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, 2001
[ ] 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
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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: $2,155,440 based on the last sales
price of $3.50 per share on March 25, 2002 and 615,840 shares held by
non-affiliates.
The registrant had 1,883,822 shares of common stock, $.001 par value,
outstanding as of March 25, 2002.
MARGO CARIBE, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 6
ITEM 3. LEGAL PROCEEDINGS.................................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS........... 8
PART II
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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 ........ 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 19
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 20
ITEM 11. EXECUTIVE COMPENSATION........................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 26
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................. 28
PART I
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ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains certain "forward looking statements" concerning the
Company's economic future performance. The words "expect", "anticipate" and
similar expressions are meant to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward
looking statements, which speak only as of the date made, and to advise readers
that various factors, including regional and national economic conditions,
natural disasters, competitive and regulatory factors and legislative changes,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligation, to update any forward looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
GENERAL
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The principal business of Margo Caribe, Inc. and its subsidiaries
(collectively, the "Company") is the production and distribution of a wide range
of both indoor and outdoor tropical foliage and flowering plants. The Company
also distributes lawn and garden products and provides landscaping design,
installation and maintenance services. The Company is also engaged in the
manufacturing and distribution of "Rain Forest" products, which include planting
media and aggregates. The Company's real estate development division is
currently permitting and designing an affordable housing project in the
Municipality of Arecibo, Puerto Rico.
PRINCIPAL OPERATIONS
- --------------------
During 2001 and 2000, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico"). These operations are described below.
The Company's operations are conducted at a 92 acre nursery farm in Vega
Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre
nursery in the Municipality of Barranquitas, Puerto Rico. The 92 acre farm is
leased from Michael J. Spector and Margaret D. Spector, who are directors,
officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS -- Lease and Option to Purchase Main Nursery Farm"
herein. The 13 acre facility in the Municipality of Barranquitas is leased from
Cali Orchids, Inc., an unrelated third party.
The Company's operations in Puerto Rico include Margo Caribe, Inc. (the
holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Flora, Inc.
("Margo Flora"), Margo Landscaping & Design, Inc. ("Landscaping"), Margo Garden
Products, Inc. ("Garden Products"), Rain Forest Products Group, Inc. ("Rain
Forest"), Margo Development Corporation ("Margo Development"), and Garrochales
Construction and Development Corporation ("Garrochales Construction"), all
Puerto Rico corporations.
-1-
Nursery Farms, which operates under the trade name of Margo Farms del
Caribe, is engaged in the production and distribution of tropical and flowering
plants. Its products are primarily utilized for the interior and exterior
landscaping of office buildings, shopping malls, hotels and other commercial
sites, as well as private residences. In Vega Alta, Nursery Farms produces
various types of palms, flowering and ornamental plants, trees, shrubs, bedding
plants and ground covers. In Barranquitas, Nursery Farms (operating as Margo
Flora) produces orchids, bromeliads, anthuriums, spathiphylum, poincettias and
other interior potted plants. Its customers include wholesalers, retailers,
chain stores and landscapers primarily located in Puerto Rico and the Caribbean.
As a bona fide agricultural enterprise, both Nursery Farms and Margo Flora
enjoy a 90% tax exemption under Puerto Rico law from income derived from its
nursery business in Puerto Rico.
Landscaping provides landscaping, maintenance and design services to
commercial, industrial and residential customers in Puerto Rico and the
Caribbean.
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor of Sunniland Corporation's fertilizer and
pesticide products, Colorite garden hoses, Greenes Fence Company, Fiskars
Consumer Product Division, State Line Bark & Mulch, L.R. Nelson Consumer
Products, Tel-Com decorative pottery, Crysalia plastic pottery, and DEROMA
Italian terracotta pottery for Puerto Rico and the Caribbean. Garden Products
also markets and merchandises Ortho and Round-up brand products for the Scotts
Company at all Home Depot stores operating in Puerto Rico.
Rain Forest is engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock, gravel and related aggregates. Rain
Forest's products are marketed by Garden Products. The Company enjoys a tax
exemption grant from the Government of Puerto Rico for the manufacturing
operations of Rain Forest.
Margo Development Corporation and Garrochales Construction and Development
Corporation are presently engaged in obtaining development permits on a new site
for the development of a residential housing project in the Municipality of
Arecibo, Puerto Rico.
Production
- ----------
The Company's plants are propagated by using cuttings, plugs, liners,
seedlings, air layers, seeds and tissue cultures. Cuttings are obtained from the
Company's own stock plants and from other nurseries for grow-out at the
Company's facilities. The newly planted cuttings take from two months to five
years to mature into finished products, depending on the variety. Bedding plants
and annuals take from four to eight weeks to mature.
The Company's products are either field grown or container grown, depending
on the variety of plants and where they are grown. Most of these products start
out in small pots and are "stepped up" to larger pot sizes over time. The
Company produces both field and container grown material, as well as flowering,
bedding plants and hanging baskets.
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Marketing
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The Company's marketing efforts are primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company targets construction and government projects which require extensive
landscaping. In addition, Landscaping provides landscaping design, installation
and maintenance services which complement the sales function. For large
retailers in Puerto Rico (such as The Home Depot, Wal*Mart Stores, Sam's Club,
Kmart and Costco Wholesale), the Company develops promotional programs which
include deliveries to customer outlets and special pricing based on volume.
During 2001, 2000 and 1999, the Company's two largest customers accounted
for approximately 35%, 30% and 26% of the Company's net sales, respectively. The
first customer (The Home Depot) accounted for 24% in 2001, 17% in 2000 and 14%
in 1999, and the second customer (Wal*Mart Stores) accounted for 11% in 2001,
13% in 2000 and 12% in 1999 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 Industry Segments
- ---------------------------------------------------
The Company has three reportable segments identified by line of business:
the production and marketing of tropical and flowering plants, the sale of
related lawn and garden products and the provision of landscaping services. The
following table sets forth sales for industry segments for the years ended
December 31, 2001, 2000 and 1999. The information is provided after the
elimination of intercompany transactions.
2001 2000 1999
---- ---- ----
(Amounts in 000's)
------------------
Plants $ 3,786 $ 3,827 $ 3,781
Lawn and garden products 2,845 2,104 1,120
Landscaping 2,554 2,372 1,300
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$ 9,185 $ 8,303 $ 6,201
======== ======= =======
Certain financial information concerning industry segments is set forth in
Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and in Note 20 to the Company's Consolidated Financial
Statements included as Item 8 to this Annual Report on Form 10-K.
-3-
Trade Names and Trademark
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The Company utilizes the Trade Names "Margo Farms" and "Margo Farms del
Caribe", and has registered the name "Margo Farms" as a trademark with the
United States Department of Commerce Patent and Trademark Office. In addition,
the Company has registered "Margo Farms del Caribe" (as a trade name) and "Rain
Forest" (as a trademark) with the Department of State of the Commonwealth of
Puerto Rico.
Competition
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At the present time, the Company's sales efforts are primarily focused in
Puerto Rico and the Caribbean. The Company enjoys an advantage over its
competitors because it is the largest producer of quality nursery products in
Puerto Rico. The Company continues expanding its operations in Puerto Rico. Most
of the Company's competitors in Puerto Rico and the Caribbean are smaller
nurseries and landscapers.
Seasonality
- -----------
The demand for plants in Puerto Rico is year round, with increased demand
during spring, late fall and winter.
Employees
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At December 31, 2001, the Company had 162 full time employees, of which 140
were directly involved in nursery production, distribution of lawn and garden
products and landscaping activities, and 22 were involved 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.
-4-
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 25, 2002, the Company had been unable to
obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, the
Company has been unsuccessful in obtaining such insurance coverages during the
past five years, and no assurance can be given that the Company will be able to
obtain such insurance coverages in the foreseeable future.
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities are
being constructed with fabricated steel in an attempt to reduce the damage from
any future storms. Each of the Company's locations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather sensitive plants.
FUTURE OPERATIONS
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The Company will continue to concentrate its economic and managerial
resources in expanding and improving its present operations in Puerto Rico as
well as the Caribbean. 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 currently has
seven stores in Puerto Rico and plans to open one more store during 2002.
The Company is the largest supplier of live goods (plant material) to
Wal*Mart International, which presently has ten stores throughout Puerto Rico,
including a recently opened "super center". The Company also supplies plant
material and lawn and garden products to six Sam's Club, a division of Wal*Mart
International.
The Company is also a supplier to Kmart Corporation in Puerto Rico. Kmart
has 24 stores in Puerto Rico and four stores in the U.S. Virgin Islands. Kmart
promotes its garden centers' sales with the Company's plant material as well as
with lawn and garden products.
During the fourth quarter of 2001, the Company became a supplier to Costco
Wholesale, which opened 2 stores in Puerto Rico and plans to open two additional
stores during 2002.
At December 31, 2001, the Company was engaged in the landscaping of a
commercial shopping center in the Municipality of Dorado, Puerto Rico, as well
as the landscaping of a state road for the Municipality of Bayamon. The Company
also has monthly maintenance contracts with various commercial shopping centers
and housing communities.
-5-
During December 2000, the Company purchased approximately 109 acres of land
in the Municipality of Arecibo, Puerto Rico for the development of a residential
housing project. The Company paid $950,000 plus incidental expenses for this
land. The Company is currently in the process of designing a master development
plan, as well as obtaining development permits for this site. The Company
recently received an endorsement from the Puerto Rico Housing Bank, which will
enable prospective buyers to qualify for government assistance in purchasing
homes from this project.
PUERTO RICO TAXES
- -----------------
The Company's operations of lawn and garden products, landscaping services
and real estate development are fully taxable and subject to Puerto Rico income,
property, municipal and other taxes.
The Company's nursery operations are covered under the Agricultural Tax
Incentives Act of the Commonwealth of Puerto Rico (Act. No. 225 of December 1,
1995, as amended) which provides a 90% tax exemption for income derived from
"bonafide" agricultural activities within Puerto Rico, including sales within
and outside Puerto Rico, as well as a 100% exemption from property, municipal
and excise taxes. The Act defines "bona fide agricultural activity" to include
the nursery business. The Act became effective for taxable years commencing on
or after December 1, 1995.
Rain Forest obtained a grant of tax exemption for its manufacturing
operations from the Puerto Rico Government under the Tax Incentives Act of 1987.
The grant provides a 90% tax exemption from income and property taxes and a 60%
exemption from municipal taxes. The grant is for a period of 15 years,
commencing January 1, 1997.
ITEM 2. PROPERTIES
During 2001, the Company conducted its operations from nursery facilities
located in Puerto Rico.
Vega Alta Nursery Facility
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The Company leases a 92 acre nursery facility in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. This facility includes the Company's
corporate offices, approximately 1,130,000 square feet of shadehouses,
propagation and mist facilities, and 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 one residence
for a field supervisor.
The Vega Alta facility is leased from Michael J. Spector and Margaret D.
Spector (the "Spectors"), who are officers, directors and the major shareholders
of the Company, pursuant to a lease agreement dated January 1, 1993. Under the
lease, the Company is required to pay rent of $24,000 per month and pay all
taxes on the property, maintain certain insurance coverage and otherwise
maintain and care for the property. The lease also contains an option which
permits the Company to purchase the property at its appraised value at any time
during the term of the lease. In consideration of the option, the Company must
pay $1,000 per month. The lease is scheduled to terminate on December 31, 2002,
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but the Spectors have committed to grant the Company an option to extend the
lease for an additional period of five years ending December 31, 2007.
During the years ended December 31, 2001 and 2000, total lease payments to
the Spectors amounted to approximately $288,000 and $290,000, 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 years ended December
31, 2001 and 2000, total lease payments amounted to $60,000.
Other Vega Alta Facilities
- --------------------------
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 area of 321 acres, and are located approximately one mile from the
Company's main nursery facility in Vega Alta. Among other things, the lease
agreement provides for an initial lease term of five years subject to three
additional renewal terms of five years, at the option of the Company. Either
party can terminate the lease upon 30 days written notice. For each of the years
ended December 31, 2001 and 2000, lease payments amounted to approximately
$34,000. During December 2001, the Company terminated this lease agreement with
the Puerto Rico Land Authority because it was determined that the land was not
suitable for its intended use since it is subject to flooding.
Land held for Future Development
- --------------------------------
On December 13, 2000, the Company purchased approximately 109 acres of land
in the Municipality of Arecibo, Puerto Rico for the development of a residential
project. The Company paid $950,000 plus incidental expenses for this land. The
Company is currently in the process of obtaining development permits, and
expects to commence construction during the fourth quarter of 2002.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the Company's financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
The proposals submitted for consideration at the Company's Annual Meeting
of Shareholders held on October 26, 2001, and the results of the voting thereon
were included under Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001, and are incorporated herein by reference.
-8-
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market ("NASDAQ")
under the symbol MRGO.
The following table sets forth the high and low sales prices for the
Company's common stock, as reported by NASDAQ, for each of the calendar quarters
of 2001 and 2000. The last reported sales price for the Common Stock on March
25, 2002 was $3.50 per share.
2001 2000
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Quarter: High Low High Low
-------- ---- --- ---- ---
First $3.38 $1.75 $29.50 $ 2.30
Second 3.50 2.00 29.00 8.00
Third 5.10 2.40 9.75 5.50
Fourth 5.25 3.10 5.50 1.75
There were approximately 62 holders of record of the common stock as of
December 31, 2001. This amount includes custodians, brokers and other
institutions which hold the common stock as nominees for an undetermined number
of beneficial owners. As of March 25, 2002, the Company had 1,883,822 shares of
common stock outstanding.
The Company did not pay any dividends on its common stock during 2001 or
2000. 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
-9-
from sources within Puerto Rico during the taxable year does not exceed $1,300
if single, or $3,000 if married, in which case dividend distributions for said
year will not be subject to Puerto Rico taxes.
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for Margo Caribe, Inc. on a historical basis, for each of the five years ended
December 31, 2001. 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,
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Earnings Statement Data: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $ 9,184,621 $ 8,302,810 $ 6,201,233 $ 5,349,244 $ 6,548,912
Gross profit 3,389,274 2,134,463 2,230,111 1,726,173 1,365,335
Selling, general and administrative expenses 3,021,016 2,583,012 2,395,350 2,122,976 2,604,106
Income (loss) from operations 368,258 (448,549) (165,239) (396,803) (1,238,771)
Net income (loss) 338,443 (1,022,733) (127,867) (1,112,837) (750,534)
Net income (loss) per common share - basic and diluted $ 0.18 ($ 0.54) ($ 0.07) ($ 0.59) ($ 0.40)
Weighted average number of common shares outstanding 1,882,877 1,881,440 1,875,322 1,878,655 1,895,322
Balance Sheet Data:
Working capital $ 3,348,454 $ 2,290,314 $ 4,306,446 $ 3,396,453 $ 4,151,894
Total assets 9,009,021 9,375,396 8,916,981 7,990,208 8,952,088
Long-term debt (excluding current portion) 307,528 239,482 338,597 85,880 252,883
Stockholders' equity 5,579,581 5,238,888 6,241,776 6,369,643 7,529,980
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
MOST SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
The Company's accounting policies are in conformity with accounting
principles generally accepted in the United States of America and have been
consistently applied as of and for the years ended December 31, 2001, 2000 and
1999. The most significant accounting policies are detailed below. For
additional accounting policies, see "Note 1 - Business and Summary of
Significant Accounting Policies", to the accompanying audited consolidated
financial statements.
Revenue recognition - the Company recognizes sales of plants and lawn and
--------------------
garden products upon shipment from its facilities to customers. Revenues
from sales of landscaping services are recognized as plants are installed
at the customers' facilities.
Accounts receivable - are recorded at net realizable value. The Company
--------------------
provides an allowance for the collection of doubtful accounts in an amount
that management believes is adequate to absorb estimated losses on existing
accounts receivable that are estimated (or identified) to be uncollectible
based on evaluations of collectibility and prior credit experience.
Inventory - inventory of plants includes the cost of seeds, cuttings, pots,
---------
soil, and an allocation of chemicals, fertilizers, direct labor and
overhead costs such as depreciation and rent, among others. Inventory of
plants are stated at the lower of cost (first-in, first-out) or market.
Inventory of lawn and garden products are stated at the lower of average
cost or market.
OVERVIEW
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The Company continued to experience sales growth during 2001, despite a
slowing local and U.S. economy. This growth was obtained through the addition of
new products and increasing the customer base in Puerto Rico and the Caribbean.
For the year ended December 31, 2001, the Company had consolidated net
income of approximately $338,000, compared to net losses of $1,023,000 and
$128,000 in 2000 and 1999, respectively. These amounts represent a consolidated
net income (loss) per common share of $.18, ($0.54) and ($.07) for 2001, 2000
and 1999, respectively.
The Company's increase in net income for the year ended December 31, 2001
was due to increases in sales and higher gross profits, which were offset, in
part, by an increase in selling general and administrative expenses, resulting
in income from operations of approximately $368,000.
The Company's net loss for the year ended December 31, 2000 was principally
due to the write off of unsalable inventory to cost of sales, with an
approximate net carrying amount of $439,000, resulting in a loss from operations
of approximately $449,000. This loss from operations was further increased by
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non-recurring expenses related to the termination of a proposed merger of
approximately $553,000, charged as other expenses.
The Company's net loss for the year ended December 31, 1999, was due to an
operating loss of approximately $165,000, which was offset by other income of
$37,000. The operating loss for the year ended December 31, 1999 was principally
due to an increase in selling, general and administrative expenses incurred
during that year.
The Company believes that it currently maintains adequate insurance
coverage for its facilities and equipment. However, as of March 25, 2002, 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, the
Company has been unsuccessful in obtaining such insurance coverages during the
past five years and no assurance can be given that the Company will be
successful in obtaining such coverages in the foreseeable future.
RESULTS OF OPERATIONS
- ---------------------
Sales
- -----
Consolidated net sales for the year ended December 31, 2001 were
approximately $9,185,000, representing an increase of 11% over sales of
$8,303,000 in 2000. This increase in sales was principally due to a 35% increase
in sales of lawn and garden products ($741,000), and an 8% increase in revenues
from landscaping services ($182,000). Sales of plant material decreased by
$41,000. Increase in sales of lawn and garden products was spread among retail
chain stores. Increase in revenues from landscaping services was due to
increased project volume, specifically during the fourth quarter of 2001.
Consolidated net sales for the year ended December 31, 2000 were
approximately $8,303,000, representing an increase of 34% over sales of
$6,201,000 in 1999. The increase in sales for 2000 was principally due to an
increase in revenues from the volume of landscaping services ($1,072,000), and
an increase in sales of lawn and garden products ($984,000) to retail chain
stores such as The Home Depot, Wal*Mart and Sam's Club, Costco Wholesale and
Kmart, with Rain Forest products representing the major increase. Sales of plant
material only increased marginally during 2000.
-13-
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,
-------------------------------
2001 2000 1999
------- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.1 74.3 64.0
------- ------- -------
Gross profit 36.9 25.7 36.0
Selling, general and administrative expenses 32.9 31.1 38.6
------- ------- -------
Income (loss) from operations 4.0 (5.4) (2.6)
Interest income (expense), net (0.5) (.4) .9
Other income (expenses), net 0.3 (6.5) (.4)
------- ------- -------
Income (loss) before income tax provision 3.8 (12.3) (2.1)
Income tax provision -- -- --
------- ------- -------
Net income (loss) 3.8 (12.3) (2.1)
======= ======= =======
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 37%, 26%, and 36%, for the years ended December 31,
2001, 2000 and 1999, respectively.
The Company's consolidated gross profit for the year ended December 31,
2001 was 37% compared to 26% in 2000, representing an overall increase of 11%.
The increase in gross profit was spread among all business segments. Gross
profit from sales of plant material during 2001 was approximately 38% compared
to 25% in 2000. This increase was due to a higher volume of sales (although
overall sales of plant material remained comparable) of certain varieties of
plants with higher gross profit, and the fact that during 2001, there were
significantly less charges to cost of sales from both the maintenance and
write-off of unsalable inventory, as experienced in 2000. Gross profit from
sales of lawn and garden products during 2001 was approximately 41% compared to
31% in 2000. This increase was also due to a higher volume of sales of products
with higher gross profit, and the fact that during 2001 there were no write-offs
of unsalable inventory as experienced in 2000. Gross profit on revenues from
landscaping services was approximately 31% in 2001 compared to 22% in 2000. This
increase was the result of improved performance in project management and
execution during 2001.
The Company's consolidated gross profit for the year ended December 31,
2000 was 26% compared to 36% for 1999, representing an overall decrease of 10%.
This decrease in gross profit was spread among all business segments. Gross
profit from sales of plant material during 2000 was approximately 25% compared
to 37% in 1999. This decrease resulted from significant charges to cost of sales
during the year from storage and maintenance of unsalable inventory, as well as
a year-end write-off of unsalable inventory with a net carrying amount of
approximately $283,000 charged to cost of sales. Gross profit from sales of lawn
and garden products during 2000 was approximately 31% compared to 38% for 1999.
-14-
This decrease was also due to a year-end write-off of unsalable inventory of
approximately $156,000. Gross profit from landscaping services also decreased in
2000 to approximately 22% from 25% in 1999. This 3% decrease in gross profit
during 2000 was due to a low gross profit from a project which accounted for 26%
of landscaping revenues for 2000.
Selling, General and Administrative Expenses
- --------------------------------------------
The Company's selling, general and administrative expenses ("SG&A") for
2001 were approximately $3,021,000 compared to $2,583,000 in 2000, representing
an increase of 17% in dollar terms, and an increase of 2% as a percentage of
sales. The increase in SG&A (in dollar terms) was the result of increases in
shipping and general and administrative expenses and were experienced evenly
throughout the year. Increase in shipping expenses resulted from increased
volume, specifically in sales of lawn and garden products; however, they
remained comparable as a percentage of sales. Increase in general and
administrative expenses was principally in compensation, as a result of the
hiring of a new chief operating officer for the Company.
The Company's SG&A for 2000 were approximately $2,583,000 compared to
$2,395,000 in 1999, representing an increase of 8% in dollar terms, and a
decrease of 8% as a percentage of sales. The increase in SG&A (in dollar terms)
for 2000 was due to increases in shipping, selling and landscaping costs and
expenses, principally from increased sales volume in lawn and garden products
and landscaping services.
Other Income and Expense
- ------------------------
During April 2000, the Company entered into an agreement to merge with a
privately held development stage internet company (iTract, LLC). Because several
of the conditions necessary for the merger to proceed did not occur by the
agreed upon date of March 1, 2001, the Company's Board of Directors decided that
it was not in the best interest of the Company or its shareholders to continue
with the transaction and on March 5, 2001, voted to terminate the merger
agreement.
Other expenses for the year ended December 31, 2001 were approximately
$30,000 compared to $574,000 for 2000. The decrease in other expenses for 2001
was principally due to the non-recurring merger related expenses of $553,000 in
2000, in connection with the terminated merger agreement mentioned above.
Interest income for the year ended December 31, 2001 decreased when
compared to that of 2000 principally from the collection of a note receivable
during the latter part of 2000 and the offsetting of short-term investments
pledged as collateral on notes payable during 2001, as well as lower yields
obtained during 2001 (from decreases in interest rates) on short-term
investments and cash equivalents.
-15-
Interest expense for the year ended December 31, 2001 decreased when
compared to that of 2000 as a result of lower interest rates experienced during
2001, as well as the offsetting of short-term investments to a related note
payable. This decrease in interest expense was offset, in part, by an increase
in long-term debt.
Interest income for the year ended December 31, 2000 remained comparable to
that of 1999, as a result of similar investments yielding similar interest
income.
Interest expense for the year ended December 31, 2000 increased by
approximately $94,000 compared to that of 1999 due to increased borrowings of
notes payable to finance terminated merger plan expenses, as well as to finance
on a short-term basis the acquisition of land held for future development.
Write Down of Note Receivable
- -----------------------------
The Company owns a note receivable from the sale of a former subsidiary to
a Dominican Republic company, which had a carrying value of $100,000 at December
31, 1998. The note is guaranteed by a junior lien on the borrower's property and
equipment located in the Dominican Republic. In February 1997, the Company
modified repayment terms waiving interest and principal payments until January
2000. The borrower did not comply with any of the modified repayment terms. As a
result, during the fourth quarter of 1999, the Company wrote down the carrying
value of the note to $20,000, and included the $80,000 charge as an other
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1999.
FINANCIAL CONDITION
- -------------------
At December 31, 2001, the Company had cash of approximately $839,000,
compared to cash of $973,000 at December 31, 2000. The decrease in cash at
December 31, 2001 was principally due to net cash outflows from operating
activities of $243,000, offset by net cash flows from investing activities of
$38,000 and financing activities of $71,000. Among the net cash outflows from
operations was an increase in accounts receivable and inventory (which resulted
from reduced collections of receivables of $619,000 and an additional investment
in inventories of $340,000), and the acceleration in payment of accounts payable
of $226,000. Net cash flows from investing activities included, among others,
the collection of $349,000 from the Company's principal shareholder, offset by
purchases of equipment of $239,000. Net cash flows from financing activities
included among others, an increase in long-term debt of $222,000, offset by
repayments of $128,000. At December 31, 2001, the Company's current ratio
improved to 2.1 to 1, compared to 1.6 to 1 at December 31, 2000.
The overall decrease in total liabilities at December 31, 2001 was due to
the acceleration in payments of accounts payable previously mentioned and the
application of short-term investments to pay off notes payable of $500,000. As a
result, the Company's debt to equity ratio at December 31, 2001 improved to 61%,
compared to 79% at December 31, 2000.
-16-
Stockholders' equity at December 31, 2001 increased principally due to
results of operations for the year. During the year ended December 31, 2001, the
Company issued 1,500 shares of common stock in connection with the conversion of
stock options. There were no dividends declared during the year ended December
31, 2000.
CURRENT LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------
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 it has
adequate resources to meet its current and anticipated liquidity and capital
requirements. The Company finances its working capital from cash flows from
operations as well as borrowings under two short-term credit facilities with two
local commercial banks. At December 31, 2001, the Company had $2 million of
credit under these facilities, of which approximately $570,000 was available.
During the first quarter of 2002, the Company replaced one of its existing $1
million credit facilities with a new $2.5 million credit facility with another
commercial bank. As of March 25, 2002, the Company has $3.5 million under the
two short-term credit facilities, of which approximately $1.6 million was
available as of such date. The credit facility for $2.5 million is secured by
the Company's trade accounts receivable and inventory. The other credit facility
of $1 million is unsecured.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- --------------------------------------
There were no significant fourth quarter adjustments for the year 2001.
During the fourth quarter of 2000, the Company wrote off unsalable
inventory with an approximate carrying value of $439,000, which were charged to
cost of sales.
During the third quarter of 1999, the Company recorded $150,000 in revenues
based on estimates of amounts to be received in hurricane assistance payments
from the Puerto Rico Department of Agriculture. During the fourth quarter, the
Company was informed by the Puerto Rico Department of Agriculture that the
actual amount to be received in assistance payments was approximately $112,000.
Moreover, the Department of Agriculture informed the Company that the receipt of
the payments would be subject to an agreement that its nursery farm subsidiary
would remain operating as an agricultural business for ten years. Failure to
meet this requirement could result in all or a portion of the amount received as
assistance payments being required to be repaid to the Department of
Agriculture. On the basis of this new information, during the fourth quarter of
1999, the Company took a charge against earnings of $150,000 to reverse the
revenue previously recognized during the third quarter of 1999 and recorded a
receivable and a deferred revenue of approximately $112,000 as of December 31,
1999. During 2000, as a result of a dispute with the lessor of the leased
property, the Company was not able to formalize the agreement referred to above
and therefore reversed the amounts previously recorded as receivable and
deferred revenue.
-17-
During the fourth quarter of 1999, the Company also recorded a charge of to
earnings of $80,000 to write down the carrying value of a note receivable from
$100,000 to $20,000, see "Write Down of Note Receivable".
INFLATION
- ---------
The primary inflationary factors which may affect the Company's results of
operations and financial condition are the costs of labor and production
materials such as soil, pots, chemicals, fertilizer and plant cuttings. During
the last three years, the impact of inflation on the results of operations and
financial condition of the Company has been minimal due to the stability of wage
rates and the availability of production materials from a wide variety of
sources.
The Company does not anticipate that inflation will have a significant
effect on its future earnings or financial condition because increases caused by
inflation are ordinarily recovered through increases in prices.
RISK MANAGEMENT
- ---------------
The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of December 31, 2001, the Company had been unable
to obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, the
Company has been unsuccessful in obtaining such insurance coverage during the
past five years and no assurance can be given that the Company will be able to
obtain such insurance coverages in the foreseeable future.
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities are
being constructed with fabricated steel in an attempt to reduce the damage from
any future storms. Each of the Company's operations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico.
Concentration of credit risk with respect to accounts receivable is mitigated by
monitoring the operations and financial strength of the Company's customers.
Certain short-term certificates of deposit are placed with local financial
institutions. Such credit risk is mitigated by depositing the funds with high
credit quality financial institutions and limiting the amount of credit exposure
in any financial institution.
-18-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the
Company's Consolidated Financial Statements and Schedules and the Independent
Auditors' Report beginning on page F-1 of this Form 10-K. Supplementary data is
not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-19-
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 25, 2002. The background and
experience of these persons are summarized in the paragraphs following the
table.
Name (Age at March 25, 2002) Positions with the Company
- ---------------------------- --------------------------
Michael J. Spector (55) Chairman of the Board, Chief Executive Officer and Director
Margaret D. Spector (50) Secretary and Director
Blas R. Ferraiuoli (57) Director
Michael A. Rubin (59) Director
John A. Wing (65) Director
Ramon L. Dominguez (48) Director
Mark H. Greene (54) Director
J. Fernando Rodriguez (38) Director, President and Chief Operating Officer
Alfonso A. Ortega (48) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi (42) 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 25, 2002.
MR. SPECTOR currently serves as the Chairman of the Board and Chief
Executive Officer of the Company. He has held these positions since the
organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary
and a director of the Company.
MRS. SPECTOR currently serves as the Secretary and as a director of the
Company. She has held these positions since the organization of the Company in
1981.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues
to hold that position. Mr. Ferraiuoli practices civil, corporate and
administrative law in his own law firm since June 1994.
-20-
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. WING was elected a director of the Company on October 26, 2001. Mr.
Wing has been a professor of Law and Finance at the Illinois Institute of
Technology and the Chairman of its Center for the Study of Law and Financial
Markets since July 1998. From 1981 to July 1998, Mr. Wing was the Chairman of
the Board and Chief Executive Officer of the Chicago Corporation. Director,
AmerUS Life Holdings and LDF, Inc. (bank holding company).
MR. DOMINGUEZ was elected as a director of the Company on October 26, 2001.
Mr. Dominguez has served as the President of San Juan Holdings, Inc. (investment
banking) since February 1998 and as the President of RD Capital, Inc.
(broker-dealer) since July 1994.
MR. GREENE was elected as a director of the Company on October 26, 2001.
Mr. Greene has been a principal of the TJAC Group, a real estate development
company involved in the development and management of shopping centers in Puerto
Rico for more than five years.
MR. RODRIGUEZ commenced as President and Chief Operating Officer of the
Company on March 5, 2001. He was elected as a director of the Company on October
26, 2001. From March 1995 to March 2000, Mr. Rodriguez served as executive vice
president of Retail Banking for Banco Santander Puerto Rico.
MR. ORTEGA currently serves as the Vice President, Treasurer and Chief
Financial Officer of the Company. He has held this position since he joined the
Company in January 1993.
MR. LLERANDI currently serves as Vice President of Marketing. He has held
this position since April 1993. He joined the Company in 1988 as Sales Manager
for Puerto Rico.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers to report their ownership of and
transactions in the Company's Common Stock to the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers.
Copies of these reports are also required to be supplied to the Company.
Specific dates for filing these reports have been established by the SEC, and
the Company is required to report in the annual report any failure of its
directors and executive officers to file by the relevant due date any of these
reports during the fiscal year ended December 31, 2001. 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 and Mark
Greene, each failed to timely file two reports related to the purchase of common
shares and Michael J. Spector failed to timely file one report related to the
purchase of common shares.
-21-
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth information regarding compensation of the
Company's Chief Executive Officer and the Company's President during each of the
three years ended December 31, 2001, 2000 and 1999. Mr. Rodriguez was employed
by the Company in March 2001. No other executive officer of the Company earned
more than $100,000 during 2001.
Annual Compensation
---------------------------------------
Number of
Name of Individual and Stock Options Other Annual
Position with the Company Salary Bonus Granted Compensation
------------------------- ------ ----- ------- ------------
Michael J. Spector 2001 $102,000 $ - 2,500(2) $8,000(1)
Chairman, Chief Executive 2000 104,000 - 2,500(2) 8,000
Officer and Director 1999 104,000 - 2,500(2) 8,000
J. Fernando Rodriguez, President 2001 118,000 - 25,000 4,600(3)
(1) Represents matching contribution under the Company's Salary Deferral Retirement Plan.
(2) Represents 2,500 options granted to his spouse, Margaret D. Spector for each of 1999, 2000 and
2001. Mr. Spector may be deemed to beneficially own the options granted to Mrs. Spector.
(3) Represents matching contribution under the Company's Salary Deferral Retirement Plan.
Compensation of Directors
- -------------------------
The directors of the Company who are not employees of the Company are paid
a quarterly retainer fee of $1,000 and an additional $1,000 for each meeting of
the board (or committee thereof) attended, plus any travel and out-of-pocket
expenses incurred in connection with the performance of their duties. No
separate fees are paid for committee meetings attended on the same day as a
regular Board meeting. The directors of the Company who are employed by the
Company do not receive additional compensation for serving as directors. The
Company also provides directors liability insurance for its directors.
As provided under the Company's 1998 Stock Option Plan ("the 1998 Plan")
adopted on April 23, 1998, any nonemployee director of the Company who is in
office on the first business day following any annual meeting of shareholders
shall automatically receive on such date an option to acquire 2,500 shares of
Common Stock at the market price on such date.
During 2001, Messrs. Ferraiuoli, Rubin, Wing, Dominguez, Greene and Mrs.
Spector each received options to acquire 2,500 shares of Common Stock at an
exercise price of $3.75 ($4.13 for Mrs. Spector), expiring on October 29, 2011,
in accordance with the 1998 Plan.
-22-
Grant of Stock Options
- ----------------------
The table below provides certain information regarding stock options
granted to the officers named in the Cash Compensation Table. No stock options
were granted to Michael J. Spector during the year ended December 31, 2001,
however, for SEC reporting purposes, Mr. Spector may be deemed to beneficially
own the options granted to Margaret D. Spector.
Potential realizable
value at assumed
annual rates of stock
price appreciation
for option term
---------------------
# of shares % of total
underlying options
options in granted Exercise Price Expiration
Name granted(2) Fiscal Year ($/share) Date 5% 10%
- ---------------------- ---------- ----------- --------- ----------- -------- --------
Michael J. Spector(1) 2,500 6.25% $4.13(3) 10-29-11 $ 4,945 $13,991
J. Fernando Rodriguez 25,000 62.5% $2.06 03-02-11 $32,388 $82,076
(1) Represents options to acquire 2,500 shares granted to Margaret D. Spector.
(2) Options become exercisable at the rate of 20% on the first, second, third, fourth and fifth anniversary
of the grant date.
(3) The exercise price is based on the last sales price (at 110%) for the Company's common stock on October 26,
2001, the date of grant.
Options Exercised During 2001 and Option Values at December 31, 2001
- --------------------------------------------------------------------
The following table sets information on outstanding options held by the
Company's executive officers and their values at December 31, 2001. There were
no exercises of options during 2001. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at
December 28, 2001, the last day the common stock traded during 2001.
Number of Shares Value of Unexercised
Underlying In-The-Money
Unexercised Options Options at
at 12/31/01 At 12/31/01 (1)(2)
----------------------------- -------------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector(1) - - 40,500 7,000 $12,160(1&2) $ 4,540(1&2)
J. Fernando Rodriguez - - - 25,000 - $36,000(3)
- ---------------
(1) Includes 17,500 options held by Margaret D. Spector, the wife of Michael J. Spector.
(2) Based on the last sales price of $3.50 per share on December 28, 2001, and an exercise price of $3.16, $3.44, $1.65,
$2.75 and $1.93 for 20,000, 17,500, 1,500, 1000 and 500 exercisable options, respectively, and an exercise price of
$1.65, $2.75, $1.93 and $4.13 for 1,000, 1,500, 2,000 and 2,500 of unexercisable options, respectively.
(3) Based on the last sales price of $3.50 on December 28, 2001 and an exercise price of $2.06.
-23-
Employment Contracts
- --------------------
The Company does not have an employment contract with any executive
officer.
Salary Deferral Retirement Plan
- -------------------------------
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of the Puerto Rico Internal Revenue Code
of 1994. The retirement plan covers all employees of Margo Caribe, Inc. who are
at least 21 years of age and is effective from the date of employment. 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, 2001, the
Company paid approximately $53,000 representing the matching contributions under
the retirement plan for all participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 25, 2002, 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.
-24-
Security Ownership as of March 25, 2002
---------------------------------------
Name
----
(Position with the Company) Amount Beneficialy Owned(1) Percent of Class(1)
--------------------------- --------------------------- -------------------
Michael J. Spector 1,315,482(2) 68.1%
(Executive Officer and Director)
Margaret D. Spector 1,315,482(2) 68.1%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis
D.H. Blair Investment Banking Corp. 186,949(3) 9.9%
44 Wall Street
New York, New York 1005
(Five Percent Shareholder)
Blas R. Ferraiuoli (Director) 14,500 (4)
Michael A. Rubin (Director) 19,500 1.0%
John A. Wing (Director) 2,000 (4)
Ramon Dominguez (Director) 11,000 (4)
Mark Greene (Director) 600 (4)
J. Fernando Rodriguez (President and 6,700 (4)
Director
All Executive Officers and 1,395,282(1) 70.6%
Directors as a Group
(7 persons)
- --------------------
(1) For each person or group, the amount shown as beneficially owned 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 25, 2002,
(except in the case of the Spectors, in which case all shares that are issuable upon
options are included irrespective of exercise date) as shown below:
- Michael J. Spector and Margaret D. Spector 47,500 shares
- Blas Ferraiuoli 11,000 shares
- Michael A. Rubin 7,000 shares
- John A. Wing -
- Ramon Dominguez -
- Mark Greene -
- J. Fernando Rodriguez 5,000 shares
- All Executive Officers and Directors, as a group 93,000 shares
Percent of class does not include shares of common stock issuable upon exercise of
stock options held by other persons.
(2) Includes 945,594 shares held directly by Mr. Spector, 298,388 shares held by Mrs.
Spector and 24,000 held jointly. Also includes stock options to acquire 30,000 and
17,500 shares held by Mr. Spector and Mrs. Spector, respectively. The Spectors share
voting and investment power over the shares owned by each other.
(3) This amount consists of 19,800 shares owned directly by J. Morton Davis and 158,649
shares held in the name of D.H. Blair Investment Banking Corp., a registered
broker-dealer, which in turn is controlled by J. Morton Davis and of 8,500 shares
owned by Rosalind Davidowitz, the spouse of Mr. Davis. This amount is based upon a
Schedule 13G, as amended on March 25, 2002, filed with the Securities and Exchange
Commission.
(4) Less than one percent.
-25-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Amount due from/to Principal Shareholder
- ----------------------------------------
In connection with the settlement of litigation with the Company's former
principal lender ("the Bank"), on May 29, 1996 the Company advanced $340,158 on
behalf of Michael J. Spector, which was the portion of the settlement that
corresponded to claims made by the Bank against Mr. Spector in his individual
capacity. This amount was reduced by $66,506 that was due to Mr. Spector in
connection with the purchase in 1996 of a residence from a partnership
controlled by Mr. Spector. During 1997, the Company charged Mr. Spector for
certain expenses paid on his behalf. During March 1998, the amount owed by Mr.
Spector was converted into a non-interest bearing note due on March 2001. During
March 2001, this note was renewed for an additional period of one year. During
the fourth quarter of 2001, Mr. Spector repaid the entire amount of the note.
Lease and Option to Purchase Main Nursery Farm
- ----------------------------------------------
Effective January 1, 1993, the Company and the Spectors entered into a
lease agreement with respect to the main Puerto Rico nursery farm. The lease had
an initial term of five years renewable for one additional term of five years at
the option of the Company. During the initial term of the lease, rent was set at
$19,000 per month. During the renewal term, the rent increases to the greater of
(x) $24,000 per month or (y) the original $19,000 per month adjusted on the
basis of the increase in the Wholesale Price Index ("WPI") published by the
United States Department of Labor, Bureau of Labor Statistics, from the WPI
which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998.
Additionally, the Company must pay all taxes on the property, maintain certain
insurance coverages and otherwise maintain and care for the property. The lease
also contains an option which permits the Company to purchase the property at
its appraised value at any time during the term of the lease. In consideration
of the option, the Company must pay the Spectors $1,000 per month. On January 1,
1998, the Company exercised its renewal option at a monthly rental of $24,000.
The lease is scheduled to terminate on December 31, 2002, however, the Spectors
have committed to grant the Company an option to extend the lease for an
additional period of five years ending December 31, 2007.
Effective January 1, 1994, the lease agreement was amended to include an
additional 27-acre tract of land adjacent to the existing nursery facility for
$1,750 per month. The lease terms for this additional tract did not include
renewal or purchase options. Effective January 1, 1998, the Company and the
Spectors entered into an amendment to the lease agreement which granted the
Company the right to continue to lease the 27 acre parcel on a month to month
basis. Either party could terminate this portion of the lease upon 30 days prior
written notice. In connection with this amendment, the Spectors also agreed to
reimburse the Company by no later than March 1, 2001, the unamortized value of
the leasehold improvements applicable to said parcel as of the date of
termination. This agreement terminated effective February 1, 2000. See "Item 2 -
Properties." During March 2001, the Spectors repaid $45,384 to the Company,
representing the unamortized value of said improvements.
-26-
Landscaping services provided by the Company to Estancias de Cerro Mar, Inc.
- ----------------------------------------------------------------------------
During 2001, the Company provided landscaping and landscape maintenance
services to Estancias de Cerro Mar, Inc., an entity controlled by the Spectors,
and charged approximately $279,000 for these services. The Company believes that
the prices and other terms granted to the Spectors were at least as favorable to
the Company as those charged to unrelated entities.
Certain Other Relationships
- ---------------------------
During 2001, the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
-27-
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this subsection of Item 14 is set forth
in the Financial Statements and Independent Auditors' Report,
beginning on page F-2 of this Form 10-K. The index to Financial
Statements is set forth on page F-1 of this Form 10-K.
(2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts is included on page
F-28 of this Form 10-K. All other financial schedules have been
omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(3) Exhibits.
Exhibit
Number Description
------ -----------
(a)(1) Financial Statements and Financial Statement Schedules.
and ------------------------------------------------------
(a)(2)
The information called for by this section of Item 14 is set
forth in the Financial Statements and Auditor's Report
beginning on page F-2 of this Form 10-K. The index to
Financial Statements and Schedules is set forth on page F-1
of this Form 10-K.
(a)(3) Exhibits. The Exhibits set forth in the following Index
--------
of the Exhibits are filed as a part of this report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between
Margo Nursery Farms, Inc. and Margo Transition Corp.,
(incorporated by reference to Exhibit 1 to the Company's Form
8-K dated December 31, 1997).
(2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo
Transition Corp., dated December 15, 1997, (incorporated by
reference to Exhibit 2(a) to the Company's Form 8-K dated
December 31, 1997).
(2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into
Margo Transition Corp., dated December 15, 1997,
(incorporated by reference to Exhibit 2(b) to the Company's
Form 8-K dated December 31, 1997).
(3)(a) Certificate of Incorporation as currently in effect
(incorporated by reference to same exhibit number to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
-28-
(3)(b) Certificate of Amendment dated May 29, 1998 to Certificate
of Incorporation (incorporated by reference to the Company's
Form 8-K dated June 1, 1998)
(3)(c) By-Laws as of January 1, 1998(incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
(4)(a) Form of Common Stock Certificate (incorporated by reference
to Exhibit No. 4.1 of Form S-8 Registration Statement (No.
333-59619).
(4)(b) 1998 Stock Option Agreement (Incorporated by reference to
Exhibit No. 4.2 of Form S-8 Registration Statement (No.
333-59619).
(4)(c) Form of Stock Option Agreement (Incorporated by reference to
Exhibit No. 4.3 of Form S-8 Registration Statement (No.
333-59619).
(10) (a) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 filed April 15,1993:
(i) Lease Agreement dated January 1, 1993 between
the Company and the Spectors.
(b) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed April 15, 1994:
(i) First Amendment to Lease Agreement dated January
1, 1994 between the Company and the Spectors.
(c) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994:
(i) Loan Commitment Agreement, dated December 15, 1994
between Puerto Rico Farm Credit ACA and the
Company.
(d) Material contract incorporated by reference from Form
8-K dated November 28, 1997:
(i) Mortgage Note, dated November 28, 1997, in the
amount of $475,000
(e) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 31, 1997:
(i) Lease and Purchase Agreement, dated October 31,
1996 among Cali Orchids, Inc. and the Company.
(ii) Stock Option Agreement, dated August 9, 1996,
with Frederick D. Moss.
(iii)Stock Option Agreement, dated August 9, 1996,
with Blas R. Ferraiuoli.
(iv) Stock Option Agreement, dated August 9, 1996,
with Michael A. Rubin.
(v) Stock Option Agreement, dated July 9, 1993,
with Frederick D. Moss.
(vi) Stock Option Agreement, dated July 9, 1993,
with Margaret D. Spector.
-29-
(vii)Stock Option Agreement, dated July 9, 1993, with
Blas R. Ferraiuoli.
(viii) Stock Option Agreement, dated August 9, 1996,
with Margaret D. Spector.
(f) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed March 31, 1998:
(i) Promissory note of the Spectors dated as of March
1, 1998.
(ii) Second Amendment to lease Agreement dated as of
January 1, 1998, between the Company and the
Spectors.
(g) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, filed March 31, 1999: (i) Lease
agreement dated March 24, 1999 with the Puerto Rico
Land Authority.
(ii) Lease agreement dated March 24, 1999 with the
Puerto Rico Land Authority.
(h) Material contract filed herewith:
(i) Master Promissory Note for $2.5 million with
Scotiabank of Puerto Rico dated January 25, 2002.
(21) List of Registrant's Subsidiaries (Incorporated by reference
from same exhibit number of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000)
(23) Consent of Deloitte & Touche.
(b) Reports on Form 8-K.
-------------------
Not applicable.
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2002 By: /s/ Michael J. Spector
-------------------------------------
Michael J. Spector, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 27, 2002 By: /s/ Michael J. Spector
-------------------------------------
Michael J. Spector, Chairman of
the Board and Chief Executive Officer
Dated: March 27, 2002 By: /s/ Margaret D. Spector
---------------------------------
Margaret D. Spector, Director
Dated: March 27, 2002 By: /s/ Blas R. Ferraiuoli
----------------------------
Blas R. Ferraiuoli, Director
Dated: March 27, 2002 By: /s/ Michael A. Rubin
--------------------------
Michael A. Rubin, Director
Dated: March 27, 2002 By: /s/ John A. Wing
----------------------
John A. Wing, Director
Dated: March 27, 2002 By: /s/Ramon Dominguez
-------------------------
Ramon Dominguez, Director
Dated: March 27, 2002 By: /s/ J. Fernando Rodriguez
-------------------------------
J. Fernando Rodriguez, Director
President and Chief
Operating Officer
Dated: March 27, 2002 By: /s/ Alfonso A. Ortega
-------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Chief Financial and
Accounting Officer
-31-
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
For the year ended December 31, 2001
-32-
MARGO CARIBE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
For the year ended December 31, 2001
Page
---------------
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedules
- ---------
Schedule II - Valuation and Qualifying Accounts F-28
All other schedules have been omitted since the required information is not
presented or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Margo Caribe, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheets of Margo Caribe,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index as Schedule II for
each of the three years in the period ended December 31, 2001. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Margo Caribe, Inc. and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 22, 2002
Stamp No. 1775087
affixed to original.
F-2
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
------
2001 2000
----------- -----------
Current Assets:
Cash and equivalents $ 838,921 $ 973,061
Short term investments -- 500,000
Accounts receivable, net 1,798,251 1,235,706
Inventories 3,510,381 3,170,074
Current portion of notes receivable 26,331 --
Prepaid expenses and other current assets 296,482 308,499
----------- -----------
Total current assets 6,470,366 6,187,340
Property and equipment, net 1,398,689 1,676,158
Land held for future development 1,053,406 988,485
Due from shareholder -- 394,269
Notes receivable, net of current portion 42,164 60,754
Other assets 44,396 68,390
----------- -----------
Total assets $ 9,009,021 $ 9,375,396
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 129,047 $ 103,403
Notes payable 1,930,500 2,455,500
Accounts payable 868,071 1,138,979
Accrued expenses 194,294 199,144
----------- -----------
Total current liabilities 3,121,912 3,897,026
Long-term debt, net of current portion 307,528 239,482
----------- -----------
Total liabilities 3,429,440 4,136,508
----------- -----------
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, 1,923,622 and 1,922,122
shares issued, 1,883,822 and 1,882,322
shares outstanding in 2001 and 2000, respec-
tively 1,924 1,922
Additional paid-in capital 4,659,792 4,657,544
Retained earnings 1,014,153 675,710
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
----------- -----------
Total shareholders' equity 5,579,581 5,238,888
----------- -----------
Total liabilities and shareholders' equity $ 9,009,021 $ 9,375,396
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000, 1999
2001 2000 1999
----------- ----------- -----------
Net sales $ 9,184,621 $ 8,302,810 $ 6,201,233
Cost of sales 5,795,347 6,168,347 3,971,122
----------- ----------- -----------
Gross profit 3,389,274 2,134,463 2,230,111
Selling, general and administrative expenses 3,021,016 2,583,012 2,395,350
----------- ----------- -----------
Income (loss) from operations 368,258 (448,549) (165,239)
----------- ----------- -----------
Other income (expense):
Interest income 69,327 104,214 105,914
Interest expense (122,984) (140,431) (46,876)
Write-down of note receivable -- -- (80,000)
Recovery from damages caused by hurricane -- -- 12,880
Terminated merger expenses -- (553,101) --
Other income 23,842 15,134 45,454
----------- ----------- -----------
Total other income (expense) (29,815) (574,184) 37,372
----------- ----------- -----------
Net income (loss) $ 338,443 $(1,022,733) $ (127,867)
=========== =========== ===========
Basic and diluted income (loss) per common share
$ .18 $ (.54) $ (.07)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Outstanding
Common Common Additional
Stock Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 1,875,322 $ 1,915 $ 4,637,706 $ 1,826,310 $ (96,288) $ 6,369,643
Net loss -- -- -- (127,867) -- (127,867)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 1,875,322 1,915 4,637,706 1,698,443 (96,288) 6,241,776
Issuance of common stock from
Conversion of stock options 7,000 7 19,838 -- -- 19,845
Net loss -- -- -- (1,022,733) -- (1,022,733)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 1,882,322 1,922 4,657,544 675,710 (96,288) 5,238,888
Issuance of common stock from
Conversion of stock options 1,500 2 2,248 -- -- 2,250
Net income -- -- -- 338,443 -- 338,443
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 1,883,822 $ 1,924 $ 4,659,792 $ 1,014,153 $ (96,288) $ 5,579,581
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 338,443 $(1,022,733) $ (127,867)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 497,051 434,176 543,165
Write-down of note receivable -- -- 80,000
Write off of unsalable inventory -- 439,000 --
Provision for bad debts 71,000 41,289 86,000
Loss (gain) on disposition of equipment 4,367 -- (16,451)
Changes in assets and liabilities affecting cash
flows from operating activities:
Accounts receivable (618,545) (175,273) 152,735
Inventories (340,307) (500,666) (844,036)
Prepaid expenses and other current assets 12,017 (45,052) (72,643)
Other assets 23,994 56,418 (71,176)
Accounts payable (226,119) 214,422 147,532
Accrued expenses (4,850) 16,749 (28,682)
----------- ----------- -----------
Net cash used in operating activities (242,949) (541,670) (151,423)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (238,949) (306,977) (394,688)
Proceeds from sale of equipment -- -- 59,910
Investment in land held for future development (64,921) (934,363) --
Increase in notes receivable (18,193) -- (5,611)
Collection from advances from(to)shareholder 349,480 (58,659)
Collection of notes receivable 10,452 482,161 3,109
----------- ----------- -----------
Net cash provided by (used in) investing activities 37,869 (817,838) (337,280)
----------- ----------- -----------
Cash flows from financing activities:
Increase in notes payable 200,000 1,355,500 600,000
Repayment of notes payable (225,000) -- --
Issuance of common stock from conversion
of stock options 2,250 19,845 --
Proceeds from long-term debt 222,051 -- 395,418
Repayments of long-term debt (128,361) (125,368) (171,513)
----------- ----------- -----------
Net cash provided by financing activities 70,940 1,249,977 823,905
----------- ----------- -----------
Net increase (decrease) in cash and equivalents (134,140) (109,531) 335,202
Cash and equivalents at beginning of year 973,061 1,082,592 747,390
----------- ----------- -----------
Cash and equivalents at end of year $ 838,921 $ 973,061 $ 1,082,592
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
Note 1 - Business and Summary of Significant Accounting Policies
- ----------------------------------------------------------------
Margo Caribe, Inc. and subsidiaries (all Commonwealth of Puerto Rico
corporations and collectively, the "Company") are primarily engaged in the
production and distribution of a wide range of tropical plants for sale to
interior and exterior landscapers, wholesalers and retailers. The Company is
also engaged in the manufacturing and distribution of its own line ("Rain
Forest") of planting media, sales and distribution of lawn and garden products,
and provides landscaping design installation and maintenance services. The
Company is also engaged in seeking real estate sites for the development of
residential housing projects.
The Company's primary facility is located in Vega Alta, Puerto Rico. From this
facility, the Company sells principally to customers in Puerto Rico and the
Caribbean.
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the financial
statements of Margo Caribe, Inc. (the holding company) and its wholly-owned
subsidiaries, Margo Nursery Farms, Inc., Margo Flora, Inc., Margo Landscaping
and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc.,
Garrochales Construction and Development Corporation and Margo Development
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months of
less to be cash equivalents. At December 31, 2001 and 2000, cash and equivalents
include $500,000 invested in a certificate of deposit bearing interest at 1.5%
and 5.35%, respectively, which has been pledged as collateral for notes payable
(refer to Note 9).
F-7
(c) Inventories
-----------
Inventories of plant material include the cost of seeds, cuttings, pots, soil,
and an allocation of chemicals, fertilizers, direct labor and overhead costs
such as depreciation and rent, among others. Inventories of plant material are
stated at the lower of cost (first-in, first-out) or market. Inventories of lawn
and garden products are stated at the lower of average cost or market.
(d) Property and Equipment and Related Depreciation and Amortization
----------------------------------------------------------------
Property and equipment are carried at acquisition cost. Depreciation and
amortization are provided over the estimated useful lives of the respective
assets on a straight-line basis. Such useful lives range from four to twenty
years. Land held for future development is stated at cost.
The Company considers depreciation of certain facilities and equipment as a
direct cost of production of inventory. As inventory is sold, such cost is
charged to cost of sales.
(e) Revenue Recognition
-------------------
The Company recognizes sales of foliage and lawn and garden products upon
shipment from its facilities to customers. Revenues from landscaping services
are recognized as plants are installed at the customers' facilities.
(f) New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations".
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001, and eliminates the use the pooling of interests
method.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
F-8
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.
The adoption of SFAS No. 141 and 142 did not have any effect on the Company's
results of operations or financial condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for Impairment or Disposal of Long-Lived Assets",
which addresses the financial accounting and reporting for the impairment or
disposal of long lived assets. The Statement superseded SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS 144 is effective for fiscal years beginning after December 15, 2001.
This statement did not have a significant effect on the Company's results of
operations or financial condition.
(g) Income Tax
----------
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the use of the asset and liability method in accounting for income taxes.
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico ("Act No.
225" of December 1, 1995, as amended) provides the Company with a 90% tax
exemption for income derived from "bonafide" agricultural business, including
sales of nursery plants within Puerto Rico and outside Puerto Rico, as well as a
100% exemption from property, municipal and excise taxes.
F-9
Rain Forest Products Group, Inc.'s operations are covered under the Puerto Rico
Industrial Tax Incentives Act of 1987 ("the Act"). Under the Act, the Company
has a 90% tax exemption on income and property taxes and a 60% exemption on
municipal taxes for a period of fifteen years, commencing January 1, 1997.
(h) Income (loss) per Common Share
------------------------------
The Company reports its earnings per share ("EPS") using Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires dual presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
(i) Fair Value of Financial Instruments
-----------------------------------
The amounts included in the consolidated financial statements for cash and
equivalents, short term investments, accounts receivable, notes payable,
accounts payable and accrued expenses reflect their fair value due to the
short-term maturity of these instruments. The fair values of the Company's other
financial instruments are discussed in Notes 5 and 10.
(j) Accounting for Stock-Based Compensation Plans
---------------------------------------------
The Company accounts for its stock-based compensation plans pursuant to the
provisions of Accounting Principles Board Opinion 25 and related
interpretations, which generally require that compensation cost be recognized to
the extent the market price of the related stock exceeds the exercise price at
the measurement date. However, Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation", provides an
alternative method for measuring compensation cost by measuring the fair value
of the option at the award date. Although the compensation cost measurement
criteria is not required to be adopted, SFAS 123 requires disclosure of pro
forma information regarding the effects of the application of its compensation
cost measurement criteria and of other information.
F-10
(k) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb estimated losses on existing accounts receivable that are
estimated to be uncollectible based on evaluations of collectibility of specific
customers and their prior credit experience. Because of uncertainties inherent
in the estimation process, management's estimate of credit losses inherent in
the existing accounts receivable and related allowance may change in the near
term.
Direct and indirect costs that are capitalized as part of inventory of plant
material which management estimates cannot be recovered from future sales of
plant inventory are charged to cost of sales. Management's determination of the
amount of capitalized costs that should be charged to cost of sales is based on
historical sales experience and its judgement with respect to the future
marketability of the inventory.
The Company has a deferred tax asset (refer to Note 11) of approximately
$753,000 which is offset in full by a valuation allowance. Realization of the
deferred tax asset is dependent on generating sufficient taxable income in the
future. The amount of the deferred tax asset considered realizable could change
in the near term if future income increases.
Note 2 - Inventories
- --------------------
At December 31, 2001 and 2000, inventories comprised the following:
Description 2001 2000
- ------------------------- ---------- ----------
Plant material $2,813,920 $2,556,984
Lawn and garden products 362,273 250,135
Raw material and supplies 334,188 362,955
---------- ----------
$3,510,381 $3,170,074
========== ==========
F-11
Note 3 - Accounts Receivable
- ----------------------------
At December 31, 2001 and 2000, accounts receivable comprised the following:
Description 2001 2000
- ------------------------- ---------- ---------
Trade receivables $1,822,315 $1,312,179
Government reimbursement 64,277 55,000
Accrued interest 390 9,590
Employee advances 8,367 7,024
Other accounts receivable 37,902 16,913
---------- ---------
1,933,251 1,400,706
Less allowance for doubtful
accounts (135,000) (165,000)
---------- ---------
$1,798,251 $1,235,706
========== ==========
Included within trade receivables are approximately $59,000 due from Estancias
de Cerro Mar, Inc. ("Estancias"), an entity controlled by the Company's
principal shareholder. During the year ended December 31, 2001, the Company
billed approximately $279,000 to Estancias for landscaping and landscape
maintenance services.
Note 4 - Short Term Investments
- -------------------------------
At December 31, 2000, short term investments consisted of a $500,000 certificate
of deposit bearing interest at 6.5%, which was pledged as collateral for notes
payable (refer to Note 9).
F-12
Note 5 - Notes Receivable
- -------------------------
At December 31, 2001 and 2000, notes receivable comprised the following:
Description 2001 2000
- -------------------------------------------- --------- --------
Note receivable from the sale of a former
Dominican Republic subsidiary, with an
original balance of $997,000 written down
due to unfavorable collection experience $ 20,000 $ 20,000
10% note, collateralized by real
property 26,331 26,331
Non-interest bearing notes, due on demand,
personally guaranteed by present
Company personnel 22,164 14,423
-------- --------
68,495 60,754
Less current portion (26,331) --
-------- --------
$ 42,164 $ 60,754
======== ========
Amounts reflected in the balance sheet for notes receivable approximate their
current fair values based on market interest rates for comparable risks,
maturities and collateral.
Note 6 - Property and Equipment
- -------------------------------
At December 31, 2001 and 2000, property and equipment comprised the following:
2001 2000
----------- -----------
Leasehold improvements $ 1,364,949 $ 1,338,304
Equipment and fixtures 1,585,675 1,443,925
Transportation equipment 460,232 442,189
Real estate property 224,327 224,327
----------- -----------
3,635,183 3,448,745
Less accumulated depreciation
and amortization (2,236,494) (1,772,587)
----------- -----------
$ 1,398,689 $ 1,676,158
=========== ===========
During the years ended December 31, 2001, 2000 and 1999, depreciation expense
charged to production was approximately $315,000, $261,000, and $293,000,
respectively.
F-13
Note 7 - Land Held for Future Development
- -----------------------------------------
During December 2000, the Company exercised an option agreement and purchased
approximately 109 acres of land in Arecibo, Puerto Rico at a total cost of
approximately $988,000. The Company intends to develop this land into
residential homes.
Note 8 - Due from Shareholder
- -----------------------------
At December 31, 2000, amount due from shareholder principally arose from the
settlement of litigation with the Company's former principal lender, as well as
other advances made by the Company on his behalf. During 2001 the Company's
major shareholder repaid the outstanding balance of $394,269.
Note 9 - Notes Payable
- ----------------------
At December 31, 2001 and 2000, the Company had short-term borrowings with
various commercial banks in Puerto Rico, comprised of the following:
Description 2001 2000
- ---------------------------------------- --------- ---------
Unsecured commercial line of credit
of $1 million, bearing interest at
2% over Libor rate (4.6% at December
31,2001) due in June 2002 $ 800,000 $600,000
Commercial line of credit of $1 million,
bearing interest at 1.8% over Libor
rate (3.66% at December 31,2001) due
on January 15, 2002, personally
guaranteed by the Company's principal
shareholder and collateralized by the
92 acre facility leased to the Company
(see Note 15(a)). This note was
refinanced upon maturity. 630,500 855,500
Note payable, collateralized by short
term borrowings invested in a certifi-
cate of deposit, bearing interest
at 1% over interest earned by the
certificate (6.5% at December 31,
2000) due on demand - 500,000
(continues)
F-14
Notes payable, collateralized by cash
equivalent invested in a
certificate of deposit, bearing
interest at 1% over interest earned
by the certificate (ranging from
2.29% to 2.90% at December 31, 2001)
due on demand 500,000 500,000
---------- ---------
$1,930,500 $2,455,500
Note 10 - Long-Term Debt
- ------------------------
At December 31, 2001 and 2000, long-term debt comprised the following:
Description 2001 2000
- ------------------------------------ ---------- ---------
Five-year term loans, bearing interest
at 2% over Libor rate (4.6% at
December 31, 2001), payable in
monthly installments of $10,754,
through June 2006 $436,575 $318,610
Five-year term loans, variable
interest rate, 8.50% at December 31,
2000, payable in quarterly
installments of approximately
$8,000 through October 2001,
including interest. The loans are
collateralized by transportation
and farm equipment - 24,275
---------- ---------
436,575 342,885
Less current portion (129,047) (103,403)
---------- ---------
Long-term debt $ 307,528 $ 239,482
========== =========
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of long-term debt approximates the
recorded amounts.
The annual aggregate maturities of long-term debt are as follows:
Year Ending
December 31, Amount
------------ ---------
2002 $ 129,047
2003 129,047
2004 131,145
2005 36,146
2006 11,190
---------
$ 436,575
=========
F-15
The Company's debt agreements contain various covenants, which among other
things, require the Company meet certain debt to asset ratios and minimum
working capital. At December 31, 2001 and 2000, the Company was in compliance
with such covenants.
Note 11 - Income Taxes
- ----------------------
The Company provides for income taxes using the applicable statutory tax rates
in the Commonwealth of Puerto Rico.
Set forth below are explanations for the differences between the income tax
provision (benefit) and the amount computed by applying the Puerto Rico
statutory income tax rate of 39% to income (loss) before income tax provision:
2001 2000 1999
--------- --------- ---------
Income tax provision (benefit)
computed by applying tax rate $ 131,992 $(398,865) $ (49,870)
(Increase) decrease in income
tax benefit resulting from:
Puerto Rico tax exemption (80,452) 248,909 (66,519)
Tax loss carryover benefit
(utilization) and other (51,540) 149,956 116,389
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Deferred income taxes, prior to the valuation allowance, were recognized in the
consolidated balance sheet at December 31, 2001 and 2000 due to the tax effect
of temporary differences and loss carryforwards as follows:
Deferred tax assets: 2001 2000
- ------------------- --------- ---------
Net operating loss carryforwards $ 734,345 $ 877,237
Valuation allowance for accounts
receivable 18,838 33,912
--------- ---------
753,183 911,149
Less valuation allowance (753,183) (911,149)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
F-16
Note 12 - Income (loss) Per Common Share
- ----------------------------------------
Basic and diluted income (loss) per common share for the years ended December
31, 2001, 2000 and 1999 were determined as follows:
Basic income (loss) per common share:
- -------------------------------------
2001 2000 1999
----------- ------------ -----------
Net income (loss) attributable
to common shareholders $ 338,443 $ (1,022,733) $ (127,867)
=========== ============ ===========
Weighted average number of
common shares outstanding 1,882,877 1,881,440 1,875,322
=========== ============ ===========
Basic income (loss) per
common share $ .18 $ (.54) $ (.07)
=========== ============ ===========
Diluted income (loss) per common share:
- ---------------------------------------
Net income (loss) attributable
to common shareholders $ 338,443 $ (1,022,733) $ (127,867)
=========== ============ ===========
Weighted average number of
common shares outstanding 1,882,877 1,881,440 1,875,322
Plus incremental shares from
assumed exercise of stock
options 30,192 -- --
----------- ------------ -----------
Adjusted weighted average
shares 1,913,069 1,881,440 1,875,322
=========== ============ ===========
Diluted income (loss) per
common share $ .18 $ (.54) $ (.07)
=========== ============ ===========
For the years ended December 31, 2000 and 1999, the effect of the assumed
exercise of stock options determined by using the treasury stock method was
antidilutive; thus no incremental shares were added to the weighted average
number of common shares outstanding.
Note 13 - Commitments and Contingencies
- ---------------------------------------
The Company is a party to various legal actions arising in the ordinary course
of business. In the opinion of management, the disposition of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.
F-17
Note 14 - Preferred Stock
- -------------------------
The certificate of incorporation of the Company authorizes the issuance of
250,000 shares of one cent ($0.01) par value serial preferred stock, and the
Board of Directors is authorized from time to time to divide the preferred stock
into series and to determine the number of shares of each series and the
relative rights, preferences and limitations of each such series. As of December
31, 2001, there were no outstanding shares of preferred stock.
Note 15 - Lease and Option Agreements
- -------------------------------------
(a) Property in Vega Alta, Puerto Rico
----------------------------------
The primary Puerto Rico facility is leased from Michael J. Spector and Margaret
D. Spector (the "Spectors"), who are officers, directors and major shareholders
of the Company.
Effective January 1, 1993, the Company entered into a lease agreement with the
Spectors for an initial five year period at a monthly rental of $19,000. In
addition, the Spectors have released the Company from responsibility from any
claims arising from the Company's use of a defective fungicide in its operations
at the nursery facility. Under the lease, the Company is required to make
monthly lease payments of $24,000, pay all taxes on property, maintain certain
insurance coverages and otherwise maintain and care for the property. The lease
is scheduled to terminate on December 31, 2002, but the Spectors have committed
to grant the Company an option to extend the lease for an additional period of
five years ending December 31, 2007.
Under the above lease agreement, the Company has the option to purchase the
nursery facility at any time during the term of the lease, based on the
property's appraised value. The Company pays $1,000 per month for this purchase
option, which amount is expensed when paid.
Effective January 1, 1994, the Company amended the lease agreement with the
Spectors to include an additional 27 acres of land adjacent to the nursery
facility at a monthly rental of $1,750. This amendment did not provide for
renewal nor purchase options towards the additional 27 acres of land. Effective
January 1, 1998, the Company and the Spectors entered into an amendment to the
lease agreement which grants the Company the right to continue to lease the 27
F-18
acre parcel on a month to month basis. Either party could terminate this portion
of the lease upon 30 days prior written notice. In connection with this lease
amendment, the Spectors also agreed to reimburse the Company by no later than
March 1, 2001 for the unamortized value of the leasehold improvements applicable
to said parcel as of the date of termination. Effective February 1, 2000, the
lease agreement with respect to the 27 acre parcel was terminated. In March
2001, the Spectors paid the unamortized value of said improvements ($45,384) to
the Company.
Total rental payments amounted to approximately $288,000, $290,000 and $309,000
in 2001, 2000 and 1999, respectively.
(b) Property in Barranquitas, Puerto Rico
-------------------------------------
Effective January 1, 1997, the Company entered into a lease agreement with Cali
Orchids, Inc. to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial five-year term of the lease, monthly payments
amount to $4,500. During the remaining four years of the initial term of the
lease, monthly payments amount to $5,000. During the first and second renewal
terms, monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
Total rental payments amounted to $60,000 in 2001, 2000 and 1999.
(c) Other Properties in Vega Alta, Puerto Rico
------------------------------------------
On March 24, 1999, the Company leased two additional parcels of land from the
Puerto Rico Land Authority (an instrumentality of the Commonwealth of Puerto
Rico). The two parcels are adjacent to each other, have a total area of 321
acres, and are located approximately one mile from the Company's main nursery
facility in Vega Alta. Among other things, the lease agreement provides for an
initial lease term of five years subject to three additional renewal terms of
five years, at the option of the Company. During the initial term, total lease
payments amount to $33,625 per year. Lease payments amounted to $33,600 in 2001
and 2000, and $25,200 in 1999. Lease payments for renewal terms are to be
F-19
negotiated 90 days prior to each renewal term. The agreement provides for
termination upon 30 days written notice by either party. During December 2001,
the Company terminated this lease agreement with the Puerto Rico Land Authority
as a result of intense flooding experienced in these parcels of land.
(d) Aggregate Lease Obligations and Expenses
----------------------------------------
The Company's obligations under the above and other non-cancelable operating
lease agreements in force at December 31, 2001, assuming the Company exercises
its renewal option on the Barranquitas, Puerto Rico property and excluding the
monthly payments for the purchase option previously mentioned, are as follows:
Year ending Minimum
December 31, Lease Payments
------------ --------------
2002 $ 360,000
2003 72,000
2004 72,000
2005 72,000
2006 72,000
Thereafter 420,000
----------
$1,068,000
==========
Total rental expense under all operating lease agreements amounted to
approximately $382,000, $403,000 and $400,000, for the years ended December 31,
2001, 2000 and 1999, respectively.
Note 16 - Stock Option and Salary Deferral Plans
- ------------------------------------------------
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan").
Outstanding options granted under the previous plan, including all related
obligations and commitments, will continue to be honored by the Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can
award options to purchase up to 200,000 shares of common stock (exclusive of
outstanding options under the previous plan) to eligible employees at 100% of
the fair market value at the time of the grant, except that options granted to
persons owning 10% or more of the outstanding common stock carry an exercise
F-20
price equal to 110% of the fair market value at the date of grant. The 1998 Plan
also provides for the automatic grant of options to purchase 2,500 shares of
common stock to each non-employee director on the first business day following
every annual meeting of shareholders.
Options vest ratably over a period of five years, become exercisable one year
from the date of grant and expire ten years after the date of grant. The status
of the stock options granted under the 1998 Plan and the prior 1988 Plan as of
December 31, 1999, 2000 and 2001, and changes during the years ended on those
dates, are as follows:
Price per Share
---------------
Weighted
Average
Description Shares Range Price
- ------------------------------- -------- -------------- ------
Outstanding, December 31, 1998 116,000 $1.50 to $3.44 $2.78
Granted 20,000 2.25 to 2.75 2.41
Exercised - - -
Forfeited (1,500) 1.94 to 3.13 2.73
-------- -------------- -----
Outstanding, December 31, 1999 134,500 1.50 to 3.44 2.72
Granted 10,000 1.75 to 1.93 1.80
Exercised (7,000) 1.50 to 3.13 2.84
Forfeited (2,000) 1.94 to 3.13 2.54
-------- -------------- -----
Outstanding, December 31, 2000 135,500 1.50 to 3.44 2.65
Granted 40,000 2.06 to 4.13 2.72
Exercised (1,500) 1.50 1.50
Forfeited (4,000) 1.94 to 3.13 2.28
-------- -------------- -----
Outstanding, December 31, 2001 170,000 $1.50 to $4.13 $2.69
======== ============== =====
F-21
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- -------------- ----------- ------------ ----- ----------- --------
$2.88 - $3.16 38,500 1.5 $ 3.03 38,500 $3.03
3.13 - 3.44 37,500 4.6 3.27 37,500 3.27
1.50 - 1.94 26,500 6.4 1.82 16,100 1.82
2.25 - 2.75 17,500 7.4 2.43 8,500 2.44
1.75 - 1.93 10,000 9.0 1.80 4,000 1.77
3.75 - 4.13 40,000 10.0 2.72 - -
- -------------- ----------- ------------ ------- ----------- --------
$1.50 - $4.13 170,000 6.0 $ 2.69 104,600 $2.83
============= =========== ============ ======= =========== ========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in measuring stock based
compensation, including options. Accordingly, no compensation expense has been
recognized for options granted under both plans. Had compensation expense been
determined based upon the fair value at the grant date for awards under any plan
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS
No. 123") the Company's net income (loss) and net income (loss) per share, on a
pro forma basis, would not have significantly changed from those reported.
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations
under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers
all employees who are at least 21 years old and is effective from the date of
employment. For the years ended December 31, 2001, 2000 and 1999, the Company
paid approximately $53,000 $50,000 and $38,000 respectively, representing the
matching contributions under the retirement plan for all participants.
F-22
Note 17 - Supplemental Disclosures for the Statements of Cash Flows
- -------------------------------------------------------------------
(a) Non-Cash Investing Activities
-----------------------------
During the year ended December 31, 2001, fully depreciated equipment with a cost
of $26,568 was written off. The Company exchanged equipment with a book value of
$19,367 recording a $15,000 account receivable, after recognizing a loss of
$4,367 on the transaction. The Company also applied $44,789 from lease payments
due to the Company's major shareholder against amounts due from the major
shareholder to the Company. In another non-cash transaction, the Company applied
a certificate of deposit amounting to $500,000 to pay off a related note
payable.
During the year ended December 31, 2000, fully depreciated equipment amounting
to $166,820 was written off. The Company also transferred unamortized leasehold
improvements with a cost of $331,456 and a book value of $45,384 as an amount
due from shareholder, regarding the termination of a lease agreement of a 27
acre parcel of land previously leased to the Company.
During the year ended December 31, 1999, fully depreciated equipment with a cost
of $454,877 was written off, and equipment with a cost of $66,129 and a book
value of $43,459 was sold at a gain of $16,451. Also, during 1999, an account
receivable and a deferred revenue in the amount of $111,885 were established in
connection with certain government assistance. These amounts were reversed in
2000.
(b) Other Cash Flow Transactions
----------------------------
During the years ended December 31, 2001, 2000, and 1999, the Company made
interest payments of approximately $125,000, $134,000, and $44,400,
respectively. During the years ended December 31, 2001, 2000 and 1999, the
Company did not make any income tax payments.
F-23
Note 18 - Major Customers
- -------------------------
During 2001, the Company's two largest customers accounted for approximately 35%
($3,275,000) of the Company's net sales. The first customer accounted for 24%
($2,220,000) and the second customer accounted for 11% ($1,055,000) of the
Company's net sales.
During 2000, the Company's two largest customers accounted for approximately 30%
($2,429,000) of the Company's net sales. The first customer accounted for 17%
($1,379,000) and the second customer accounted for 13% ($1,050,000) of the
Company's net sales.
During 1999, the Company's two largest customers accounted for approximately 26%
($1,592,000) of the Company's net sales. The first customer accounted for 14%
($864,000) and the second customer accounted for 12% ($728,000) of the Company's
net sales.
Note 19 - 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, 2001, the Company had been unable
to obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, 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-24
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 20 - Segment Information
- -----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS 131").
SFAS 131 establishes standards for the way an enterprise reports information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS 131 requires a
reconciliation of total segment revenue and expense items and segment assets to
the amount in the enterprise's financial statements. SFAS 131 also requires a
descriptive report on how the operating segments were determined, the products
and services provided by the operating segments, and any measurement differences
used for segment reporting and financial statement reporting.
The Company's management monitors and manages the financial performance of three
primary business segments: the production and distribution of plants, sales of
lawn and garden products and landscaping services. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income or
loss.
The financial information presented below was derived from the internal
management accounting system and is based on internal management accounting
policies. The information presented does not necessarily represent each
segment's financial condition and results of operations as if they were
independent entities. At December 31, 2001 and 2000, the Company had $1,053,406
and $988,485, respectively, in assets pertaining to a new real estate
F-25
development segment (which had not generated any revenues or expenses), of which
$64,921 and $934,363 were acquired during 2001 and 2000, respectively. These
assets have been included as part of the segment assets under the plants segment
presented below.
2001
--------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
--------------------------------------------------------------
Revenue from external customers $ 3,785,948 $ 2,844,395 $ 2,554,278 $ 9,184,621
Intersegment revenues 308,299 81,894 -- 390,193
Interest income 69,327 -- -- 69,327
Interest expense 122,984 -- -- 122,984
Depreciation and amortization 431,102 44,023 21,926 497,051
Segment income 207,861 54,227 76,355 338,443
Segment assets 7,016,957 1,015,901 976,163 9,009,021
Expenditures for segment assets 209,282 29,667 -- 238,949
2000
--------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
--------------------------------------------------------------
Revenue from external customers $ 3,826,927 $ 2,104,065 $ 2,371,818 $ 8,302,810
Intersegment revenues 332,364 34,819 -- 367,183
Interest income 104,214 -- -- 104,214
Interest expense 140,431 -- -- 140,431
Depreciation and amortization 363,032 33,561 37,583 434,176
Segment loss (796,800) (124,407) (101,526) (1,022,733)
Segment assets 7,881,009 851,355 643,032 9,375,396
Expenditures for segment assets 306,977 -- -- 306,977
1999
--------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Totals
--------------------------------------------------------------
Revenue from external customers $ 3,780,645 $ 1,120,342 $ 1,300,246 $ 6,201,233
Intersegment revenues 186,453 24,727 -- 211,180
Interest income 105,914 -- -- 105,914
Interest expense 46,876 -- -- 46,876
Depreciation and amortization 444,765 33,868 64,532 543,165
Segment income (loss) 167,844 (132,515) (163,196) (127,867)
Segment assets 7,472,038 939,588 505,355 8,916,981
Expenditures for segment assets 296,380 53,015 45,293 394,688
F-26
Note 21 - Terminated Merger Agreement
- -------------------------------------
During April 2000, the Company entered into an agreement to merge with a
privately held development stage internet company (iTract, LLC). Certain
conditions for the Company's obligation to proceed with the merger were not met
as of March 1, 2001, and the Company's Board of Directors decided that it was
not in the best interest of the Company or its shareholders to proceed with the
transaction and terminated the merger agreement. The accompanying consolidated
statement of operations for the year ended December 31, 2000 includes all
expenses incurred in connection with the terminated merger agreement amounting
to approximately $553,000.
F-27
SCHEDULE II
-----------
MARGO CARIBE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2001, 2000 and 1999
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, 2001:
Allowance for doubtful accounts $165,000 $71,000 $ - $(101,000) $135,000
======== ======= ======== ========== ========
Year ended December 31, 2000:
Allowance for doubtful accounts $158,000 $41,300 $ - $ (34,300) $165,000
======== ======= ======== ========= ========
Year ended December 31, 1999:
Allowance for doubtful accounts $123,700 $86,000 $ - $ (51,700) $158,000
======== ======= ======== ========= ========
F-28