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, 2002
[ ] 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
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act).
Yes [ ] No [X]
As of June 26, 2002, the aggregate market value of the registrant's common
stock, $.001 par value, held by non-affiliates of the registrant was $1,986,920
based on the last sales price of $3.25 per share on the NASDAQ Stock Market on
June 26, 2002.
The registrant had 2,079,889 shares of common stock, $.001 par value,
outstanding as of March 15, 2003.
MARGO CARIBE, INC.
2002 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...........................................................7
ITEM 3. LEGAL PROCEEDINGS....................................................8
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 .........................................................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................18
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................19
ITEM 11. EXECUTIVE COMPENSATION.............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25
ITEM 14. CONTROLS AND PROCEDURES............................................26
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...................................................26
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
- -------
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
- --------------------
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
an unrelated third party. During the fourth quarter of 2002, the Company entered
into an agreement with the lessor to return the Barranquitas facility and
intends to consolidate this operation into its main nursery farm in Vega Alta,
Puerto Rico (refer to ITEM 2. PROPERTIES).
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.
The Barranquitas operation will be consolidated with the Vega Alta facility
(refer to ITEM 2. PROPERTIES)
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, 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.
2
Marketing
- ---------
The Company's marketing efforts are primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company's landscaping division 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 2002, the Company's single largest customer (The Home Depot)
accounted for approximately 30% of the Company's net sales. During 2001 and
2000, the Company's two largest customers accounted for approximately 35% and
30% of the Company's net sales, respectively. The Company's largest customer
(The Home Depot) accounted for 24% in 2001 and 17% in 2000, and the second
largest customer (Wal*Mart Stores) accounted for 11% in 2001 and 13% in 2000 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, 2002, 2001 and 2000. The information is provided after the
elimination of intercompany transactions.
2002 2001 2000
--------- --------- ----------
(Amounts in 000's)
------------------
Plants $ 4,325 $ 3,786 $ 3,827
Lawn and garden products 2,884 2,845 2,104
Landscaping 2,542 2,554 2,372
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$ 9,751 $ 9,185 $ 8,303
========= ========= ==========
Certain financial information concerning industry segments is set forth in
Item 7 - Management's Discussion and Analysis of Results of Operations and
Financial Condition and in Note 21 to the Company's Consolidated Financial
Statements included as Item 8 to this Annual Report on Form 10-K.
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, 2002, the Company had 169 full time employees, of which 147
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
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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
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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, 2003 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.
JOINT VENTURE IN SALINAS HOLDINGS, INC.
- ---------------------------------------
On October 14, 2002, the Company, through its wholly-owned subsidiary,
Nursery Farms entered into a joint venture to grow sod, palms and trees on a
farm of approximately 254 acres located in the Municipality of Salinas, Puerto
Rico, operated by Salinas Holdings, Inc. ("Salinas"). Salinas is a newly formed
entity in which Nursery Farms owns one-third of the outstanding voting stock.
The remaining two-thirds are owned in equal parts by Mr. Mark Greene, a former
director of the Company, and by Mr. Alberto Rubi. The Company has committed to
make equity cash contributions to the new entity of up to $775,000. As of
December 31, 2002, the Company had invested $433,333 .
The farm is leased by Salinas Holdings, Inc. from an entity controlled by
Mr. Rubi, for an initial 10-year term with renewal options for an additional
20-year period.
Salinas has entered into a five year management agreement with Nursery
Farms (automatically renewable for additional five year terms unless otherwise
elected by either party) whereby Nursery Farms will provide certain management
services to the new entity and will be responsible for all sales and marketing
activities for the new entity. Under the terms of the management agreement,
Nursery Farms will receive a basic administrative fee of $2,000 per month, and a
commission on gross collected revenue varying from 15% to 17%. During the term
of the management agreement, the Company has agreed not to grow sod or to have
more than 50 "cuerdas" (a "cuerda" equals approximately 0.97 of an acre) of
palms or trees under cultivation on its facilities. The Company is currently not
engaged in the business of growing sod.
The investment in and results of operations of Salinas are not consolidated
with the financial statements of the Company, but instead are reported under the
equity method of accounting for investments. Accordingly, the Company's
financial statements reflect the Company's proportionate share (33.33%) of the
results of operations of Salinas.
5
Nursery Farms' investment in Salinas as of December 31, 2002 amounted to
$433,333. This amount was reduced by Margo's participation in the proportionate
share (33.33%) of Salinas' loss for the period from commencement of operations
through December 31, 2002 ($16,037).
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. The
Board believes that the Company should continue to capitalize its advantage as
one of the largest, full service nurseries in the region. However, the Board
will explore opportunities for expansion outside of Puerto Rico.
The Company is a supplier of plants and lawn and garden products for The
Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and
garden products according to Nursery Retailer magazine. Home Depot currently has
eight stores in Puerto Rico (one of which was opened in January 2003) and plans
to open two more stores during the remainder of 2003.
The Company continues to supply live goods (plant material) to Wal*Mart
International, which presently has eleven stores (including two "super centers")
throughout Puerto Rico (of which one was opened in February 2003) and plans to
open two more super centers during the remainder of 2003. 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. During January 2003,
Costco Wholesale opened a third store in Puerto Rico.
At December 31, 2002, the Company was engaged in the various landscaping
projects and also had monthly maintenance contracts with various commercial
shopping centers and housing communities.
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. However, the Company cannot give any assurance how long
it will take to obtain the necessary permits to develop the project or whether
said permits in fact be obtained.
6
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 2002, 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 agreement (including the option) terminated on
December 31, 2002. The Spectors committed to grant the Company an option to
extend the lease for an additional period of five years ending December 31,
2007. The Company is in the process of negotiating a new lease agreement with
the Spectors. Pending the execution of a new lease agreement, the parties have
agreed to a month to month lease arrangement with monthly lease payments of
$24,000, as under the prior lease.
7
During the years ended December 31, 2002 and 2001, total lease payments to
the Spectors amounted to approximately $288,000 (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. For the
years ended December 31, 2002 and 2001, total lease payments amounted to $72,000
and $60,000, respectively.
Effective December 23, 2002, the lessor and the Company entered into an
agreement to terminate the lease agreement and return the facility on or before
June 30, 2003.
The Company intends to consolidate the operations currently conducted at
the Barranquitas nursery facility with its Vega Alta nursery facility. The
Company considers that the Vega Alta facility is generally in good condition, is
well maintained and is generally suitable and adequate to carry on the Company's
business.
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. No
assurance can be given how long it will take to obtain the necessary permits or
whether said permits will in fact be obtained.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, any pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
Not applicable.
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 2002 and 2001. The last reported sales price for the Common Stock on March
14, 2003 was $5.18 per share. Common stock prices have been adjusted to give
retroactive effect to the 10% stock dividend declared on the Company's common
stock effective June 28, 2002.
2002 2001
---------------- -----------------------
Quarter: High Low High Low
-------- ---- --- ---- ---
First $ 4.32 $ 2.78 $ 3.07 $ 1.59
Second 3.74 2.73 3.18 1.82
Third 3.30 2.71 4.64 2.18
Fourth 4.45 3.00 4.77 2.82
There were approximately 60 holders of record of the common stock as of
December 31, 2002. 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 14, 2003, the Company had 2,079,889 shares of
common stock outstanding.
The Company did not pay any cash dividends on its common stock during 2002
or 2001. However, effective June 28, 2002, the Company issued a 10% stock
dividend to shareholders of record as of June 14, 2002. This resulted in the
issuance of 188,367 additional shares of common stock. 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.
9
United States citizens who are non-residents of Puerto Rico may also make
such an election, except that notwithstanding the making of such election of the
10% withholding tax will still be made on any dividend distribution unless the
individual files with the Company prior to the first distribution date for the
taxable year a certificate to the effect that said individual's gross income
from sources within Puerto Rico during the taxable year does not exceed $1,300
if single, or $3,000 if married, in which case dividend distributions for said
year will not be subject to Puerto Rico taxes.
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for Margo Caribe, Inc. on a historical basis, for each of the five years ended
December 31, 2002. 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. Per
share information has been retroactively adjusted to reflect a 10% stock
dividend effective June 28, 2002.
10
MARGO CARIBE, INC. AND SUBSIDIARIES
-----------------------------------
Selected Financial Data
Years Ended December 31,
------------------------------------------------------------------------
Earnings Statement Data: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 9,751,294 $ 9,184,621 $ 8,302,810 $ 6,201,233 $ 5,349,244
Gross profit 3,875,882 3,389,274 2,134,463 2,230,111 1,726,173
Selling, general and administrative expenses 3,477,923 3,021,016 2,583,012 2,395,350 2,122,976
Income (loss) from operations 397,959 368,258 (448,549) (165,239) (396,803)
Net income (loss) 852,345 338,443 (1,022,733) (127,867) (1,112,837)
Basic income (loss) per common share $ 0.41 $ 0.16 $ (0.49) $ (0.06) $ (0.54)
Diluted income (loss) per common share $ 0.40 $ 0.16 $ (0.49) $ (0.06) $ (0.54)
Weighted average number of common shares outstanding
and common share equivalents 2,114,245 2,104,385 2,069,584 2,062,854 2,066,520
Balance Sheet Data:
Working capital $ 3,958,112 $ 3,348,454 $ 2,290,314 $ 4,306,446 $ 3,396,453
Total assets 9,796,206 9,009,021 9,375,396 8,916,981 7,990,208
Long-term debt (excluding current portion) 244,425 307,528 239,482 338,597 85,880
Stockholders' equity 6,446,389 5,579,581 5,238,888 6,241,776 6,369,643
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America .
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 Company's management believes the following critical accounting
policies affect its more significant estimates and assumptions used in the
preparation of its 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.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is an amount that management believes
will be adequate to absorb estimated losses on existing accounts receivable that
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.
Capitalization of Inventory Costs
- ---------------------------------
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.
Deferred Income Taxes
- ---------------------
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the use of the asset and liability method in accounting for income taxes.
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities.
12
The Company records a valuation allowance to reduce its deferred tax asset
to the amount that is more likely than not to be realized. 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 depending on future levels of taxable income.
OVERVIEW
- --------
For the year ended December 31, 2002, the Company had consolidated net
income of approximately $852,000, compared to net income of $338,000 in 2001,
and a net loss of $1,023,000 in 2000. These amounts represent a consolidated
diluted income (loss) per common share of $0.40, $0.16 and ($.49) for 2002, 2001
and 2000, respectively.
The Company's increase in net income for the year ended December 31, 2002
when compared to 2001, was due to a substantial increase in other income of
approximately $473,000, principally from a gain upon the collection of a
$405,000 note receivable previously written down to $20,000. Income from
operations for the year ended December 31, 2002 was comparable to that of 2001.
The Company's increase in net income for the year ended December 31, 2001
when compared to 2000, was due to increases in sales and higher gross profits,
which were offset, in part, by an increase in selling, general and
administrative expenses.
The Company's net loss for the year ended December 31, 2000 was principally
due to the write off of unsalable inventory charged to cost of sales, resulting
in a loss from operations. This loss from operations was further increased by
non-recurring expenses related to the termination of a proposed merger charged
as other expenses.
RESULTS OF OPERATIONS
- ---------------------
Sales
- -----
Consolidated net sales for the year ended December 31, 2002 were
approximately $9,751,000 representing an increase of 6% over sales of $9,185,000
in 2001. This increase in sales is principally due to a 14% increase in sales of
plant material ($539,000). Sales of lawn and garden products increased by 1% and
sales of landscaping services decreased by 0.5%. Increase in sales of plant
material was principally due to increased sales to major chain stores as well as
local landscapers. Sales of lawn and garden products as well as landscaping
services remained comparable with sales for 2001. During 2002, approximately
$525,000 (21%) of landscaping service revenues were provided to an entity
controlled by the Company's major shareholder, compared to $279,000 (11%) for
2001.
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
13
$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.
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,
------------------------
2002 2001 2000
------- ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 60.3 63.1 74.3
------- ------ ------
Gross profit 39.7 36.9 25.7
Selling, general and administrative expenses 35.7 32.9 31.1
------- ------ ------
Income (loss) from operations 4.0 4.0 (5.4)
Interest expense, net (.4) (.5) (.4)
Other income (expenses), net 5.0 .3 (6.5)
------- ------ ------
Income (loss) before income deferred income tax credit 8.6 3.8 (12.3)
Deferred income tax credit .1 - -
------- ------ ------
Net income (loss) 8.7 3.8 (12.3)
====== ====== ======
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 40%, 37%, and 26%, for the years ended December 31,
2002, 2001and 2000, respectively.
The Company's consolidated gross profit for the year ended December 31,
2002 was 40%, compared 37% in 2001, representing an overall increase of 3%. This
increase in gross profit was principally due to an increase in gross profit from
sales of landscaping services of 7% (38% in 2002 and 31% in 2001). This increase
was due to increased performance in project management during 2002. Gross profit
from sales of lawn and garden products increased by 3% (44% in 2002 and 41% in
2001). This increase was principally due to improved efficiency in the
production of the Company's Rain Forest line of soil and aggregates. Gross
profit from sales of plant material remained comparable at 38% in 2002 and 2001.
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
14
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.
Selling, General and Administrative Expenses
- --------------------------------------------
The Company's selling, general and administrative expenses ("SG&A") for
2002 were approximately $3,478,000 compared to $3,021,000 in 2001, representing
an increase of 15% in dollar terms, and an increase of 3% as a percentage of
sales. The increase (in dollar terms) was principally due to increases in
administrative expenses, mainly due to additional sales and administrative
personnel, and increase in executive compensation. Other administrative expenses
increases included the provision for uncollectible receivables and repairs and
maintenance of machinery and equipment in general. Shipping expenses also
increased in dollar terms, but remained comparable as a percentage of sales.
The Company's 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.
Other Income and Expense
- ------------------------
Interest income for the year ended December 31, 2002 decreased when
compared to that of 2001 due to a reduction of funds invested as well as lower
yields obtained during 2002.
Interest expenses for the year ended December 31, 2002 decreased
principally from lower interest rates experienced during 2002.
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.
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.
15
Other income for the year ended December 31, 2002, includes a gain from
the sale of an investment of approximately $71,000. This investment had been
previously classified and included as an other asset in the Company's balance
sheet at an approximate cost of $41,000.
Also included as other income for the year ended December 31, 2002 is a
gain of $405,000 from the collection of a note receivable which had been
previously written down to a carrying value of $20,000 (refer to Note 5 in the
accompanying Notes to Consolidated Financial Statements for the year ended
December 31, 2002).
Other income for the year ended December 31, 2002 also includes a
"Participation in loss of unconsolidated subsidiary" of $16,037. This represents
the Company's 33.33% share in the loss of Salinas Holdings, Inc. for the period
from November 1, 2002 (commencement of operations) through December 31, 2002. As
stated under "ITEM I. Joint Venture in Salinas Holdings, Inc.", during 2002, the
Company made an investment in Salinas Holdings, Inc. This investment was
accounted for under the equity method for investments in common stock.
Accordingly, at year end, the Company includes as other income (expense) its
proportionate share of the results of operations of Salinas Holdings, Inc..
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 described below.
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.
FINANCIAL CONDITION
- -------------------
At December 31, 2002, the Company had cash of approximately $1,418,000,
compared to cash of $839,000 at December 31, 2001, or an increase of $579,000.
The increase in cash at December 31, 2002 was principally due to net cash flows
from operating activities of $1,001,000. These net cash flows from operations
were offset by net cash outflows used in investing activities and financing
activities of $109,000 and $313,000, respectively. Among the net cash outflows
from investing activities were additions to property and equipment ($182,000)
and the initial investment in the Company's unconsolidated equity subsidiary
($433,000). These were offset by proceeds from sale of investment ($113,000) and
from the collection of notes receivable ($451,000). Among the cash outflows from
financing activities were the repayment of long term debt ($128,000) and
repayment of notes payable ($733,000). These were offset by an increase in notes
payable ($533,000).
16
As a result of the Company's net income for the year ended December 31,
2002, the Company's debt to equity ratio improved to 51%, compared to 61% at
December 31, 2001.
Stockholders' equity at December 31, 2002 increased principally due to
results of operations for the year. During the year ended December 31, 2002, the
Company issued 7,700 shares of common stock in connection with the conversion of
stock options. The Company issued 188,367 shares of common stock in connection
with a 10% stock dividend on June 28, 2002. There were no cash dividends
declared during the year ended December 31, 2002.
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 short-term credit facilities with a local
commercial bank. At December 31, 2002, the Company had $2.5 million of credit
under these facilities, of which approximately $1,081,000 was available. The
credit facility for $2.5 million is secured by the Company's trade accounts
receivable and inventory. On February 27, 2003, the credit facility was modified
to create a subline of $150,000 to be used exclusively to finance vehicle
purchases, reducing the amount available under the credit facility for general
working capital to $2.35 million. As of March 15, 2003, the Company had not used
the subline for vehicle loans.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- --------------------------------------
There were no significant fourth quarter adjustments for the years ended
December 31, 2002 and 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.
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, plant cuttings and shipping
costs. 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.
17
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, 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 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.
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.
18
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors,
nominee for director and executive officers of the Company as of March 15, 2003.
The background and experience of these persons are summarized in the paragraphs
following the table.
Name (Age at March 15, 2003) Positions with the Company
- ---------------------------- --------------------------
Michael J. Spector (56) Chairman of the Board, Chief Executive Officer and Director
Margaret D. Spector (51) Secretary and Director
Jairo Estrada (55) Nominee
Blas R. Ferraiuoli (58) Director
Michael A. Rubin (60) Director
John A. Wing (66) Director
Ramon L. Dominguez (49) Director
J. Fernando Rodriguez (39) Director, President and Chief Operating Officer
Alfonso A. Ortega (49) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi (43) Vice President - Marketing
John A. Wing and Margaret D. Spector have informed the Company that they
do not intend to stand for reelection at the 2003 annual meeting of
shareholders. Mr. Jairo Estrada is being nominated for election as a director
for the first time at the 2003 annual meeting of shareholders.
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 and nominee of the Company as of March 15, 2003.
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.
19
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.
MR. ESTRADA is being nominated to the Board of Directors for the first time
at the Annual Meeting of Shareholders. Mr. Estrada has served as the Chairman of
the Board of N.S.C. of Puerto Rico, a manufacturing company serving the
pharmaceutical industry since 1999. From December 1985 to August 1996, Mr.
Estrada was the Chairman of the Board and Chief Executive Officer of Garden Way
Incorporated. Prior to joining Garden Way, in 1972 Mr. Estrada was a Senior
Consultant with KPMG Peat Marwick in Albany, New York, the Caribbean Islands and
South America. Mr. Estrada is a member of the Board of Directors of Flow
Management Technologies, Inc. (a health company), World Wide Education Services
(not for profit educational entity) and Velcero, Inc. (internet service solution
provider). He is also a member of the Advisory Board of the American College of
the Immaculate Conception of Leuven, Belgium; and the Board of Directors of
Telefonos Publicos de Puerto Rico and MBTI of Puerto Rico.
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. Rubin is a Director of The Herzfeld
Caribbean Basin Fund, Inc.
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. 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.
20
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, 2002. 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 Mark Greene, a former
director, failed to timely file one report related to the purchase of 230 common
shares and J. Fernando Rodriguez failed to timely file one report related to the
purchase of 330 common shares.
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 and Chief
Operating Officer during each of the three years ended December 31, 2002, 2001
and 2000. Mr. Rodriguez was employed by the Company in March 2001. No other
executive officer of the Company earned more than $100,000 during 2002, 2001 or
2000. The amount (and related exercise price) of option grants shown in the
table have been adjusted for the 10% stock dividend effective June 28, 2002.
Annual Compensation
---------------------------------------
Number of
Name of Individual and Stock Options Other Annual
Position with the Company Salary Bonus Granted Compensation (1)
------------------------- ------ ----- ------- ----------------
Michael J. Spector 2002 $115,000 $11,000 2,750(2) $8,000
Chairman, Chief Executive 2001 102,000 - 2,750(2) 8,000
Officer and Director 2000 104,000 - 2,750(2) 8,000
J. Fernando Rodriguez, President 2002 160,000 15,000 55,000 8,000
and Chief Operating Officer 2001 118,000 - 27,500 4,600
(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 2000, 2001 and 2002. Mr. Spector may be deemed to beneficially own
the options granted to Mrs. Spector.
21
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 2002, Messrs. Ferraiuoli, Rubin, Wing, Dominguez, and Mrs. Spector
each received options to acquire 2,750 shares (adjusted due to the 10% stock
dividend declared June 28, 2002) of Common Stock at an exercise price of $3.18
($3.50 for Mrs. Spector), expiring on May 25, 2012, in accordance with the 1998
Plan. All share amounts and exercise prices have been adjusted for the 10% stock
dividend effective June 28, 2002.
Grant of Stock Options
- ----------------------
The table below provides certain information regarding stock options
granted to the officers named in the Cash Compensation Table. No stock options
were granted to Michael J. Spector during the year ended December 31, 2002,
however, for SEC reporting purposes, Mr. Spector may be deemed to beneficially
own the options granted to Margaret D. Spector. All share amounts and exercise
prices have been adjusted for the 10% stock dividend effective June 28, 2002.
Potential realizable
value at assumed
annual rates of stock
price appreciation
for option term
---------------------
# of shares % of total
underlying options
options granted in Exercise Price Expiration
Name granted(2) Fiscal Year ($/share) Date 5% 10%
- ---------------------- ---------- ----------- --------- ---------- --------- -----
Michael J. Spector(1) 2,750 3.9% $3.50(3) 05-25-12 $ 4,620 $ 13,063
J. Fernando Rodriguez 55,000 76.9% $3.18 05-24-12 $110,000 $278,500
(1) Represents options to acquire 2,750 shares granted to Margaret D. Spector.
(2) Options become exercisable at the rate of 20% on the first, second, third, fourth and
fifth anniversary of the grant date.
(3) The exercise price is based on the last sales price (at 110%) for the Company's common
stock on May 25, 2002, the date of grant.
22
Options Exercised During 2002 and Option Values at December 31, 2002
- --------------------------------------------------------------------
The following table sets information on outstanding options held by the
Company's executive officers and their values at December 31, 2002. There were
no exercises of options during 2002 by any of the persons named in the Cash
Compensation Table. Value is calculated as the difference between the last sales
price of the Common Stock and the exercise price at December 31, 2002, the last
day the common stock traded during 2002.
Number of Shares Value of Unexercised
Underlying In-The-Money
Unexercised Options Options at
at 12/31/02 At 12/31/02 (1)(2)
----------------------------- -------------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector(1) - - 46,750 8,250 $41,442(1&2) $6,765(1&2)
J. Fernando Rodriguez - - 5,500 77,000 $10,395(3) $74,030(3)
(1) Includes 22,000 options held by Margaret D. Spector, the wife of Michael J.
Spector.
(2) Based on the last sales price of $3.77 per share on December 31, 2002, and
an exercise price of $2.87, $3.13, $1.50, $2.50, $1.75 and $3.75 for
22,000, 19,250, 2,200, 1,650 ,1,100 and 550 exercisable options,
respectively, and an exercise price of $1.50, $2.50, $1.75, $3.75 and$3.50
for 550, 1,100, 1,650 and 2,200 and 2,750 of unexercisable options,
respectively.
(3) Based on the last sales price of $3.77 on December 31, 2002 and an exercise
price of $1.88 for 5,500 exercisable options and an exercise price of $1.88
and $2.89 for 22,000 and 55,000 of unexercisable options, respectively.
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, 2002, the
Company paid approximately $58,000 representing the matching contributions under
the retirement plan for all participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 15, 2003, the number of
shares of common stock of the Company owned beneficially by the following
persons: (a) each director of the Company; (b) each nominee for director; (c)
all executive officers, directors and nominees of the Company as a group; and
(c) each person known to the Company who owns more than 5% of the outstanding
common stock of the Company. Unless otherwise stated, all shares are held with
sole investment and voting power.
23
Security Ownership as of March 15, 2003
---------------------------------------
Name
(Position with the Company) Amount Beneficially Owned(1) (5) Percent of Class(1)
--------------------------- -------------------------------- -------------------
Michael J. Spector 1,469,699(2) 68.8%
(Executive Officer and Director)
Margaret D. Spector 1,469,699(2) 68.8%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis 205,643(3) 9.9%
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 1005
(Five Percent Shareholder)
Jairo Estrada (Nominee) - -
Blas R. Ferraiuoli (Director) 17,600 (4)
Michael A. Rubin (Director) 33,700 1.6%
John A. Wing (Director) 2,750 (4)
Ramon Dominguez (Director) 12,650 (4)
J. Fernando Rodriguez (President and 13,200 (4)
Director
All Executive Officers and 1,580,729(1) 72.1%
Directors and Nominee as a Group
(8 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 15, 2003, (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 55,000 shares
- Blas Ferraiuoli 13,750 shares
- Michael A. Rubin 8,800 shares
- John A. Wing 550 shares
- Ramon Dominguez 550 shares
- J. Fernando Rodriguez 11,000 shares
- All Executive Officers and Directors, as a group 112,200 shares
Percent of class does not include shares of common stock issuable upon
exercise of stock options held by other persons.
(2) Includes 1,045,873 shares held directly by Mr. Spector, 334,826 shares held
by Mrs. Spector and 34,000 held jointly. Also includes stock options to
acquire 33,000 and 22,000 shares held by Mr. Spector and Mrs. Spector,
respectively. The Spectors share voting and investment power over the
shares owned by each other.
(3) This amount consists of 21,780 shares owned directly by J. Morton Davis and
174,513 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 9,350 shares owned by Rosalind Davidowitz, the spouse of Mr. Davis.
This amount is based upon a Schedule 13G, as amended on February 4, 2003,
filed with the Securities and Exchange Commission.
(4) Less than one percent.
(5) Amount of shares adjusted for 10% stock dividend effective June 28, 2002.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 was required to pay all taxes on the property,
maintain certain insurance coverages and otherwise maintain and care for the
property. The lease also contained an option which permited 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 was required to pay the
Spectors an additional $1,000 per month. On January 1, 1998, the Company
exercised its renewal option at a monthly rental of $24,000. The lease to
terminated on December 31, 2002. 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. The Company is in the process of negotiating a new
lease agreement with the Spectors. The negotiations will be conducted on behalf
of the Company by a committee of independent directors . Pending execution of a
new lease agreement, the parties have agreed to a month to month arrangement
with monthly lease payments of $24,000 as under the prior lease.
Landscaping services provided by the Company to Estancias de Cerro Mar, Inc.
- ----------------------------------------------------------------------------
During 2002 and 2001, the Company provided landscaping and landscape
maintenance services to Estancias de Cerro Mar, Inc., an entity controlled by
the Spectors, and charged approximately $525,000 and $279,000, respectively, 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 2002, the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
25
PART IV
-------
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period preceding the filing of this Annual Report on Form
10-K, an evaluation was performed under the supervision of and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the design and operation of the Company's disclosure controls and procedures
were effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
ITEM 15. 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) and Financial Statements and Financial Statement Schedules.
(a)(2) The information called for by this section of Item 14 is set
forth in the Financial Statements and Auditor's Report
beginning on page F-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:
26
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between
Margo Nursery Farms, Inc. and Margo Transition Corp.,
(incorporated by reference to Exhibit 1 to the Company's
Form 8-K dated December 31, 1997).
(2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo
Transition Corp., dated December 15, 1997, (incorporated by
reference to Exhibit 2(a) to the Company's Form 8-K dated
December 31, 1997).
(2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into
Margo Transition Corp., dated December 15, 1997,
(incorporated by reference to Exhibit 2(b) to the Company's
Form 8-K dated December 31, 1997).
(3)(a) Certificate of Incorporation as currently in effect
(incorporated by reference to same exhibit number to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
(3)(b) Certificate of Amendment dated May 29, 1998 to Certificate
of Incorporation (incorporated by reference to the Company's
Form 8-K dated June 1, 1998)
(3)(c) By-Laws as of January 1, 1998(incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
(4)(a) Form of Common Stock Certificate (incorporated by reference
to Exhibit No. 4.1 of Form S-8 Registration Statement (No.
333-59619).
(4)(b) 1998 Stock Option Agreement (Incorporated by reference to
Exhibit No. 4.2 of Form S-8 Registration Statement (No.
333-59619).
(4)(c) Form of Stock Option Agreement (Incorporated by reference to
Exhibit No. 4.3 of Form S-8 Registration Statement (No.
333-59619).
(10) (a) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 filed April 15,1993:
(i) Lease Agreement dated January 1, 1993 between the
Company and the Spectors.
(b) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed April 15, 1994:
(i) First Amendment to Lease Agreement dated January 1,
1994 between the Company and the Spectors.
(c) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 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.
27
(vi) Stock Option Agreement, dated July 9, 1993, with
Margaret D. Spector.
(vii)Stock Option Agreement, dated July 9, 1993, with Blas
R. Ferraiuoli.
(viii) Stock Option Agreement, dated August 9, 1996, with
Margaret D. Spector.
(d) 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:
(ii) Second Amendment to lease Agreement dated as of January
1, 1998, between the Company and the Spectors.
(e) Material contract incorporated by reference from the
Company's Annual Report on Report on Form 10-K for the year
ended December 31, 2001.
(i) Master Promissory Note for %2.5 million with Scotiabank
of Puerto Rico dated January 25, 2002.
(f) Material Contract incorporated by reference from the
Company's Report on Form 10-Q for the quarter ended
September 30, 2002
(i) Management Agreement, dated October 14, 2002, between
Salinas Holdings, Inc. and Margo Nursery Farms, Inc.
(21) List of Registrant's Subsidiaries. (Incorporated by reference to same
exhibit number of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001)
(23) Consent of Deloitte & Touche.
(b) Reports on Form 8-K.
-------------------
(i) Report on Form 8-K, dated December 2, 2002, reporting under
Item 5, the collection of $425,000 on a past due note.
(ii) Report on Form 8-K, dated November 14, 2002, reporting under
Item 7, the filing of Certifications by the Chief Executive and
Chief Financial Officers of the Company.
(iii)Report on Form 8-K, dated October 14, 2002, reporting under
Item 5, entering into Salinas Holding, Inc. joint venture.
28
I, Michael J. Spector, Chairman of the Board and Chief Executive Officer of
Margo Caribe, Inc. certify that:
1. I have reviewed this Annual Report on Form 10-K of Margo Caribe, Inc.
2 . Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
29
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Michael J. Spector
-------------- ----------------------
Michael J. Spector
Chief Executive Officer
30
I, Alfonso Ortega, Chief Financial Officer of Margo Caribe, Inc. certify that:
1. I have reviewed this Annual Report on Form 10-K of Margo Caribe, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
31
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Alfonso Ortega
-------------- ------------------
Alfonso Ortega
Chief Financial Officer
32
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 26, 2003 By: /s/ Michael J. Spector, President
----------------------------------
Michael J. Spector, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 26, 2003 By: /s/ Michael J. Spector
----------------------------------------
Michael J. Spector, Chairman
of the Board and Chief Executive Officer
Dated: March 26, 2003 By: /s/ Margaret D. Spector
----------------------------------------
Margaret D. Spector, Director
Dated: March 26, 2003 By: /s/ Blas R. Ferraiuoli
----------------------------------------
Blas R. Ferraiuoli, Director
Dated: March 26, 2003 By: /s/ Michael A. Rubin
----------------------------------------
Michael A. Rubin, Director
Dated: March 26, 2003 By: /s/ John A. Wing
----------------------------------------
John A. Wing, Director
Dated: March 26, 2003 By: /s/Ramon Dominguez
----------------------------------------
Ramon Dominguez, Director
Dated: March 26, 2003 By: /s/ J. Fernando Rodriguez
----------------------------------------
J. Fernando Rodriguez, Director
President and Chief
Operating Officer
Dated: March 26, 2003 By: /s/ Alfonso A. Ortega
--------------------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Chief Financial and
Accounting Officer
33
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, 2002
MARGO CARIBE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
For the year ended December 31, 2002
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-32
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. 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, 2002. 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, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, 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 14, 2003
Stamp No. 1857194
affixed to original.
F-2
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS
------
2002 2001
----------- -----------
Current Assets:
Cash and equivalents $ 1,417,879 $ 838,921
Accounts receivable, net 1,818,076 1,798,251
Inventories 3,378,779 3,510,381
Due from related entity 51,026 --
Current portion of notes receivable -- 26,331
Deferred tax asset 11,400 --
Prepaid expenses and other current assets 312,106 296,482
----------- -----------
Total current assets 6,989,266 6,470,366
Property and equipment, net 1,249,889 1,398,689
Land held for future development 1,105,627 1,053,406
Investment in unconsolidated subsidiary 417,296 --
Notes receivable, net of current portion 28,112 42,164
Other assets 6,016 44,396
----------- -----------
Total assets $ 9,796,206 $ 9,009,021
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 138,967 $ 129,047
Notes payable 1,730,500 1,930,500
Accounts payable 829,382 868,071
Accrued expenses 332,305 194,294
----------- -----------
Total current liabilities 3,031,154 3,121,912
Deferred revenue 74,238 --
Long-term debt, net of current portion 244,425 307,528
----------- -----------
Total liabilities 3,349,817 3,429,440
----------- -----------
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, 2,119,609 and 2,115,984
shares issued, 2,079,889 and 2,072,204
shares outstanding in 2002 and 2001, respec-
tively 2,120 1,924
Additional paid-in capital 5,241,136 4,659,792
Retained earnings 1,299,421 1,014,153
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
----------- -----------
Total shareholders' equity 6,446,389 5,579,581
----------- -----------
Total liabilities and shareholders' equity $ 9,796,206 $ 9,009,021
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001, 2000
2002 2001 2000
----------- ----------- -----------
Net sales $ 9,751,294 $ 9,184,621 $ 8,302,810
Cost of sales 5,875,412 5,795,347 6,168,347
----------- ----------- -----------
Gross profit 3,875,882 3,389,274 2,134,463
Selling, general and administrative expenses 3,477,923 3,021,016 2,583,012
----------- ----------- -----------
Income (loss) from operations 397,959 368,258 (448,549)
----------- ----------- -----------
Other income (expense):
Interest income 15,695 69,327 104,214
Interest expense (58,194) (122,984) (140,431)
Gain on collection of note receivable
previously written down 405,000 -- --
Gain on sale of investment 71,462 -- --
Participation in loss of unconsolidated
subsidiary (16,037) -- --
Commissions and fees 6,481 -- --
Terminated merger expenses -- -- (553,101)
Other income 18,579 23,842 15,134
----------- ----------- -----------
Total other income (expense) 442,986 (29,815) (574,184)
----------- ----------- -----------
Income (loss) before deferred income tax
benefit 840,945 338,443 (1,022,733)
Deferred income tax benefit 11,400 -- --
----------- ----------- -----------
Net income (loss) $ 852,345 $ 338,443 $(1,022,733)
=========== =========== ===========
Basic income (loss) per common share .41 .16 (.49)
=========== =========== ===========
Diluted income (loss) per common share $ .40 $ .16 $ (.49)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Outstanding
Common Common Additional
Stock Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
----------- ----------- ----------- ----------- ----------- -----------
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
Issuance of common stock from
10% stock dividend 188,367 188 566,843 (567,077) -- (46)
Issuance of common stock from
conversion of stock options 7,700 8 14,501 -- -- 14,509
Net income -- -- -- 852,345 -- 852,345
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 2,079,889 $ 2,120 $ 5,241,136 $ 1,299,421 $ (96,288) $ 6,446,389
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 852,345 $ 338,443 $(1,022,733)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 411,600 497,051 434,176
Write off of unsalable inventory -- -- 439,000
Provision for bad debts 120,929 71,000 41,289
Gain from collection of note receivable (405,000) -- --
Deferred revenue 74,238 -- --
Deferred tax benefit (11,400) -- --
Participation in loss-unconsolidated subsidiary 16,037 -- --
Gain on sale of investment (71,462) -- --
Loss (gain) on disposition of equipment (6,287) 4,367 --
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (140,754) (618,545) (175,273)
Inventories 131,602 (340,307) (500,666)
Due from related entity (51,026) -- --
Prepaid expenses and other current assets (15,624) 12,017 (45,052)
Other assets (3,082) 23,994 56,418
Accounts payable (38,689) (226,119) 214,422
Accrued expenses 138,011 (4,850) 16,749
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,001,438 (242,949) (541,670)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (181,688) (238,949) (306,977)
Proceeds from sale of investment 112,924 -- --
Investment in land held for future development (52,221) (64,921) (934,363)
Increase in notes receivable (5,948) (18,193) --
Investment in unconsolidated subsidiary (433,333) -- --
Collection from (advances to)shareholder -- 349,480 (58,659)
Proceeds from collection of notes receivable 451,331 10,452 482,161
----------- ----------- -----------
Net cash provided by (used in) investing activities (108,935) 37,869 (817,838)
----------- ----------- -----------
Cash flows from financing activities:
Increase in notes payable 533,333 200,000 1,355,500
Repayment of notes payable (733,333) (225,000) --
Cash payment in lieu of issuing fractional
shares in stock dividend (46) -- --
Issuance of common stock from conversion
of stock options 14,509 2,250 19,845
Proceeds from long-term debt -- 222,051 --
Repayments of long-term debt (128,008) (128,361) (125,368)
----------- ----------- -----------
Net cash provided by (used in) financing activities (313,545) 70,940 1,249,977
----------- ----------- -----------
Net increase (decrease) in cash and equivalents 578,958 (134,140) (109,531)
Cash and equivalents at beginning of year 838,921 973,061 1,082,592
----------- ----------- -----------
Cash and equivalents at end of year $ 1,417,879 $ 838,921 $ 973,061
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 and 2000
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, 2002 and 2001, cash and equivalents
include $500,000 invested in a certificate of deposit bearing interest at 1.7%
and 1.5%, 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 Land Held for Future Development
-----------------------------------------------------------
Property and equipment are carried at acquisition cost. Depreciation and
amortization are provided over the estimated useful lives of the respective
assets on a straight-line basis. Such useful lives range from four to twenty
years.
The Company considers depreciation of certain facilities and equipment as a
direct cost of production of inventory. As inventory is sold, such cost is
charged to cost of sales.
Land held for future development is stated at cost. Interest is capitalized at
the effective interest rate paid on borrowings for interest costs incurred on
real estate investment components during the pre-construction and planning
stage, and the periods that the project is under development. Capitalization of
interest is discontinued if development ceases at a project.
(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 June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
F-8
assets and the associated asset retirement costs. This statement is effective
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's financial condition
or results of operations.
In August 2001, the FASB issued SFAS No. 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 No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". SFAS No. 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections". SFAS No. 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt - an
amendment of APB Opinion No. 30", which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion No. 30 will now be used to classify those gains and losses. This
amendment is effective for fiscal years beginning after May 15, 2002.
SFAS No. 145 also amends SFAS No. 13 "Accounting for Leases", which requires
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment became effective for transactions
occurring after May 15, 2002. SFAS No. 145 is not expected to have a significant
effect on the Company's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS also
establishes that fair value is the objective for initial measurement of the
liability. SFAS No. 146 applies to costs associated with an exit activity, but
F-9
does not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 146
does not apply to costs associated with a retirement of long-lived assets
covered by SFAS No. 143. The Company is required to implement SFAS No. 146 for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of this statement to have a significant
effect on its financial position or results of operations.
(g) Income Tax
----------
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires the use of the asset and liability method in
accounting for income taxes. Deferred income taxes are recognized for the future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico ("Act No.
225" of December 1, 1995, as amended) provides the Company with a 90% tax
exemption for income derived from "bonafide" agricultural business, including
sales of nursery plants within Puerto Rico and outside Puerto Rico, as well as a
100% exemption from property, municipal and excise taxes.
Rain Forest Products Group, Inc.'s operations are covered under the Puerto Rico
Industrial Tax Incentives Act of 1987 ("the Act"). Under the Act, the Company
has a 90% tax exemption on income and property taxes and a 60% exemption on
municipal taxes for a period of fifteen years, commencing January 1, 1997.
(h) Income (loss) per Common Share
------------------------------
The Company reports its earnings per share ("EPS") using SFAS No. 128, "Earnings
Per Share". SFAS No. 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.
F-10
On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend
on the Company's common stock. The stock dividend was issued on June 28, 2002,
to shareholders of record on June 14, 2002. The stock dividend resulted in the
issuance of 188,367 additional shares of common stock. Accordingly, the weighted
average number of common shares outstanding (and stock options) for the periods
prior to December 31, 2002 have been adjusted to reflect the effect of the stock
dividend as of the beginning of the earliest period pressented.
(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, SFAS No. 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 No.
123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123", requires disclosure of
pro forma information regarding the effects of the application of its
compensation cost measurement criteria and of other information.
(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
F-11
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
deemed 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 the 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 12) of $673,612, which is
partially offset by a valuation allowance of $662,212. 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 depending on future levels of taxable income.
F-12
(l) Investment in Unconsolidated Subsidiary
---------------------------------------
Investment in unconsolidated subsidiary is accounted for by using the equity
method of accounting for investments, under which the Company's share of
earnings of the subsidiary is reflected in income as earned, and dividends are
credited against the investment in subsidiary when received.
(m) Impairment of Long-Lived Assets
-------------------------------
The Company periodically reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. No indications of impairment are evident as a result of
such review.
Note 2 - Inventories
- --------------------
At December 31, 2002 and 2001, inventories comprised the following:
Description 2002 2001
- -------------------------------- ---------- ----------
Plant material $2,799,960 $2,813,920
Lawn and garden products 251,438 362,273
Raw material and supplies 327,381 334,188
---------- ----------
$3,378,779 $3,510,381
========== ==========
Note 3 - Accounts Receivable
- ----------------------------
At December 31, 2002 and 2001, accounts receivable comprised the following:
Description 2002 2001
- --------------------------- ---------- ----------
Trade receivables $1,863,522 $1,822,315
Government reimbursement 75,000 64,277
Accrued interest 188 390
Employee advances 9,929 8,367
Other accounts receivable 65,137 37,902
---------- ---------
2,013,776 1,933,251
Less allowance for doubtful
accounts (195,700) (135,000)
---------- ----------
$1,818,076 $1,798,251
========== ==========
F-13
Included within trade receivables as of December 31, 2002 are approximately
$104,000 ($59,000 in 2001) due from Estancias de Cerro Mar, Inc. ("Estancias"),
an entity controlled by the Company's principal shareholder. During the years
ended December 31, 2002 and 2001, the Company billed approximately $525,000 and
$279,000, respectively, to Estancias for landscaping and landscape maintenance
services.
Note 4 - Due from Related Entity
- --------------------------------
At December 31, 2002, the Company had advanced approximately $51,000 to its
unconsolidated subsidiary, Salinas Holdings, Inc. for working capital purposes.
This balance was collected during February 2003.
Note 5 - Notes Receivable
- -------------------------
At December 31, 2002 and 2001, notes receivable comprised the following:
Description 2002 2001
- ------------------------------------------ --------- ---------
Note receivable from the sale of a former
Dominican Republic subsidiary $ -- $ 20,000
10% note, collateralized by real
property -- 26,331
Non-interest bearing notes, due on demand,
personally guaranteed by present
company personnel 28,112 22,164
--------- ---------
28,112 68,495
Less current portion -- (26,331)
--------- ---------
$ 28,112 $ 42,164
========= =========
The Company owned a note receivable with an outstanding principal balance of
approximately $997,000, from the sale of Cariplant S.A. ("Cariplant") a former
Dominican Republic subsidiary, to Altec International C. por A. ("Altec"),
another unrelated Dominican Republic company. The note was collateralized by the
common stock and personal guarantee of the major shareholder of Altec, as well
as by a junior lien on Cariplant's property and equipment.
F-14
Due to the unfavorable collection experience, the note was written down on
several occasions and reduced to a carrying value of $20,000 at December 31,
1999.
During December 2002, Altec agreed to settle the note for $450,000, in order to
obtain the collateral pledged and remove the Company's junior lien from
Cariplant's property. For the year ended December 31, 2002, the Company received
$425,000, recognizing $405,000 as a gain in the accompanying statement of
operations. The remaining $25,000 will be received during 2003 and recognized as
income upon collection.
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, 2002 and 2001, property and equipment comprised the following:
2002 2001
----------- -----------
Leasehold improvements $ 1,456,960 $ 1,364,949
Equipment and fixtures 1,599,948 1,585,675
Transportation equipment 600,344 460,232
Real estate property 224,327 224,327
----------- -----------
3,881,579 3,635,183
Less accumulated depreciation
and amortization (2,631,690) (2,236,494)
----------- -----------
$ 1,249,889 $ 1,398,689
=========== ===========
During the years ended December 31, 2002, 2001 and 2000, depreciation expense
charged to production was approximately $234,000, $315,000, and $261,000,
respectively.
Note 7 - Land Held for Future Development
- -----------------------------------------
In December 2000, the Company 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 lots for residential homes.
F-15
Note 8 - Investment in Unconsolidated Equity Subsidiary
- -------------------------------------------------------
On October 14, 2002, the Company entered into an agreement with two other
unrelated parties and organized Salinas Holdings, Inc.("Salinas"), a Puerto Rico
corporation engaged in the production and distribution of sod (turf) and palms
and trees grown in the ground. The Company has a 33.33% interest in Salinas. The
Company further entered into a management agreement with Salinas to provide
certain management services to the entity and to market its products. The
Company earns $2,000 per month for such services and between 15% and 17%
commission on the sales of its products. Salinas commenced operations on
November 1, 2002.
The Company has accounted for its investment in Salinas using the equity method
of accounting. At December 31, 2002, and for the period then ended, Salinas'
unaudited condensed financial position and results of operations information was
as follows:
Assets Amount
------ ----------
Current assets $ 839,162
Property and equipment 396,033
----------
$1,235,195
==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities $ 83,306
Shareholders' equity 1,151,889
----------
$1,235,195
==========
Results of Operations Amount
--------------------- ----------
Sales $ 10,144
Cost of sales 4,346
General and adminis-
trative expenses 53,909
----------
Net loss $ 48,111
==========
F-16
At December 31, 2002, the Company's investment in Salinas Holdings, Inc., was as
follows:
Description Amount
- ----------------------- ---------
Original investment $ 433,333
Participation in loss of
unconsolidated equity
subsidiary (16,037)
---------
Balance at December 31, 2002 $ 417,296
=========
Note 9 - Notes Payable
At December 31, 2002 and 2001, the Company had short-term borrowings with
various commercial banks in Puerto Rico, comprised of the following:
Description 2002 2001
- ----------------------------------- ---- -----
Unsecured commercial line of credit
of $1 million, bearing interest
at 2% over Libor rate (4.6% at December
31,2001), expired in June 2002 $ - $ 800,000
Commercial line of credit of $2.5 million,
bearing interest at 1.8% over Libor
rate (3.13% at December 31, 2002)
due on June 30, 2003, collateralized by
land held for future development and
the Company's accounts receivable and
inventories 1,230,500 630,500
Notes payable, collateralized by cash
equivalent invested in a certificate of
deposit, bearing interest at 2.2% and
2.3% at December 31 2002 and 2001,
respectively 500,000 500,000
---------- ----------
$1,730,500 $1,930,500
========== ==========
F-17
Note 10 - Long-Term Debt
- ------------------------
At December 31, 2002 and 2001, long-term debt comprised the following:
Description 2002 2001
- ------------------------------------ ---- ----
Five-year term loans, bearing interest
at 2% over Libor rate (3.8% at December
31, 2002), payable in monthly installments
of $11,581, through December 2007 $383,392 $436,575
Less current portion (138,967) (129,047)
-------- --------
Long-term debt $244,425 $307,528
======== ========
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
------------ ------
2003 $138,967
2004 138,967
2005 71,730
2006 26,153
2007 7,575
--------
$383,392
========
The Company's debt agreements contain various covenants, which among other
things, require the Company to meet certain debt to asset ratios and a minimum
working capital. At December 31, 2002 and 2001, the Company was in compliance
with such covenants.
F-18
Note 11 - Deferred Revenue
- --------------------------
As a result of damages caused by Hurricane Georges in September 1998, the Puerto
Rico Department of Agriculture (the "Department of Agriculture") committed to
providing assistance to bona-fide agricultural enterprises affected by the
hurricane. During 2002, the Company received $74,238, representing the
assistance approved by the Department of Agriculture to the Company, and signed
an agreement with the Department of Agriculture, which among other things,
requires the Company's Barranquitas facility to be operated as an agricultural
enterprise for a minimum period of ten years from the date of the agreement.
Accordingly, the Company recorded the amount received as deferred revenue, which
will be credited to income prorata over the ten-year period of the commitment
(refer to Note 16 (b)).
Note 12 - Income Taxes
- ----------------------
The Company provides for income taxes using the applicable statutory tax rates
in the Commonwealth of Puerto Rico.
Set forth below are explanations for the differences between the income tax
provision (benefit) and the amount computed by applying the Puerto Rico
statutory income tax rate of 39% to income (loss) before income tax provision:
2002 2001 2000
--------- --------- ---------
Income tax provision (benefit)
computed by applying tax rate $ 327,969 $ 131,992 $(398,865)
(Increase) decrease in income
tax benefit resulting from
Puerto Rico tax exemption (251,542) (80,452) 248,909
Tax loss carryover benefit
(utilization) and other
(76,427) (51,540) 149,956
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Deferred income taxes, prior to the valuation allowance, were recognized in the
consolidated balance sheet at December 31, 2002 and 2001 due to the tax effect
of temporary differences and loss carryforwards as follows:
F-19
2002 2001
--------- ---------
Deferred tax assets:
- -------------------
Net operating loss carryforwards $ 628,496 $ 734,345
Valuation allowance for accounts
receivable 45,116 18,838
--------- ---------
673,612 753,183
Less valuation allowance (662,212) (753,183)
--------- ---------
Net deferred tax asset $ 11,400 $ --
========= =========
Note 13 - Income (loss) Per Common Share
- ----------------------------------------
Basic and diluted income (loss) per common share for the years ended December
31, 2002, 2001 and 2000 were determined as follows:
Basic income (loss) per common share:
- -------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income (loss) attributable
to common shareholders $ 852,345 $ 338,443 $(1,022,733)
=========== =========== ===========
Weighted average number of
common shares outstanding 2,073,997 2,071,174 2,069,584
=========== =========== ===========
Basic income (loss) per
common share $ .41 $ .16 $ (.49)
=========== =========== ===========
Diluted income (loss) per common share:
- ---------------------------------------
Net income (loss) attributable
to common shareholders $ 852,345 $ 338,443 $(1,022,733)
=========== =========== ===========
Weighted average number of
common shares outstanding 2,073,997 2,071,174 2,069,584
Plus incremental shares from
assumed exercise of stock
options 40,248 33,211 --
----------- ----------- -----------
Adjusted weighted average
shares 2,114,245 2,104,385 2,069,584
=========== =========== ===========
Diluted income (loss) per
common share $ .40 $ .16 $ (.49)
=========== =========== ===========
F-20
For the year ended December 31, 2000, the effect of the assumed exercise of
stock options determined by using the treasury stock method was antidilutive;
thus no incremental shares were added to the weighted average number of common
shares outstanding.
Note 14 - Commitments and Contingencies
- ---------------------------------------
The Company is a party to various legal actions arising in the ordinary course
of business. In the opinion of management, the disposition of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.
Note 15 - 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, 2002, there were no outstanding shares of preferred stock.
Note 16 - Lease and Option Agreements
- -------------------------------------
(a) Property in Vega Alta, Puerto Rico
----------------------------------
The primary Puerto Rico facility is leased from Michael J. Spector and Margaret
D. Spector (the "Spectors"), who are officers, directors and major shareholders
of the Company.
Effective January 1, 1993, the Company entered into a lease agreement with the
Spectors for an initial five year period at a monthly rental of $19,000. In
addition, the Spectors have released the Company from responsibility from any
claims arising from the Company's use of a defective fungicide in its operations
at the nursery facility. Under the lease, the Company is required to make
monthly lease payments of $24,000, pay all taxes on property, maintain certain
insurance coverages and otherwise maintain and care for the property. The lease
agreement terminated on December 31, 2002. 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. As of December 31, 2002, the Company was in the
process of negotiating a new lease agreement with the Spectors.
F-21
Under the expired lease agreement, the Company had 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 paid $1,000 per month for this purchase
option, which amount was expensed when paid.
Effective January 1, 1994, the Company amended the lease agreement with the
Spectors to include an additional 27 acres of land adjacent to the nursery
facility at a monthly rental of $1,750. This amendment did not provide for
renewal nor purchase options towards the additional 27 acres of land. Effective
January 1, 1998, the Company and the Spectors entered into an amendment to the
lease agreement which grants the Company the right to continue to lease the 27
acre parcel on a month to month basis. Either party 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 in 2002 and 2001 and
$290,000 in 2000.
(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
amounted to $4,500. During the remaining four years of the initial term of the
lease, monthly payments amounted to $5,000. During the first and second renewal
terms, monthly payments increased to $6,000 and $7,000, respectively. Effective
December 23, 2002, both the lessor and the Company executed a "Release and
Settlement Agreement" in order to terminate the lease agreement. Under the terms
of the agreement, the Company must vacate the facilities on or before June 30,
2003.
F-22
In connection with a certain requirement arising from an agreement for
assistance proceeds received from the Puerto Rico Department of Agriculture, the
lessor has represented to the Company within the Release and Settlement
Agreement that he will comply with the ten-year requirement for this facility to
be operated as an agricultural enterprise.
Total rental payments amounted to $72,000 in 2002 and $60,000 in 2001 and 2000.
(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. 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, 2002, assuming the Company continues
its lease payments at the Vega Alta facility at $24,000 per month, and vacates
the Barranquitas facility by June 30, 2003, are as follows:
Year ending Minimum
December 31, Lease Payments
------------ --------------
2003 $324,000
2004 288,000
2005 288,000
2006 288,000
2007 288,000
-----------
$1,476,000
==========
F-23
Total rental expense under all operating lease agreements amounted to
approximately $360,000, $382,000 and $403,000, for the years ended December 31,
2002, 2001 and 2000, respectively.
Note 17 - Stock Option and Salary Deferral Plans
- ------------------------------------------------
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan").
Outstanding options granted under the previous plan, including all related
obligations and commitments, will continue to be honored by the Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can
award options to purchase up to 200,000 shares of common stock (exclusive of
outstanding options under the previous plan) to eligible employees at 100% of
the fair market value at the time of the grant, except that options granted to
persons owning 10% or more of the outstanding common stock carry an exercise
price 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, 2000, 2001 and 2002, and changes during the years ended on those
dates, are as follows:
F-24
- ------------------------------- ------------ ----------------- -------------
Weighted
Price per Share Average
Description Shares Range Price
- ------------------------------- ------------ ----------------- -------------
Outstanding, December 31, 1999 147,950 $1.36 to $3.13 $2.47
Granted 11,000 1.59 to 1.75 1.63
Exercised (7,700) 1.36 to 2.85 2.57
Forfeited (2,200) 1.76 to 2.85 2.31
--------- -------------- ----
Outstanding, December 31, 2000 149,050 1.36 to 3.13 2.41
Granted 44,000 1.88 to 3.75 2.48
Exercised (1,650) 1.36 1.36
Forfeited (4,400) 1.76 to 2.85 2.08
-------- -------------- ----
Outstanding, December 31, 2001 187,000 1.36 to 3.75 2.44
Granted 71,500 2.89 to 3.50 2.97
Exercised (7,700) 1.76 to 2.05 1.88
Forfeited (1,100) 1.76 1.76
-------- -------------- ----
Outstanding, December 31, 2002 249,700 $1.36 to $3.75 $2.61
======== ============== =====
Exercisable, December 31, 2002 125,180 $1.36 to $3.75 $2.45
======== ============== =====
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted Average Weighted
Remaining Average Weighted Average
Range of Contractual Exercise Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- -------------------- -------------- ----------------- ------------- ------------- ----------------
$2.61 - $2.87 42,350 0.5 $ 2.75 42,350 $ 2.75
2.85 - 3.13 41,250 3.6 2.98 41,250 2.98
1.36 - 1.76 23,650 5.4 1.63 18,480 1.61
2.05 - 2.50 15,950 6.4 2.24 8,250 2.27
1.59 - 1.75 11,000 8.0 1.63 6,050 1.62
1.88 - 3.75 44,000 9.0 2.48 8,800 1.07
2.89 - 3.50 71,500 10.0 2.97 - -
- --------------- --------- ------- ------- -------- ------
$1.36 - $3.75 249,700 6.4 $ 2.61 125,180 $ 2.45
=============== ========= ======= ======= ======== ======
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", the
Company's net income (loss) and net income (loss) per share, on a pro forma
basis, would have been as follows:
F-25
Year ended December 31,
-----------------------------------------
2002 2001 2000
--------- --------- -------------
Net income as reported $ 852,345 $ 338,443 $ (1,022,733)
Total stock based com-
pensation expense
determined under fair
value based method for
all awards (36,463) (34,527) (42,670)
--------- --------- -------------
Pro forma net income
(loss) $ 815,882 $ 303,916 $ (1,065,403)
========= ========= =============
Earnings per share:
Basic - as reported $ 0.41 $ 0.16 $ (0.49)
========= ========= =============
Basic - pro forma $ 0.39 $ 0.15 $ (0.51)
========= ========= =============
Diluted - as reported $ 0.40 $ 0.16 $ (0.49)
========= ========= =============
Diluted - pro forma $ 0.39 $ 0.14 $ (0.51)
========= ========= =============
The weighted average fair value of an option granted in 2002, 2001 and 2000, was
$1.35, $1.90 and $2.26, respectively. For purposes of fair market value
disclosures, the fair market value of an option grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate 5.36% 6.4% 7.0%
Average life of options 10 yrs. 10 yrs. 10 yrs.
Volatility 34% 72% 211%
Dividend yield 0% 0% 0%
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
F-26
employment. For the years ended December 31, 2002, 2001 and 2000, the Company
paid approximately $58,000 $53,000 and $50,000 respectively, representing the
matching contributions under the retirement plan for all participants.
Note 18 - Supplemental Disclosures for the Statements of Cash Flows
- -------------------------------------------------------------------
(a) Non-Cash Investing Activities
-----------------------------
During the year ended December 31, 2002, the Company applied a certificate
of deposit amounting to $500,000 to pay off a related note payable.
Subsequently, on two separate occasions, the Company opened a certificate
of deposit amounting to $500,000 with the proceeds from a related note
payable. The Company also traded-in a vehicle with a cost of $31,500,
receiving $7,000 as a trade-in value for the old vehicle, and assuming a
related debt of $24,500. The Company also purchased various vehicles for
$50,325 by assuming the related debt.
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.
F-27
(b) Non-Cash Financing Activities
-----------------------------
The Company issued a 10% stock dividend, resulting in the capitalization of
188,367 common shares at a market price of $3.01 as of June 28, 2002.
(c) Other Cash Flow Transactions
----------------------------
During the years ended December 31, 2002, 2001, and 2000, the Company made
interest payments of approximately $64,000, $125,000, and $134,000,
respectively. During the years ended December 31, 2002, 2001 and 2000, the
Company did not make any income tax payments.
Note 19 - Major Customers
- -------------------------
During 2002, the Company's single largest customer accounted for approximately
30% ($2,961,000) of the Company's net sales.
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.
Note 20 - Significant Concentration of Risk
- -------------------------------------------
As discussed in Note 1, the Company's operations are principally concentrated in
Puerto Rico. The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of December 31, 2002, the Company has been unable
to obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
F-28
The Company believes it has taken reasonable precautions to protect its plants
and operations from natural hazards. The Company's newer facilities are being
constructed with fabricated steel in an attempt to reduce the damage from any
future storms. Each of the Company's operations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico.
Concentration of credit risk with respect to accounts receivable is mitigated by
monitoring the operations and financial strength of the Company's customers.
Certain short-term certificates of deposit are placed with local financial
institutions. Such credit risk is mitigated by depositing the funds with high
credit quality financial institutions and limiting the amount of credit exposure
in any financial institution.
Note 21 - Segment Information
- -----------------------------
In June 1997, the FASB issued Statement No. 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 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 No. 131 requires a reconciliation of total segment revenue and
expense items and segment assets to the amount in the enterprise's financial
statements. SFAS No. 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
F-29
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, 2002 and 2001, the Company had $1,105,627
and $1,053,406, respectively, in assets pertaining to a new real estate
development segment (which had not generated any revenues or expenses), of which
$52,221 and $64,921 were acquired during 2002 and 2001, respectively. These
assets have been included as part of the segment assets under the plants segment
presented below.
2002
- ------------------------------------ ------------- ---------------- ------------- ------------
Lawn & Garden
Plants Products Landscaping Totals
- ------------------------------------ ------------- ---------------- ------------- ------------
Revenue from external customers $4,325,204 $2,883,685 $2,542,405 $9,751,294
Intersegment revenues 378,855 48,356 - 427,211
Interest income 15,695 - - 15,695
Interest expense 58,194 - - 58,194
Depreciation and amortization 306,039 61,279 44,282 411,600
Segment income 686,450 6,197 159,698 852,345
Segment assets 7,937,541 904,725 953,940 9,796,206
Expenditures for segment assets 181,688 - - 181,688
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 238,949 - - 238,949
F-30
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
- ------------------------------------ ------------- ---------------- ------------- ------------
Note 22 - 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-31
SCHEDULE II
-----------
MARGO CARIBE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2002, 2001 and 2000
Column A Column B Column C Column D Column E
- ----------------------------------- -------------- --------------------------------- -------------- -----------------
Balance Charged to Costs Charged to
Beginning and Other Balance
Description Of Year Expenses Accounts Deductions End of Year
- ----------------------------------- -------------- ---------------- -------------- -------------- -----------------
Year ended December 31, 2002:
Allowance for doubtful accounts $135,000 $121,000 $ - $ (60,300) $195,700
======== ======== ======== ========== ========
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
======== ======= ======== ========= ========
F-32