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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, 1998
[ ] 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: $2,315,070 based on the last sales
price of $35/8 per share on March 15, 1999 and 638,640 shares held by
non-affiliates.
The registrant had 1,875,322 shares of common stock, $.001 par value,
outstanding as of March 15, 1999.
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MARGO CARIBE, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.................................................................................................1
ITEM 2. PROPERTIES...............................................................................................7
ITEM 3. LEGAL PROCEEDINGS....................................................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................................................................... 9
ITEM 6. SELECTED FINANCIAL DATA.................................................................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION....................................................................12
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK................................................................................................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................19
ITEM 11. EXECUTIVE COMPENSATION.................................................................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..........................................................................................26
PART I
ITEM 1. BUSINESS
GENERAL
The principal business of Margo Caribe, Inc. and its subsidiaries
(collectively, the "Company") is the production and distribution of tropical and
flowering plants, the sale and distribution of lawn and garden products as well
as landscaping design and installation services. During 1998, the Company was
also engaged in seeking sites for the development of residential housing
projects.
Effective December 31, 1997, the Company changed its jurisdiction of
incorporation from Florida to the Commonwealth of Puerto Rico. The
reincorporation was accomplished by means of the merger of the Florida
corporation into a newly created Puerto Rico corporation. As part of the merger,
the Puerto Rico corporation changed its name to Margo Nursery Farms, Inc., and
continued to operate the business previously conducted by the Florida
corporation with the same officers and directors.
Effective June 1, 1998, the Company adopted a holding company structure.
The restructuring was accomplished by means of Margo Nursery Farms, Inc.
("Margo") transferring substantially all of its assets and liabilities to a
newly formed Puerto Rico subsidiary ("Newco"), in return for all the outstanding
stock of Newco. Newco continues to conduct the business previously operated by
Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo
Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as
the other existing subsidiaries of Margo. In connection with the holding company
restructuring, Margo changed its corporate name to Margo Caribe, Inc.
PRINCIPAL OPERATIONS
During 1998 and 1997, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico"). During 1997 the Company also conducted
operations in South Florida. These operations are described below.
PUERTO RICO OPERATIONS
The Company's operations in Puerto Rico are conducted at a 117 acre nursery
farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a
13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre
farm is leased from Michael J. Spector and Margaret Spector, who are directors,
officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS -- Lease and Option to Purchase Puerto Rico Nursery
Farm" herein. The 13 acre facility in the Municipality of Barranquitas is leased
from Cali Orchids, Inc., an unrelated third party.
The Company's operations in Puerto Rico include Margo Caribe, Inc. (the
holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping
& Design, Inc. ("Landscaping"), Margo Garden Products, Inc. ("Garden Products"),
Rain Forest Products Group, Inc. ("Rain Forest"), and Margo Development
Corporation, all Puerto Rico corporations.
Nursery Farms, which operates under the trade name of Margo Farms del
Caribe, is engaged in the production and distribution of tropical and flowering
plants. Its products are primarily utilized for the interior and exterior
landscaping of office buildings, shopping malls, hotels and other commercial
sites, as well as private residences. In Vega Alta, Nursery Farms produces
various types of palms, flowering and ornamental plants, trees, shrubs, bedding
plants and ground covers. In Barranquitas, Nursery Farms produces orchids,
bromeliads, anthuriums, spathiphylum and poincettias. Its customers include
wholesalers, retailers, chain stores and landscapers primarily located in Puerto
Rico and the Caribbean. As a bona fide agricultural
enterprise, Nursery Farms enjoys a 90% tax exemption under Puerto Rico law from
income derived from its nursery business in Puerto Rico.
Landscaping provides landscaping services to customers in Puerto Rico and
the Caribbean, including commercial as well as residential landscape design and
landscaping.
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor of Sunniland Corporation's fertilizer and
pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico
and the Caribbean.
Rain Forest is engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock and gravels. Rain Forest's products are
marketed by Garden Products. The Company enjoys a tax exemption grant from the
Government of Puerto Rico for the manufacturing operations of Rain Forest.
Margo Development Corporation, incorporated in January 1998, has been
engaged in seeking real estate sites for the development of residential projects
in Puerto Rico.
SOUTH FLORIDA OPERATIONS
After resuming sales in 1994 following the damage caused by Hurricane
Andrew, the South Florida operation (Margo Bay Farms, Inc.) was not able to
obtain adequate sales levels sufficient to make the operation feasible.
On August 15, 1997, after a review of past and present performance of the
South Florida operation, and in view of the strong competition in that market,
the Company's Board of Directors determined to close this operation effective
September 30, 1997, and dispose of all related assets. On September 29 and
November 28, 1997, the Company sold the two nursery farms (a 54 acre and a 20
acre parcel) which comprised the Company's facilities in South Florida.
PRODUCTION
The Company's plants are propagated by using cuttings, plugs, liners, air
layers, seeds and tissue cultures. Cuttings are obtained from the Company's own
stock plants and from other nurseries for grow-out at the Company's facilities.
The newly planted cuttings take from two months to five years to mature into
finished products, depending on variety. Bedding plants and annuals take from
four to eight weeks to mature.
The Company's products are either field grown or container grown, depending
on the variety of plants and where they are grown. Most of these products start
out in small pots and are "stepped up" to larger pot sizes over time. The
Company produces both field and container grown material, as well as flowering,
bedding plants and hanging baskets.
MARKETING
The Company's marketing efforts have been primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company targets construction and government projects which require extensive
landscaping. In addition, Margo Landscaping provides landscaping design,
installation and maintenance services which complement the sales function. For
large retailers in Puerto Rico, such as The Home Depot,
2
WalMart, Kmart, and Masso Expo) the Company develops promotional programs which
include deliveries to customer outlets and special pricing based on volume.
During 1998, 1997 and 1996, the Company's single largest customer, Masso
Expo (formerly Builders Square) accounted for approximately 13%, 24%, and 27% ,
respectively, 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.
FINANCIAL INFORMATION RELATING TO PRINCIPAL OPERATIONS
The following table sets forth information regarding operations at each of
the Company's operating locations for the years ended December 31, 1998, 1997
and 1996 as well as information regarding assets by location as of December 31,
1998, 1997 and 1996. The information is provided after the elimination of
intercompany transactions.
1998 1997 1996
---- ---- ----
(Amounts in 000's)
SALES BY LOCATION:
South Florida $ - $ 478 $ 471
Puerto Rico:
Plants 3,019 2,957 3,192
Lawn and garden products 862 1,390 1,429
Landscaping 1,468 1,724 1,017
-------- ------- --------
$ 5,349 $6,549 $ 6,109
======== ====== =======
OPERATING PROFIT (LOSS) BY LOCATION:
South Florida $ - $ (517) $ (95)
Puerto Rico (397) (722) 102
------- ------- -------
$ (397) $ (1,239) $ 7
========= ========= ========
IDENTIFIABLE ASSETS BY LOCATION:
Puerto Rico $ 7,990 $ 8,952 $ 8,022
South Florida - - 2,370
Netherlands - - 4
---------- --------- ----------
$ 7,990 $ 8,952 $ 10,396
======== ======= ========
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.
3
COMPETITION
At the present time, the Company's sales efforts are primarily focused in
Puerto Rico and the Caribbean. The Company enjoys a significant advantage over
its competitors because it is the largest producer of quality nursery products
in Puerto Rico. The Company continues expanding its operations in Puerto Rico.
Most of the Company's competitors in Puerto Rico and the Caribbean are small
nurseries and landscapers.
SEASONALITY
The demand for plants in Puerto Rico is year round, with increased demand
during spring, late fall and winter.
WORKING CAPITAL REQUIREMENTS OF THE INDUSTRY
The nursery industry requires producers to maintain large quantities of
stock plants and inventory to meet customer demand and to assure a new source of
products in the future. As a result, producers need to invest significant
amounts of capital in stock plants and inventory. The Company believes that it
has sufficient working capital for its operations from cash flow generated from
operations and short-term borrowings.
EMPLOYEES
At December 31, 1998, the Company had 138 full time employees, of which 120
were directly involved in nursery production activities, and 18 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.
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 30, 1999, the Company had been unable to
obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
4
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities are
being constructed with fabricated steel in an attempt to reduce the damage from
any future storms. Each of the Company's locations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
INDUSTRY SEGMENTS
The Company has three reportable segments identified by line of business:
the production and marketing of tropical and flowering plants, the sale of
related lawn and garden products and the provision of landscaping services.
Certain financial information concerning this industry segment is set forth in
Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and in the Company's Consolidated Financial Statements
included as Item 8 to this Annual Report on Form 10-K.
FUTURE OPERATIONS
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. Home Depot entered the
Puerto Rico market with one store opening in September 1998, and has announced
plans to open eight additional stores in Puerto Rico over the next three years.
During March 1999, the Company leased two additional parcels of land
(approximately 320 acres) from the Puerto Rico Land Authority. The Company
intends to relocate 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).
The Company was recently awarded a contract for approximately $668,000 by
the Municipality of San Juan for the purchase of trees in connection with an
ongoing reforestation program.
The Company was also awarded a landscaping project for the Puerto Rico Art
Museum. This landscaping project is scheduled for commencement during 1999 at an
approximate contract price of $650,000.
The Company is also exploring the possibility of diversifying into other
activities within Puerto Rico, including but not limited to, real estate
development. In this regard, during January 1998, the Company incorporated a new
subsidiary, Margo Development Corporation. During 1999, the Company will be
seeking to acquire options to purchase and/or purchase real estate sites for the
development of residential projects in Puerto Rico. At March 15, 1999, the
Company was in process of formalizing an option agreement for the purchase of
approximately 20 acres of land near the Municipality of Loiza, Puerto Rico for
future real estate development.
INCOME TAXES
FEDERAL TAXES
As a Florida corporation, through December 31, 1997, the Company was
subject to federal income taxes on its worldwide operations. For U.S. income tax
purposes, the Company had elected the benefits of Section
5
936 ("Section 936") of the Internal Revenue Code ("the "Code"), which provided a
credit against the Company's income tax liability based generally on a portion
of wages paid by the Company in Puerto Rico.
The Small Business Job Protection Act of 1996 (the "1996 Amendments")
enacted into law on August 20, 1996, further amended Section 936 by repealing
the credit available under this Section subject to a ten-year grandfather rule
applicable only for corporations that were actively conducting a trade or
business in Puerto Rico on October 13, 1995. In light of the phase-out of the
benefits of Section 936, the Company decided to change its jurisdiction of
incorporation to Puerto Rico, where it enjoys substantial tax benefits as
discussed below. As a Puerto Rico corporation, effective January 1, 1998, the
Company is generally only subject to U.S. income taxation to the extent it is
engaged in a trade or business in the United States or receives income from
sources in the United States.
PUERTO RICO TAXES
The Company is also subject to Puerto Rico income taxes from its Puerto
Rico operations. Subject to certain limitations, during 1997 and 1996 the
Company's federal income tax liability was creditable against its Puerto Rico
income tax liability.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico
(Act. No. 225 of December 1, 1995, as amended) provides the Company with a 90%
tax exemption for income derived from "bonafide" agricultural activities within
Puerto Rico, including sales within and outside Puerto Rico, as well as a 100%
exemption from property, municipal and excise taxes. The Act defines "bona fide
agricultural activity" to include the nursery business. The Act became effective
for taxable years commencing on or after December 1, 1995.
Prior to the adoption of the Agricultural Incentives Act, the Company had
obtained a grant of tax exemption from the Puerto Rico government under the
Puerto Rico Tax Incentives Act of 1987, granting it an exemption from income tax
on 90% of its income derived on the Company's export sales from Puerto Rico. The
grant expired in 2002. Due to the benefits of Act. No. 225, the Company
relinquished the export sales grant.
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.
6
ITEM 2. PROPERTIES
During 1998, the Company conducted its operations from nursery facilities
located in Puerto Rico.
VEGA ALTA NURSERY FACILITY
The Company leases a 117 acre nursery facility in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. The facility, which includes the
Company's corporate offices, consists of approximately 1,130,000 square feet of
shade houses, 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 as of January 1, 1993. The
lease provides for an initial term of five years subject to one additional
renewal term of five years at the option of the Company. During the initial term
of the lease, rent was $19,000 per month. The lease also provides that during
the renewal term, the rent increases to the greater of $24,000 per month, or the
original $19,000 per month adjusted on the basis of the increase in the
Wholesale Price Index ("WPI") published by the United States Department of
Labor, Bureau of Labor Statistics, from the WPI which was in effect on January
1, 1993 to the WPI in effect on January 1, 1998. Under the lease, the Company
must pay all taxes on the property, maintain certain insurance coverage and
otherwise maintain and care for the property. The lease also contains an option
which permits the Company to purchase the property at its appraised value at any
time during the term of the lease. In consideration of the option, the Company
must pay $1,000 per month. On January 1, 1998, the Company exercised its renewal
option at a monthly rental of $24,000.
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.
During the years ended December 31, 1998 and 1997, total lease payments to
the Spectors amounted to$309,000 and $249,000, respectively (not including the
monthly payments for the option referred to above).
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 year ended December 31, 1998, and 1997 total lease payments
amounted to $45,000 and $54,000, respectively. Lease payments for 1998 reflect a
rent abatement of $15,000 due to damages caused by Hurricane Georges.
7
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. During the
initial term, total lease payments amount to $33,625 per year. Lease payments
for renewal terms are to be negotiated 90 days prior to each renewal term.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK
HOLDER 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 1998 and 1997. The last reported sales price for the Common Stock on March
15, 1999 was $35/8 per share.
1998 1997
------------------------ ------------------------
QUARTER: HIGH LOW HIGH LOW
- -------- ---- --- ---- ---
First $3 $1 7/8 $3 5/8 $2 1/2
Second 2 1/2 1 5/16 3 1 1/2
Third 4 1 7/16 3 3/8 1 3/8
Fourth 3 2 2 7/8 1 1/2
There were approximately 80 holders of record of the common stock as of
December 31, 1998. 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 in connection with the payment of shares to shareholders
who exercised their statutory dissenter's rights in connection with the
reincorporation of the Company. As of March 15, 1999, the Company had 1,875,332
shares of common stock outstanding.
The Company did not pay any dividends on its common stock during 1998 or
1997. 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.
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.
9
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been taken from the Consolidated
Financial Statements included with this Annual Report on Form 10-K. 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.
10
MARGO CARIBE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
Earnings Statement Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Sales $ 5,349,244 $ 6,548,912 $6,108,865 $4,933,718 $3,679,367
Gross Profit 1,726,173 1,365,335 2,137,340 1,777,358 1,467,202
Selling, general and
administrative expenses 2,122,976 2,604,106 2,130,114 2,110,380 1,782,840
Income (loss) from operations (396,803) (1,238,771) 7,226 (333,022) (315,638)
Loss before income tax provision (1,112,837) (750,534) (553,722) (386,334) (386,798)
Net loss (1,112,837) (750,534) (577,214) (396,334) (510,798)
Net loss per common share - basic ($.59) ($.40) ($.30) ($.21) ($.27)
Weighted average number of
common shares outstanding 1,878,655 1,895,322 1,895,322 1,895,322 1,895,322
Balance Sheet Data:
Working capital $ 3,396,453 $ 4,151,894 $ 4,113,799 $ 5,020,099 $ 5,580,916
Total assets 7,990,208 8,952,088 10,396,211 15,400,582 15,930,657
Long-term debt 85,880 252,883 427,078 354,707 372,424
Stockholders' equity 6,369,643 7,529,980 8,271,350 8,848,402 9,244,855
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
For the year ended December 31, 1998, the Company incurred a net loss of
approximately $1,113,000, compared to a net loss of $751,000 and $577,000 in
1997 and 1996, respectively. These amounts represent a loss per common share
(basic) of $.59, $.40 and $.30 for 1998, 1997 and 1996, respectively.
The Company's net loss for the year ended December 31, 1998 is primarily
the result of three unrelated events experienced during the year. The first of
these events was a decrease in sales of approximately $1.2 million, 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 Hurricane Georges struck Puerto Rico. The hurricane
caused moderate to severe damage to the Company's inventory of plant material
and its infrastructure at both of its locations in Vega Alta and Barranquitas.
Additionally, the Company was not able to resume sales until late October 1998.
The Company believes that it currently maintains adequate insurance
coverage for its facilities and equipment. However, as of March 30, 1999, the
Company had been unable to obtain adequate crop insurance coverage at a
reasonable cost for its inventories nor business interruption coverage for its
operations. The Company intends to continue to seek to obtain crop insurance and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be successful in obtaining such
coverages.
During the year ended December 31, 1997 the Company closed its South
Florida operation and sold its major assets, represented by two parcels of land.
Although the sale of these two properties resulted in a gain of $474,574 for
1997, this gain was more than offset, however, by a loss from operations of
$517,000 from the South Florida operation, arising from storage and maintenance
costs as well as the write down associated with unsalable inventory and certain
other administrative costs related to the closing of the operation. Operations
in Puerto Rico during 1997 were negatively impacted by two increases in minimum
wage effective September 1996 and 1997, both representing an increase of
approximately 21% in production, warehouse and shipping, and landscaping labor
costs. All of the Company's production costs (including labor) are capitalized
as part of inventory. These wage increases combined with storage and maintenance
costs of slow moving inventory caused significant provisions to the inventory
valuation reserve in Puerto Rico.
Operations for the year ended December 31, 1996 were also affected with
storage and maintenance costs of slow moving inventory, as well as other events
which were non-operational in nature.
12
RESULTS OF OPERATIONS
SALES
Consolidated net sales for the year ended December 31, 1998 were
approximately $5,349,000, representing a decrease of 18% from sales of
$6,549,000 in 1997. This decrease in sales for 1998 was principally due to a
reduction in sales of approximately $857,000 to one of the Company's major
customers (principally in sales of lawn and garden products), a decrease in the
volume of landscaping services of approximately $256,000 and the absence of
sales of the discontinued South Florida operation which had sales of
approximately $478,000 in 1997. These decreases were offset by increases from
new customer base as well as a sales contract with the Puerto Rico Department
of Transportation and Public Works of approximately $221,000.
Consolidated net sales for the year ended December 31, 1997 were
approximately $6,549,000, representing a 7% increase from sales of $6,109,000 in
1996. This increase in sales for 1997 was principally due to increased sales of
landscaping services of approximately $707,000. The increase in sales of
landscaping services was offset by a decrease in sales of plant material of
approximately $235,000. This decrease was due to a reduction in sales to two of
the Company's major customers during the third and fourth quarters of 1997.
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,
----------------------------------
1998 1997 1996
---- ---- ----
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 67.8 79.2 65.0
----- ----- -----
Gross profit..................................... 32.2 20.8 35.0
Selling, general and administrative expenses..... 39.7 39.8 34.9
----- ---- -----
Income (loss) from operations.................... (7.5) (19.0) .1
Interest income (expense), net................... 1.2 - (.2)
Other income (expenses) - net.................... (14.5) 7.5 (9.0)
Loss before income tax provision................. (20.8) (11.5) (9.1)
Income tax provision............................. - - (.3)
----- ----- ----
Net loss......................................... (20.8) (11.5) (9.4)
===== ===== ====
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 32%, 21%, and 35%, for the years ended December 31,
1998, 1997 and 1996, respectively.
13
The Company's gross profit for the year ended December 31, 1998 was 32%
compared to 21% for 1997, representing an aggregate increase of 11%. This
increase is principally due to several events experienced during 1997 (as
explained below), including but not limited to, significantly lower charges to
the inventory valuation reserve (only $30,000 for 1998) and increased margins in
sales of lawn and garden products. Sales of landscaping services also resulted
in increased margins principally as a result of improved efficiency during 1998.
Gross profit for 1997 (21%) was adversely affected by the following:
(i) regarding the South Florida operations, during the second quarter of
1997, the Company charged approximately $340,000 (in addition to $170,000
previously included in the inventory valuation reserve at December 31, 1996) to
cost of sales, representing a substantial write down of inventory at this
location. As result, sales of the South Florida operation did not provide any
gross profit during 1997;
(ii) charges to cost of sales during 1997 also included a provision of
$250,000 to the Puerto Rico inventory valuation reserve, arising from storage
and maintenance costs associated with overproduction and slow moving inventory;
and
(iii) during 1997, the Company experienced the effect of two minimum wage
increases of approximately 21%. Production labor comprised approximately 35% of
production costs, being the single highest production cost. Selling prices are
controlled by the market, and as inventory is sold and its cost expensed, any
increase in its components reduced gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses (SG&A) for 1998
were approximately $2,123,000 compared to $2,604,000 in 1997, representing an
18% decrease. This decrease was due to the non-recurrence of approximately
$220,000 incurred at the discontinued South Florida operation during 1997, as
well as decreases in shipping, travel and legal services during 1998.
The Company's SG&A for 1997 were approximately $2,604,000, compared to
$2,130,000 in 1996, representing a 22% increase. These increases were due to
minimum wage increases, (specifically in warehouse and shipping), increase in
repairs and maintenance, as well as professional fees incurred in connection
with the Company's reorganization. In addition to the above, certain costs
associated with the closing of the South Florida operation were expensed as SG&A
during 1997.
OTHER INCOME AND EXPENSE
The increase in interest income for 1998 when compared to 1997, was due to
higher average yields obtained during 1998 with similar investments. The
decrease in interest expense for 1998 compared to 1997 was the result of
reductions in the outstanding principal balances of long-term debt.
HURRICANE GEORGES
As previously mentioned, Hurricane Georges struck Puerto Rico on September
21, 1998. As with other hurricanes, the agricultural industry was the hardest
hit. At its Vega Alta facilities, the Company suffered moderate damage to all of
its fabricated steel structures (shadehouses) and near total destruction of all
its wooden shadehouses and its irrigation systems. Total property written down
as a result of the damages had a book value of approximately $171,000 at
December 31, 1998. At its Barranquitas facilities, moderate damage was also
sustained to a portion of its pull and cable shadehouses and its irrigation
system, however, all of the shadecloth covers were blown away. As of December
31, 1998 the Company had incurred expenses of approximately $694,000 in
connection with clean-up, restoration and debris removal at both locations.
14
The Company's inventory of lawn and garden products did not suffer any
damages. However, inventory of plant material sustained significant damages as a
result of damage and destruction to shadehouses at both Company locations.
Inventory destroyed at both of the Company's locations as of December 31, 1998
had a cost of approximately $492,000 and a net realizable value of $362,000.
As of December 31, 1998, the Company had received approximately $618,000
from its insurers for property damages.
WRITE DOWN OF NOTE RECEIVABLE
The Company owns a note receivable (refer to Note 5 to the accompanying
consolidated financial statements) from the sale of a former subsidiary to a
Dominican Republic company, which had a carrying value of approximately $302,000
at December 31, 1997. The note has been in default since December 1995 and is
collateralized by a second mortgage on property and equipment located in the
Dominican Republic. 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 statements of operations for the
year ended December 31, 1998.
SALE OF LAND IN SOUTH FLORIDA
During 1997, the Company sold two parcels of land in South Florida at an
aggregate gain of $474,574, arising from the Company's decision to close its
South Florida operation.
15
FINANCIAL CONDITION
Although the Company's financial condition at December 31, 1998 was
affected by the damages caused by Hurricane Georges, the Company's current ratio
continues to be strong, with a ratio of 3.2 to 1 at December 31, 1998, compared
to 4.6 to 1 at December 31, 1997.
At December 31, 1998, the Company had cash of approximately $747,000 and
short term investments of $500,000, compared to cash of $1,230,000 and short
term investments of $500,000 at December 31, 1997. The decrease in cash at
December 31, 1998 is principally due to cash flows provided by operations
($25,000) and collection of notes receivable ($40,000), offset by cash outflows
resulting from additions to property and equipment ($374,000), repayment of
long-term debt ($126,000), and acquisition of treasury stock ($47,500).
The increase in current liabilities resulted from expenses incurred in
connection with Hurricane Georges as well as purchases of inventory. As a
result, the Company's debt to equity ratio at December 31, 1998 was 25%,
compared to 19% at December 31, 1997.
Stockholders' equity at December 31, 1998 decreased due to results of
operations for the year. Stockholders' equity also decreased by $47,500 from the
acquisition of treasury stock as a result of the exercise of statutory
dissenters rights by shareholders in connection with the reincorporation of the
Company. There were no dividends declared nor issuance of capital stock during
the year ended December 31, 1998.
INFLATION
The primary inflationary factors which may affect the Company's results of
operations and financial condition are the costs of labor and production
materials such as soil, pots, chemicals, fertilizer and plant cuttings. During
the last three years, the impact of inflation on the results of operations and
financial condition of the Company has been minimal due to the stability of wage
rates (except for the increase in minumium wage experienced during 1997) 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.
YEAR 2000 ISSUE
The inability of computer hardware and software to recognize and properly
process data fields using a four-digit year to define the applicable year is
commonly referred to as the "Year 2000 Issue". As the year 2000 approaches,
computer systems using a two-digit year data field may be unable to accurately
process certain information.
The Company has completed a review and evaluation of its hardware and
software programs and applications and is in the process of modifying and
testing its software and operating systems for Year 2000 compliance. The Company
expects such testing to be complete by September 30, 1999. The testing for the
Company's operating hardware has been completed and is Year 2000 compliant. All
test results are being verified by an external consultant.
While the Company has not initiated formal communications with its
suppliers, management also anticipates there will not be any major Year 2000
compliance issues with them due to the nature of the Company's operations and
due to the fact that the Company does not order or communicate with its
suppliers using any computer based information system.
16
The Company estimates that the total cost of being Year 2000 compliant will
not exceed $75,000, of which approximately $25,000 had been incurred as of
December 31, 1998. The cost of being Year 2000 compliant will be funded through
operating cash flows. The Company anticipates being Year 2000 compliant by late
September 1999. The costs of and completion date on which the Company believes
it will be year 2000 compliant are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
While the Company is taking steps to ensure that its systems are Year 2000
compliant, Year 2000 problems sufferred by third parties, including providers of
basic services, such as telephone, water and electricity, could have an adverse
impact on the daily operations of the Company. The Company does not have a
formal contingency plan to deal with disruptions that may be caused by Year 2000
problems. In the event of any such disruptions, the Company intends to perform
most operational functions manually.
17
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 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.
18
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, 1999. The background and
experience of these persons are summarized in the paragraphs following the
table.
NAME (AGE AT MARCH 15, 1999) POSITIONS WITH THE COMPANY
- ---------------------------- --------------------------
Michael J. Spector (52) Chairman, President, Chief Executive Officer and Director
Margaret D. Spector (47) Secretary and Director
Blas R. Ferraiuoli (54) Director
Frederick D. Moss (70) Director
Michael A. Rubin (56) Director
Guillermo Fradera (49) Vice President - Production
Alfonso Ortega (45) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi (39) 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, 1999.
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 servers as the Secretary and as a director of the
Company. She has held these positions since the organization of the Company in
1981. Since July 1993, Mrs. Spector supervises the Company's lawn and garden
distribution business.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues
to hold that position. Since June 1994, he manages his own law firm in San Juan,
Puerto Rico. He was a partner in the law firm of Axtmayer, Adsuar, Muniz &
Goyco, San Juan, Puerto Rico from March 1994 to June 1994. Prior to March 1994,
he was a partner in the firm of Goldman, Antonetti, Cordova and Axtmayer. Mr.
Ferraiuoli practices civil, corporate and administrative law and has provided
services to the Company since 1987.
19
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. Moss is a director of Summit High
Yield Fund (mutual fund) and the Summit Energy Market Fund (mutual fund).
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. FRADERA currently serves as the Vice President of Production effective
October 1, 1997. Prior to October 1, 1997, he served as Vice President and
General Manager of the Company's South Florida operation. He held these
positions since December 1989. He joined the Company in 1984 and served as Vice
President for Corporate Development from 1987 to 1989.
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 1, 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, 1998. 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 Michael Rubin filed a late
report related to one transaction.
20
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, 1998, 1997 and 1996. No other executive officer of the Company earned more
than $100,000 during 1998.
NUMBER OF
ANNUAL COMPENSATION STOCK
NAME OF INDIVIDUAL AND --------------------- OPTIONS OTHER ANNUAL
POSITION WITH THE COM YEAR SALARY BONUS GRANTED(2) COMPENSATION
------------------------- ---- ------ ----- ------------ ------------
Michael J. Spector 1998 $104,000 $ - 2,500 $8,000(1)
Chairman, President, Chief 1997 160,000 - - 0
Executive Officer and Director 1996 160,000 13,600 17,500 0
- ------------
(1) Represents matching contribution under the Company's Salary Deferral
Retirement Plan.
(2) Includes 2,500 options granted to Mr. Spector for each of 1996 and 1998.
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 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 1998, Messrs. Ferraiuoli, Moss, Rubin and Mrs. Spector each received
an option to acquire 2,500 shares of Common Stock at an exercise price of $1
1/2, expiring on May 29, 2008, in accordance with the 1998 Plan.
GRANT OF STOCK OPTIONS
No stock options were granted to Mr. Michael J. Spector during the year
ended December 31, 1998. 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.
21
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
$ OF SHARES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS FOR OPTION TERM
OPTIONS GRANTED IN EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCALYEAR ($/SHARE)(3) DATE 5% 10%
- -------------------- ------------- ---------- ---------------- ----------- --- ------
Michael J. Spector(1) 2,500 8% $1.65 06-01-03 $625 $1,925
- ------------
(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 for the Company's common
stock on June 1, 1998, the date of grant.
OPTIONS EXERCISED DURING 1998 AND OPTION VALUES AT DECEMBER 31, 1998
The following table sets information on outstanding options held by the
Company's chief executive officer and their value at December 31, 1998. There
were no exercises of options during 1998. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at as of
December 24, 1998, the last day the common stock traded during 1998.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 12/31/98 12/31/98(1)(2)
ACQUIRED VALUE ------------------------------ ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector(1) - - 27,000 13,000 $ - $1,500
- ------------------
(1) Includes 10,000 options held by Margaret D. Spector, the wife of Michael
J. Spector.
(2) Based on the last sales price of $2 1/4 per share on December 24, 1998 and
an exercise price of $3.16 and $3.44 for 20,000 and 7,000 exercisable
options, respectively, and an exercise price of $3.44 and $1.65 for 10,500
and 2,500 of unexercisable options, respectively.
EMPLOYMENT CONTRACTS
The Company does not have any employment contracts with its executive
officers.
SALARY DEFERRAL RETIREMENT PLAN
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of the Puerto Rico Internal Revenue Code
of 1994. The retirement plan covers all employees 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, 1998, the Company accrued $8,000
representing the matching contribution under the retirement plan for Mr.
Spector.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 15, 1999, 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.
23
SECURITY OWNERSHIP AS OF MARCH 15, 1999
NAME
(POSITION WITH THE COMPANY) AMOUNT BENEFICIALLYOWNED(1) PERCENT OF CLASS(1)
--------------------------- --------------------------- -------------------
Michael J. Spector 1,276,682(2) 66.7%
(Executive Officer and Director)
Margaret D. Spector 1,276,682(2) 66.7%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis 185,249(3) 9.9%
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) 14,500(4) (7)
Blas Ferraiuoli (Director) 10,000(4) (7)
Michael A. Rubin (Director) 7,000(5) (7)
All Executive Officers and 1,333,162(6) 68.6%
Directors as a Group
(8 persons)
- ------------
(1) The percent of class held by each person includes the number of shares of
Common Stock the named person(s) has the right to acquire upon exercise of
stock options that are exercisable within 60 days of March 15, 1999 (except
in the case of Mr. and Mrs. Spector in which case all shares issuable upon
exercise of stock options are included whether or not exercisable within 60
days of March 15, 1999), but does not include shares of Common Stock
issuable upon exercise of stock options held by other persons.
(2) Includes 939,394 shares held directly by Mr. Spector and 297,288 shares held
by Mrs. Spector. Also includes stock options to acquire 30,000 and 10,000
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) Includes 6,000 shares issuable upon stock options exercisable on or within
60 days of March 15, 1999
(5) Includes 2,000 shares issuable upon stock option exercisable on or within 60
days of March 15, 1999
(6) Includes 40,000 shares issuable upon exercise of stock options granted to
Mr. and Mrs. Spector as described in footnote (1) above and 27,400 shares
issuable upon exercise of stock options granted to other officers and
directors that are exercisable on or within 60 days of March 15, 1999.
(7) Less than one percent.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMOUNT DUE FROM/TO PRINCIPAL SHAREHOLDER
In connection with the settlement of the Company's litigation with First
Union 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 First Union 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 the residence from a partnesship 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 were converted into a
non-interest bearing note due on March 2001. At December 31, 1998 and 1997, Mr.
Spector owed the Company $290,226 and $291,481, respectively.
LEASE AND OPTION TO PURCHASE PUERTO RICO NURSERY FARM
Effective January 1, 1993, the Company and the Spectors entered into a
lease agreement with respect to the 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.
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. See "Item 2 - Properties."
CERTAIN OTHER RELATIONSHIPS
During 1998 the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(a)(1) and FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(a)(2)
The information called for by this section of Item 14
is set forth in the Financial Statements and Auditor's
Report beginning on page F-1 of this Form 10-K. The index to
Financial Statements and Schedules is set forth on page F-2
of this Form 10-K.
(a)(3) EXHIBITS. The Exhibits set forth in the following Index of the Exhibits are filed as a part of this
report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between Margo Nursery Farms, Inc. and
Margo Transition Corp., (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated
December 31, 1997).
(2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo Transition Corp., dated December 15,
1997, (incorporated by reference to Exhibit 2(a) to the Company's Form 8-K dated December 31,
1997).
(2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into Margo Transition Corp., dated December
15, 1997, (incorporated by reference to Exhibit 2(b) to the Company's Form 8-K dated December
31, 1997).
(3)(a) Certificate of Incorporation as currently in effect, filed herewith.
(3)(b) Certificate of Amendment to Certificate 6 of Incorporation is incorporated by reference to the
Company's Form 8-K dated December 31, 1997.
(3)(c) By-Laws as of January 1, 1998 are incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(4)(a) Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 of Form S-8
Registration Statement (No. 333-59619).
(4)(b) 1998 Stock Option Agreement (Incorporated by reference to Exhibit No. 4.2 of Form S-8
Registration Statement (No. 333-59619).
(4)(c) Form of Stock Option Agreement (Incorporated by reference to Exhibit No. 4.3 of Form S-8
Registration Statement (No. 333-59619).
(10) (a) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 filed April 15,1993:
(i) Lease Agreement dated January 1, 1993 between the
Company and the Spectors.
(b) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed April 15, 1994:
(i) First Amendment to Lease Agreement dated January
1, 1994 between the Company and the Spectors.
(c) Material Contracts incorporated by reference from the Company's
Annual Report on Form 10- K for the year ended December 31, 1994:
26
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(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 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 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 filed with this Form 10-K
(i) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority
(ii) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority
(21) List of Registrant's Subsidiaries (filed herewith)
(23)(a) Consent of Deloitte & Touche LLP
(23)(b) Consent of Kaufman, Rossin & Co.
(27) Financial Data Schedule (filed herewith)
(b) REPORTS ON FORM 8-K.
None.
27
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 30, 1999 By: /s/ MICHAEL J. SPECTOR
-------------------------------------
Michael J. Spector, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 30, 1999 By: /S/ MICHAEL J. SPECTOR
---------------------------------------
Michael J. Spector, Chairman
of the Board and Chief
Executive Officer
Dated: March 30, 1999 By: /S/ MARGARET D. SPECTOR
---------------------------------------
Margaret D. Spector, Director
Dated: March 30, 1999 By: /S/ BLAS R. FERRAIUOLI
---------------------------------------
Blas R. Ferraiuoli, Director
Dated: March 30, 1999 By: /S/ MICHAEL A. RUBIN
---------------------------------------
Michael A. Rubin, Director
Dated: March 30, 1999 By: /S/ FREDERICK D. MOSS
---------------------------------------
Frederick D. Moss, Director
Dated: March 30, 1999 By: /S/ ALFONSO A. ORTEGA PEREZ
---------------------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
28
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1998
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1998
PAGE
----
Independent Auditors' Reports.......................................... F-2
Financial Statements
Consolidated Balance Sheets......................................... F-4
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Shareholders' Equity..................... F-6
Consolidated Statements of Cash Flows............................... F-7
Notes to Consolidated Financial Statements.......................... F-8
SCHEDULES
Schedule II - Valuation and Qualifying Accounts..................... F-29
All other schedules have been omitted since the required information is not
present 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
DELOITTE &
TOUCHE LLP [LETTER HEAD]
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index as Schedule II for the years ended December 31, 1998 and
1997. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of Margo Caribe, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such 1998 and
1997 financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 19, 1999
(March 24, 1999 as to Note 22)
F-2
KAUFMAN ROSSIN [LETTER HEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Margo Caribe, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Margo Caribe, Inc. (f/k/a Margo Nursery
Farms, Inc.) and Subsidiaries for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Margo Caribe, Inc. (f/k/a Margo Nursery Farms, Inc.) and Subsidiaries for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
In connection with our audit of the consolidated financial statements referred
to above, we audited the consolidated financial statement schedule listed under
Item 14(a)(2) for the year ended December 31, 1996. In our opinion, this
schedule presents fairly, in all material respects, the information stated
therein, when considered in relation to the consolidated financial statements
taken as a whole.
/s/ Kaufman, Rossin & Co.
KAUFMAN, ROSSIN & CO.
Miami, Florida
February 25, 1997
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
Current Assets:
Cash and equivalents $ 747,390 $ 1,230,250
Short term investments 500,000 500,000
Accounts receivable, net 1,228,572 1,050,949
Inventories 2,264,372 2,438,128
Prepaid expenses 190,804 101,792
----------- -----------
Total current assets 4,931,138 5,321,119
Property and equipment, net 2,094,799 2,419,595
Due from shareholder 290,226 291,481
Notes receivable 620,413 860,982
Other assets 53,632 58,911
----------- -----------
Total assets $ 7,990,208 $ 8,952,088
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 158,468 $ 117,694
Notes payable 500,000 500,000
Accounts payable 665,140 388,318
Accrued expenses 211,077 163,213
Income taxes payable - -
----------- -----------
Total current liabilities 1,534,685 1,169,225
Long-term debt 85,880 252,883
----------- -----------
Total liabilities 1,620,565 1,422,108
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 250,000
shares authorized, no shares issued - -
Common stock, $.001 par value; 10,000,000
shares authorized, 1,915,122 shares issued,
1,875,322 and 1,895,322 shares outstanding in
1998 and 1997 1,915 1,915
Additional paid-in capital 4,637,706 4,637,706
Retained earnings 1,826,310 2,939,147
Treasury stock, 39,800 and 19,800 common shares
in 1998 and 1997, at cost (96,288) (48,788)
----------- -----------
Total shareholders' equity 6,369,643 7,529,980
----------- -----------
Total liabilities and shareholders' equity $ 7,990,208 $ 8,952,088
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
----------- ----------- -----------
Net Sales $ 5,349,244 $ 6,548,912 $ 6,108,865
Cost of Sales 3,623,071 5,183,577 3,971,525
----------- ----------- -----------
Gross profit 1,726,173 1,365,335 2,137,340
Selling, general and administrative expenses 2,122,976 2,604,106 2,130,114
----------- ----------- -----------
Income (loss) from operations (396,803) (1,238,771) 7,226
----------- ----------- -----------
Other income (expense):
Interest income 122,683 73,060 189,924
Interest expense (62,020) (73,274) (206,316)
Write-down of note receivable (201,621) - -
Loss from damages caused by Hurricane
Georges, net of insurance proceeds (609,009) - -
Gain on sale of land in South Florida - 474,574 -
Litigation expenses - - (87,961)
Litigation settlement - - (255,174)
Provision for impairment of assets
of subsidiary - - (250,000)
Other income 33,933 13,877 48,579
----------- ----------- -----------
(716,034) 488,237 (560,948)
----------- ----------- -----------
Loss before income tax provision (1,112,837) (750,534) (553,722)
Income tax provision - - 23,492
----------- ----------- -----------
Net loss $(1,112,837) $ (750,534) $ (577,214)
=========== =========== ===========
Loss per common share - basic $ (.59) $ (.40) $ (.30)
=========== =========== ===========
Weighted average common shares 1,878,655 1,895,322 1,895,322
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
--------- ------- ---------- ---------- -------- ------- -----------
Balance at December 31, 1995 1,895,322 $ 1,915 $4,637,706 $4,266,895 $(48,788) $(9,326) $ 8,848,402
Net loss - - - (577,214) - - (577,214)
Foreign currency translation gain - - - - - 162 162
--------- ------- ---------- ---------- -------- ------- -----------
Balance at December 31, 1996 1,895,322 1,915 4,637,706 3,689,681 (48,788) (9,164) 8,271,350
Realized loss on translation
adjustment - - - - - 9,164 9,164
Net loss - - - (750,534) - - (750,534)
--------- ------- ---------- ---------- -------- ------- -----------
Balance at December 31, 1997 1,895,322 1,915 4,637,706 2,939,147 (48,788) - 7,529,980
Net loss - - - (1,112,837) - - (1,112,837)
Acquisition of treasury stock, at
cost (20,000) - - - (47,500) - (47,500)
--------- ------- ---------- ---------- -------- ------- -----------
Balance at December 31, 1998 1,875,322 $ 1,915 $4,637,706 $1,826,310 $(96,288) $ - $ 6,369,643
========= ======= ========== ========== ======== ======= ===========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,112,837) $ (750,534) $ (577,214)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 527,791 491,634 467,261
Provision for inventory valuation reserve 30,000 420,000 252,000
Write-down of note receivable 201,621 - -
Loss on disposal of property and equipment
related to Hurricane Georges 171,039 - -
Realized loss on translation adjustment - 9,164 -
Gain on sale of land in South Florida - (474,574) -
Provision for possible bad debts 35,900 37,515 4,000
Provision for impairment of assets of subsidiary - - 250,000
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (213,523) (80,517) (319,782)
Inventories 143,756 (121,019) (648,736)
Prepaid expenses (89,012) 14,244 53,571
Advances from (to) shareholders 1,255 (17,829) (106,786)
Other assets 5,279 8,238 74,525
Accounts payable 276,822 (242,254) 258,547
Accrued expenses 46,812 (12,421) (1,379,553)
Income taxes payable - (23,492) 23,492
----------- ----------- -----------
Net cash provided by (used in) operating activities 24,903 (741,845) (1,648,675)
----------- ----------- -----------
Cash flows from investing activities:
Decrease in restricted cash - - 6,732,597
Decrease (increase) in short-term investments - 504,000 (504,000)
Purchases of property and equipment (374,034) (109,639) (497,308)
Increase in due from shareholder - - (340,158)
Proceeds from sale of land in South Florida - 812,630 -
Increase in notes receivable - (6,800) -
Collection on notes receivable 40,000 - 7,667
----------- ----------- -----------
Net cash provided by (used in) investing activities (334,034) 1,200,191 5,398,798
----------- ----------- -----------
Cash flows from financing activities:
Acquisition of treasury stock (47,500) - -
Proceeds from long-term debt - - 122,000
Repayments of long-term debt (126,229) (174,586) (3,711,285)
----------- ----------- -----------
Net cash used in financing activities (173,729) (174,586) (3,589,285)
----------- ----------- -----------
Net increase (decrease) in cash and equivalents (482,860) 283,760 160,838
Effect of change in exchange rates on cash - - 162
Cash and equivalents at beginning of year 1,230,250 946,490 785,490
----------- ----------- -----------
Cash and equivalents at end of year $ 747,390 $ 1,230,250 $ 946,490
=========== =========== ===========
See accompanying notes to consolidated financial statments.
F-7
MARGO CARIBE, INC. AND SUBSIDIARIES
(FORMERLY MARGO NURSERY FARMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Margo Caribe, Inc. and subsidiaries (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.
During 1998, the Company was also engaged in seeking real estate sites for the
development of residential housing projects.
The Company's primary facility is located in Vega Alta, Puerto Rico. From this
facility, the Company sells principally to customers in Puerto Rico and the
Caribbean.
Effective December 31, 1997, the Company changed its jurisdiction of
incorporation from Florida to the Commonwealth of Puerto Rico. The
reincorporation was accomplished by means of a merger of the Florida corporation
into a newly created Puerto Rico corporation, with the new company being the
surviving corporation of such merger. As part of the merger, the new Puerto Rico
corporation then changed its name to Margo Nursery Farms, Inc.
Prior to the consummation of the above reincorporation, Margo Bay Farms, Inc. a
wholly-owned subsidiary operating in South Florida, was merged with and into its
parent company, Margo Nursery Farms, Inc. This merger was effective December 12,
1997, after the Company closed its South Florida operations due to its lack of
profitability, and sold the two nursery farms which comprised its operations.
Furthermore, effective June 1, 1998, the Company adopted a holding company
structure. The restructuring was accomplished by means of Margo Nursery Farms,
Inc. ("Margo") transferring substantially all of its assets and liabilities to a
newly formed Puerto Rico subsidiary ("Newco") in return for all the outstanding
stock of Newco. Newco continued to conduct the business previously operated by
Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo
Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as
the other existing subsidiar ies of Margo. In connection with the holding
company restructur ing, Margo changed its corporate name to Margo Caribe, Inc.
F-8
(a) PRINCIPLES OF CONSOLIDATION
For the year ended December 31, 1998 the accompanying consolidated financial
statements include the financial statements of Margo Caribe, Inc. and its
wholly-owned subsidiaries, Margo Nursery Farms, Inc., Margo Landscaping and
Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc. and
Margo Development Corporation. For the years ended December 31, 1997 and 1996,
these consolidated financial statements also include the financial statements of
Margo Bay Farms, Inc. and its wholly owned subsidiaries, Tropiflower, Inc. and
Margo Imports, B.V. (a Netherlands company). 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 or
less to be cash equivalents. At December 31, 1998 and 1997, cash and cash
equivalents include $500,000 invested in a certificate of deposit bearing
interest at 4.6% and 5.65%, respectively.
(c) INVENTORIES
Inventory of plant material includes the cost of seeds, cuttings, pots, soil,
chemicals, fertilizer, direct labor and an allocation of overhead costs such as
depreciation and rent, among others. Inventories of plants 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 or market.
(d) PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property and equipment are carried at acquisition cost. Deprecia tion and
amortization are provided over the estimated useful lives of the respective
assets on a straight-line basis. Such useful lives range from four to twenty
years.
The Company considers depreciation of certain facilities, equipment and stock
plants as a direct cost of production of inventory. As inventory is sold, such
cost is charged to cost of sales.
(e) FOREIGN CURRENCY TRANSLATION
Assets and liabilities outside the United States and Puerto Rico are translated
to U.S. Dollars using exchange rates at the balance sheet date. Revenues and
expenses are translated at the average rates of exchange during the applicable
period. Effects of translation adjustments are deferred and included as a
separate component of shareholders' equity. There were no balances or
F-9
transactions involving foreign currency translation as of December 31, 1998, or
for the year then ended.
(f) REVENUE RECOGNITION
The Company recognizes sales of foliage and lawn and garden products upon
shipment from its facilities to customers.
(g) INCOME TAXES
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.
Prior to the reincorporation, the Company was a Florida Corporation and,
therefore, was required to file a final federal corporate income tax return for
the taxable year ended December 31, 1997. However, the Company elected to be
treated as a possessions corporation under Section 936 of the Internal Revenue
Code, and accordingly, received a credit of federal income tax payable for
operations in Puerto Rico. During 1993, the Internal Revenue Code was amended to
reduce the benefits available under Section 936. During 1996, the Internal
Revenue Code was further amended and Section 936 was repealed subject to a
ten-year grandfather rule. During the ten-year grandfather period, the credit is
limited to certain caps based on the taxpayer's Puerto Rico income over a base
period ending in October 1995. These changes were effective for taxable years
commencing after December 31, 1993. For the years ended December 31, 1997 and
1996, there were no tax effects arising as a result of these changes. Margo Bay
Farms, Inc., also a former Florida corporation, filed a final federal income tax
return for the year ended December 31, 1997.
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. The Act became
efective for taxable years commencing on or after December 1, 1995.
Prior to the enactment of the Agricultural Tax Incentives Act, Margo Nursery
Farms, Inc. had been granted a 90% exemption from property taxes and from income
derived from its export sales, and a 60% exemption from volume of business tax
related to export sales, under the Puerto Rico Industrial Incentives Act of
1987. The exemption is for a period of 15 years commencing on July 6,
F-10
1987. Due to the benefits of Act. No. 225, the Company relin quished this grant.
(h) LOSS PER COMMON SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS"). It replaces the
presentation of primary EPS with basic EPS, and requires dual presentation of
basic and diluted EPS on the face of the statement of operations. 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.
Loss per share amounts for each of the years presented have been computed in
accordance with the provisions of SFAS 128. Dilutive loss per share has not been
presented as the effect of considering outstanding stock options is
antidilutive.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts included in the consolidated financial statements for cash and cash
equivalents, short-term investments, accounts receivable, notes payable,
accounts payable and accrued expenses reflect their fair value due to the
short-term maturity of these instruments. The fair values of the Company's other
financial instruments are discussed in Notes 5 and 9.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of property and equipment is evaluated periodi cally 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. No indications of impairment are evident as a result of such
review as of December 31, 1998.
(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 compensa tion cost measurement
criteria is not required to be adopted, SFAS
F-11
123 requires disclosure of pro forma information regarding the effects of the
application of its compensation cost measurement criteria and of other
information.
(l) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb possible losses on existing accounts receivable that may
become uncollectible based on evaluations of collectibility and prior credit
experience. Because on 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 inventory valuation allowance is also an estimate which is established
through charges to cost of goods sold. Management's judgement in determining the
adequacy of the allowance is based on several factors which include, but are not
limited to, costs of specific inventory items, sales histories of these items
and management's judgement with respect to future marketability of the
inventory. Based on the above, it is reasonably possible the Company's estimate
of the inventory valuation allowance will change in the near term. The valuation
allowance at December 31, 1998 and 1997 was $200,000 and $300,000, respectively.
Set forth below is the movement of the inventory valuation allowance for the
years ended December 31, 1998 and 1997:
DESCRIPTION 1998 1997
----------- -------- --------
Beginning balance $300,000 $420,000
Provisions 30,000 420,000
Write downs (130,000) (540,000)
-------- --------
Ending balance $200,000 $300,000
======== ========
The Company has recorded a deferred tax asset of approximately $358,000 which is
offset by a valuation allowance. Realization of the deferred tax asset is
dependent on generating sufficient taxable income in the future. The amount of
the deferred tax asset considered realizable could change in the near term if
estimates of future taxable income are increased.
F-12
(m) COMPREHENSIVE INCOME
Effective January 1, 1998, the Financial Accounting Standards Board issued
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". Comprehensive
income is any change in shareholders' equity during a period, arising from
transactions, events or circumstances through nonowner sources. SFAS 130
establishes standards for disclosing the elements and amounts of comprehensive
income. The Company did not adopt of SFAS 130 since its applica tion would not
have a significant effect on the accompanying consolidated financial statements.
NOTE 2 - INVENTORIES
At December 31, 1998 and 1997, inventories comprised the following:
DESCRIPTION 1998 1997
----------- ---------- ----------
Plant material $1,900,250 $2,152,249
Lawn and garden products 347,637 359,112
Raw material and supplies 216,485 226,767
---------- ----------
2,464,372 2,738,128
Less valuation allowance (200,000) (300,000)
---------- ----------
$2,264,372 $2,438,128
========== ==========
NOTE 3 - ACCOUNTS RECEIVABLE
At December 31, 1998 and 1997, accounts receivable comprised the following:
DESCRIPTION 1998 1997
----------- ---------- ----------
Trade receivables $1,260,629 $1,010,653
Government reimbursement 57,887 70,336
Accrued interest 6,140 11,149
Employee advances 16,063 28,011
Other accounts receivable 11,553 6,800
---------- ----------
1,352,272 1,126,949
Less allowance for doubtful
accounts (123,700) (76,000)
---------- ----------
$1,228,572 $1,050,949
========== ==========
NOTE 4 - SHORT TERM INVESTMENTS
At December 31, 1998 and 1997, short term investments consisted of a $500,000
certificate of deposit bearing interest at 4.5% and
F-13
5.35%, respectively, which was pledged as collateral for notes payable (refer to
Note 8).
NOTE 5 - NOTES RECEIVABLE
The Company owns a note receivable with an outstanding principal balance of
$996,962, from the sale of Cariplant S.A. (a former Dominican Republic
subsidiary) to Altec International, C. por A. ("Altec"), another Dominican
Republic company. The note is collateralized by the common stock and personal
guarantee of the major shareholder of Cariplant.
From the inception of the note in March 1993, the Company received several
payments through December 1995. However, Altec has been unable to comply with
the terms of the note.
Due to the unfavorable collection experience as well as the difficulties of
operating in the Dominican Republic, in 1994 Company management wrote down the
carrying amount of the note to $316,000 ($301,621 at June 30, 1998),
representing the estimated value of Cariplant's land and related improvements,
including buildings, shadehouses, and fixed and installed equipment.
On February 12, 1997, the Company obtained a junior lien on Cariplant's property
and equipment and entered into an agreement with Altec to modify the repayment
terms of the unpaid principal balance of $996,962, with payments of principal
and interest commencing in the year 2000. Payment of interest on the note was
waived through January 1, 2000.
On September 23, 1998, the Dominican Republic was struck by Hurricane Georges
severely damaging Cariplant's facilities. As a result of the damages caused by
the hurricane, the Company determined to write down the carrying value of the
note to $100,000. The write down, amounting to $201,621 was included as an other
expense in the accompanying consolidated statements of operations for the year
ended December 31, 1998.
At December 31, 1998 and 1997, notes receivable comprised the following:
F-14
DESCRIPTION 1998 1997
----------- -------- --------
Note receivable from Altec $100,000 $301,621
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)) 475,000 475,000
10% note, collateralized by real
property 26,331 26,331
Non-interest bearing notes, due on
demand, personally guaranteed by
present and former Company personnel. 19,082 58,030
-------- --------
$620,413 $860,982
======== ========
Amounts reflected in the balance sheet for notes receivable approximate their
current fair values based on market interest rates for comparable risks,
maturities and collateral. With respect to the Altec note, management believes
it is not practica ble to estimate its fair value because of the difference
between the face value of the note and its carrying amount, deferral of
principal and interest payments until the year 2000 and other factors.
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 1998 and 1997, property and equipment comprised the following:
1998 1997
---------- ----------
Leasehold improvements $1,590,145 $1,860,754
Equipment and fixtures 1,618,312 1,504,103
Transportation equipment 407,266 747,180
Real estate property 224,327 224,327
---------- ----------
3,840,050 4,336,364
Less accumulated depreciation and
amortization (1,745,251) (1,916,769)
---------- ----------
$2,094,799 $2,419,595
========== ==========
During the years ended December 31, 1998, 1997, and 1996, deprecia tion expense
charged to production was approximately $276,000, $258,000, and $287,000,
respectively.
F-15
NOTE 7 - DUE FROM SHAREHOLDER
At December 31, 1998 and 1997, amounts due from shareholder principally arise
from the settlement of litigation with the Company's former principal lender
(refer to Notes 12 and 16(a)). In March 1998, the Company's major shareholder
signed a non-interest bearing note due on March 2001 for $285,538 of the
outstanding balance.
NOTE 8 - NOTES PAYABLE
At December 31, 1998 and 1997, the Company had short-term borrowings of $500,000
with a commercial bank in Puerto Rico collateralized by a certificate of
deposit. The notes bear interest at 1% over the rate earned by a $500,000
certificate of deposit (5.5% and 6.35% at December 31, 1998 and 1997, respec
tively).
NOTE 9 - LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt comprised the following:
DESCRIPTION 1998 1997
----------- ---------- ----------
Five-year term loans, variable
interest rate, 8.0% and 8.5% at
December 31, 1998 and 1997,
respectively, payable in quarterly in-
stallments of approximately $31,000
through January 2000 and $8,000
through October 2001, including
interest. The loans are collatera-
lized by transportation and farm
equipment $ 214,871 $ 316,997
9.25% commercial loan, payable in
monthly installments of $2,000, including
interest, through April 2000, collateralized by real
estate property 29,477 53,580
---------- ----------
244,348 370,577
Less current portion (158,468) (117,694)
---------- ----------
Long-term debt $ 85,880 $ 252,883
========== ==========
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.
F-16
The annual aggregate maturities of long-term debt and other financing
obligations are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
1999 $158,468
2000 61,605
2001 24,275
--------
$244,348
========
NOTE 10 - HURRICANE GEORGES
On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3
hurricane on the Saffir/Simpson scale. The hurricane severely damaged a portion
of the Company's facilities (shadehouses) and inventory of plant material.
For the year ended December 31, 1998, as a result of the damages caused by the
hurricane, the Company recorded the following loss:
DESCRIPTION AMOUNT
----------- ----------
Inventory damaged or destroyed (cost of $491,767
less valuation allowance of $130,000) $ 361,767
Restoration, clean-up and debris removal 696,373
Book 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
==========
NOTE 11 - INCOME TAXES
The Company provides for income taxes using the applicable statutory tax rates
in the related jurisdictions where it operates. The provision for income taxes,
as reflected in the accompanying statements of operations for 1998, 1997 and
1996, does not bear a normal relationship to results of operations due to
several items, such as the 90% tax exemption and unutilized net loss
carryforwards.
F-17
Income tax expense for the years ended December 31, 1998, 1997 and 1996
consisted of the following:
1998 1997 1996
------- -------- -------
Current:
Puerto Rico $ - $ - $ -
United States - - 23,492
Deferred - - -
------- -------- -------
$ - $ - $23,492
======= ======== =======
Set forth below are explanations for the differences between the income tax
provision and the amount computed by applying the Puerto Rico statutory income
tax rate of 39% (for 1997 and 1996, the federal statutory income tax rate of 34%
was used) to loss before income tax provision:
1998 1997 1996
--------- --------- ---------
Income tax benefit computed
by applying tax rate $(434,005) $(255,181) $(188,265)
(Increase) decrease in in-
come tax benefit resulting
from:
Tax-exempt income - - (17,170)
Puerto Rico tax exemption 334,951 141,706 (67,563)
Effect of Florida and Puerto
Rico taxes (benefits) - (11,807) (10,022)
Increase (decrease) in
valuation allowance 99,054 (469,100) 338,697
Federal tax attributes lost
as a result of reorganiza-
tion, including net operat-
ing loss carryforwards - 580,960 -
Unutilized losses (untaxed
income) of foreign subsi-
diaries - - (4,094)
Other differences - 13,422 (28,091)
--------- --------- ---------
$ - $ - $ 23,492
========= ========= =========
F-18
Deferred income taxes were recognized in the consolidated balance sheet at
December 31, 1998 and 1997 due to the tax effect of temporary differences and
loss carryforwards as follows:
1998 1997
--------- ---------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 352,880 $ 97,470
Valuation allowances for inventory and
accounts receivable 5,029 16,920
--------- ---------
357,909 114,390
Less valuation allowance (357,909) (114,390)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On May 29, 1996, the Company (including all related entities) and Michael J.
Spector, President and the principal stockholder of the Company entered into a
Settlement Agreement with First Union National Bank of Florida ("the Bank"). The
Settlement Agreement covered all claims brought by the Bank against the Company
and related entities and settled all counterclaims brought by the Company
against the Bank. The Company had also guaranteed $400,000 of personal loans
made to its major shareholder by the Bank, with an outstanding principal balance
of $230,000 at the time of the settlement. The Settlement Agreement provided for
a payment to the Bank of $5,625,000, of which $5,285,000 corresponded to the
Company and $340,000 corresponded to Mr. Spector. The settlement payment made by
the Company resulted in a charge of $255,174 to other expenses for the year
ended December 31, 1996.
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 of the Company.
NOTE 13 - SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
The articles of incorporation of the Company authorize the issuance of 250,000
shares of one cent ($0.01) par value series preferred stock, and the Board of
Directors is authorized to amend the articles of incorporation 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.
F-19
(b) TREASURY STOCK
At December 31, 1997, the Company had 19,800 common shares in treasury at a cost
of $48,788, which were acquired during 1988.
As previously discussed in Note 1, effective December 31, 1997, the Company
reincorporated its parent company from a Florida to a Puerto Rico corporation.
On February 27, 1998, the Company purchased 20,000 shares of common stock at a
cost of $47,500 in connection with the payment of shares to shareholders who
exercised their statutory dissenter's rights regarding the reincorporation.
NOTE 14 - 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 its
major shareholders for an initial five year period at a monthly rental of
$19,000. In addition, the lessors have released the Company from responsibility
for any claims arising from the Company's use of a defective fungicide in its
operations at the nursery facility. The Company had an option to renew this
lease for an additional five year period at the greater of $24,000 per month, or
the original $19,000 per month adjusted on the basis of the increase in the
Wholesale Price Index ("WPI") published by the United States Department of
Labor, Bureau of Labor Statistics, from the WPI which was in effect on January
1, 1993 to the WPI in effect on January 1, 1998. On January 1, 1998, the Company
exercised its option to renew the lease agreement with the Spectors at a monthly
rental of $24,000.
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.
Effective January 1, 1994, the Company amended the lease agreement with its
major shareholders to include an additional 27 acres of land adjacent to the
nursery facility at a monthly rental of $1,750. This amendment did not provide
for renewal nor purchase options towards the additional 27 acres of land.
Effective January 1, 1998, the Company and the Spectors entered into an
amendment to the lease agreement which grants the Company the right to continue
to lease the 27 acre parcel on a month to month basis. Either party may
terminate this portion of the lease upon 30 days prior written notice. In
connection with this lease amendment, the Spectors also agreed to reimburse the
Company by no later than March 1, 2001, the
F-20
unamortized value of the leasehold improvements applicable to said parcel as of
the date of termination.
Total rental payments amounted to approximately $309,000 in $249,000 in 1998 and
1997.
(b) PROPERTY IN BARRANQUITAS, PUERTO RICO
Effective January 1, 1997, the Company entered into a lease agreement with Cali
Orchids, Inc., to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial five-year term of the lease, monthly payments
amount to $4,500. During the remaining four years of the initial term of the
lease, monthly payments amount to $5,000. During the first and second renewal
terms, monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
Total rental payments amounted to $45,000 and $54,000 for the years ended
December 31, 1998 and 1997, respectively. Lease payments for 1998 reflect a rent
abatement of $15,000 due to damages caused by Hurricane Georges.
(c) AGGREGATE LEASE OBLIGATIONS AND EXPENSES
The Company's obligations under the above operating lease agree ments in force
at December 31, 1998, assuming the Company exercises its renewal option on the
Barranquitas, Puerto Rico property, are as follows:
YEAR ENDING MINIMUM
DECEMBER 31, LEASE PAYMENTS
------------ --------------
1999 $ 348,000
2000 348,000
2001 348,000
2002 360,000
2003 72,000
Total rental expense under all operating lease agreements amounted to
approximately $354,000, $303,000, and $249,000, for the years ended December 31,
1998, 1997, and 1996, respectively.
F-21
NOTE 15 - STOCK OPTION PLAN
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to replace the Company's existing 1988 Stock Benefits Plan (the "1988
Plan"). Outstanding options granted under the previous plan, including all
related obligations and commit ments, will continue to be honored by the
Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can
award options to purchase up to 200,000 shares of common stock (exclusive of
outstanding options under the previous plan) to eligible employees at 100% of
the fair market value at the time of the grant, except that options granted to
persons owning 10% or more of the outstanding common stock carry an exercise
price equal to 110% of the fair market value at the date of grant. The 1998 Plan
also provides for the automatic grant of options to purchase 2,500 shares of
common stock to each non-employee director on the first business day following
every annual meeting of shareholders.
Options generally vest 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, 1996, 1997 and 1998, and changes during the years ended on those
dates, are as follows:
PRICE PER SHARE
------------------------
WEIGHTED
AVERAGE
DESCRIPTION SHARES RANGE PRICE
----------- ------- -------------- --------
Outstanding, January 1, 1996 67,250 $2.00 to $3.16 $2.93
Granted 46,500 3.13 to 3.44 3.25
Exercised - - -
------- -------------- -----
Outstanding, December 31, 1996 113,750 2.00 to 3.44 3.06
Granted - - -
Exercised - - -
Forfeited 27,500 2.00 TO 3.13 2.88
------- -------------- -----
Outstanding, December 31, 1997 86,250 2.00 to 3.44 3.12
Granted 31,000 1.50 to 1.94 1.81
Exercised - - -
Forfeited 1,250 2.00 2.00
------- -------------- -----
Outstanding, December 31, 1998 116,000 $1.50 to $3.44 $2.78
======= ============== =====
F-22
The following table summarizes information about stock options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
$2.88-$3.16 43,500 4.5 $3.01 43,500 $3.01
3.13- 3.44 41,500 7.6 3.26 16,600 3.26
1.50- 1.94 31,000 9.4 1.81 - -
- ----------- ------- --- ----- ------ -----
$1.50-$3.44 116,000 6.9 $2.78 60,100 $3.08
=========== ======= === ===== ====== =====
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 the Plan. Had compensation expense been
determined based upon the fair value at the grant date for awards under the 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 year old and have completed one year of
service. The Company did not make any cash contributions to the retirement plan
during 1998.
NOTE 16 - SUPPLEMENTAL DISCLOSURES FOR THE STATEMENTS OF CASH FLOWS
(a) NON-CASH INVESTING ACTIVITIES
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.
F-23
During the year ended December 31, 1997, the Company wrote off stock plants with
a cost of $97,277 and a book value of $72,951. The write off was charged to an
accrual made as of December 31, 1996, for the possible impairment of assets at
the Company's South Florida location.
During 1997, the Company sold two properties at its South Florida location with
a cost of $1,088,594 and a book value of $990,105. Included in the determination
of the $474,574 gain on the sale of the property sold were $177,049 representing
the remaining balance of the accrual made at December 31, 1996 for the possible
impair ment of assets at the Company's South Florida location. In connection
with the sale of one of the properties, the Company received a $475,000 mortgage
note from the buyer as part of the sales price.
During the year ended December 31, 1996, the Company acquired a residence
(previously leased by the Company) from a partnership. The purchase price of the
residence, determined by an independent certified real estate appraiser,
amounted to $220,800. Regarding the acquisition, the Company assumed a
commercial loan amounting to $87,789, owed by the partnership, recorded an
account payable to the Company's major shareholders amounting to $66,506, and
applied $57,562 and $8,943 to the principal and interest, respectively, of a
note receivable owed by a Company employee.
During 1996, the Company acquired a vehicle with a cost of $28,477 (including a
7 year maintenance contract of $2,660) by assuming a loan for the same amount.
(b) OTHER CASH FLOW TRANSACTIONS
During the years ended December 31, 1998, 1997 and 1996, the Company made
interest payments of approximately $62,000, $75,500, and $1,513,000,
respectively, and made income tax payments of $23,500 during the year ended
December 31, 1997. During the years ended December 31, 1998 and 1996, the
Company did not make any income tax payments.
NOTE 17 - MAJOR CUSTOMERS
During 1998, 1997 and 1996 the Company's single largest customer accounted for
approximately 13% ($683,000) 24% ($1,540,000), and 27% ($1,621,000),
respectively, of the Company's net sales.
NOTE 18 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded a $250,000 provision for
impairment of assets for its South Florida operation (Margo Bay Farms, Inc.).
F-24
NOTE 19 - DISPOSAL OF MARGO IMPORTS, B.V. AND MARGO BAY FARMS, INC.
In 1991, the Company formed Margo Imports, B. V., a Netherlands corporation, to
market Company products in Europe. In March 1993, the Company discontinued these
operations in connection with the sale of Cariplant, S.A. (refer to Note 5).
Effective January 1, 1997, the Company disposed of Margo Imports, B. V.
recording the accumulated deficit in Margo Bay Farms, Inc., owner of all its
outstanding common stock.
Regarding the Company's South Florida operation (Margo Bay Farms, Inc.), due to
the strong competition, inadequate sales levels and lack of profitability, on
August 15, 1997, the Company's Board of Directors determined to close this
operation effective September 30, 1997 and dispose of all related assets. On
September 29 and November 28, 1997, the Company sold two nursery farms (a 54
acre and a 20 acre tract) which comprised the Company's South Florida operation.
The sale of these two properties resulted in a gain of $474,574. On December 12,
1997, Margo Bay Farms, Inc. was merged with and into its parent company, Margo
Nursery Farms, Inc., prior to the reincorporation of the parent company.
The South Florida operation which closed effective September 30, 1997, accounted
for net sales of approximately $478,000, $471,000 and incurred net losses of
$27,000, $708,000 and for the years ended December 31, 1997 and 1996,
respectively.
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, 1998, 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 interrup tion 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.
F-25
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,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way an enterprise reports
information about operating segments in annual financial statements and requires
that enter prises 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. The Statement
requires a reconciliation of total segment revenue and expense items and segment
assets to the amounts 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
account ing 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 are based on internal management accounting
policies. The information presented does not necessarily represent each
segments's financial condition and results of operations as if they were
independent entities.
F-26
1998
--------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------- ---------- ------------- -----------
Revenues from external customers $3,019,406 $ 862,050 $1,467,788 $ 5,349,244
Intersegment revenues 247,785 26,736 - 274,521
Interest income 122,683 - - 122,683
Interest expense 62,020 - - 62,020
Depreciation and amortization 447,285 22,436 58,070 527,791
Segment loss 899,698 142,692 70,447 1,112,837
Segment assets 6,405,425 761,623 823,160 7,990,208
Expenditures for segment assets 374,034 - - 374,034
1997
--------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------- ---------- ------------- -----------
Revenues from external customers $3,435,291 $1,389,617 $1,724,004 $ 6,548,912
Intersegment revenues 415,896 57,487 - 473,383
Interest income 73,060 - - 73,060
Interest expense 73,274 - - 73,274
Depreciation & Amortization 412,716 22,652 56,266 491,634
Segment loss 331,731 239,249 179,554 750,534
Segment assets 7,411,884 827,389 712,815 8,952,088
Expenditures for segment assets 66,826 7,304 35,509 109,639
1996
--------------------------------------------------------
LAWN & GARDEN
PLANTS PRODUCTS LANDSCAPING TOTALS
---------- ---------- ------------- -----------
Revenues from external customers $3,662,732 $1,429,537 $1,016,596 $ 6,108,865
Intersegment revenues 290,223 - - 290,623
Interest income 189,924 - - 189,924
Interest expense 206,316 - - 206,316
Depreciation and amortization 415,939 24,600 26,722 467,261
Segment loss 424,592 18,677 133,945 577,214
Segment assets 8,997,313 1,398,898 - 10,396,211
Expenditures for segment assets 497,308 - - 497,308
F-27
NOTE 22 - SUBSEGUENT EVENT
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 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. During the initial term, total lease
payments amount to $33,625 per year. Lease payments for renewal terms are to be
negotiated 90 days prior to each renewal term.
F-28
SCHEDULE II
MARGO CARIBE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1998:
Allowance for doubtful accounts $ 76,000 $ 35,900 $ 11,800 $ - $123,700
Allowance for inventory valuation $300,000 $ 30,000 - $(130,000) 200,000
-------- -------- --------- --------- --------
$376,000 $ 65,900 $ 11,800 $(130,000) $323,700
======== ======== ========= ========= ========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 79,000 $ 37,515 $ - $ (40,515) $ 76,000
Allowance for inventory valuation $420,000 $420,000 - (540,000) 300,000
-------- -------- --------- --------- --------
$499,000 $457,515 $ - $(580,515) $376,000
======== ======== ========= ========= ========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful account $136,100 $ 4,000 $ - $ (61,100) $ 79,000
Allowance for inventory valuation $350,000 $252,000 - (182,000) 420,000
-------- -------- --------- --------- --------
$486,100 $256,000 $ - $(243,100) $499,000
======== ======== ========= ========= ========
F-29
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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10(g)(i) Lease agreement dated March 24, 1999 with the Puerto Rico
Land Authority
10(g)(ii) Lease agreement dated March 24, 1999 with the Puerto Rico
Land Authority
(21) List of Registrant's Subsidiaries (filed herewith)
(23)(a) Consent of Deloitte & Touche LLP
(23)(b) Consent of Kaufman, Rossin & Co.
(27) Financial Data Schedule (filed herewith)