UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
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
---------------------------------------
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 30, 2003, the aggregate market value of the registrant's common
stock, $.001 par value, held by non-affiliates of the registrant was $4,048,703
based on the last sales price of $7.21 per share on the NASDAQ Stock Market on
June 30, 2003.
The registrant had 2,184,039 shares of common stock, $.001 par value,
outstanding as of March 1, 2004.
1
MARGO CARIBE, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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ITEM 1 BUSINESS..................................................... 3
ITEM 2 PROPERTIES................................................... 10
ITEM 3 LEGAL PROCEEDINGS ........................................... 11
ITEM 4 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY SHAREHOLDERS .................................... 11
PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASER
OF EQUITY SECURITIES ........................................ 12
ITEM 6 SELECTED FINANCIAL DATA..................................... 13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ...........................15
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 24
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................25
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 25
ITEM 9A CONTROLS AND PROCEDURES...................................... 25
PART III
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ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 26
ITEM 11 EXECUTIVE COMPENSATION ...................................... 29
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 31
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 33
ITEM 14 PRINCIPAL ACCOUNTANTS AND FEES............................... 34
PART IV
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ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...................................................35
2
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
- --------------------------
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "believes", "estimate", "project", or similar expressions are
intended 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 circumstance after the date of such statements.
GENERAL
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Margo Caribe, Inc. and its subsidiaries (collectively, the "Company") are in the
business of growing, distributing and installing tropical plants and trees. The
Company is also engaged in the manufacturing and distribution of its own line
("Rain Forest") of planting media and aggregates, the distribution of lawn and
garden products and also provides landscaping design and installation services.
In addition, beginning in 2003, the Company acts as sales representative for
several consumer goods brands in Puerto Rico and Mexico. The Company's real
estate development division is currently seeking the required permits for an
affordable housing project in the Municipality of Arecibo, Puerto Rico.
The Compan's operations include Margo Caribe, Inc. (the holding company), Margo
Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc.
("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest
Products Group, Inc. ("Rain Forest"), Margo Flora, Inc., Garrochales
Construction and Development Corporation and Margo Development Corporation, all
Puerto Rico corporations.
Margo 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 its nursery facility located in Vega
Alta , Puerto Rico, Margo Nursery Farms produces various types of palms,
flowering and ornamental plants, trees, shrubs, bedding plants and ground
covers. Its customers include wholesalers, retailers, chain stores and
landscapers primarily located in Puerto Rico and the
3
Caribbean. Prior to July 1, 2003, the Company operated an additional nursery
farm in Barranquitas, Puerto Rico that produced orchids, bromeliads, anthuriums,
spathiphylum and pointsethias. This operation was consolidated into the Vega
Alta nursery operation effective June 30, 2003 (refer to FUTURE OPERATIONS, also
refer to ITEM 2. PROPERTIES).
As a bona fide agricultural enterprise, Margo Nursery Farms enjoys a 90% tax
exemption under Puerto Rico law from income derived from its nursery business in
Puerto Rico.
Margo Landscaping & Design provides landscaping, maintenance and design services
to customers in Puerto Rico.
Margo 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 (for Puerto Rico and the Caribbean) of
Sunniland Corporation's fertilizer and pesticide products, Greenes Fence
Company, Fiskars Consumer Product Division, State Line Bark & Mulch, L.R. Nelson
Consumer Products, Tel-Com decorative pottery, Crysalia plastic pottery, DEROMA
Italian terracotta pottery and North American Outdoor Products. 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 and the United States
Virgin Islands.
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 were created for the development of residential projects in Puerto
Rico. Currently, Garrochales Construction is requesting approval of a permit for
the development of a new residential project in the Municipality of Arecibo,
Puerto Rico.
PRINCIPAL OPERATIONS
- --------------------
The Company's operations are focused in the Commonwealth of Puerto Rico ("Puerto
Rico"). These operations are conducted at a 92 "cuerdas" (a "cuerda" equals
approximately 0.97 of an acre) nursery farm in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. This farm is leased from Michael J.
Spector and Margaret Spector, who are executive officers and principal
shareholders of the Company.
4
Until June 30, 2003, the Company also operated a 13 "cuerdas" nursery in
Barranquitas, Puerto Rico. This nursery was leased from an unrelated third
party. During the fourth quarter of 2002, the Company entered into an agreement
with the lessor of the Barranquitas facility to terminate the lease and vacate
the facility by June 30, 2003. As a result, the Company has consolidated the
Barranquitas operation into its Vega Alta nursery farm (refer to FUTURE
OPERATIONS, also refer to ITEM 2. PROPERTIES).
Production
- ----------
Using cuttings, plugs, liners, seedlings, air layers, seeds and tissue cultures
propagates the Company's plants. 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 six to ten 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 field and container-grown material, as well as flowering, bedding
plants and hanging baskets.
Marketing
- ---------
The Company's marketing efforts are primarily directed at customers throughout
Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company's landscaping division targets construction and government projects that
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 that include deliveries to customer outlets and special
pricing based on volume.
During 2003, the Company's single largest customer (The Home Depot) accounted
for approximately 41% of the Company's net sales. During 2002 The Home Depot
accounted for approximately 30% of the Company's net sales. During 2001, the
Company's two largest customers accounted for approximately 35% of the Company's
net sales. The Company's largest customer (The Home Depot) accounted for 24% in
2001 and the second largest customer (Wal*Mart Stores) accounted for 11% in 2001
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.
5
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 lawn and
garden products segment also includes sales commissions for consumer goods not
related to lawn and garden products. The following table sets forth sales for
industry segments for the years ended December 31, 2003, 2002 and 2001. The
information is provided after the elimination of intercompany transactions.
2003 2002 2001
---- ---- ----
(Amounts in 000's)
------------------
Plants $3,739 $4,325 $3,786
Lawn and garden products 3,279 2,884 2,845
Landscaping 1,415 2,542 2,554
------ ------ ------
$8,433 $9,751 $9,185
====== ====== =======
Certain financial information concerning industry segments is set forth in Item
7 - Management's Discussion and Analysis of Results of Operations and Financial
Condition and in Note 20 to the Company s Consolidated Financial Statements
included as Item 8 to this Annual Report on Form 10-K.
Trade Names and Trademark
- -------------------------
The Company utilizes the Trade Names "Margo Farms" and "Margo Farms del Caribe",
and has registered the name "Margo Farms" as a trademark with the United States
Department of Commerce Patent and Trademark Office. In addition, the Company has
registered "Margo Farms del Caribe" (as a trade name) and "Rain Forest" (as a
trademark) with the Department of State of the Commonwealth of Puerto Rico.
Competition
- -----------
At the present time, the Company's sales efforts are primarily focused in Puerto
Rico and the Caribbean. The Company enjoys an advantage over its competitors
because it is the largest producer of quality nursery products in Puerto Rico.
The Company continues expanding its operations in Puerto Rico. Most of the
Company's competitors in Puerto Rico and the Caribbean are smaller nurseries and
landscapers.
Seasonality
- -----------
The demand for plants in Puerto Rico is year round, with increased demand during
spring, late fall and winter.
6
Employees
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At December 31, 2003, the Company had 154 full time employees, of which 132 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 the Company's employees are represented by a union.
Government Regulation
- ---------------------
The United States Department of Agriculture ("USDA") inspects cuttings imported
into the United States by the Company. In addition, USDA regulations control
various aspects of the Company's plant production process, including
restrictions on the types of pesticides and fertilizers. All pesticides and
fertilizers utilized by the Company are approved by the Environmental Protection
Agency, as required by USDA regulations. The USDA prohibits the importation of
foreign soil into the United States and limits the size of plants that can be
imported into the United States. Puerto Rico is considered part of the United
States for purposes of the USDA regulations.
Shipments of products may also be subject to inspections by certain Puerto Rico
or state officials. These officials may quarantine or destroy plants that are
contaminated or infected by hazardous organisms.
The Company's operations are subject to the Fair Labor Standards Act, which
governs such matters as minimum wage requirements, overtime and other working
conditions. A large number of the Company's personnel are paid at or just above
the federal minimum wage level and, accordingly, changes in such minimum wage
rate have an adverse effect on the Company's labor costs.
Natural Hazards
- ---------------
The Company's operations are vulnerable to severe weather, such as hurricanes,
floods, and 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. In recent years, the Company had been unable to obtain
crop and business interruption insurance coverage. 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 coverage 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. The Company's nursery farm currently has access to a plentiful
water supply and facilities for the protection of many of their weather
sensitive plants.
7
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 262 "cuerdas" located in the Municipality of Salinas, Puerto Rico,
operated by Salinas Holdings, Inc. ("Salinas"). The farm is leased by Salinas
Holdings, Inc. from Criadores de Salinas, S.E., an entity controlled by Mr. Luis
A. Rubi, for an initial 10-year term with renewal options for an additional
20-year period.
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 H. Greene, a former director of the Company, and by Mr. Luis A. Rubi.
The Company has committed to make equity cash contributions to the new entity of
up to $775,000. As of December 31, 2003, the Company had invested $193,333, net
of capital returns of $400,000.
Salinas has entered into a five-year management agreement with Nursery Farms
(automatically renewable for an additional five year term 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 administration fee of $2,000 per month, and a
commission on gross collected revenue varying from 15% to 17%. Commissions and
fees earned for services provided to Salinas for the year ending December 31,
2003 totaled $140,921. During the term of the management agreement, the Company
has agreed not to grow sod or to have more than 50 "cuerdas" 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. Salinas net income for the year ended December
31, 2003 was $227,366.
FUTURE OPERATIONS
- -----------------
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.
In order to increase production capacity at its Vega Alta nursery and
consolidate Barranquitas' production, the Company has recently completed the
construction of an 112,000 square feet shade house and a new 124,000 square feet
greenhouse. These structures are being constructed with fabricated steel, and
include sophisticated irrigation systems (refer to ITEM 2. PROPERTIES). The
Company is also constructing a new shipping/receiving area. Upon completion, the
loading docks in the new shipping/receiving are will have a capacity to manage
14 trailer-containers at one time.
8
On August 5, 2003, the Company acquired the rights of a sole proprietorship
doing business as Global Associates that represented various lines of consumer
goods brands for $100,000 in cash. As part of the transaction, the Company
entered into a one-year employment agreement with Tulio Figueroa, the former
President of Global Associates, to serve as Senior Vice President of Marketing
and Sales of Margo Caribe, Inc. and granted Mr. Figueroa 10,000 restricted
shares of common stock under the Margo Caribe, Inc. 2003 Restricted Stock Plan.
The Company is a supplier of plants and lawn and garden products for The Home
Depot Puerto Rico and United States Virgin Islands ("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 and one store in
St. Thomas, U.S. Virgin Islands.
The Company also supplies live goods (plant material) and lawn and garden
products to COSTCO Wholesale, which has three stores in Puerto Rico.
The Company continues to supply live goods as well as lawn and garden products
to Wal*Mart International, which presently has eleven stores (including three
"super centers") throughout Puerto Rico. The Company also supplies plant
material and lawn and garden products to six Sam's Club stores, a division of
Wal*Mart International.
The Company also supplies 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 December 2000, the Company purchased approximately 117 "cuerdas" of land
in the Municipality of Arecibo, Puerto Rico, for the development of a
residential housing project. The Company paid approximately $950,000 plus
incidental expenses for this land. The Company is currently in the process of
designing a master development plan, as well as seeking the required permits for
the development of this site. The Company received an endorsement from the
Puerto Rico Housing Bank, which will enable prospective buyers to qualify for
government assistance when purchasing homes at this project. However, the
Company cannot give any assurance as to how long it will take to obtain the
necessary permits to develop the project or whether said permits will in fact be
obtained (refer to ITEM 2. PROPERTIES).
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.
9
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 2003, the Company conducted its operations from nursery facilities
located in Vega Alta, Puerto Rico.
Vega Alta Nursery Facility
- --------------------------
The Company leases a 92 "cuerdas" nursery facility in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. This facility includes the Company's
corporate offices, approximately 1,366,000 square feet of shade houses,
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 executive officers and principal shareholders of the
Company, pursuant to a lease agreement dated as of January 1, 2004. The lease
has an original five year term and an option to renew for additional five year
term. Under the lease, the Company is required to pay a 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. During the renewal period, the
rent will be adjusted to reflect the increase in the Wholesale Price Index from
the original lease term. 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 if both Mr. and Mrs. Spector become deceased. In consideration
of the option, the Company must pay an additional $1,000 per month.
In connection with this lease, the Spectors also agreed to reimburse the Company
for the unamortized value of the leasehold improvements applicable to the Vega
Alta facility as of the date of termination.
During the years ended December 31, 2003 and 2002, total lease payments to the
Spectors under the prior lease amounted to approximately $288,000, each year
(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 "cuerdas" nursery facility located in the town of
Barranquitas, Puerto Rico. The lease had an initial term of five years and with
renewal options for two additional five-year terms at the Company's option. For
the years ended December 31, 2003 and 2002, total lease payments amounted to
$36,000 and $72,000, 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
10
June 30, 2003. On July 1, 2003 the Company consolidated the operations 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 64 "cuerdas" 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 continuing in the process of obtaining the required 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
On October 20, 2003, Mr. Fernando Rodriguez, the former President and Chief
Operating Officer of the Company, brought a civil action in the U.S. District
Court of Puerto Rico against the Company. The complaint was amended in October
20, 2003, to include Michael J. Spector, the Chief Executive Officer of the
Company as a defendant.
The amended complaint states two basic causes of action (1) an alleged Cobra
violation in connection with the dismissal of Mr. Rodriguez from the Company and
(2) an alleged federal securities law violation in connection with the exercise
of employee stock options by Mr. Rodriguez. The Company has filed a motion to
dismiss both causes of action and believes that it has meritorious defenses to
each.
The Company is also a party to a number of legal proceedings in the ordinary
course of its business, none of which, in the opinion of management, will 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
On January 17, 2004, shareholders owning more than a majority of the outstanding
shares of common stock executed written consents to remove Mr. J. Fernando
Rodriguez as a director of the Company.
11
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 2003
and 2002. The last reported sales price for the Common Stock on March 2, 2004
was $5.00 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.
2003 2002
-------------------- ----------------------
Quarter: High Low High Low
-------- ---- --- ---- ---
First $7.50 $3.04 $4.32 $2.78
Second $7.70 $4.98 $3.74 $2.73
Third $10.00 $5.85 $3.30 $2.71
Fourth $7.50 $7.00 $4.45 $3.00
There were approximately 55 holders of record of the common stock as of March 1,
2004. This amount includes custodians, brokers and other institutions that hold
the common stock as nominees for an undetermined number of beneficial owners. As
of March 1, 2004, the Company had 2,184,039 shares of common stock outstanding.
The Company did not pay any cash dividends on its common stock during 2003 or
2002. 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.
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%
12
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.
The Company did not purchase any of its equity securities during the fourth
quarter of 2003.
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, 2003. 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.
13
MARGO CARIBE, INC. AND SUBSIDIARIES
-----------------------------------
Selected Financial Data
Years Ended December 31,
----------------------------------------------------------------------------
Earnings Statement Data: 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales $ 8,433,185 $ 9,751,294 $ 9,184,621 $ 8,302,810 $ 6,201,233
Gross profit 2,377,951 3,875,882 3,389,274 2,134,463 2,230,111
Selling, general and administrative expenses 3,821,819 3,477,923 3,021,016 2,583,012 2,395,350
Costs related to consolidating nursery facilities 253,738 - - - -
(Loss) income from operations (1,697,606) 397,959 368,258 (448,549) (165,239)
Net (loss) income (1,491,867) 852,345 338,443 (1,022,733) (127,867)
Basic (loss) income per common share ($0.71) $0.41 $0.16 ($0.49) ($0.06)
Diluted (loss) income per common share ($0.71) $0.40 $0.16 ($0.49) ($0.06)
Weighted average number of common shares
outstanding and common share equivalents 2,111,499 2,114,245 2,104,385 2,069,584 2,062,854
Balance Sheet Data:
Working capital $ 1,589,228 $ 3,958,112 $ 3,348,454 $ 2,290,314 $ 4,306,446
Total assets 9,158,982 9,796,206 9,009,021 9,375,396 8,916,981
Long-term debt (excluding current portion) 187,073 244,425 307,528 239,482 338,597
Shareholders' equity 5,113,152 6,446,389 5,579,581 5,238,888 6,241,776
14
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
acknowledgment receipt of merchandise by the customers. Revenues from sales of
landscaping services are recognized as plants are installed at the customers'
facilities. Revenues from garden maintenance contracts are recognized when the
maintenance is provided.
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
become uncollectible based on evaluations of collectibility of specific
customers and their prior credit experience. In addition, the Company evaluates
the prior years' experience of the allowance as a whole.
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.
15
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 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, 2003, the Company incurred a net loss of
approximately $1,492,000, compared to a net income of $852,000 and $338,000 in
2002 and 2001, respectively. These amounts represent a diluted (loss) income per
common share of ($0.71), $0.40 and $0.16 for 2003, 2002 and 2001, respectively.
The net loss for the year ended December 31, 2003, is principally due to losses
in the plants and landscaping segments.
The plants segment loss was $714,000 for the year ended December 31, 2003,
compared to an income of $686,000 for the year ended December 31, 2002. The loss
from the plants segment for the year ended December 31, 2003, is mainly
attributable to an increase of $234,000 in the write-off of slow-moving
inventory, and a charge of $191,000 for damaged inventory (refer to SIGNIFICANT
FOURTH QUARTER ADJUSTMENTS). The loss from the plants segment for the year ended
December 31, 2003, also reflects a decrease in sales and related gross profit.
Total sales from the plants segment decreased by approximately $587,000, or 14%
compared to the year ended December 31, 2002. Finally, the loss from the plants
segment for the year ended December 31, 2003, also reflects approximately
$254,000 of costs associated with the closing of the Barranquitas nursery
operation, as well as those associated with consolidation of the Company's
nursery operations at its Vega Alta facility. Offsetting the loss of the plants
segment for the year ended December 31, 2003, was the collection of $25,000 from
a note receivable, which had been written down in prior years, and the
commissions and equity in earnings from an investment in an unconsolidated joint
venture (Salinas Holdings) in the amount of $193,000.
The landscaping segment's loss was $535,000 for the year ended December 31, 2003
compared to an income of $160,000 for the year ended December 31, 2002. The loss
from the landscaping segment is due to a decrease in revenues and related gross
profit. Also, there was a bad debt expense of approximately $177,000 for the
year ended December 31, 2003, compared to a bad debt expense of approximately
$45,000 for the year ended December 31, 2002. Gross revenues from landscaping
services were approximately $1,415,000 for the year ended December 31, 2003,
compared to $2,542,000 for 2002. Landscaping sales for the year ended December
31, 2002, were favorably impacted by three major projects aggregating $619,000.
These decreases in sales are associated with the slow development of new
residential and commercial real estate projects in Puerto Rico during 2003.
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
16
$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.
RESULTS OF OPERATIONS
- ---------------------
Sales
- -----
The Company's consolidated net sales for the year ended December 31, 2003 were
approximately $8,433,000, compared to $9,751,000 for the year 2002, representing
an overall decrease of approximately 14%. The Company's consolidated sales for
the year ended December 31, 2001 were approximately $9,185,000.
The decrease in sales for the year ended December 31, 2003, was principally the
result of a reduction in sales of nursery plants of $587,000 or 14%, and a
reduction in sales of landscaping services of $1,127,000 or 44%, resulting from
a decrease in the number of large landscaping projects. Landscaping sales for
the year ended December 31, 2002, were favorably impacted by three major
projects aggregating $619,000. This decrease in landscaping sales is associated
with the slow development of new residential and commercial real estate projects
in Puerto Rico during 2003. Although there was an overall decrease in plant
material sales, sales of plant material to major chain stores remained strong.
Total sales to major chain stores for the year ended December 31, 2003, were
$4,934,000, compared to $ $4,712,000 for the year ended December 31, 2002.
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 was 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 was provided to an entity controlled by
the Company's major shareholder, compared to $279,000 (11%) for 2001. All such
services were provided by the Company on an arms-length basis on terms no less
favorable to the Company than those offered to unaffiliated third parties.
17
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
2003 2002 2001
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 71.8 60.3 63.1
------ ------ ------
Gross profit 28.2 39.7 36.9
Selling, general and administrative expenses 45.3 35.7 32.9
Costs related to consolidating nursery facilities 3.0 - -
------ ------ ------
(Loss) income from operations (20.1) 4.0 4.0
Interest expense, net (.7) (.4) (.5)
Other income (expenses), net 3.2 5.0 .3
------ ------ ------
(Loss) income before income deferred income tax credit (17.6) 8.6 3.8
Deferred income tax credit - .1 -
------ ------ ------
Net (loss) income (17.6) 8.7 3.8
------ ------ ------
The table above reflects that consolidated gross profits as a percentage of net
sales were approximately 28%, 40%, and 37%, for the years ended December 31,
2003, 2002 and 2001, respectively.
The decrease in gross profit for the year ended December 31, 2003 when compared
to year 2002 was the result of a decrease in gross profit of the plants and
landscaping segments. For the year ended, December 31, 2003, the gross profit
for the plants segment was 19% compared to 35% for the year ended December 31,
2002. For the year ended December 31, 2003, the gross profit for the landscaping
segment was 15% compared to 38% for the year ended December 31, 2002. Due to the
slow development of new residential and commercial real estate projects in
Puerto Rico during 2003, the Company reduced its labor costs through reduction
in head count by approximately 10% during the year 2003.
The Company's consolidated gross profit for the year ended December 31, 2002 was
40%, compared to 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.
18
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses (SG&A) were approximately
$3,822,000 and $3,478,000 for the year ended December 31, 2003 and 2002,
respectively. This represents a 10% increase in dollar terms and a 10% increase
as a percentage of sales.
The increase in SG&A in dollar terms for the year ended December 31, 2003, when
compared to the year 2002, is principally due to the bad debt expense of
approximately $201,000 for the year ended December 31, 2003, compared to a bad
debt expense of approximately $121,000 for the year ended December 31, 2002.
Also, an increase in professional services of $89,000 mainly due to the
contracting of business consulting services for $42,000 and an increase of
approximately $47,000 in legal expenses related to corporate and labor issues.
The increase in SG&A as a percentage of sales for the year ended December 31,
2003 was also adversely impacted by the decrease in net sales.
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.
Costs Related to Consolidating Nursery Facilities
- -------------------------------------------------
Until June 30, 2003, the Company also operated a 13 acre nursery farm in
Barranquitas, Puerto Rico. This nursery was leased from an unrelated third
party. During the fourth quarter of 2002, the Company entered into an agreement
with the lessor of the Barranquitas facility to terminate the lease and vacated
the facility by June 30, 2003. As a result, the Company has consolidated the
operations previously conducted at the Barranquitas facility operation into its
Vega Alta nursery farm.
Costs associated with closing the Barranquitas nursery operation in connection
with the consolidation of the Company's nursery facilities in its Vega Alta
nursery operation amounted to approximately $254,000 for the year ended December
31, 2003 (refer to SIGNIFICANT FOURTH QUARTER ADJUSTMENTS).
Other Income and Expense
- ------------------------
Interest income for the year ended December 31, 2003, decreased by $6,000 when
compared with 2002. Decrease in interest income is mainly due to a decrease in
the interest rates available in the investment market coupled with a decrease in
the volume of invested funds.
19
Interest expense for the year ended December 31, 2003, increased by $15,000 when
compared with 2002. Increase is related to the increase in the short-term
borrowings used for the Company's operations (refer to CURRENT LIQUIDITY AND
CAPITAL RESOURCES).
Other income for the year ended December 31, 2003 includes several income
sources not present in 2002. Among these were the following:
1) Gain of $25,000 from the collection of a note receivable previously
written down in prior years. This represents the remaining portion of
a note partially collected in the fourth quarter of 2002 (refer to
Note 6 in the Notes to the Company's Consolidated Financial Statements
for the year ended December 31, 2003).
2) Equity in earnings of unconsolidated subsidiary of approximately
$76,000 and related commissions of $117,000. The $76,000 represents
the Company's 33.33% equity interest in Salinas Holdings Inc.'s net
income for the year ended December 31, 2003. The commission of
$117,000 represents the commissions payable by Salinas Holdings, Inc.
to the Company for acting as its sales agent. (refer to ITEM I. Joint
Venture in Salinas Holdings, Inc.)
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 expense for the year ended December 31, 2002 decreased principally from
lower interest rates experienced during 2002. Such increase is mainly due to the
interest incurred for the utilization of the Company's line of credit.
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
included as other assets in the Company's balance sheet at a cost of
approximately $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 6 in the accompanying
Notes to Consolidated Financial Statements for the year ended December 31,
2003).
Other income for the year ended December 31, 2002 also includes a "Participation
in loss of unconsolidated subsidiary" of $16,000. 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, the Company
includes as other income (expense) its proportionate share of the results of
operations of Salinas Holdings, Inc.
20
FINANCIAL CONDITION
- -------------------
The Company's current ratio decreased to 1.42 to 1 on December 31, 2003 compared
to 2.3 to 1 on December 31, 2002. The decrease in the current ratio is
principally due to cash outflows used in investing activities and to the
increase in short-term borrowings under the credit facility used to finance
current operations (refer to CURRENT LIQUIDITY AND CAPITAL RESOURCES).
On December 31, 2003, the Company had cash of approximately $447,000, compared
to cash of $1,418,000 on December 31, 2002. The decrease in cash on December 31,
2003 is principally due to cash outflows used for operational purposes and in
investing activities, which were primarily related to capital improvements made
at the Vega Alta facility and the purchase of the rights to act as local sales
representative for $100,000 from Global Associates.
Shareholders' equity on December 31, 2003 decreased due to the net loss for the
year then ended, partially offset by the proceeds from the exercise of stock
options. During the year ended December 31, 2003, the Company issued 61,600
shares of common stock in connection with the exercise of stock options. In
addition, the Company issued 17,500 restricted shares of common stock and
recorded the related deferred stock compensation, the net effect of which
decreased shareholders' equity. No dividends were declared during the year ended
December 31, 2003.
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. The Company believes it has adequate resources to meet
its current and anticipated liquidity and capital requirements. The Company
finances its working capital needs from cash flow from operations as well as
borrowings under short-term credit facilities with a local commercial bank. As
of December 31, 2003, the Company had available a short-term credit facility of
$2.5 million, of which approximately $156,500 was available as of such date.
This credit facility is secured by the Company's trade accounts receivable and
inventories.
During the fourth quarter of 2003, the Company implemented a cost containment
program designed to reduce the expenses. As part of this program, the Company
reduced its labor costs through reduction in head count by approximately 10%
during 2003. The results of the cost containment program should be reflected
during the year 2004. The Company is also exploring other alternatives to
increase its liquidity, including but not limited to, (1) an increase in its
short-term credit facilities and (2) the sale of preferred stock to a limited
number of investors in a private placement transaction.
21
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------------------
The following represents the contractual obligations summarized by type of
obligation and payment due date as of December 31, 2003.
o Long-Term Debt
--------------
At December 31, 2003 and 2002, long-term debt comprised the following:
Description 2003 2002
- ------------------------------------- ---- ----
Five-year term loans, bearing interest
at 2% over Libor rate (3.14%-5.00% at
December 31, 2003), payable in monthly
installments of $12,488, through
December 2008 $330,251 $383,392
Less current portion 143,178 138,967
-------- --------
Long-term debt $187,073 $244,425
========= =========
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 aggregate maturities of long-term debt are as follows:
Less than 1 year $143,178
1 to 3 years 159,613
3 to 5 years 27,460
--------
$330,251
=========
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, 2003 and 2002, the Company was in compliance
with the related debt covenants.
22
o Lease and Option Agreements
---------------------------
The Vega Alta facility is leased from Michael J. Spector and Margaret D. Spector
(the "Spectors"), who are executive officers and principal shareholders of the
Company, pursuant to a lease agreement dated as of January 1, 2004. The lease
has an original five-year term and an option to renew for additional five-year
term. Under the lease, the Company is required to pay a 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. During the renewal period, the
rent will be adjusted to reflect the increase in the Wholesale Price Index from
the original lease term. 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 if both Mr. and Mrs. Spector become deceased. In consideration
of the option, the Company must pay an additional $1,000 per month.
In connection with this lease, the Spectors also agreed to reimburse the Company
for the unamortized value of the leasehold improvements applicable to the Vega
Alta facility as of the date of termination.
The Company's obligations under the above agreement in force at December 31,
2003, are as follows:
Less than 1 year $ 300,000
1 to 3 years 900,000
---------
$ 1,200,000
=========
Obligations Under Guarantees
- ----------------------------
Since September 22, 2003, the Company is guarantor for a loan in the amount of
$1,300,000 made by Salinas Holdings, Inc., an unconsolidated subsidiary. The
guaranty is continuous and limited covering all outstanding principal and
accrued interest, pro-rata to the Company's 33.33% ownership participation. The
term of the loan is thirty-six months and payable in monthly installments of
$36,111, plus accrued interests. The interest rate is calculated based on the 90
days LIBOR rate fluctuating every 90 days, plus 1.5% over such rate.
As of December 31, 2003, the maximum potential amount of future payments that
the Company could be required to make under the guarantee, net of interests, is
as follows:
Less than 1 year $144,430
1 to 3 years 252,752
--------
$397,182
=========
23
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.
RISK MANAGEMENT
- ---------------
The Company's operations are vulnerable to severe weather, such as hurricanes,
floods, and 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. For the past several years, the Company has been
unable to obtain crop and business interruption insurance coverage. 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 coverage 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. The Company's Vega Alta nursery farm 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. Monitoring
the operations and financial strength of the Company's customers mitigates
concentration of credit risk with respect to accounts receivable. Certain
short-term certificates of deposit are placed with local financial institutions.
Depositing the funds with high credit quality financial institutions and
limiting the amount of credit exposure in any financial institution mitigate
such credit risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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.
25
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 1, 2004.
The background and experience of these persons are summarized in the paragraphs
following the table.
Name (Age at March 1, 2004) Positions with the Company
- --------------------------- --------------------------
Michael J. Spector (57) Chairman of the Board, President, Chief Executive
Officer and Director
Margaret D. Spector (52) Secretary
Jairo Estrada (56) Director
Blas R. Ferraiuoli (59) Director
Michael A. Rubin (61) Director
Ramon L. Dominguez (50) Director
Juan B. Medina (44) Senior Vice President and Chief Financial Officer
Tulio Figueroa (53) Senior Vice President - Marketing and Sales
Rene Llerandi (44) Vice President - Sales
Leida Rivera (33) Comptroller
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, the Secretary of the
Company, 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 1, 2004.
MR. SPECTOR currently serves as the Chairman of the Board, President and Chief
Executive Officer of the Company. He has held the Chairman of the Board position
and Chief Executive Officer position since the organization of the Company in
1981. His wife, Margaret D. Spector, is Secretary of the Company.
MRS. SPECTOR currently serves as the Secretary of the Company. She has held this
position since the organization of the Company in 1981.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues to
hold that position. Mr. Ferraiuoli practices civil, corporate and administrative
law in his own law firm since June 1994.
26
MR. ESTRADA was elected a director of the Company in 2003. 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. (an
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 also a Director of The Herzfeld
Caribbean Basin Fund, Inc.
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. MEDINA currently serves as the Senior Vice President and Chief Financial
Officer of the Company. He has held this position since he joined the Company on
September 2, 2003. From January 1983 to July 1986, Mr. Medina worked as an
auditor for KPMG Peat Marwick in San Juan, Puerto Rico. From July 1986 to May
2003 worked for MAPFRE/PRAICO Life, a Puerto Rico based life insurance Company
with Parent Company in Madrid, Spain. Positions held during this period were
Vice President of Finance from 1986 to 1992; Vice President Operations &
Finance, Treasurer from 1992 to 1997; Executive Vice President, Chief Financial
Officer, member of the Board of Directors and various committees delegated by
the Board from 1997 to 2003.
MR. FIGUEROA currently serves as the Senior Vice President of Marketing and
Sales of the Company. He has held this position since he joined the Company on
August 4, 2003. Former President of Global Associates, Inc., from February 1995
to August 2003; and former Regional Vice President of Latin America for
Rubbermaid, Inc. from June 1988 to January 1995.
MR. LLERANDI currently serves as Vice President of Sales. He has held this
position since August 2003. He formerly serves as Vice President of Marketing.
He joined the Company in 1988 as Sales Manager for Puerto Rico.
MRS. RIVERA currently serves as the Comptroller of the Company. She has held
this position since she joined the Company on October 16, 2003. Mrs. Rivera has
more than 10 years of professional experience and was previously employed for
more than five years prior to joining the Company as audit manager with Ernst &
Young LLP.
27
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, 2003. Based solely on its
review of the copies of the report received by it, the Company believes that all
such filing requirements were satisfied except that Michael J. Spector filed two
late reports related to the purchase of 1,100 shares, Rene Llerandi filed three
later reports related to the sale of 1,400 shares and the exercise of options to
purchase 1,100 shares and Jairo Estrada filed late his initial report upon
becoming a director.
Code of Ethics
- --------------
The Company has adopted a Code of Business Conduct and Ethics applicable to all
employees of the Company and designed to comply with the requirements of the
Sarbanes-Oxley Act of 2002 and certain rule changes adopted by the Securities
and Exchange Commission and the NASDAQ Stock Market. A copy of the Code of
Business Conduct and Ethics is filed as an Exhibit 14 to this Annual Report on
Form 10-K.
28
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth information regarding compensation of the
Company's President and Chief Executive Officer during each of the three years
ended December 31, 2003, 2002 and 2001. No other executive officer of the
Company earned more than $100,000 during 2003, 2002 or 2001. The amount (and
related exercise price) of option grants shown in the table has been adjusted
for the 10% stock dividend effective June 28, 2002.
Annual Compensation
----------------------------
Number of
Stock
Name of Individual and Options Other Annual
Position with the Company Salary Bonus Granted Compensation (1)
------------------------ ------ ----- --------- ----------------
Michael J. Spector,Chairman, 2003 $130,000 $ - - $8,000
President, Chief Executive 2002 $115,000 $11,000 2,750(2) $8,000
Officer and Director 2001 $102,000 $11,000 2,750(2) $8,000
(1) Represents matching contribution under the Company's Salary Deferral
Retirement Plan.
(2) Represents 2,750 options granted to his spouse, Margaret D. Spector for each
of 2001, 2002 and 2003. Mr. Spector may be deemed to beneficially own the
options granted to Mrs. Spector.
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 non-employee 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 2,750 shares of Common
Stock at the market price on such date.
During 2003, Messrs. Ferraiuoli, Rubin, Dominguez and Estrada, each received
options to acquire 2,750 shares of Common Stock at an exercise price of $7.25
expiring on May 23, 2013, in accordance with the 1998 Plan.
29
Grant of Stock Options
- ----------------------
During 2003, the Company did not grant any stock options to its officers.
Stock Options Exercised During 2003 and, Stock Options Values at December 31,
2003
- --------------------------------------------------------------------------------
None of the executive officers of the Company named in the Cash Compensation
Table exercised any stock options during 2003.
The following table sets information on outstanding options and restricted
shares held by the Company's executive officer listed in the Cash Compensation
Table and their values at December 31, 2003. Value is calculated as the
difference between the last sales price of the Common Stock and the exercise
price at December 31, 2003, the last day the common stock traded during 2003.
Number of Shares Value of Unexercised
Underlying In-The-Money
Unexercised Options Options
at 12/31/03 At 12/31/03 (1)(2)
----------------------------- ------------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- ------------
Michael J. Spector(1) - - 27,500 5,500 $116,435(1&2) $21,863(1&2)
(1) Represents stock options. Includes 22,000 options held by Margaret D. Spector, the wife of Michael J.
Spector.
(2) Based on the last sales price of $7.10 per share on December 31, 2003, and an exercise price of $3.13,
$1.50, $2.50, $1.75, $3.75 and $3.50 for 22,000, 19,250, 2,750, 2,200 ,1,650, 1,100 and 550 exercisable
options, respectively, and an exercise price of $2.50, $1.75, $3.75 and $3.50 for 550, 1,100, 1,650 and
2,200 of unexercisable options, respectively.
The Company did not re-price any options during 2003.
Employment Agreements
- ---------------------
The Company has entered into an employment agreement with Mr. Tulio Figueroa,
Senior Vice President-Marketing and Sales. Under the Agreement, Mr. Figueroa is
entitled to an annual salary of $108,000 for one-year term ending August 3,
2004. He also received 10,000 restricted shares of common stock in connection
with the execution of his agreement. Refer to Exhibit 10(a), Employment
Agreement, dated as of August 4, 2003, between the Company and Mr. Tulio
Figueroa.
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
30
subject to a maximum of $8,000. For the year ended December 31, 2003, the
Company paid approximately $57,000 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 1, 2004, 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.
31
Security Ownership as of March 1, 2004
--------------------------------------
Name Amount Beneficially Percent of
(Position with the Company) Owned(1) (5) Class(1)
-------------------------- ------------------ ----------
Michael J. Spector 1,466,999 (2) 66.3%
(Executive Officer and Director)
Margaret D. Spector 1,466,999 (2) 66.3%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Secretary)
J. Morton Davis 207,643 (3) 9.5%
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 1005
(Five Percent Shareholder)
Jairo Estrada (Director) - -
Blas R. Ferraiuoli (Director) 41,250 1.9%
Michael A. Rubin (Director) 35,900 1.6%
Ramon Dominguez (Director) 11,650 (4)
All Executive Officers and 1,583,799 (1) 70.8%
Directors as a Group
(10 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 1 , 2004, as shown below:
- Michael J. Spector and Margaret D. Spector 27,500 shares
- Blas Ferraiuoli 11,000 shares
- Michael A. Rubin 11,000 shares
- Ramon Dominguez 1,650 shares
- All Executive Officers and Directors, as a group 54,450 shares
Percent of class does not include shares of common stock issuable upon
exercise of stock options held by other persons.
(2) Includes 1,099,173 shares held directly by Mr. Spector, 334,326 shares held
by Mrs. Spector and 36,100 held jointly. Also includes stock options to
acquire 16,500 and 11,000 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 11,350 shares owned by Rosalind Davidowitz, the spouse of Mr. Davis.
This amount is based upon a Schedule 13G, as amended on February 5, 2004,
filed with the Securities and Exchange Commission.
(4) Less than one percent.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease and Option to Purchase Main Nursery Farm
- ----------------------------------------------
Effective January 1, 2004, the Company and the Spectors entered into a new lease
agreement with respect to the main Puerto Rico nursery farm. The lease has 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 is set at
$24,000 per month. During the renewal term, the rent increases to the greater of
(x) $24,000 per month or (y) the original $24,000 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, 2003 to the WPI in effect on January 1, 2008.
Additionally, the Company was required to pay all taxes on the property,
maintain certain insurance coverage and otherwise maintain and care for the
property. The lease also contains an option that permits the Company to purchase
the property at its appraised value in the event of the death of both Mr. and
Mrs. Spector. In consideration of the option, the Company is required to pay the
Spectors an additional $1,000 per month. The independent directors approved the
new lease agreement.
In connection with this lease, the Spectors also agreed to reimburse the Company
for the unamortized value of the leasehold improvements applicable to the Vega
Alta facility as of the date of termination.
Landscaping Services Provided by the Company to Estancias de Cerro Mar, Inc.
- ----------------------------------------------------------------------------
During 2003 and 2002, the Company provided landscaping and landscape maintenance
services to Estancias de Cerro Mar, Inc., an entity controlled by the Spectors,
and charged approximately $417,000 and $525,000, 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.
Obligations Under Guarantees
- ----------------------------
Since September 22, 2003, the Company is guarantor for a loan in the amount of
$1,300,000 made to Salinas Holdings, Inc., an unconsolidated subsidiary. The
guaranty is continuous and several, limited to 33.33% of all outstanding
principal and accrued interest on the loan, which is equal to the Company's
pro-rata ownership participation in Salinas Holdings. The term of the loan is
thirty-six months and payable in monthly installments of $36,111, plus accrued
interests. The interest rate is calculated based on the 90 days LIBOR rate
fluctuating every 90 days, plus 1.5% over such rate. As of December 31, 2003,
the maximum potential amount of future payments that the Company could be
required to make under the guarantee is approximately $397,000, plus accrued
interest.
33
Certain Other Relationships
- ---------------------------
During 2003, Blas Ferraiuoli, a director of the Company, received legal fees
from the purchasers of homes in the Estancias de Cerro Mar, Inc. development
controlled by the Spectors
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.
ITEM 14. PRINCIPAL ACCOUNTANTS AND FEES
Deloitte & Touche LLP has served as the Company's independent public accountants
since 1997. Services provided to the Company and its subsidiaries by Deloitte &
Touche LLP in fiscal 2003 included the audit of the Company's consolidated
financial statements, limited reviews of quarterly reports, services related to
filings with the SEC and consultations on various accounting matters.
The Audit Committee reviewed all non-audit services rendered by Deloitte &
Touche LLP to the Company and concluded that the provision of such services was
compatible with the maintenance of Deloitte & Touche's independence in the
conduct of its auditing functions.
The aggregate fees billed for professional services by Deloitte & Touche LLP in
2003 and 2002 for these various services provided to the Company were:
Type of Fees 2003 2002
------------------------- ----------- ------------
Audit Fees $71,260 $72,525
Audit-Related Fees 3,800 -
Tax Fees - 26,150
All Other Fees - -
---------- -----------
Total $75,060 $98,675
In the above table, in accordance with new SEC definitions and rules, "audit
fees" are fees the Company paid Deloitte & Touche LLP for professional services
for the audit of the Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K and review of financial statements included
in the Company's Form 10-Qs, or for services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements;
"audit-related fees" are fees billed by Deloitte & Touche LLP for assurance and
related services that are reasonably related to the performance of the audit or
review of the Company's financial statements, accounting consultations and
Sarbanes-Oxley, Section 404, consultations; "tax fees" are fees for tax
compliance, tax advice and assistance with tax audits; and "all other fees" are
fees billed by Deloitte & Touche LLP to the Company for any services not
included in the first three categories of which there were none during 2003 and
2002.
34
PART IV
-------
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 15 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-33 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 15 is set
forth in the Financial Statements and Auditor's Report
beginning on page F-2 of this Form 10-K. The index to
Financial Statements and Schedules is set forth on page F-1
of this Form 10-K.
(a)(3) Exhibits. The Exhibits set forth in the following Index of
the Exhibits are filed as a part of this report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between
Margo Nursery Farms, Inc. and Margo Transition Corp.,
(incorporated by reference to Exhibit 1 to the Company's Form
8-K dated December 31,1997).
(2)(b) Articles of Merger of Marg o 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 eference 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).
35
(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 RegisStatement (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).
(4)(d) 2003 Restricted Stock Plan (Filed as Exhibit A to the
Company's proxy statement dated May 7, 2003;
(4)(e) Form of Restricted Stock Award (Filed herewith)
(10) (a) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the yearended
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, 1996, filed March 31, 1997:
(i) Lease and Purchase Agreement, dated October 31,1996
among Cali Orchids, Inc. and the Company.
(ii) Stock Option Agreement, dated August 9, 1996, with
Frederick D. Moss.
(iii) Stock Option Agreement, dated August 9, 1996, with
Blas R. Ferraiuoli.
(iv) Stock Option Agreement, dated August 9, 1996, with
Michael A. Rubin.
(v) Stock Option Agreement, dated July 9, 1993, with
Frederick D. Moss.
(vi) Stock Option Agreement, dated July 9, 1993, with
Margaret D. Spector.
(vii) Stock Option Agreement, dated July 9, 1993, with
Blas R. Ferraiuoli.
(viii) Stock Option Agreement, dated August 9, 1996, with
Margaret D. Spector.
(c) 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.
(d) Material Contract incorporated by reference from the
Company's Report on Form 10-Q for the quarter ended
September 30, 2002
36
(i) Management Agreement, dated October 14, 2002,
between Salinas Holdings, Inc. and Margo Nursery
Farms, Inc.
(e) Material Contract incorporated by reference from the
Company's Report on Form 10-Q for the quarter ended
September 30, 2003
(i) Employment Agreement, dated August 4, 2003,
between the Company and Mr. Tulio Figueroa.
(f) Material Agreements filed with this Form 10-K
(i) Asset Purchase and Sale Agreement dated as of
August 4, 2003, between Margo Garden Products, Inc.
and Tulio Figueroa d/b/a/ Global Associates.
(ii) Lease Agreement, dated as of January 1, 2004,
between the Company and Michael J. Spector and
Margaret Spector.
(14) Code of Business Conduct and Ethics. (Filed herewith)
(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 LLP. (Filed herewith)
(31)(i) CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith)
(31)(ii) CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith)
(32)(i) CEO Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to the Sarbanes-Oxley Act of 2002.
(Filed herewith)
(32)(ii) CFO Certification pursuant to 18 U.S.C. Section 1350,
as adopted to the Sarbanes-Oxley Act of 2002.
(Filed herewith)
(b) Reports on Form 8-K.
--------------------
(i) Report on Form 8-K, dated November 14, 2003, reporting
under Item 12, the unaudited results for the third quarter
and nine months ended September 30, 2003.
(ii) Report on Form 8-K, dated January 7, 2004, reporting
under Item 5 the removal of J. Fernando Rodriguez as a
director of the Company.
(iii) Report on Form 8-K, dated October 14, 2002, reporting
under Item 5, the entering into the Salinas Holding, Inc.
joint venture.
37
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 17, 2004 By: /s/ Michael J. Spector, President
---------------------------------
Michael J. Spector, Chairman
of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 30, 2004 By: /s/ Michael J. Spector
----------------------------------
Michael J. Spector, Chairman
of the Board, President and Chief
Executive Officer
Dated: March 30, 2004 ----------------------------------
Jairo Estrada, Director
Dated: March 30, 2004 By: /s/ Blas R. Ferraiuoli
----------------------------------
Blas R. Ferraiuoli, Director
Dated: March 30, 2004 By: /s/ Michael A. Rubin
----------------------------------
Michael A. Rubin, Director
Dated: March 30, 2004 By: /s/ Ramon Dominguez
----------------------------------
Ramon Dominguez, Director
Dated: March 30, 2004 By: /s/ Juan B. Medina
----------------------------------
Juan B. Medina,
Senior Vice President,
Chief Financial Officer
Dated: March 30, 2004 By: /s/ Leida Rivera
----------------------------------
Leida Rivera,
Comptroller
38
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, 2003
MARGO CARIBE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
For the year ended December 31, 2003
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-34
All other schedules have been omitted since the required information is not
required 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 (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. 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, 2003.
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, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003, 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 17, 2004
Stamp No. 1939111
affixed to original.
F-2
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS
------
2003 2002
---------- ---------
Current Assets:
Cash and equivalents $446,891 $1,417,879
Accounts receivable, net 1,225,039 1,818,076
Inventories 3,192,357 3,378,779
Due from related entity 170,800 51,026
Deferred tax asset 11,400 11,400
Prepaid expenses and other current assets 334,685 312,106
---------- ---------
Total current assets 5,381,172 6,989,266
Property and equipment, net 2,292,511 1,249,889
Land held for future development 1,105,627 1,105,627
Investment in unconsolidated subsidiary 253,159 417,296
Notes receivable 22,164 28,112
Distribution rights 100,000 -
Other assets 4,349 6,016
---------- ----------
Total assets $9,158,982 $9,796,206
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $143,178 $138,967
Notes payable 2,685,359 1,730,500
Accounts payable 735,203 829,382
Accrued expenses 228,204 332,305
---------- ---------
Total current liabilities 3,791,944 3,031,154
Other liabilities 66,813 74,238
Long-term debt, net of current portion 187,073 244,425
---------- ---------
Total liabilities 4,045,830 3,349,817
---------- ---------
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, 2,198,709 and 2,119,609
shares issued, 2,158,989 and 2,079,889
shares outstanding in 2003 and 2002,
respectively 2,199 2,120
Additional paid-in capital 5,523,781 5,241,136
Retained earnings (deficit) (192,446) 1,299,421
Deferred stock compensation (124,094) -
Treasury stock, 39,800 common shares, at cost (96,288) (96,288)
---------- ---------
Total shareholders' equity 5,113,152 6,446,389
---------- ---------
Total liabilities and shareholders' equity $9,158,982 $9,796,206
========== ==========
See accompanying notes to consolidated financial statements.
F-3
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002, 2001
2003 2002 2001
----------- ----------- -----------
Net sales $8,433,185 $9,751,294 $9,184,621
Cost of sales 6,055,234 5,875,412 5,795,347
----------- ----------- -----------
Gross profit 2,377,951 3,875,882 3,389,274
Selling, general and administrative
expenses 3,821,819 3,477,923 3,021,016
Costs related to consolidating nursery
facilities 253,738 - -
----------- ------------ ----------
Loss (income) from operations (1,697,606) 397,959 368,258
----------- ------------ ----------
Other income (expense):
Interest income 9,848 15,695 69,327
Interest expense (72,941) (58,194) (122,984)
Gain on collection of note receivable
previously written down 25,000 405,000 -
Gain on sale of investment - 71,462 -
Participation in income (loss) of
unconsolidated subsidiary 75,863 (16,037) -
Commissions income from unconsolidated
subsidiary 116,921 6,481 -
Other income 51,048 18,579 23,842
----------- ------------ -----------
Total other income (expense) 205,739 442,986 (29,815)
----------- ------------ -----------
(Loss) income before deferred income tax
benefit (1,491,867) 840,945 338,443
Deferred income tax benefit - 11,400 -
----------- ------------ -----------
Net (loss) income ($1,491,867) $ 852,345 $ 338,443
=========== ============ ===========
Basic (loss) income per common share ($0.71) .41 .16
=========== ============ ===========
Diluted (loss) income per common share ($0.71) $ .40 $ .16
=========== ============ ===========
See accompanying notes to consolidated financial statements.
F-4
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Outstanding
Common Common Additional Deferred Retained
Stock Stock Paid-in Stock (Deficit) Treasury
Shares Amount Capital Compensation Earnings Stock Total
----------- ------- ---------- ------------ --------- --------- ----------
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 exercise 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 stoc
from exercise 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
Issuance of common stock
from exercise of stock
options 61,600 62 155,787 - - - 155,849
Issuance of common stock
under restricted stock 17,500 17 126,858 (126,875) - - -
plan
Restricted stock amortized
to operations - - - 2,781 - - 2,781
Net loss - - - - (1,491,867) - (1,491,867)
----------- ------- ---------- ------------ ---------- ---------- ------------
Balance at December 31, 2003 2,158,989 $2,199 $5,523,781 ($124,094) ($192,446) ($96,288) $5,113,152
=========== ======= ========== ============ ========== ========= ============
See accompanying notes to consolidated financial statements.
F-5
MARGO CARIBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(1,491,867) $ 852,345 $ 338,443
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 404,898 411,600 497,051
Provision for bad debts 200,727 120,929 71,000
Gain on collection of note receivable (25,000) (405,000) -
Deferred revenue - 74,238 -
Deferred stock compensation 2,781 - -
Deferred tax benefit - (11,400) -
Participation in (profit)/loss-unconsolidated
Subsidiary
(75,863) 16,037 -
Gain on sale of investment - (71,462) -
Loss (gain) on disposition of equipment 64,852 (6,287) 4,367
Changes in assets and liabilities affecting cash
Flows from operating activities:
Decrease (increase) in:
Accounts receivable 392,310 (140,754) (618,545)
Inventories 186,422 131,602 (340,307)
Due from related entity (119,774) (51,026) -
Prepaid expenses and other current assets (22,579) (15,624) 12,017
Distribution rights (100,000) - -
Other assets 1,667 (3,082) 23,994
Increase (decrease) in:
Accounts payable (94,179) (38,689) (226,119)
Accrued expenses (104,101) 138,011 (4,850)
Other liabilities (7,425) - -
------------ ---------- ----------
Net cash provided by (used in) operating activities (787,131) 1,001,438 (242,949)
------------ ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,512,372) (181,688) (238,949)
Proceeds from sale of investment - 112,924 -
Investment in land held for future development - (52,221) (64,921)
Decrease (increase) in notes receivable 5,948 (5,948) (18,193)
Investment in unconsolidated subsidiary (160,000) (433,333) -
Investment distribution from unconsolidated
subsidiary 400,000 - -
Collection from shareholder - - 349,480
Proceeds from collection of notes receivable 25,000 451,331 10,452
------------ ---------- ----------
Net cash provided by (used in) investing activities (1,241,424) (108,935) 37,869
------------ ---------- ----------
Cash flows from financing activities:
Increase in notes payable 954,859 533,333 200,000
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 exercis
of stock options 155,849 14,509 2,250
Proceeds from long-term debt 109,720 - 222,051
Repayments of long-term debt (162,861) (128,008) (128,361)
Net cash provided by (used in) financing activities 1,057,567 (313,545) 70,940
------------ ---------- ----------
Net increase (decrease) in cash and equivalents (970,988) 578,958 (134,140)
Cash and equivalents at beginning of year $1,417,879 838,921 973,061
------------ ---------- ----------
Cash and equivalents at end of year $446,891 $1,417,879 $838,921
============ ========== ==========
See accompanying notes to consolidated financial statements.
F-6
MARGO CARIBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001
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,
acting as sales agent for consumer related 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 nursery 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, 2003 and 2002, cash and equivalents
include $500,000 invested in a certificate of deposit bearing interest at 1.35%
and 1.7%, respectively, which has been pledged as collateral for notes payable
(refer to Note 10).
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
acknowledgement receipt of merchandise by the customer. Revenues from
landscaping services are recognized as plants are installed at the customers'
facilities. Revenues from garden maintenance contracts are recognized when the
maintenance is incurred.
F-8
(f) Recent Accounting Developments
------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the Disposal of
a Segment of a Business." Implementation of SFAS No. 144 did not have a
significant effect on the Company's financial condition or results of
operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements 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 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. SFAS No. 145 also amends SFAS No. 13, "Accounting for
Leases", to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 did not 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." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. Implementation of SFAS No. 146 did not have a
significant effect on the Company's financial condition or results of
operations.
F-9
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." In
addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-and-borrower-relationship intangible assets and credit cardholder's
intangible assets. SFAS No. 147 was effective for acquisitions or impairment
measurement of such intangibles effective on or after October 1, 2002. SFAS No.
147 did not have a significant effect on the Company's financial condition or
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has decided to continue using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations.
In November 2002, the FASB issued FASB Interpretation No.45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34."
This interpretation elaborates on the disclosures to be made by a guarantor in
the financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
F-10
measurement provisions of FIN 45 were applicable for guarantees issued or
modified after December 31, 2002. Adoption of the recognition and measurement
provisions did not have a significant effect on the Company's financial
condition and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
issue voting interests (or other interests with similar rights) or (b) the total
equity investment at risk is not sufficient to permit the entity to finance its
activities. FIN 46 requires an enterprise to consolidate a variable interest
entity if that enterprise has a variable interest that will absorb a majority of
the entity's expected losses if these occur, receive a majority of the entity's
expected residual returns if these occur, or both. Qualifying Special Purpose
Entities are exempt from the consolidation requirements. In addition to numerous
FASB Staff Positions written to clarify and improve the application of FIN 46,
the FASB recently announced a deferral for certain entities, and an amendment to
FIN 46 entitled FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R). The Company must apply
FIN 46R as of the first interim or annual period ending after March 15, 2004.
FIN 46R is not expected to have a significant effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6 (b) of Statement 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying to
conform it to language used in FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", and (4) amends certain other existing
F-11
pronouncements. This Statement was effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Implementation of SFAS No. 149 did not have a significant effect
on the Company's financial position or results of operations. In May 2003, the
FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 is effective for
all freestanding financial instruments entered into or modified after May 31,
2003. For all other freestanding financial instruments, it became effective at
the beginning of the first interim period beginning after June 15, 2003. SFAS
No. 150 applies to three categories of freestanding financial instruments
(mandatorily redeemable instruments, instruments with repurchase obligations and
instruments with obligations to issue a variable number of shares). Instruments
within the scope of SFAS No. 150 must be classified as liabilities in the
statement of financial condition. Certain provisions of SFAS No. 150 related to
mandatorily redeemable financial instruments have been subsequently deferred
indefinitely by the FASB. The Company does not have mandatorily redeemable
financial instruments outstanding. Implementation of SFAS No. 150 did not have a
significant effect on the Company's 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.
F-12
(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.
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 has been adjusted to reflect the effect of the stock
dividend as of the beginning of the earliest period presented.
(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 6 and 11.
(j) Accounting for Stock-Based Compensation Plans
---------------------------------------------
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, 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. Accordingly, no compensation expense has
been recognized for options granted under the 1998 Plan and the 1988 Plan.
However, SFAS No. 123, "Accounting for Stock-Based Compensation", provides an
alternative method for measuring compensation cost by measuring the fair value
F-13
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 prominent disclosure of pro forma
information regarding the effects of the application of its compensation cost
measurement criteria and of other information. Had compensation expense been
determined based upon the fair value at the grant date for awards under any plan
consistent with SFAS No. 123, the Company's net income (loss) and net income
(loss) per share, on a pro forma basis, would have been as follows:
Year ended December 31,
-----------------------------
2003 2002 2001
---- --- ----
Net (loss) income
as reported $(1,491,867) $852,345 $338,443
Total stock based com-
pensation expense
determined under fair
value based method for
all awards (43,258) (36,463) (34,527)
------------ --------- ---------
Pro forma net (loss)
income $(1,535,125) $815,882 $303,916
=========== ======== =========
Earnings per share:
Basic - as reported $(.71) $0.41 $0.16
===== ===== =====
Basic - pro forma $(.73) $0.39 $0.15
===== ===== =====
Diluted - as reported $(.71) $0.40 $0.16
===== ===== =====
Diluted - pro forma $(.73) $0.39 $0.14
===== ===== =====
(k) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-14
The allowance for doubtful accounts is an amount that management believes will
be adequate to absorb estimated losses on existing accounts receivable that
become uncollectible based on evaluations of collectibility of specific
customers and their prior credit experience. In addition, the Company evaluates
the prior years experience of the allowance as a whole.
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 $946,798, which is
partially offset by a valuation allowance of $935,398. 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.
(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 distributions
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 - Stock Based Compensation and Salary Deferral Plans
- -----------------------------------------------------------
(a) Stock Based Compensation Plans
------------------------------
Effective May 2,2003, the Company adopted the Margo Caribe, Inc. 2003 Restricted
Stock Plan (the "Restricted Stock Plan"). Under the terms of the Restricted
Stock Plan, the Compensation Committee of the Board of Directors is authorized
F-15
to grant up to 200,000 shares of common stock to officers and other key
employees of the Company. The restricted stock grants may be subject to
time-based or performance-based restrictions.
During the year ended December 31, 2003, the Company granted 17,500 shares of
restricted stock at a market value of $7.25 per share under the Margo Caribe,
Inc. 2003 Restricted Stock Plan to members of senior management. The shares of
restricted stock shall vest ratably over a five-year period. The shares are
subject to forfeiture if employment terminates prior to vesting. Recipients of
restricted shares are entitled to dividends and to vote their respective shares.
The value of all of the restricted shares was established by the market price on
the date of grant. Deferred stock compensation was charged for the market value
of the restricted shares. The deferred stock compensation is shown as a
reduction of shareholders' equity and is being amortized ratably over the
vesting period. During the year ended December 31, 2003, the Company recognized
$2,781 in selling, general and administrative expenses related to the grants.
The unamortized portion remaining in shareholders' equity at December 31, 2003
was $124,094
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 2,750 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
F-16
of the stock options granted under the 1998 Plan and the prior 1988 Plan as of
December 31, 2001, 2002 and 2003, and changes during the years ended on those
dates, are as follows:
Weighted
Price per Share Average
Description Shares Range Price
- ----------------------------- ------- --------------- ----------
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
Granted 11,000 7.25 7.25
Exercised (61,600) 1.76 to 3.41 2.55
Forfeited (69,300) 1.76 to 3.41 2.65
------- --------------- ----------
Outstanding, December 31, 2003 129,800 $1.36 to $7.25 $3.01
======= =============== ==========
Exercisable, December 31, 2003 94,820 $1.36 to $3.75 $2.54
======= =============== ==========
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- -------------- ----------- ------------ -------- ----------- ---------
$2.61 - $3.13 37,400 2.6 $2.98 37,400 $2.98
1.36 - 1.76 9,350 4.4 1.42 9,350 1.42
2.05 - 2.50 12,650 5.4 2.29 10,650 2.28
1.59 - 1.75 11,000 7.0 1.63 7,700 1.62
1.88 - 3.75 24,200 8.0 2.75 16,280 2.40
2.89 - 3.50 24,200 9.0 3.08 13,640 2.96
7.25 11,000 10.0 7.25 - -
- -------------- ----------- ------------ -------- ----------- ---------
$1.36 - $3.75 129,800 6.2 $ 3.02 94,820 $ 2.54
============== =========== ============ ======== =========== =========
The weighted average fair value of an option granted in 2003, 2002 and 2001, was
$2.64, $1.35 and $1.90, 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:
F-17
2003 2002 2001
---- ---- ----
Risk-free interest rate 5.28% 5.36% 6.4%
Average life of options 10 yrs. 10 yrs. 10 yrs.
Volatility 78% 34% 72%
Dividend yield 0% 0% 0%
(b) Salary Deferral Plan
--------------------
During 1998, the Company established a Salary Deferral Retirement Plan (the
"Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations
under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers
all employees who are at least 21 years old and is effective from the date of
employment. For the years ended December 31, 2003, 2002 and 2001, the Company
paid approximately $57,000, $58,000 and $53,000, respectively, representing the
matching contributions under the retirement plan for all participants.
Note 3 - Inventories
- --------------------
At December 31, 2003 and 2002, inventories comprised the following:
Description 2003 2002
- ---------------------------- ---------- ----------
Plant material $2,388,460 $2,799,960
Lawn and garden products 313,001 251,438
Raw material and supplies 490,896 327,381
---------- ----------
$3,192,357 $3,378,779
========== ==========
F-18
Note 4 - Accounts Receivable
- ----------------------------
At December 31, 2003 and 2002, accounts receivable comprised the following:
Description 2003 2002
- ---------------------------- ---------- ----------
Trade receivables $1,335,809 $1,863,522
Government reimbursement 185,657 75,000
Accrued interest - 188
Employee advances 1,590 9,929
Other accounts receivable 26,952 65,137
---------- ----------
1,550,008 2,013,776
Less allowance for doubtful
accounts (324,969) (195,700)
---------- ----------
$1,225,039 $1,818,076
========== ==========
Included within trade receivables as of December 31, 2003 are approximately
$53,504 ($104,000 in 2002) due from Estancias de Cerro Mar, Inc. ("Estancias"),
an entity controlled by the Company's principal shareholder. During the years
ended December 31, 2003 and 2002, the Company billed approximately $417,000 and
$525,000, respectively, to Estancias for landscaping and landscape maintenance
services.
F-19
Note 5 - Due from Related Entity
- --------------------------------
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 (see Note 9). 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.
At December 31, 2003 and 2002, the amount due from this related entity consisted
of:
2003 2002
---------- ---------
Management fees $ 24,000 $ 5,000
Commissions 116,921 1,481
Advances, net 29,879 44,545
---------- ----------
$170,800 $51,026
========== ==========
Note 6 - Notes Receivable
- -------------------------
At December 31, 2003 and 2002, notes receivable comprised the following:
Description 2003 2002
- ---------------------------- ---------- ----------
Non-interest bearing notes,
due from present Company's
employees, due on demand $ 22,164 $ 28,112
========== ==========
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.
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.
F-20
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 was 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 7 - Property and Equipment
- -------------------------------
At December 31, 2003 and 2002, property and equipment comprised the following:
2003 2002
---------- ----------
Leasehold improvements $2,412,363 $1,456,960
Equipment and fixtures 1,659,325 1,599,948
Transportation equipment 809,206 600,344
Real estate property 224,327 224,327
----------- ----------
5,105,221 3,881,579
Less accumulated depreciation
and amortization 2,812,710 2,631,690
----------- ----------
$2,292,511 $1,249,889
=========== ==========
During the years ended December 31, 2003, 2002 and 2001, depreciation expense
charged to production was approximately $146,614, $234,000, and $315,000,
respectively.
Note 8 - 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 carrying
value at December 31, 2003 of approximately $1,106,000 includes approximately
$118,000 of capitalized interest, design and other permitting phase costs. The
Company intends to develop this land into lots for residential homes and is in
the process of obtaining the required permits.
F-21
Note 9 - Investment in Unconsolidated Equity Subsidiary
- -------------------------------------------------------
The Company has accounted for its investment in Salinas using the equity method
of accounting. At December 31, 2003 and 2002, and for the year and period then
ended, Salinas' condensed financial position and results of operations
information was as follows:
Assets 2003 2002
------ ---------- ----------
Current assets $1,430,763 $839,162
Property and equipment 821,918 396,033
---------- ----------
$2,252,681 $1,235,195
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities $ 735,090 $ 83,306
Long term debt 758,335 -
Shareholders' equity 759,256 1,151,889
---------- ----------
$2,252,681 $1,235,195
========== ==========
Company's share of equity $ 253,159 $ 417,296
========== ==========
Results of Operations
---------------------
For the two month
Year ended period ended
December 31, December 31,
2003 2002
---------- ----------
Sales $ 730,321 $10,144
Cost of sales 245,501 4,346
General and adminis-
trative expenses 257,454 53,909
---------- ----------
Net income (loss) $ 227,366 ($48,111)
========== ==========
Company's share of net income (loss) $ 75,863 ($16,037)
========== ==========
At December 31, 2003 and 2002, the Company's investment in Salinas Holdings,
Inc., was as follows:
Description Amount
----------- ------
Original investment 2002 $433,333
Equity in loss of
unconsolidated
subsidiary for 2002 (16,037)
---------
Balance at December 31, 2002 $417,296
Additional investment 160,000
Distribution from unconsolidated
subsidiary (400,000)
Equity in earnings of
unconsolidated
subsidiary for 2003 75,863
--------
Balance at December 31, 2003 $253,159
========
F-22
Note 10 - Notes Payable
- -----------------------
At December 31, 2003 and 2002, the Company had short-term borrowings with
various financial institutions in Puerto Rico, comprised of the following:
Description 2003 2002
----------- ---------- ----------
Unsecured note payable of $136,000,
bearing interest at 7.95% at December
31,2003 due on September 2004 $ 135,859 -
Commercial line of credit of $2.5
million, bearing interest at 1.8%
over Libor rate (2.0% at December 31,
2003) due on demand, collateralized
by land held for future development
and the Company's accounts
receivable and inventories 2,343,500 1,230,500
Notes payable, collateralized by cash
equivalent invested in a certificate
of deposit, bearing interest at 2.05%
and 2.2% at December 31 2003 and
2002, respectively, due on demand 206,000 500,000
---------- ---------
$ 2,685,359 $1,730,500
=========== ===========
Note 11 - Long-Term Debt
- ------------------------
At December 31, 2003 and 2002, the Company had long-term debt with various
commercial banks in Puerto Rico. Long-term debt comprised the following:
Description 2003 2002
----------- ---------- ----------
Five-year term loans, bearing interest
at 2% over Libor rate (3.14%-5.00% at
December 31, 2003), payable in monthly
installments of $12,488, through
March 2008 $ 330,251 $ 383,392
Less current portion 143,178 138,967
---------- ---------
Long-term debt $ 187,073 $ 244,425
========== =========
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of long-term debt approximates the
recorded amounts.
F-23
The annual aggregate maturities of long-term debt are as follows:
Year Ending
December 31, Amount
----------- ------
2004 $143,178
2005 103,641
2006 55,972
2007 21,936
2008 5,524
--------
$330,251
========
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, 2003 and 2002, the Company was in compliance
with such covenants.
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:
2003 2002 2001
--------- -------- --------
Income tax provision (benefit)
computed by applying tax rate $(581,827) $327,969 $131,992
(Increase) decrease in income
tax benefit resulting from
Puerto Rico tax exemption 256,258 (251,542) (80,452)
Tax loss carryover benefit
(utilization) and other
325,569 (76,427) (51,540)
--------- --------- --------
$ - $ - $ -
========= ========= ========
Deferred income taxes, prior to the valuation allowance, were recognized in the
consolidated balance sheet at December 31, 2003 and 2002 due to the tax effect
of temporary differences and loss carry forwards as follows:
F-24
2003 2002
---------- ----------
Deferred tax assets:
- --------------------
Net operating loss carryforwards $850,593 628,496
Valuation allowance for accounts
receivable 96,205 45,116
---------- ----------
946,798 673,612
Less valuation allowance (935,398) (662,212)
---------- ----------
Net deferred tax asset $11,400 $11,400
========== ==========
Note 13 - Income (loss) Per Common Share
- ----------------------------------------
Basic and diluted income (loss) per common share for the years ended December
31, 2003, 2002 and 2001 were determined as follows:
Basic income (loss) per common share:
- -------------------------------------
2003 2002 2001
--------- -------- --------
Net (loss)income attributable
to common shareholders $ (1,491,867) $ 852,345 $ 338,443
============ =========== ===========
Weighted average number of
common shares outstanding 2,111,499 2,073,997 2,071,174
============ =========== ===========
Basic (loss)income per
common share $ (.71) $ .41 $ .16
============ =========== ===========
Diluted (loss) income per common share:
- ---------------------------------------
Net (loss) income attributable
to common shareholders $ (1,491,867) $ 852,345 $ 338,443
=========== =========== ===========
Weighted average number of
common shares outstanding 2,111,499 2,073,997 2,071,174
Plus incremental shares from
assumed exercise of stock
options - 40,248 33,211
----------- ----------- -----------
Adjusted weighted average
shares 2,111,499 2,114,245 2,104,385
=========== =========== ===========
Diluted (loss) income per
common share $ (.71) $ .40 $ (.16)
=========== =========== ===========
F-25
The effect of the assumed exercise of stock options determined by using the
treasury stock method was anti-dilutive for the year ended December 31, 2003;
thus no incremental shares were added to the weighted average number of common
shares outstanding for the year.
Note 14 - Commitments and Contingencies
- ---------------------------------------
On September 22, 2003, the Company became guarantor for a loan in the amount of
$1,300,000 made by Salinas Holdings, Inc., an unconsolidated subsidiary. The
guaranty is continuous and limited covering all outstanding principal and
accrued interest, pro-rata to the Company's 33.33% ownership participation. The
term of the loan is thirty-six months and payable in monthly installments of
$36,111, plus accrued interests. The interest rate is calculated based on the 90
days LIBOR, plus 1.5% over such rate. As of December 31, 2003, the maximum
potential amount of future payments that the Company could be required to make
under the guarantee is approximately $397,000, plus accrued interests.
The Company's operations are vulnerable to severe weather, such as hurricanes,
floods, and storms and, to a lesser extent, plant disease and pests. In recent
years, the Company has been unable to obtain crop and business interruption
insurance coverage. No assurance can be given that the Company will be able to
obtain such insurance coverage 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. The
Company's nursery farm currently has access to a plentiful water supply and
facilities for the protection of many of their weather sensitive plants.
In 2003, a former officer of the Company brought a civil action in the U.S.
District Court of Puerto Rico against the Company. The complaint alleges, among
other, a federal securities law violation in connection with the exercise of
employee stock options by the plaintiff. The Company believes, based on the
opinion of legal counsel, that it will be able to defend this action
successfully.
The Company is also a party to various legal actions arising in the ordinary
course of business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial condition or
results of operations of the Company.
F-26
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, 2003, there were no outstanding shares of preferred stock.
Note 16 - Lease and Option Agreements
- -------------------------------------
(a) Property in Vega Alta, Puerto Rico
----------------------------------
The Vega Alta facility is leased from Michael J. Spector and Margaret D. Spector
(the "Spectors"), who are executive officers and principal shareholders of the
Company, pursuant to a lease agreement dated as of January 1, 2004. The lease
has an original five year term and an option to renew for additional five year
term. Under the lease, the Company is required to pay a 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. During the renewal period, the
rent will be adjusted to reflect the increase in the Wholesale Price Index from
the original lease term. 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 if both Mr. and Mrs. Spector become deceased. In consideration
of the option, the Company must pay an additional $1,000 per month.
In connection with this lease, the Spectors also agreed to reimburse the Company
for the unamortized value of the leasehold improvements applicable to the Vega
Alta facility as of the date of termination.
Total rental payments amounted to approximately $288,000 in 2003, 2002 and 2001.
(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. Effective December 23, 2002, both the lessor and the
Company executed a "Release and Settlement Agreement" in order to terminate the
F-27
lease agreement. Under the terms of the agreement, the Company vacated the
facilities as of June 30, 2003. As a result, the Company has consolidated the
Barranquitas operation into its Vega Alta nursery farm.
Total rental payments amounted to $36,000 in 2003 and $72,000 in 2002 and
$60,000 in 2001.
(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, 2003, based on the lease agreement in
effect as of January 1, 2004, are as follows:
Year ending Minimum Additional
December 31, Lease Payments Option Payments
----------- -------------- --------------
2004 $ 288,000 $12,000
2005 288,000 12,000
2006 288,000 12,000
2007 288,000 12,000
-------------- --------------
$ 1,152,000 $48,000
============== ==============
Total rental expense under all operating lease agreements amounted to
approximately $324,000, $360,000 and $382,000, for the years ended December 31,
2003, 2002 and 2001, respectively.
Note 17 - 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
F-28
$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.
(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, 2003, 2002, and 2001, the Company made
interest payments of approximately $73,000, $64,000, and $125,000,
respectively. During the years ended December 31, 2003, 2002 and 2001, the
Company did not make any income tax payments.
Note 18 - Major Customers
- -------------------------
During 2003, the Company's single largest customer accounted for approximately
41% ($3,458,000) of the Company's net sales.
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.
Note 19 - Significant Concentration of Risk
- -------------------------------------------
As discussed in Note 1, the Company's operations are principally concentrated in
Puerto Rico. The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, and 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, 2003, the Company has been
unable to obtain crop and business interruption insurance coverage. The Company
F-29
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 coverage.
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. Monitoring
the operations and financial strength of the Company's customers mitigates
concentration of credit risk with respect to account receivable. Certain
short-term certificates of deposit are placed with local financial institutions.
Depositing the funds with high credit quality financial institutions and
limiting the amount of credit exposure in any financial institution mitigates
such credit risk.
Note 20 - 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 four
primary business segments: the production and distribution of plants, sales of
lawn and garden products,landscaping services and real estate. During 2003, the
Company commenced acting as sales agent for consumer related products. These
F-30
activities are included within the lawn and garden segment. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on net
income or loss.
The financial information presented below was derived from the internal
management accounting system and is based on internal management accounting
policies. The information presented does not necessarily represent each
segment's financial condition and results of operations as if they were
independent entities.
2003
--------------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Real Estate Totals
--------------------------------------------------------------------------------
Revenue from
external customers $3,738,687 $3,279,168 $1,415,330 $- $8,433,185
Intersegment
revenues 182,717 17,075 - - 199,792
Interest income 9,848 - - - 9,848
Interest expense 72,941 - - - 72,941
Depreciation and
Amortization 261,003 69,895 74,000 - 404,898
Segment loss (714,047) (242,371) (535,449) - (1,491,867)
Segment assets 6,603,647 1,003,126 446,582 1,105,627 9,158,982
Expenditures for
segment assets 1,357,697 - 154,675 - 1,512,372
F-31
2002
--------------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Real Estate 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 6,831,914 904,725 953,940 1,105,627 9,796,206
Expenditures for
segment assets 181,688 - - - 181,688
2001
--------------------------------------------------------------------------------
Lawn & Garden
Plants Products Landscaping Real Estate 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 5,963,551 1,015,901 976,163 1,053,406 9,009,021
Expenditures for
segment assets 238,949 - - - 238,949
F-32
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------
Financial data showing results for each of the quarters in 2003, 2002 and 2001
are presented below. These results are unaudited. In the opinion of the
management, all adjustments necessary for a fair presentation have been
included.
(in thousands, except per share data) 1st. 2nd. 3rd. 4th.
- ------------------------------------- ------ ------ ------ -------
2003
Net sales $2,495 $2,156 $1,873 $1,909
Gross profit 880 748 623 127
Net income (loss) 45 (122) (303) (1,112)
Basic income (loss) per common share 0.02 (0.06) (0.14) (0.71)
Diluted income (loss) per common share 0.02 (0.06) (0.14) (0.71)
2002
Net sales $2,320 $2,489 $2,311 $2,631
Gross profit 914 1,010 1,019 933
Net income 180 143 101 428
Basic income per common share 0.10 0.07 0.05 0.41
Diluted income per common share 0.09 0.07 0.05 0.40
2001
Net sales $2,170 $2,283 $2,243 $2,489
Gross profit 780 855 794 960
Net income 71 110 20 137
Basic income per common share 0.04 0.05 0.01 0.16
Diluted income per common share 0.04 0.05 0.01 0.16
The results of operations for the fourth quarter of 2003 reflect certain
significant adjustments as follows:
o a charge of approximately $234,000 to reduce inventories to the lower
of cost or market.
o a charge of $301,000 to write off unsalable damaged inventory of which
$191,000 was reflected as part of cost of sales and $110,000 was
reflected as part of the costs relating to the consolidation of the
nursery facilities.
There were no significant fourth quarter adjustments in 2002 and 2001.
F-33
SCHEDULE II
- -----------
MARGO CARIBE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2003, 2002 and 2001
Column A Column B Column C Column D Column E
- ------------------------------- ----------- ------------------------ ------------ ----------
Balance Charged to Charged to
Beginning Costs and Other Balance
Description Of Year Expenses Accounts Deductions End of Year
----------- --------- --------- ---------- ---------- ----------
Year ended December 31, 2003:
Allowance for doubtful accounts $195,700 $201,000 $ - $ (71,700) $325,000
========= ========= ========== ========== ==========
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
========= ========= ========== ========== ==========
F-34