
March 31, 2000, filed May 15, 2000:
(i) Agreement and Plan of Merger, dated April 11, 2000, by
and among Margo Caribe, Inc., iTract Acquisition
Company, LLC, iTract, Inc., itract, LLC and
International Commerce Exchange Systems, Inc.
(i) Material Contract incorporated by referene from the Company's
Current Report on Form 8-K dated June 30, 2000, filed July 7,
2000.
(i) Stock Purchase Agreement, dated as of June 30, 2000,
between Margo Caribe, Inc. and Empresas Margo, Inc.
(j) Material Contract incorporated by reference from the
Company's Current Report on Form 8-K dated October 20, 2000,
filed October 20, 2000.
(i) Amendment to Agreement and Plan of Merger with itract,
LLC.
(k) Material contract filed herewith:
(i) Line of Credit Agreement with Westernbank dated August
11, 2000.
(21) List of Registrant's Subsidiaries (filed herewith)
(23) Consent of Deloitte & Touche.
33
(b) Reports on Form 8-K.
--------------------
(i) Current Report on Form 8-K ("Form 8-K") dated October 20, 2000,
reporting under Item 5 - "Other Items", the execution of an amendment
to the Agreement and Plan of Merger with itract, LLC
(ii) Form 8-K dated March 5, 2001, reporting under Item 5, "Other
Items" the termination of the Agreement and Plan of Merger with
itract, LLC.
34
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, 2001 By: /s/ Michael J. Spector, President
----------------------------------
Michael J. Spector, Chairman of
the Board 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, 2001 By: /s/ Michael J. Spector
--------------------------
Michael J. Spector, Chairman
of the Board and Chief Executive Officer
Dated: March 27, 2001 By: /s/ Margaret D. Spector
---------------------------
Margaret D. Spector, Director
Dated: March 27, 2001 By: /s/ Blas R. Ferraiuoli
----------------------------
Blas R. Ferraiuoli, Director
Dated: March 27, 2001 By: /s/ Michael A. Rubin
--------------------------
Michael A. Rubin, Director
Dated: March 27, 2001 By: /s/ Frederick D. Moss
------------------------
Frederick D. Moss, Director
Dated: March 27, 2001 By: /s/ J. Fernando Rodriguez
-------------------------
J. Fernando Rodriguez
President and Chief
Operating Officer
Dated: March 27, 2001 By: /s/ Alfonso A. Ortega
-------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Chief Financial and
Accounting Officer
35
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, 2000
MARGO CARIBE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
For the year ended December 31, 2000
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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 23, 2001
Stamp No. 1703294
affixed to original.
F-2
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
------
2000 1999
---------- ----------
Current Assets:
Cash and equivalents $ 973,061 $1,082,592
Short term investments 500,000 500,000
Accounts receivable, net 1,235,706 1,101,722
Inventories 3,170,074 3,108,408
Current portion of notes receivable - 475,000
Prepaid expenses 308,499 263,447
---------- ----------
Total current assets 6,187,340 6,531,169
Property and equipment, net 1,676,158 1,902,863
Land held for future development 988,485 -
Due from shareholder 394,269 290,226
Notes receivable, net of current portion 60,754 67,915
Other assets and other current assets 68,390 124,808
---------- ----------
Total assets $9,375,396 $8,916,981
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 103,403 $ 129,656
Notes payable 2,455,500 1,100,000
Accounts payable 1,138,979 812,672
Accrued expenses 199,144 182,395
---------- ----------
Total current liabilities 3,897,026 2,224,723
Deferred revenue - 111,885
Long-term debt, net of current portion 239,482 338,597
---------- ----------
Total liabilities 4,136,508 2,675,205
---------- ----------
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, 1,922,122 and 1,915,122
shares issued, 1,882,322 and 1,875,322
shares outstanding in 2000 and 1999,
respectively 1,922 1,915
Additional paid-in capital 4,657,544 4,637,706
Retained earnings 675,710 1,698,443
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
---------- ----------
Total shareholders' equity 5,238,888 6,241,776
---------- ----------
Total liabilities and shareholders' equity $9,375,396 $8,916,981
========== ==========
See accompanying notes to consolidated financial statements.
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999, 1998
2000 1999 1998
----------- ---------- -----------
Net sales $ 8,302,810 $6,201,233 $ 5,349,244
Cost of sales 6,168,347 3,971,122 3,623,071
----------- ---------- -----------
Gross profit 2,134,463 2,230,111 1,726,173
Selling, general and administrative expenses 2,583,012 2,395,350 2,122,976
----------- ---------- -----------
Loss from operations (448,549) (165,239) (396,803)
----------- ---------- -----------
Other income (expense):
Interest income 104,214 105,914 122,683
Interest expense (140,431) (46,876) (62,020)
Write-down of note receivable - (80,000) (201,621)
Recovery (loss) from damages
caused by Hurricane Georges,
net of insurance proceeds - 12,880 (609,009)
Terminated merger plan expenses (553,101) - -
Other income 15,134 45,454 33,933
----------- ---------- -----------
Total other income (expense) (574,184) 37,372 (716,034)
----------- ---------- -----------
Net loss $(1,022,733) $ (127,867) $(1,112,837)
=========== ========== ===========
Basic and diluted loss per common share $ (.54) $ (.07) $ (.59)
=========== ========== ===========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Outstanding
Common Common Additional
Stock Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ------- -------- ----- -----
Balance at December 31, 1997 1,895,322 $1,915 $4,637,706 $ 2,939,147 $(48,788) $ 7,529,980
Acquisition of treasury
stock, at cost (20,000) - - - (47,500) (47,500)
Net loss - - - (1,112,837) - (1,112,837)
--------- ------ ---------- ----------- -------- -----------
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
Issuance of common stock from
conversion of stock options 7,000 7 19,838 - - 19,845
Net loss - - - (1,022,733) - (1,022,733)
--------- ------ ---------- ----------- -------- -----------
Balance at December 31, 2000 1,882,322 $1,922 $4,657,544 $ 675,710 $(96,288) $ 5,238,888
========= ====== ========== =========== ======== ===========
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows operating activities:
Net loss $(1,022,733) $ (127,867) $(1,112,837)
Adjustments to reconcile net loss to net
Cash provided by (used in) operating activities:
Depreciation and amortization 434,176 543,165 527,791
Write-down of note receivable - 80,000 201,621
Write-off of unsaleable inventory 439,000 - -
Loss on disposal of property and equipment
related to Hurricane Georges - - 171,039
Provision for bad debts 41,289 86,000 35,900
Gain on sale of equipment - (16,451) -
Changes in assets and liabilities affecting cash
flows from operating activities:
Accounts receivable (175,273) 152,735 (213,523)
Inventories (500,666) (844,036) 173,756
Prepaid expenses (45,052) (72,643) (89,012)
Advances from (to) shareholder (58,659) - 1,255
Other assets 56,418 (71,176) 5,279
Accounts payable 214,422 147,532 276,822
Accrued expenses 16,749 (28,682) 46,812
----------- ---------- -----------
Net cash provided by (used in) operating activities (600,329) (151,423) 24,903
----------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (306,977) (394,688) (374,034)
Proceeds from sale of equipment - 59,910 -
Acquisition of land for future development (934,363) - -
Increase in notes receivable - (5,611) -
Collection of notes receivable 482,161 3,109 40,000
----------- ---------- -----------
Net cash used in investing activities (759,179) (337,280) (334,034)
----------- ---------- -----------
Cash flows from financing activities:
Increase in notes payable 1,355,500 600,000 -
Acquisition of treasury stock - - (47,500)
Issuance of common stock from conversion
of stock options 19,845 - -
Proceeds from long-term debt - 395,418 -
Repayments of long-term debt (125,368) (171,513) (126,229)
----------- ---------- -----------
Net cash provided by (used in) financing activities 1,249,977 823,905 (173,729)
----------- ---------- -----------
Net increase (decrease) in cash and equivalents (109,531) 335,202 (482,860)
Cash and equivalents at beginning of year 1,082,592 747,390 1,230,250
----------- ---------- -----------
Cash and equivalents at end of year $ 973,061 $1,082,592 $ 747,390
=========== ========== ===========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 and 1998
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.
As discussed in Note 22, on April 11, 2000, the Company entered into an
agreement to merge with iTract, LLC, a privately held development stage internet
company. Certain conditions for the Company's obligation to proceed with the
merger were not met as of March 1, 2001, and the Company's Board of Directors
decided that it was not in the best interest of the Company or its shareholders
to proceed with the transaction. The merger called for the sale of the Company's
operating businesses and effective June 30, 2000, the Company presented its
assets, liabilities, results of operations and cash flows as discontinued
operations. The Company has decided to continue to focus on expanding and
developing its existing business, and the agreement for the sale of the
Company's operating businesses has also been terminated. As a result, the
Company has changed the presentation of its assets, liabilities, results of
operations and cash flows for the years ended December 31, 2000, 1999 and 1998
from discontinued operations to continuing operations. The provision for loss on
disposition of discontinued operations recorded on June 30, 2000 (with an
original balance of approximately $1.3 million) was reversed as a result of the
termination of the merger agreement. The accompanying consolidated statement
F-7
of operations for the year ended December 31, 2000 includes all expenses
incurred (approximately $553,000) in connection with the terminated merger
agreement.
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the financial
statements of Margo Caribe, Inc. (the holding company) and its wholly-owned
subsidiaries, Margo Nursery Farms, Inc., Margo Flora, Inc., Margo Landscaping
and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc.,
Garrochales Construction and Development Corporation and Margo Development
Corporation. 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, 2000 and 1999, cash and equivalents
include $500,000 invested in a certificate of deposit bearing interest at 5.35%
and 5.3%, respectively, which has been pledged as collateral for notes payable
(refer to Note 9).
(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. Land held for future development is stated at cost.
F-8
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.
(e) 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 provides additional guidance on revenue recognition, as
well as criteria for when revenue is generally realized and earned, and also
requires the deferral of incremental direct selling costs. The conformity of its
revenue recognition policy with SAB No. 101 did not have a significant effect on
the Company's results of operations or financial condition.
(f) Derivatives and Hedging Activities
----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on the Company's balance sheet. Changes in the fair values of
derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
The FASB amended this pronouncement in June 1999 to defer the effective date of
SFAS No. 133 until January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133. The
amendments in SFAS No. 138 address certain implementation issues and such
related matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging foreign-currency-denominated assets
and liabilities, and intercompany derivatives. SFAS No. 138 also amends SFAS
F-9
No. 133 for decisions made by the FASB related to the Derivatives Implementation
Group process.
The adoption of SFAS No. 133 and 138 will not have any effect on the Company's
results of operations or financial condition.
(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.
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.
Rain Forest Products Group, Inc.'s operations are covered under the Puerto Rico
Industrial Tax Incentives Act of 1987 ("the Act"). Under the Act, the Company
has a 90% tax exemption on income and property taxes and a 60% exemption on
municipal taxes for a period of fifteen years, commencing January 1, 1997.
(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.
F-10
(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 10.
(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 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 accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities 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.
F-11
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb estimated losses on existing accounts receivable that are
estimated to be 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 a deferred tax asset of approximately $876,000 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
future income increases.
Note 2 - Inventories
- --------------------
At December 31, 2000 and 1999, inventories comprised the following:
Description 2000 1999
- --------------------------- ---------- ----------
Plant material $2,556,984 $2,417,102
Lawn and garden products 250,135 485,017
Raw material and supplies 362,955 206,289
---------- ----------
$3,170,074 $3,108,408
========== ==========
F-12
Note 3 - Accounts Receivable
- ----------------------------
At December 31, 2000 and 1999, accounts receivable comprised the following:
Description 2000 1999
- -------------------------------- ---------- ----------
Trade receivables $1,312,179 $1,054,120
Hurricane assistance (Note 11) - 111,885
Government reimbursement 55,000 50,000
Accrued interest 9,590 13,823
Employee advances 7,024 12,180
Other accounts receivable 16,913 17,714
---------- ----------
1,400,706 1,259,722
Less allowance for doubtful
accounts (165,000) (158,000)
---------- ----------
$1,235,706 $1,101,722
========== ==========
Note 4 - Short Term Investments
- -------------------------------
At December 31, 2000 and 1999, short term investments consisted of a $500,000
certificate of deposit bearing interest at 6.5% and 5.4%, respectively, which
was pledged as collateral for notes payable (refer to Note 9).
F-13
Note 5 - Notes Receivable
- -------------------------
At December 31, 2000 and 1999, notes receivable comprised the following:
Description 2000 1999
- ----------------------------------------------- ------- ---------
Note receivable from the sale of a former
Dominican Republic subsidiary, with an
original balance of $997,000 written down
due to unfavorable collection experience $20,000 $ 20,000
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 16(a)) - 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 14,423 21,584
------- ---------
60,754 542,915
Less current portion - (475,000)
------- ---------
$60,754 $ 67,915
======= =========
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.
Note 6 - Property and Equipment
- -------------------------------
At December 31, 2000 and 1999, property and equipment comprised the following:
2000 1999
---- ----
Leasehold improvements $ 1,338,304 $ 1,609,137
Equipment and fixtures 1,443,925 1,534,280
Transportation equipment 442,189 326,422
Real estate property 224,327 224,327
----------- -----------
3,448,745 3,694,166
Less accumulated depreciation
and amortization (1,772,587) (1,791,303)
----------- -----------
$ 1,676,158 $ 1,902,863
=========== ===========
F-14
During the years ended December 31, 2000, 1999 and 1998, depreciation expense
charged to production was approximately $261,000, $293,000, and $276,000,
respectively.
Note 7 - Land Held for Future Development
- -----------------------------------------
During December 2000, the Company exercised an outstanding option and purchased
approximately 109 acres of land in Barceloneta, Puerto Rico at a total cost of
approximately $988,000. The Company intends to develop this land into
residential homes.
Note 8 - Due from Shareholder
- -----------------------------
At December 31, 2000 and 1999, amounts due from shareholder principally arise
from the settlement of litigation with the Company's former principal lender as
well as other advances of $108,731 made by the Company on his behalf as of
December 31, 2000, of which approximately $45,000 were repaid during March 2001.
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. During March
2001, this note was renewed for an additional period of one year.
F-15
Note 9 - Notes Payable
- ----------------------
At December 31, 2000 and 1999, the Company had short-term borrowings with
various commercial banks in Puerto Rico, comprised of the following:
Description 2000 1999
- ----------------------------------- ---- ----
Unsecured commercial line of credit
of $1 million, bearing interest at
2% over Libor rate (6.45% at
December 31,2000) due in July 2001 $ 600,000 $100,000
Commercial line of credit of $1 million,
bearing interest at 1.8% over Libor
rate (6.45% at December 31,2000)due in
August 2001, personally guaranteed
by the Company's principal shareholder
and collateralized by the 92 acre
facility leased to the Company (see
Note 16(a)) 855,500 -
Note payable, collateralized by cash
equivalent invested in a certifi-
cate of deposit, bearing interest
at 1% over interest earned by the
certificate (6.5% at December 31,
2000)due on demand 500,000 500,000
Note payable, collateralized by short
term borrowings invested in a
certificate of deposit, bearing
interest at 1% over interest earned
by the certificate (5.35% at
December 31, 2000)due on demand 500,000 500,000
---------- ----------
$2,455,500 $1,100,000
========== ==========
F-16
Note 10 - Long-Term Debt
- ------------------------
At December 31, 2000 and 1999, long-term debt comprised the following:
Description 2000 1999
- ------------------------------------ ---- ----
Five-year term loans, bearing interest
at 2% over Libor rate (6.45% at
December 31, 2000), payable in
quarterly installments of $19,781,
through December 2004 $ 318,610 $ 395,418
Five-year term loans, variable
interest rate, 8.50% and 8.25%
at December 31, 2000 and 1999,
respectively, payable in quarterly
installments of approximately
$8,000 through October 2001,
including interest. The loans are
collateralized by transportation
and farm equipment 24,275 72,835
---------- ---------
342,885 468,253
Less current portion (103,403) (129,656)
--------- ---------
Long-term debt $ 239,482 $ 338,597
========= =========
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
------------ ------
2001 $103,403
2002 79,128
2003 79,128
2004 81,226
--------
$342,885
========
The Company's debt agreements contain various covenants, which among other
things, require the Company meet certain debt to asset ratios and minimum
working capital. At December 31, 2000 and 1999, the Company was in compliance
with such covenants.
F-17
Note 11 - 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 a
leased property. 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.
During 2000, as a result of a dispute with the lessor of the leased property,
the Company was not able to formalize the agreement referred to above and,
therefore, reversed the amounts previously recorded.
F-18
Note 12 - Income Taxes
- ----------------------
The Company provides for income taxes using the applicable statutory tax rates
in the Commonwealth of Puerto Rico.
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% to loss before income tax provision:
2000 1999 1998
--------- -------- ---------
Income tax benefit computed by
applying tax rate $(398,865) $(49,870) $(434,005)
(Increase) decrease in income
tax benefit resulting from:
Puerto Rico tax exemption 248,909 (66,519) 334,951
Increase in valuation
allowances 149,956 116,389 99,054
--------- -------- ---------
$ - $ - $ -
========= ======== =========
Deferred income taxes, prior to the valuation allowance, were recognized in the
consolidated balance sheet at December 31, 2000 and 1999 due to the tax effect
of temporary differences and loss carryforwards as follows:
2000 1999
---- ----
Deferred tax assets:
- --------------------
Net operating loss carryforwards $ 877,237 $ 603,048
Valuation allowance for accounts
receivable (1,392) 5,371
--------- ---------
875,845 608,419
Less valuation allowance (875,845) (608,419)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
F-19
Note 13 - Loss Per Common Share
- -------------------------------
Basic and diluted loss per common share for the years ended December 31, 2000,
1999 and 1998 were determined as follows:
Basic loss per common share: 2000 1999 1998
- --------------------------- --------- ----------- ----------
Net loss available to common
shareholders $(1,022,733) $ (127,867) $(1,112,837)
=========== =========== ===========
Weighted average number of common
shares outstanding 1,881,440 1,875,322 1,878,655
=========== =========== ===========
Basic loss per common share $ (.54) $ (.07) $ (.59)
=========== =========== ===========
Diluted loss per common share:
- ------------------------------
Net loss available to common
shareholders $(1,022,733) $ (127,867) $(1,112,837)
=========== =========== ===========
Weighted average number of
common shares outstanding 1,881,440 1,875,322 1,878,655
Plus incremental shares from
assumed exercise of stock
options - - -
----------- ----------- ----------
Adjusted weighted average
shares 1,881,440 1,875,322 1,895,322
========== =========== ==========
Diluted loss per common share $ (.54) $ (.07) $ (.59)
========== =========== ==========
For the years ended December 31, 2000, 1999 and 1998, the effect of the assumed
exercise of stock options determined by using the treasury stock method was
antidilutive; thus no incremental shares were added to the weighted average
number of common shares outstanding.
Note 14 - 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.
Note 15 - 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
F-20
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, 2000, 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 16 - 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. Under the lease, the Company is required to make
monthly lease payments of $24,000, pay all taxes on property, maintain certain
insurance coverages and otherwise maintain and care for the property. The lease
is scheduled to terminate on December 31, 2002, but 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.
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
F-21
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 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. In March 2001, the Spectors paid the
unamortized value of said improvements ($45,384) to the Company.
Total rental payments amounted to approximately $290,000 in 2000 and $309,000 in
1999 and 1998.
(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.
Total rental payments amounted to $60,000 in 2000 and 1999 and $45,000 for the
year ended December 31, 1998, as a result of 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.
F-22
During the initial term, total lease payments amount to $33,625 per year. During
2000 and 1999, lease payments amounted to $33,600 and $25,200, respectively.
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, 2000, 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
------------ --------------
2001 $ 414,700
2002 426,700
2003 132,200
2004 99,400
2005 99,400
Thereafter 498,900
----------
$1,671,300
==========
Total rental expense under all operating lease agreements amounted to
approximately $403,000, $400,000 and $354,000, for the years ended December 31,
2000, 1999 and 1998, respectively.
Note 17 - 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
F-23
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, 1998, 1999 and 2000, and changes during the years ended on those
dates, are as follows:
Price per Share
---------------
Weighted
Average
Description Shares Range Price
- -------------------------------- -------- -------------- -----
Outstanding, January 1, 1998 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
Granted 10,000 1.75 to 1.93 1.80
Exercised (7,000) 1.50 to 3.13 2.84
Forfeited (2,000) 1.94 to 3.13 2.54
------- -------------- -----
Outstanding, December 31, 2000 135,500 $1.50 to $3.44 $2.65
======= ============== =====
F-24
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- -------------- ----------- ------------ ----- ----------- -----
$2.88 - $3.16 38,500 2.5 $3.03 38,500 $3.03
3.13 - 3.44 38,000 5.6 3.27 30,100 3.27
1.50 - 1.94 29,000 7.4 1.81 11,300 1.82
2.25 - 2.75 20,000 8.4 2.41 4,000 2.41
1.75 - 1.93 10,000 10.0 1.80 - -
- --------------- ------- ---- ----- ------ -----
$1.50 - $3.44 135,500 5.8 $2.65 83,900 $2.92
=============== ======= ==== ===== ====== =====
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, 2000 and 1999, the Company paid
approximately $50,000 and $38,000 respectively, representing the matching
contributions under the retirement plan for all participants.
F-25
Note 18 - Supplemental Disclosures for the Statements of Cash Flows
- -------------------------------------------------------------------
(a) Non-Cash Investing Activities
-----------------------------
During the year ended December 31, 2000, fully depreciated equipment amounting
to $166,820 was written off. The Company also transferred unamortized leasehold
improvements with a cost of $331,456 and a book value of $45,384 as an amount
due from shareholder, regarding the termination of a lease agreement of a 27
acre parcel of land previously leased to the Company.
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. These amounts were reversed in
2000.
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.
(b) Other Cash Flow Transactions
----------------------------
During the years ended December 31, 2000, 1999 and 1998, the Company made
interest payments of approximately $134,000, $44,400, and $62,000, respectively.
During the years ended December 31, 2000, 1999 and 1998, the Company did not
make any income tax payments.
Note 19 - Major Customers
- -------------------------
During 2000, the Company's two largest customers accounted for approximately 30%
($2,429,000) of the Company's net sales. The first customer accounted for 17%
($1,379,000) and the second customer accounted for 13% ($1,050,000) of the
Company's net sales.
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
F-26
the second customer accounted for 12% ($728,000) of the Company's net sales.
During 1998, the Company's single largest customer accounted for approximately
13% ($683,000) of the Company's net sales.
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, 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 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
F-27
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.
The financial information presented below was derived from the internal
management accounting system and is based on internal management accounting
policies. The information presented does not necessarily represent each
segment's financial condition and results of operations as if they were
independent entities. At December 31, 2000, aside from the information presented
below, the Company had $988,485 in assets pertaining to a new real estate
development segment (which had not generated any revenues or expenses), of which
$934,363 were acquired during 2000.
F-28
2000
----------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
----------------------------------------------------------
Revenue from external customers $3,826,927 $2,104,065 $ 2,371,818 $ 8,302,810
Intersegment revenues 332,364 34,819 - 367,183
Interest income 104,214 - - 104,214
Interest expense 140,431 - - 140,431
Depreciation and amortization 363,032 33,561 37,583 434,176
Segment loss (796,800) (124,407) (101,526) (1,022,733)
Segment assets 7,881,009 851,355 643,032 9,375,396
Expenditures for segment assets 306,977 - - -
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
F-29
Note 22 - Subsequent Event
- --------------------------
As discussed in Note 1, on March 1, 2001, the Company decided not to proceed
with a proposed merger and the related sale of its operating businesses. As a
result, the accompanying consolidated financial statements have been prepared
using the continuing operations presentation.
F-30
SCHEDULE II
-----------
MARGO CARIBE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
Column A Column B Column C Column D Column E
- ---------------------------------- ------------ ------------------------ ------------ ------------
Balance Charged to Charged to
Beginning Costs and Other Balance
Description Of Year Expenses Accounts Deductions End of Year
----------- ------- -------- -------- ---------- -----------
Year ended December 31, 2000:
Allowance for doubtful accounts $158,000 $41,300 $ - $ (34,300) $ 165,000
======== ======= ======== ========== =========
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
======== ======= ======== ========== =========
F-31
Exhibit
Number Description
-----------
(a)(1) Financial Statements and Financial Statement Schedules.
------------------------------------------------------
and
(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-2 of this Form 10-K. The index to Financial Statements
and Schedules is set forth on page F-1 of this Form 10-K.
(a)(3) Exhibits. The Exhibits set forth in the following Index of the
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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 (incorporated
by reference to same exhibit number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999).
(3)(b) Certificate of Amendment dated May 29, 1998 to Certificate of
Incorporation (incorporated by reference to the Company's Form 8-K
dated June 1, 1998)
(3)(c) By-Laws as of January 1, 1998(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.
(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 incorporated by reference from 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.
(h) Material Contracts incorporated by reference from the
Company's Quarterly report on Form 10-Q for the quarter ended
March 31, 2000, filed May 15, 2000:
(i) Agreement and Plan of Merger, dated April 11, 2000, by
and among Margo Caribe, Inc., iTract Acquisition
Company, LLC, iTract, Inc., itract, LLC and
International Commerce Exchange Systems, Inc.
(i) Material Contract incorporated by referene from the Company's
Current Report on Form 8-K dated June 30, 2000, filed July 7,
2000.
(i) Stock Purchase Agreement, dated as of June 30, 2000,
between Margo Caribe, Inc. and Empresas Margo, Inc.
(j) Material Contract incorporated by reference from the
Company's Current Report on Form 8-K dated October 20, 2000,
filed October 20, 2000.
(i) Amendment to Agreement and Plan of Merger with itract,
LLC.
(k) Material contract filed herewith:
(i) Line of Credit Agreement with Westernbank dated August
11, 2000.
(21) List of Registrant's Subsidiaries (filed herewith)
(23) Consent of Deloitte & Touche.