-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J9EvQ/z50j0Rnz72ylud34AQ0HwnpL5+S5y+571kO33eHqDMOZ/1caDhYTkNEMX5 ejSqslHhNwDAd7jMRkoOzg== 0000950170-00-000487.txt : 20000331 0000950170-00-000487.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950170-00-000487 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARGO CARIBE INC CENTRAL INDEX KEY: 0000808493 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 592807561 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15336 FILM NUMBER: 588189 BUSINESS ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 BUSINESS PHONE: 8098832570 MAIL ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 STREET 2: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 FORMER COMPANY: FORMER CONFORMED NAME: MARGO NURSERY FARMS INC DATE OF NAME CHANGE: 19920703 10-K 1 MARGO CARIBE, INC.--FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-15336 MARGO CARIBE, INC. A PUERTO RICO CORPORATION - I.R.S. NO. 66-0550881 ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: ROAD 690, KILOMETER 5.8 VEGA ALTA, PUERTO RICO 00692 REGISTRANT'S TELEPHONE NUMBER: (787) 883-2570 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE ---- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE --------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock, $.001 par value, held by non-affiliates of the registrant: $12,267,160 based on the last sales price of $19 per share on March 15, 2000 and 645,640 shares held by non-affiliates. The registrant had 1,882,322 shares of common stock, $.001 par value, outstanding as of March 15, 2000. MARGO CARIBE, INC. 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS........................................................................................ 1 ITEM 2. PROPERTIES...................................................................................... 9 ITEM 3. LEGAL PROCEEDINGS............................................................................... 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... ................................. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................................................................... 11 ITEM 6. SELECTED FINANCIAL DATA........................................................................ 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION........................................................ 14 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................................................................... 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................... 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 21 ITEM 11. EXECUTIVE COMPENSATION......................................................................... 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................................................... 25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................................................................29
PART I ITEM 1. BUSINESS GENERAL The principal business of Margo Caribe, Inc. and its subsidiaries (collectively, the "Company") is the production and distribution of tropical and flowering plants, the sale and distribution of lawn and garden products as well as landscaping design and installation services. The Company is also engaged in seeking sites for the development of residential housing projects. On February 9, 2000, the Company signed a letter of intent to merge with iTract, LLC, a developmental stage internet company. To the extent the transactions contemplated in the letter of intent are consumated, the Company will cease being engaged in the current nursery and related businesses and would be engaged in providing internet based marketing services. See "Proposed Merger with iTract, LLC" herein. PRINCIPAL OPERATIONS During 1999 and 1998, the Company conducted operations in the Commonwealth of Puerto Rico ("Puerto Rico"). During 1997, the Company also conducted operations in South Florida. These operations are described below. Puerto Rico Operations The Company's operations in Puerto Rico are conducted at a 117 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre farm is leased from Michael J. Spector and Margaret D. Spector, who are directors, officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Lease and Option to Purchase Main Nursery Farm" herein. The 13 acre facility in the Municipality of Barranquitas is leased from Cali Orchids, Inc., an unrelated third party. The Company's operations in Puerto Rico include Margo Caribe, Inc. (the holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc. ("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest Products Group, Inc. ("Rain Forest"), and Margo Development Corporation, all Puerto Rico corporations. Nursery Farms, which operates under the trade name of Margo Farms del Caribe, is engaged in the production and distribution of tropical and flowering plants. Its products are primarily utilized for the interior and exterior landscaping of office buildings, shopping malls, hotels and other commercial sites, as well as private residences. In Vega Alta, Nursery Farms produces various types of palms, flowering and ornamental plants, trees, shrubs, bedding plants and ground covers. In Barranquitas, Nursery Farms produces orchids, bromeliads, anthuriums, spathiphylum and poincettias. Its customers include wholesalers, retailers, chain stores and landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, Nursery Farms enjoys a 90% tax exemption under Puerto Rico law from income derived from its nursery business in Puerto Rico. The Company is a supplier of plants and lawn and garden products for The Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and garden products according to Nursery Retailer magazine. As of December 31, 1999, Home Depot had opened two stores, and has announced plans to open seven additional stores in Puerto Rico over the next three years. During March 1999, the Company leased two additional parcels of land (approximately 320 acres) from the Puerto Rico Land Authority with the intent of relocating its existing Vega Alta facilities and corporate offices to this property as well as to use this additional land to increase the Company's volume of field grown material and to deversify within the nursery business by growing turf (sod). During the third quarter of 1999, the Company became the largest supplier of live goods (plant material) to WalMart Stores, which presently has nine stores throughout Puerto Rico. Landscaping provides landscaping services to customers in Puerto Rico and the Caribbean, including commercial as well as residential landscape design and landscaping. The Company was awarded a landscaping project for the Puerto Rico Art Museum being constructed in San Juan, Puerto Rico. This landscaping project commenced during the fourth quarter of 1999 at an approximate contract price of $650,000. Garden Products is engaged in sales of lawn and garden products, including plastic and terracotta pottery, planting media (soil, peat moss, etc.) and mulch. Among the various lawn and garden product lines it distributes, Garden Products is the exclusive distributor of Sunniland Corporation's fertilizer and pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico and the Caribbean. Rain Forest is engaged in the manufacturing of potting soils, mulch, professional growing mixes, river rock and gravels. Rain Forest's products are marketed by Garden Products. The Company enjoys a tax exemption grant from the Government of Puerto Rico for the manufacturing operations of Rain Forest. Margo Development Corporation, incorporated in January 1998, has been engaged in seeking real estate sites for the development of residential projects in Puerto Rico. On August 31, 1999, the Company entered into an option agreement to purchase approximately 109 acres of land in the Municipality of Barceloneta, Puerto Rico for possible development of a residential project. The Company paid $47,500 for the option agreement, which will be applied to the purchase price of the land of $950,000. This option expires on April 16, 2000. 2 South Florida Operations On August 15, 1997, after a review of past and present performance of the South Florida operation (Margo Bay Farms, Inc.), and in view of the strong competition in that market, the Company's Board of Directors made the determination to close this operation effective September 30, 1997, and dispose of all related assets. On September 29 and November 28, 1997, the Company sold the two nursery farms (a 54 acre and a 20 acre parcel) which comprised the Company's facilities in South Florida. Production The Company's plants are propagated by using cuttings, plugs, liners, air layers, seeds and tissue cultures. Cuttings are obtained from the Company's own stock plants and from other nurseries for grow-out at the Company's facilities. The newly planted cuttings take from two months to five years to mature into finished products, depending on variety. Bedding plants and annuals take from four to eight weeks to mature. The Company's products are either field grown or container grown, depending on the variety of plants and where they are grown. Most of these products start out in small pots and are "stepped up" to larger pot sizes over time. The Company produces both field and container grown material, as well as flowering, bedding plants and hanging baskets. Marketing The Company's marketing efforts have been primarily directed at customers throughout Puerto Rico and the Caribbean. The principal customers of the Company are wholesalers, mass merchandisers, chain stores, retailers, garden centers, hotels, landscapers, government projects and commercial businesses located in Puerto Rico and the Caribbean. The Company targets construction and government projects which require extensive landscaping. In addition, Landscaping provides landscaping design, installation and maintenance services which complement the sales function. For large retailers in Puerto Rico (such as The Home Depot, WalMart Stores, Kmart, and Masso Expo), the Company develops promotional programs which include deliveries to customer outlets and special pricing based on volume. During 1999, the Company's two largest customers accounted for approximately 26% of the Company's net sales. The first customer (The Home Depot) accounted for 14% and the second customer (WalMart Stores) accounted for 12% of the Company's net sales. During 1998 and 1997, the Company's single largest customer, Masso Expo (formerly Builders Square) accounted for approximately 13% and 24%, respectively, of the Company's net sales. 3 The Company does not have any significant long-term (over one year) delivery contracts with customers, including landscaping contracts. Financial Information Relating to Principal Operations The following table sets forth information regarding operations at each of the Company's operating locations for the years ended December 31, 1999, 1998 and 1997 as well as information regarding assets by location as of December 31, 1999, 1998 and 1997. The information is provided after the elimination of intercompany transactions.
1999 1998 1997 ------- ------- ------- (AMOUNTS IN 000'S) SALES BY LOCATION: Puerto Rico: Plants $ 3,781 $ 3,019 $ 2,957 Lawn and garden products 1,120 862 1,390 Landscaping 1,300 1,468 1,724 South Florida -- -- 478 ------- ------- ------- $ 6,201 $ 5,349 $ 6,549 ======= ======= ======= OPERATING LOSS BY LOCATION: Puerto Rico $ (165) $ (397) $ (722) South Florida -- -- (517) ------- ------- ------- $ (165) $ (397) $(1,239) ======= ======= ======= IDENTIFIABLE ASSETS BY LOCATION: Puerto Rico $ 8,917 $ 7,990 $ 8,952 South Florida -- -- -- ------- ------- ------- $ 8,917 $ 7,990 $ 8,952 ======= ======= =======
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. 4 Competition At the present time, the Company's sales efforts are primarily focused in Puerto Rico and the Caribbean. The Company enjoys an advantage over its competitors because it is the largest producer of quality nursery products in Puerto Rico. The Company continues expanding its operations in Puerto Rico. Most of the Company's competitors in Puerto Rico and the Caribbean are small nurseries and landscapers. Seasonality The demand for plants in Puerto Rico is year round, with increased demand during spring, late fall and winter. Working Capital Requirements of the Industry The nursery industry requires producers to maintain large quantities of stock plants and inventory to meet customer demand and to assure a new source of products in the future. As a result, producers need to invest significant amounts of capital in stock plants and inventory. The Company believes that it has sufficient working capital for its operations from cash flow generated from operations and short-term borrowings. Employees At December 31, 1999, the Company had 144 full time employees, of which 124 were directly involved in nursery production activities, and 20 in sales, accounting and administration. None of its employees are represented by a union. Government Regulation The United States Department of Agriculture ("USDA") inspects cuttings imported into the United States by the Company. In addition, USDA regulations control various aspects of the Company's plant production process, including restrictions on the types of pesticides and fertilizers. All pesticides and fertilizers utilized by the Company are approved by the Environmental Protection Agency, as required by USDA regulations. The USDA prohibits the importation of foreign soil into the United States and limits the size of plants that can be imported into the United States. Puerto Rico is considered part of the United States for purposes of the USDA regulations. Shipments of products may also be subject to inspections by certain Puerto Rico or state officials. These officials may quarantine or destroy plants that are contaminated or infected by hazardous organisms. The Company's operations are subject to the Fair Labor Standards Act which governs such matters as minimum wage requirements, overtime and other working conditions. A large 5 number of the Company's personnel are paid at or just above the federal minimum wage level and, accordingly, changes in such minimum wage rate have an adverse effect on the Company's labor costs. Natural Hazards The Company's operations are vulnerable to severe weather, such as hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. As of March 15, 2000, the Company had been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages. The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's locations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants. Industry Segments The Company has three reportable segments identified by line of business: the production and marketing of tropical and flowering plants, the sale of related lawn and garden products and the provision of landscaping services. Certain financial information concerning this industry segment is set forth in Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Condition and in the Company's Consolidated Financial Statements included as Item 8 to this Annual Report on Form 10-K. INCOME TAXES Federal Taxes As a Florida corporation, through December 31, 1997, the Company was subject to federal income taxes on its worldwide operations. For U.S. income tax purposes, the Company had elected the benefits of Section 936 ("Section 936") of the Internal Revenue Code (the "Code"), which provided a credit against the Company's income tax liability based generally on a portion of wages paid by the Company in Puerto Rico. The Small Business Job Protection Act of 1996 (the "1996 Amendments") enacted into law on August 20, 1996, amended Section 936 by repealing the credit available under this Section subject to a ten-year grandfather rule applicable only for corporations that were actively conducting a trade or business in Puerto Rico on October 13, 1995. In light of the phase-out of the benefits of Section 936, the Company decided to change its jurisdiction of incorporation to Puerto Rico, where it enjoys substantial tax benefits as discussed below. As a Puerto Rico corporation, effective January 1, 1998, the Company is generally only subject to U.S. income 6 taxation to the extent it is engaged in a trade or business in the United States or receives income from sources in the United States. Puerto Rico Taxes The Company is also subject to Puerto Rico income taxes from its Puerto Rico operations. Subject to certain limitations, during 1997 the Company's federal income tax liability was creditable against its Puerto Rico income tax liability. The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico (Act. No. 225 of December 1, 1995, as amended) provides its nursery operations with a 90% tax exemption for income derived from "bonafide" agricultural activities within Puerto Rico, including sales within and outside Puerto Rico, as well as a 100% exemption from property, municipal and excise taxes. The Act defines "bona fide agricultural activity" to include the nursery business. The Act became effective for taxable years commencing on or after December 1, 1995. 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. PROPOSED MERGER WITH iTRACT, LLC On February 9, 2000 the Company announced that it entered into a non-binding letter of intent to merge with iTract, LLC ("iTract"), a privately held developmental stage internet company building a communication tool that is designed to allow its users to deliver a targeted marketing campaign using e-mail, fax and postal mail. To date, iTract has not earned any significant revenues. iTract will seek to address the needs of businesses that desire more efficient, expedient and cost- effective ways to promote and communicate products and services to their target audiences. iTract will target small to medium sized businesses that want to reach potential customers at a lower cost than traditional direct marketing. iTract's system is designed to allow users to send out faxes, e-mails and postal mail in volume from the same document directly off the computer at the same time. iTract is also building a permission-based fax and e-mail list that is demographically organized and can be custom configured to meet the client's marketing needs. Under the proposed transaction, the Company would first reincorporate as a Delaware corporation pursuant to a merger (the "Reincorporation Merger") with a newly created Delaware corporation. A subsidiary of the new Delaware corporation would then merge with iTract (the "iTract Merger"). As a result of the iTract Merger, iTract members would receive 88% of the issued and outstanding shares of common stock of the new Delaware corporation (on a fully diluted basis assuming exercise of all outstanding stock options) in exchange for all the outstanding membership interests of iTract. Thus, following the iTract Merger, iTract members would control the new Delaware corporation, holding 88% of its common stock, with the Company's current shareholders holding 12%. Prior to the effective time of the iTract Merger, all outstanding stock 7 options held by officers, directors and employees of the Company would vest and become immediately exercisable. Following the merger, the new corporation would be named iTract, Inc. A majority of the Board of Directors of the merged company would be composed of members designated by iTract, and iTract's management would manage the merged company. The letter of intent does not provide for any break-up fee. It is anticipated that the Reincorporation Merger will be a taxable transaction for U. S. shareholders for federal income tax purposes. It is a condition to the consummation of the iTract Merger that the Company sell prior to the iTract Merger its nursery and other operating businesses. In addition, as of the effective time of the merger, the Company must have at least $5 million in cash and cash equivalents and not be subject to liabilities exceeding $10,000 in the aggregate. In connection with the execution of the letter of intent, Michael J. Spector, President, Chief Executive Officer and the controlling shareholder of the Company, and another major shareholder of the Company made a $2.0 million loan to International Commerce Exchange Systems, Inc. ("ICES"), an indirect parent company of iTract. The loan is payable in a single balloon payment on the closing day of the iTract Merger. If the iTract Merger is not consummated, such loan will be converted into common stock of ICES. The parties anticipate that the transaction would close during the latter part of the second quarter or early part of the third quarter of 2000, subject to the negotiation of definitive agreements, the satisfactory completion of due diligence examinations, and the satisfaction of various other conditions customary and appropriate for this type of transaction, including the approval of the merger by the majority of the Company's and iTract's equity holders, the qualification of the iTract Merger as a tax-free reorganization for federal and Puerto Rico income tax purposes, continued listing of the shares on the NASDAQ Small Cap Market and obtaining an opinion from an investment banking firm satisfactory to the Company that the transaction is fair to shareholders from a financial point of view. The letter of intent provides that concurrent with the execution of the merger agreement, Michael J. Spector will agree to vote his Company shares, representing approximately 66% of the Company's outstanding common stock, in favor of the merger. No assurance can be given that the Company will reach a definitive merger agreement or that, if reached, the parties will be able to satisfy the conditions to the consummation of the merger. If the parties do not execute a merger agreement by April 14, 2000, the letter of intent will be automatically terminated. To the extent a definitive merger agreement is executed with iTract, the Company plans to file a Registration Statement on SEC Form S-4 in connection with the proposed transactions and mail a proxy statement/prospectus to the Company's shareholders containing information about the proposed transactions. Investors and shareholders are urged to carefully read the Registration Statement and proxy statement/prospectus when they are available. 8 ITEM 2. PROPERTIES During 1999, the Company conducted its operations from nursery facilities located in Puerto Rico. Vega Alta Nursery Facility The Company leases a 117 acre nursery facility in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan. The facility, which includes the Company's corporate offices, consists of approximately 1,130,000 square feet of shadehouses, propagation and mist facilities, as well as a 10,000 square foot warehouse for the Company's lawn and garden products. The nursery facility also has irrigation equipment and pump houses, shipping and storage areas, as well as a home for a field supervisor. The Vega Alta facility is leased from Michael J. Spector and Margaret D. Spector (the "Spectors"), who are officers, directors and the major shareholders of the Company, pursuant to a lease agreement dated January 1, 1993. The lease provides for an initial term of five years subject to one additional renewal term of five years at the option of the Company. During the initial term of the lease, rent was $19,000 per month. The lease also provides that during the renewal term, the rent increases to the greater of $24,000 per month, or the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. Under the lease, the Company must pay all taxes on the property, maintain certain insurance coverage and otherwise maintain and care for the property. The lease also contains an option which permits the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company must pay $1,000 per month. On January 1, 1998, the Company exercised its renewal option at a monthly rental of $24,000. The Spectors have committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. On January 1, 1994, the lease agreement was amended to include an additional 27 acres of land adjacent to the nursery facility at a monthly rental of $1,750. This amendment did not provide for renewal or purchase options for this tract of land. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001, the unamortized value (approximately $45,000 at February 1, 2000) of the leasehold improvements applicable to such parcel as of the date of termination. Effective February 1, 2000, the lease agreement with respect to the 27 acre parcel terminated. During the years ended December 31, 1999 and 1998, total lease payments to the Spectors amounted to $309,000 (not including the monthly payments for the option referred to above). 9 Barranquitas Nursery Facility Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. During the first year of the initial term of the lease, monthly payments amount to $4,500. During the remaining four years of the initial term of the lease, monthly payments amount to $5,000. During the first and second renewal terms, monthly payments increase to $6,000 and $7,000, respectively. The lease agreement does not provide for any purchase option. For the years ended December 31, 1999, and 1998 total lease payments amounted to $60,000 and $45,000, respectively. Lease payments for 1998 reflect a rent abatement of $15,000 due to damages caused by Hurricane Georges. New Vega Alta Facility On March 24, 1999, the Company leased two additional parcels of land from the Puerto Rico Land Authority (an instrumentality of the Government of the Commonwealth of Puerto Rico). The two parcels are adjacent to each other, have a total capacity of 321 acres, and are located approximately one mile from the Company's main nursery facility in Vega Alta. Among other things, the lease agreement provides for an initial lease term of five years subject to three additional renewal terms of five years, at the option of the Company. Lease payments amount to $33,625 per year. During 1999, lease payments of $25,219 were made. Lease payments for renewal terms are to be negotiated 90 days prior to each renewal term. ITEM 3. LEGAL PROCEEDINGS In the opinion of the Company's management, any pending or threatened legal proceedings of which management is aware will not have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 PART II 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 1999 and 1998. The last reported sales price for the Common Stock on March 15, 2000 was $19 per share. 1999 1998 -------------------- -------------------- QUARTER: HIGH LOW HIGH LOW - -------- ---- --- ---- --- First $ 4 $ 2 1/16 $ 3 $ 1 7/8 Second 3 1/2 2 1/16 2 1/2 1 5/16 Third 3 1/4 2 3/16 4 1 7/16 Fourth 2 7/8 1 15/16 3 2 There were approximately 78 holders of record of the common stock as of December 31, 1999. This amount includes custodians, brokers and other institutions which hold the common stock as nominees for an undetermined number of beneficial owners. On February 27, 1998, the Company purchased 20,000 shares of common stock at a cost of $47,500. As of March 15, 2000, the Company had 1,882,322 shares of common stock outstanding. The Company did not pay any dividends on its common stock during 1999 or 1998. The payment of cash dividends in the future is dependent upon the earnings, cash position and capital needs of the Company, as well as other matters deemed relevant by the Company's Board of Directors. Dividends paid on the Company's Common Stock are generally subject to a 10% withholding tax at source under Puerto Rico tax laws. United States shareholders may be entitled to a foreign tax credit, subject to certain limitations, in connection with the imposition of the withholding tax. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular graduated rates, in which case the special 10% tax will not be withheld from such year's distributions. 11 United States citizens who are non-residents of Puerto Rico may also make such an election, except that notwithstanding the making of such election of the 10% withholding tax will still be made on any dividend distribution unless the individual files with the Company prior to the first distribution date for the taxable year a certificate to the effect that said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, in which case dividend distributions for said year will not be subject to Puerto Rico taxes. The Company recommends that shareholders consult their own tax advisors regarding the above tax issues. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected consolidated financial data for Margo Caribe, Inc. on a historical basis, for each of the five years ended December 31, 1999. The selected financial data should be read in conjunction with Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Condition and the Company's Consolidated Financial Statements. 12 MARGO CARIBE, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- Earnings Statement Data: 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Net sales $ 6,201,233 $ 5,349,244 $ 6,548,912 $ 6,108,865 $ 4,933,718 Gross profit 2,230,111 1,726,173 1,365,335 2,137,340 1,777,358 Selling, general and administrative expenses 2,395,350 2,122,976 2,604,106 2,130,114 2,110,380 Income (loss) from operations (165,239) (396,803) (1,238,771) 7,226 (333,022) Loss before income tax provision (127,867) (1,112,837) (750,534) (553,722) (386,334) Net loss (127,867) (1,112,837) (750,534) (577,214) (396,334) Net loss per common share - basic and diluted ($ .07) ($ .59) ($ .40) ($ .30) ($ .21) Weighted average number of common shares outstanding 1,875,322 1,878,655 1,895,322 1,895,322 1,895,322 Balance Sheet Data: Working capital $ 4,306,446 $ 3,396,453 $ 4,151,894 $ 4,113,799 $ 5,020,099 Total assets 8,916,981 7,990,208 8,952,088 10,396,211 15,400,582 Long-term debt (excluding current portion) 338,597 85,880 252,883 427,078 354,707 Stockholders' equity 6,241,776 6,369,643 7,529,980 8,271,350 8,848,402
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW For the year ended December 31, 1999, the Company incurred a consolidated net loss of approximately $128,000, compared to a net loss of $1,113,000 and $751,000 in 1998 and 1997, respectively. These amounts represent a consolidated net loss per common share of $.07, $.59 and $.40 for 1999, 1998 and 1997, respectively. The Company's net loss for the year ended December 31, 1999, was due to an operating loss of approximately $165,000, which was offset by other income of $37,000. The operating loss for the year ended December 31, 1999 was principally due to an increase in selling, general and administrative expenses incurred during the year. The Company's net loss for the year ended December 31, 1998 was due to three unrelated events experienced during the year. The first of these events was a decrease in sales of approximately $1.2 million (when compared to 1997), which precluded additional gross profit to absorb selling, general and administrative expenses. The second and third events were non-operational in nature. These included the write-down of approximately $202,000 to the carrying value of a note receivable and a loss of $609,000 as a result of damages caused by Hurricane Georges on September 21, 1998. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. However, as of March 15, 2000, the Company had been unable to obtain adequate crop insurance coverage at a reasonable cost for its inventories nor business interruption coverage for its operations. The Company intends to continue to seek to obtain crop insurance and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be successful in obtaining such coverages. During the year ended December 31, 1997, the Company closed its South Florida operation and sold the major assets related to this operation, represented by two parcels of land. Although the sale of these two properties resulted in a gain of $474,574 for 1997, this gain was more than offset by a loss from operations of approximately $1,239,000 of which $517,000 corresponded to the South Florida operation, arising from storage and maintenance costs as well as the write down associated with unsalable inventory and certain other administrative costs related to the closing of the operation. 14 RESULTS OF OPERATIONS Sales Consolidated net sales for the year ended December 31, 1999 were approximately $6,201,000, representing an increase of 16% over sales of $5,349,000 in 1998. The increase in sales for 1999 was principally due to the result of increased sales volume to chain stores such as The Home Depot and WalMart Stores, as well as a sales contract of mature trees with the Municipality of San Juan. Increases included sales of both plant material ($762,000) and lawn and garden products ($258,000), with Rain Forest products representing the major increase. Sales of landscaping services decreased by $168,000 due to higher volume of post-Hurricane Georges services performed during the fourth quarter of 1998. Consolidated net sales for the year ended December 31, 1998 were approximately $5,349,000, representing a decrease of 18% from sales of $6,549,000 in 1997. This decrease in sales for 1998 was principally due to a reduction in sales of approximately $857,000 to one of the Company's major customers (principally in sales of lawn and garden products), a decrease in the volume of landscaping services of approximately $256,000 and the absence of sales of the discontinued South Florida operation which had sales of approximately $478,000 in 1997. These decreases were offset by increases from new customer base as well as a sales contract with the Puerto Rico Department of Transportation and Public Works of approximately $221,000. 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, ----------------------------- 1999 1998 1997 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 64.0 67.8 79.2 ------ ------ ------ Gross profit 36.0 32.2 20.8 Selling, general and administrative expenses 38.6 39.7 39.8 ------ ------ ------ Loss from operations (2.6) (7.5) (19.0) Interest income (expense), net .9 1.2 -- Other income (expenses), net (.4) (14.5) 7.5 Loss before income tax provision (2.1) (20.8) (11.5) Income tax provision -- -- -- ------ ------ ------ Net loss (2.1) (20.8) (11.5) ====== ====== ====== The table above reflects that consolidated gross profits as a percentage of net sales were approximately 36%, 32%, and 21%, for the years ended December 31, 1999, 1998 and 1997, respectively. 15 The Company's consolidated gross profit for the year ended December 31, 1999 was 36% compared to 32% for 1998, representing an increase of 4%. This increase in gross profit was spread among all business segments. Gross profit from sales of plant material for 1999 was approximately 37% compared to 32% in 1998. This increase of 5% was due to higher margins under various sales contracts during 1999, as well as sales of plant material during the Christmas season. Gross profit from sales of lawn and garden products was approximately 38% for 1999, compared to 36% in 1998. This increase of 2% was due to higher sales volume of Rain Forest products during 1999. Gross profit from sales of landscaping services was approximately 25% for 1999 compared to 30% in 1998. This decrease of 5% experienced during 1999 was directly related to an unfavorable performance on a specific project during 1999. The Company's consolidated gross profit for the year ended December 31, 1998 was 32% compared to 21% in 1997, representing an increase of 11%. This increase in gross profit was directly related to the closing of the Company's unprofitable South Florida operation during September 1997. To a lesser extent, the Puerto Rico operation also had gross profit problems during 1997, arising from excessive storage and maintenance costs of slow moving inventory. Selling, General and Administrative Expenses The Company's selling, general and administrative expenses ("SG&A") for 1999 were approximately $2,395,000 compared to $2,123,000 in 1998, representing an increase of 13% in dollar terms and a decrease of 1% as a percentage of sales (due to increased sales in 1999). The increase in SG&A (in dollar terms) for 1999 was due to increases in shipping and selling costs (principally salaries) as well as administrative salaries, a portion of which were classified as clean up and debris removal in 1998, as a result of the damages caused by Hurricane Georges. The Company's SG&A for 1998 were approximately $2,123,000 compared to $2,604,000 in 1997, representing a decrease of 18% in dollar terms. SG&A as a percentage of sales remained at 40% in both 1998 and 1997. The decrease in dollar terms was due to the non-recurrence of approximately $220,000 incurred at the discontinued South Florida operation during 1997, as well as decreases in shipping, travel and legal services during 1998. Other Income and Expense The decrease in interest income for the year ended December 31, 1999, when compared to 1998, is due to lower yields obtained during 1999 on similar investments. The decrease in interest expense for the year ended December 31, 1999 when compared to 1998, is due to reductions in the outstanding principal balances of long-term debt, despite an increase in notes payable and long-term debt for in the latter part of 1999. 16 Hurricane Georges As previously mentioned, Hurricane Georges struck Puerto Rico on September 21, 1998. As with other hurricanes, the agricultural industry was the hardest hit. At its Vega Alta facilities, the Company suffered moderate damage to all of its fabricated steel structures (shadehouses) and near total destruction of all its wooden shadehouses and its irrigation systems. Total property written down as a result of the damages had a book value of approximately $171,000 at December 31, 1998. At its Barranquitas facilities, moderate damage was also sustained to a portion of its pull and cable shadehouses and its irrigation system, however, all of the shadecloth covers were blown away. As of December 31, 1998 the Company had incurred expenses of approximately $696,000 in connection with clean-up, restoration and debris removal at both locations. The Company's inventory of lawn and garden products did not suffer any damages. However, inventory of plant material sustained significant damages as a result of damage and destruction to shadehouses at both Company locations. Inventory destroyed at both of the Company's locations as of December 31, 1998 had a net realizable value of approximately $362,000. As of December 31, 1998, the Company had received approximately $620,000 from its insurers for property damages, for a loss of $609,000 from the damages caused by the hurricane. During 1999, the Company received an assistance payment of $12,880 from the Farm Service Agency of the United States Department of Agriculture for debris removal from damages caused by the hurricane. The Puerto Rico Department of Agriculture has committed to provide assistance to bona-fide agricultural enterprises for damages caused by the hurricane. At December 31, 1999, the Puerto Rico Department of Agriculture had approved $111,885 in assistance, subject to the formalization of an agreement, which among other things requires the facility to be operated as a nursery farm for a minimum period of ten years from the date of the signing. Accordingly, the Company recorded a receivable and a deferred revenue to account for the assistance at December 31, 1999. Write Down of Note Receivable The Company owns a note receivable (refer to Note 5 to the accompanying consolidated financial statements) from the sale of a former subsidiary to a Dominican Republic company, which had a carrying value of approximately $302,000 at December 31, 1997. On February 12, 1997, the Company obtained a junior lien on the borrower's property and equipment and modified the terms of the note by waiving interest and principal payments until January 2000. On September 23, 1998, Hurricane Georges struck the Dominican Republic. The hurricane severely damaged the former subsidiary's facilities. As a result of the damages caused by the hurricane, the Company determined to write down the carrying value of the note to $100,000 as of September 30, 1998. The write down, amounting to $201,621 was included as an other expense in the accompanying consolidated statement of operations for the year ended December 31, 1998. 17 The borrower is now in default with certain modified repayment terms. As a result, during the fourth quarter of 1999, the Company wrote down the carrying value of the note to $20,000, and has included the $80,000 charge as an other expense in the accompanying consolidated statement of operations for the year ended December 31, 1999. Sale of Land in South Florida During 1997, the Company sold two parcels of land in South Florida at an aggregate gain of $474,574, arising from the Company's decision to close its South Florida operation. 18 FINANCIAL CONDITION At December 31, 1999, the Company had cash of approximately $1,083,000 and short term investments of $500,000, compared to cash of $747,000 and short term investments of $500,000 at December 31, 1998. The increase in cash at December 31, 1999 was principally due to cash flows from financing activities (with a net increase of $824,000 in notes payable and long-term debt), offset by cash outflows from operating activities ($151,000), and additions to property and equipment ($395,000). At December 31, 1999, the Company's current ratio was 2.9 to 1 as compared to 3.2 to 1 at December 31, 1998. The overall increase in total liabilities at December 31, 1999 (principally notes payable and long-term debt) was due to increased production of plant material inventory during 1999 as a result of inventory losses in 1998 from damages caused by Hurricane Georges. As a result, the Company's debt to equity ratio at December 31, 1999 was 43%, compared to 25% at December 31, 1998. Stockholders' equity at December 31, 1999 decreased due to results of operations for the year. There were no dividends declared nor issuance of capital stock during the year ended December 31, 1999. Significant Fourth Quarter Adjustments During the third quarter of 1999, the Company recorded $150,000 in revenues based on estimates of amounts to be received in hurricane assistance payments from the Puerto Rico Department of Agriculture. During the fourth quarter, the Company was informed by the Puerto Rico Department of Agriuclture that the actual amount to be received in assistance payments was approximately $112,000. Moreover, the Department of Agriculture informed the Company that the receipt of the payments would be subject to an agreement that its nursery farm subsidiary would remain operating as an agricultural business for ten years. Failure to meet this requirement, could result in all or a portion of the amount received as assistance payments being required to be repaid to the Department of Agriculture. On the basis of this new information, during the fourth quarter of 1999, the Company took a charge against earnings of $150,000 to reverse the revenue previously recognized during the third quarter of 1999 and recorded a receivable and a deferred revenue of approximately $112,000 as of December 31, 1999. Also, during the fourth quarter of 1999, the Company recorded a charge of to earnings of $80,000 to write down the carrying value of a note receivable from $100,000 to $20,000, see "Write Down of Note Receivable". Inflation The primary inflationary factors which may affect the Company's results of operations and financial condition are the costs of labor and production materials such as soil, pots, chemicals, fertilizer and plant cuttings. During the last three years, the impact of inflation on the results of operations and financial condition of the Company has been minimal due to the stability of wage rates (except for the increase in minimum wage experienced during 1997) and the availability of production materials from a wide variety of sources. 19 The Company does not anticipate that inflation will have a significant effect on its future earnings or financial condition because increases caused by inflation are ordinarily recovered through increases in prices. Year 2000 Issue The inability of computer hardware and software to recognize and properly process data fields using a four-digit year to define the applicable year is commonly referred to as the "Year 2000 Problem". During 1999, the Company completed a review and evaluation of its hardware and software programs and applications and modified and tested its software and operating systems for Year 2000 compliance. As of the date of this report, the Company's hardware and software systems were fully operational and the Company had not experienced any material adverse effect on its operations as a result of Year 2000 Problems, nor had the Company been aware of problems by either its major suppliers or customers. Future Developments On February 9, 2000, the Company signed a letter of intent to merge with iTract, LLC, a developmental stage internet company. To the extent the transactions contemplated in the letter of intent are consumated, the Company will cease being engaged in the current nursery and related businesses and would be engaged in providing internet based marketing services (See Part 1, Item 1. Business - "Proposed Merger with iTract, LLC"). Reclassifications Certain reclassifications were made to the 1998 and 1997 consolidated financial statements in order for them to be in conformity with the 1999 presentation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference to the Company's Consolidated Financial Statements and Schedules and the Independent Auditors' Report beginning on page F-1 of this Form 10-K. Supplementary data is not required. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the directors and executive officers of the Company as of March 15, 2000. The background and experience of these persons are summarized in the paragraphs following the table.
NAME (AGE AT MARCH 15, 2000) POSITIONS WITH THE COMPANY - ---------------------------- -------------------------- Michael J. Spector (53) Chairman, President, Chief Executive Officer and Director Margaret D. Spector (48) Secretary and Director Blas R. Ferraiuoli (55) Director Frederick D. Moss (71) Director Michael A. Rubin (57) Director Alfonso A. Ortega (46) Vice President, Treasurer and Chief Financial Officer Rene Llerandi (40) Vice President - Marketing
Each director of the Company holds office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. Officers serve at the discretion of the Board of Directors. All of the executive officers of the Company except Margaret D. Spector devote their full time to the operations of the Company. Background of Officers and Directors Set forth below is a summary of the background of each person who was an officer or director of the Company as of March 15, 2000. MR. SPECTOR currently serves as the Chairman of the Board, Chief Executive Officer and President of the Company. He has held these positions since the organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary and a director of the Company. MRS. SPECTOR currently serves as the Secretary and as a director of the Company. She has held these positions since the organization of the Company in 1981. Since July 1993, Mrs. Spector supervises the Company's lawn and garden distribution business. MR. FERRAIUOLI was elected a director of the Company in 1988 and continues to hold that position. Since June 1994, he manages his own law firm in San Juan, Puerto Rico. He was a partner in the law firm of Axtmayer, Adsuar, Muniz & Goyco, San Juan, Puerto Rico from March 1994 to June 1994. Prior to March 1994, he was a partner in the firm of Goldman, Antonetti, Cordova and Axtmayer. Mr. Ferraiuoli practices civil, corporate and administrative law and has provided services to the Company since 1987. 21 MR. MOSS was elected a director of the Company in 1988 and continues to hold that position. Since 1986, he has been an independent financial consultant in New York City. He has also served as the Chairman of the Board of Trustees of the Cincinnati Stock Exchange since 1989. MR. RUBIN was elected a director of the Company in 1995 and continues to hold that position. Mr. Rubin is an attorney engaged in private practice. He has been a partner in the law firm of Michael A. Rubin, P.A., Coral Gables, Florida, for more than the past five years. MR. ORTEGA currently serves as the Vice President, Treasurer and Chief Financial Officer of the Company. He has held this position since he joined the Company in January 1993. MR. LLERANDI currently serves as Vice President of Marketing. He has held this position since April 1993. He joined the Company in 1988 as Sales Manager for Puerto Rico. Section 16(a) Beneficial Ownership Reporting Compliance Section 16 of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers to report their ownership of and transactions in the Company's Common Stock to the Securities and Exchange Commission (the "SEC") and the National Association of Securities Dealers. Copies of these reports are also required to be supplied to the Company. Specific dates for filing these reports have been established by the SEC, and the Company is required to report in the annual report any failure of its directors and executive officers to file by the relevant due date any of these reports during the fiscal year ended December 31, 1999. Based solely on its review of the copies of the report received by it, the Company believes that all such filing requirements were satisfied, except that each of Blas R. Ferraiuoli, Frederick D. Moss, Michael Rubin and Margaret D. Spector failed to timely file one report each, related to receipt of stock options; Frederick D. Moss failed to timely file two reports related to three purchases of common stock and Rene Llerandi failed to timely file one report related to the purchase of common stock. 22 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information regarding compensation of the Company's chief executive officer during each of the three years ended December 31, 1999, 1998 and 1997. No other executive officer of the Company earned more than $100,000 during 1999.
ANNUAL COMPENSATION --------------------------------------- NUMBER OF NAME OF INDIVIDUAL AND STOCK OPTIONS OTHER ANNUAL POSITION WITH THE COMPANY SALARY BONUS GRANTED(2) COMPENSATION ------------------------- ------ ----- ------------- ------------ Michael J. Spector 1999 $104,000 $ - 2,500 $8,000(1) Chairman, President, Chief 1998 104,000 - 2,500 8,000 Executive Officer and Director 1997 160,000 - - -
(1) Represents matching contribution under the Company's Salary Deferral Retirement Plan. (2) Includes 2,500 options granted to Mrs. Spector for each of 1998 and 1999. Compensation of Directors The directors of the Company who are not employees of the Company are paid a quarterly retainer fee of $1,000 and an additional $1,000 for each meeting of the board (or committee thereof) attended, plus any travel and out-of-pocket expenses incurred in connection with the performance of their duties. No separate fees are paid for committee meetings attended on the same day as a regular Board meeting. The directors of the Company who are employed by the Company do not receive additional compensation for serving as directors. The Company also provides directors liability insurance for its directors. As provided under the Company's 1998 Stock Option Plan ("the 1998 Plan") adopted on April 23, 1998, any nonemployee director of the Company who is in office on the first business day following any annual meeting of shareholders shall automatically receive on such date an option to acquire 2,500 shares of Common Stock at the market price on such date. During 1999, Messrs. Ferraiuoli, Moss, Rubin and Mrs. Spector each received options to acquire 2,500 shares of Common Stock at an exercise price of $2 1/2($23/4 for Mrs. Spector), expiring on May 17, 2009, in accordance with the 1998 Plan. 23 Grant of Stock Options No stock options were granted to Mr. Michael J. Spector during the year ended December 31, 1999. However, the table below provides certain information regarding stock options granted to Mrs. Margaret D. Spector as discussed above, which for SEC reporting purposes, Mr. Spector is deemed to beneficially own.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM # OF SHARES ---------------------- UNDERLYING % OF TOTAL OPTIONS OPTIONS GRANTED EXERCISE PRICE EXPIRATION NAME GRANTED(2) IN FISCALYEAR ($/SHARE)(3) DATE 5% 10% - -------------------------- ---------- --------------- ------------ ------------ ------ ---- Michael J. Spector(1) 2,500 12.5% $2.75 05-17-09 $1,075 $3,200
(1) Represents options to acquire 2,500 shares granted to Margaret D. Spector. (2) Options become exercisable at the rate of 20% on the first, second, third, fourth and fifth anniversary of the grant date. (3) The exercise price is based on the last sales price (at 110%) for the Company's common stock on May 17, 1999, the date of grant. Options Exercised During 1999 and Option Values at December 31, 1999 The following table sets information on outstanding options held by the Company's chief executive officer and their value at December 31, 1999. There were no exercises of options during 1999. Value is calculated as the difference between the last sales price of the Common Stock and the exercise price at December 31, 1999, the last day the common stock traded during 1999. See Part 1, Item 1. Business - "Proposed Merger with iTract, LLC" for a description of a transaction that could cause all outstanding options to vest and become immediately exercisable. The information in the table is based on the original vesting schedule of the options without taking into account that such options may become automatically exercisable as part of the iTract Merger. 24
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT AT 12/31/99 AT 12/31/99 (1)(2) SHARES ------------------- -------------------- ACQUIRED VALUE NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Michael J. Spector(1) - - 31,000 11,500 $331 $1,325
- --------------- (1) Includes 12,500 options held by Margaret D. Spector, the wife of Michael J. Spector. (2) Based on the last sales price of $25/16 per share on December 31, 1999 and an exercise price of $3.16, $3.44 and $1.65 for 20,000, 10,500 and 500 exercisable options, respectively, and an exercise price of $3.44 , $1.65 and $2.75 for 7,000, 2,000 and 2,500 of unexercisable options, respectively. Employment Contracts The Company does not have an employment contract with Michael J. Spector. 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 have completed one year of service. Under the terms of the retirement plan, the Company matches up to 100% of the pre-tax contributions made by employees in an amount equal to 10% of their basic salary subject to a maximum of $8,000. For the year ended December 31, 1999, the Company paid approximately $38,000 representing the matching contributions under the retirement plan for all participants. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth, as of March 15, 2000, the number of shares of common stock of the Company owned beneficially by the following persons: (a) each director of the Company; (b) all executive officers and directors of the Company as a group; and (c) each person known to the Company who owns more than 5% of the outstanding common stock of the Company. Unless otherwise stated, all shares are held with sole investment and voting power. 25 SECURITY OWNERSHIP AS OF MARCH 15, 2000
NAME (POSITION WITH THE COMPANY) AMOUNT BENEFICIALY OWNED(1) PERCENT OF CLASS(1) -------------------------- --------------------------- ------------------ Michael J. Spector 1,279,182(2) 66.5% (Executive Officer and Director) Margaret D. Spector 1,279,182(2) 66.5% Carr. 690, Km. 5.8 Vega Alta, Puerto Rico 00646 (Executive Officer and Director) J. Morton Davis 185,249(3) 9.8% D.H. Blair Holdings, Inc. D.H. Blair Investment Banking Corp. 44 Wall Street New York, New York 1005 (Five Percent Shareholder) Frederick D. Moss (Director) 20,500 1.1% Blas R. Ferraiuoli (Director) 11,000(4) (7) Michael A. Rubin (Director) 11,000(5) (7) All Executive Officers and 1,343,782(6) 68.9% Directors as a Group (7 persons)
- -------------------- (1) The percent of class held by each person includes the number of shares of Common Stock the named person(s) has the right to acquire upon exercise of stock options that are exercisable within 60 days of March 15, 2000 (except in the case of Mr. and Mrs. Spector in which case all shares issuable upon exercise of stock options are included whether or not exercisable within 60 days of March 15, 2000), but does not include shares of Common Stock issuable upon exercise of stock options held by other persons. (2) Includes 939,394 shares held directly by Mr. Spector and 297,288 shares held by Mrs. Spector. Also includes stock options to acquire 30,000 and 12,500 shares held by Mr. Spector and Mrs. Spector, respectively. The Spectors share voting and investment power over the shares owned by each other. (3) This amount consists of 184,149 shares held in the name of D.H. Blair Investment Banking Corp., a registered broker-dealer which is wholly-owned by D.H. Blair Holdings, Inc., which in turn is wholly-owned by J. Morton Davis and of 1,100 shares owned by Rosalind Davidowitz, the spouse of Mr. Davis. This amount is based upon a Schedule 13G dated February 9, 1995, as amended, filed with the Securities and Exchange Commission. (4) Includes 7,000 shares issuable upon stock options exercisable on or within 60 days of March 15, 2000. (5) Includes 3,500 shares issuable upon stock options exercisable on or within 60 days of March 15, 2000. (6) Includes 42,500 shares issuable upon exercise of stock options granted to Mr. and Mrs. Spector as described in footnote (1) above and 26,800 shares issuable upon exercise of stock options granted to other officers and directors that are exercisable on or within 60 days of March 15, 2000. (7) Less than one percent. 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Amount due from/to Principal Shareholder In connection with the settlement of litigation with the Company's former principal lender ("the Bank"), on May 29, 1996 the Company advanced $340,158 on behalf of Michael J. Spector, which was the portion of the settlement that corresponded to claims made by the Bank against Mr. Spector in his individual capacity. This amount was reduced by $66,506 that was due to Mr. Spector in connection with the purchase in 1996 of a residence from a partnership controlled by Mr. Spector. During 1997, the Company charged Mr. Spector for certain expenses paid on his behalf. During March 1998, the amount owed by Mr. Spector was converted into a non-interest bearing note due on March 2001. At December 31, 1999 and 1998, Mr. Spector owed the Company $290,226. Lease and Option to Purchase Main Nursery Farm Effective January 1, 1993, the Company and the Spectors entered into a lease agreement with respect to the main Puerto Rico nursery farm. The lease had an initial term of five years renewable for one additional term of five years at the option of the Company. During the initial term of the lease, rent was set at $19,000 per month. During the renewal term, the rent increases to the greater of (x) $24,000 per month or (y) the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. Additionally, the Company must pay all taxes on the property, maintain certain insurance coverages and otherwise maintain and care for the property. The lease also contains an option which permits the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company must pay the Spectors $1,000 per month. On January 1, 1998, the Company exercised its renewal option at a monthly rental of $24,000. The Spectors have committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. Effective January 1, 1994, the lease agreement was amended to include an additional 27-acre tract of land adjacent to the existing nursery facility for $1,750 per month. The lease terms for this additional tract did not include renewal or purchase options. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001, the unamortized value (approximately $45,000 at February 1, 2000) of the leasehold improvements applicable to said parcel as of the date of termination. This agreement terminated effective February 1, 2000. See "Item 2 - Properties." 27 Certain Other Relationships During 1999, the Company engaged Blas Ferraiuoli and Michael A. Rubin, each a director of the Company, to render legal services on behalf of the Company. Investment by Michael J. Spector in International Commerce Exchange Systems, Inc. On February 24, 2000, Michael J. Spector together with another major shareholder of the Company, made a $2.0 million loan to International Commerce Exchange Systems, Inc. ("ICES"), the indirect parent company of iTract, LLC ("iTract"). The loan bears interest at 1% over Prime Rate and is payable in a single balloon payment on the closing date of the merger of the Company with iTract. If the merger with iTract is not consummated, said loan will be converted into common stock of ICES. For more information regarding the iTract transaction, see Part 1, Item 1. Business - "Proposed Merger with iTract, LLC". 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report. (1) Financial Statements. The information called for by this subsection of Item 14 is set forth in the Financial Statements and Independent Auditors' Report, beginning on page F-1 of this Form 10-K. The index to Financial Statements is set forth on page F-2 of this Form 10-K. (2) Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts is included on page F-31 of this Form 10-K. All other financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------ ----------- (a)(1) and Financial Statements and Financial Statement Schedules. (a)(2) The information called for by this section of Item 14 is set forth in the Financial Statements and Auditor's Report beginning on page F-1 of this Form 10-K. The index to Financial Statements and Schedules is set forth on page F-2 of this Form 10-K. (a)(3) Exhibits. The Exhibits set forth in the following Index of the Exhibits are filed as a part of this report: (2)(a) Agreement and Plan of Merger dated November 17, 1997 between Margo Nursery Farms, Inc. and Margo Transition Corp., (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated December 31, 1997). (2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(a) to the Company's Form 8-K dated December 31, 1997). (2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(b) to the Company's Form 8-K dated December 31, 1997). (3)(a) Certificate of Incorporation as currently in effect, filed herewith. (3)(b) Certificate of Amendment to Certificate of Incorporation is incorporated by reference to the Company's Form 8-K dated June 1, 1998. 29 (3)(c) By-Laws as of January 1, 1998 are incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (4)(a) Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 of Form S-8 Registration Statement (No. 333-59619). (4)(b) 1998 Stock Option Agreement (Incorporated by reference to Exhibit No. 4.2 of Form S-8 Registration Statement (No. 333-59619). (4)(c) Form of Stock Option Agreement (Incorporated by reference to Exhibit No. 4.3 of Form S-8 Registration Statement (No. 333-59619). (10) (a) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 filed April 15,1993: (i) Lease Agreement dated January 1, 1993 between the Company and the Spectors. (b) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993 filed April 15, 1994: (i) First Amendment to Lease Agreement dated January 1, 1994 between the Company and the Spectors. (c) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994: (i) Loan Commitment Agreement, dated December 15, 1994 between Puerto Rico Farm Credit ACA and the Company. (d) Material contract incorporated by reference from Form 8-K dated November 28, 1997 (i) Mortgage Note, dated November 28, 1997, in the amount of $475,000 (e) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997: (i) Lease and Purchase Agreement, dated October 31, 1996 among Cali Orchids, Inc. and the Company. (ii) Stock Option Agreement, dated August 9, 1996, with Frederick D. Moss. (iii) Stock Option Agreement, dated August 9, 1996, with Blas R. Ferraiuoli. (iv) Stock Option Agreement, dated August 9, 1996, with Michael A. Rubin. (v) Stock Option Agreement, dated July 9, 1993, with Frederick D. Moss. (vi) Stock Option Agreement, dated July 9, 1993, with Margaret D. Spector. (vii) Stock Option Agreement, dated July 9, 1993, with Blas R. Ferraiuoli. (viii) Stock Option Agreement, dated August 9, 1996, with Margaret D. Spector. 30 (f) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. (i) Promissory note of the Spectors dated as of March 1, 1998. (ii) Second Amendment to lease Agreement dated as of January 1, 1998, between the Company and the Spectors. (g) Material Contracts filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, filed March 31, 1999: (i) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority. (ii) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority. (21) List of Registrant's Subsidiaries (incorporated by reference to Exhibit 21 in the Company's Annual Report on Form 10-K for the year ended December 31, 1998). (23) Consent of Deloitte & Touche (27) Financial Data Schedule (filed herewith). (b) Reports on Form 8-K. (i) Current Report on Form 8-K ("Form 8-K") dated February 8, 2000, reporting on Item 5 - "Other Items" the execution of a letter of intent to merge with iTract, LLC. (ii) Form 8-K dated March 14, 2000, reporting under Item 5 - "Other Items" the extension of the letter of intent with iTract, LLC, until April 14, 2000.
31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 27, 2000 By: /s/ Michael J. Spector, President ---------------------------------- Michael J. Spector, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated. Dated: March 27, 2000 By: /s/ Michael J. Spector ------------------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer Dated: March 27, 2000 By: /s/ Margaret D. Spector ------------------------------------- Margaret D. Spector, Director Dated: March 27, 2000 By: /s/ Blas R. Ferraiuoli ------------------------------------- Blas R. Ferraiuoli, Director Dated: March 27, 2000 By: /s/ Michael A. Rubin ------------------------------------- Michael A. Rubin, Director Dated: March 27, 2000 By: /s/ Frederick D. Moss ------------------------------------- Frederick D. Moss, Director Dated: March 27, 2000 By: /s/ Alfonso A. Ortega ------------------------------------- Alfonso A. Ortega Perez, Vice President, Treasurer, Chief Financial and Accounting Officer 32 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, 1999 MARGO CARIBE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE --------------- Independent Auditors' Report F-2 Financial Statements: Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 SCHEDULES Schedule II - Valuation and Qualifying Accounts F-31
All other schedules have been omitted since the required information is not presented or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Margo Caribe, Inc. Vega Alta, Puerto Rico We have audited the accompanying consolidated balance sheets of Margo Caribe, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Margo Caribe, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. 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. As discussed in Note 22, on February 9, 2000, the Company entered into a letter of intent concerning a proposed merger after divesting its current core business. DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 3, 2000 Stamp No. 1634930 affixed to original. F-2 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 ASSETS
1999 1998 ---------- ---------- Current Assets: Cash and equivalents $1,082,592 $ 747,390 Short term investments 500,000 500,000 Accounts receivable, net 1,101,722 1,228,572 Inventories 3,108,408 2,264,372 Current portion of notes receivable 475,000 - Prepaid expenses 263,447 190,804 ---------- ---------- Total current assets 6,531,169 4,931,138 Property and equipment, net 1,902,863 2,094,799 Due from shareholder 290,226 290,226 Notes receivable, net of current portion 67,915 620,413 Other assets 124,808 53,632 ---------- ---------- Total assets $8,916,981 $7,990,208 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 129,656 $ 158,468 Notes payable 1,100,000 500,000 Accounts payable 812,672 665,140 Accrued expenses 182,395 211,077 ---------- ---------- Total current liabilities 2,224,723 1,534,685 Deferred revenue 111,885 - Long-term debt, net of current portion 338,597 85,880 ---------- ---------- Total liabilities 2,675,205 1,620,565 ---------- ---------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; 250,000 shares authorized, no shares issued - - Common stock, $.001 par value; 10,000,000 shares authorized, 1,915,122 shares issued, 1,875,322 shares outstanding 1,915 1,915 Additional paid-in capital 4,637,706 4,637,706 Retained earnings 1,698,443 1,826,310 Treasury stock, 39,800 common shares, at cost (96,288) (96,288) ---------- ---------- Total shareholders' equity 6,241,776 6,369,643 ---------- ---------- Total liabilities and shareholders' equity $8,916,981 $7,990,208 ========== ==========
See accompanying notes to consolidated financial statements. F-3 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998, 1997
1999 1998 1997 ----------- ----------- ---------- Net Sales $6,201,233 $ 5,349,244 $6,548,912 Cost of Sales 3,971,122 3,623,071 5,183,577 ---------- ----------- ---------- Gross profit 2,230,111 1,726,173 1,365,335 Selling, general and administrative expenses 2,395,350 2,122,976 2,604,106 ---------- ----------- ---------- Loss from operations (165,239) (396,803) (1,238,771) ---------- ---------- ---------- Other income (expense): Interest income 105,914 122,683 73,060 Interest expense (46,876) (62,020) (73,274) Write-down of note receivable (80,000) (201,621) - Recovery of loss (loss) from damages caused by Hurricane Georges, net of insurance proceeds 12,880 (609,009) - Gain on sale of land in South Florida - - 474,574 Other income 45,454 33,933 13,877 ---------- ---------- ---------- 37,372 (716,034) 488,237 ---------- ---------- ---------- Net loss $ (127,867) $(1,112,837) $ (750,534) ========== =========== ========== Basic and diluted loss per common share $ (.07) $ (.59) $ (.40) ========== =========== ==========
See accompanying notes to consolidated financial statements. F-4 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
OUTSTANDING COMMON COMMON ADDITIONAL CUMULATIVE STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL ------------ ------ --------- -------- -------- ----------- ------ Balance at December 31, 1996 1,895,322 $1,915 $4,637,706 $3,689,681 $(48,788) $(9,164) $8,271,350 Realized loss on translation adjustment - - - - - 9,164 9,164 Net loss - - - (750,534) - - (750,534) --------- ------ ---------- ---------- -------- -------- ---------- Balance at December 31, 1997 1,895,322 1,915 4,637,706 2,939,147 (48,788) - 7,529,980 Net loss - - - (1,112,837) - - (1,112,837) Acquisition of treasury stock, at cost (20,000) - - - (47,500) - (47,500) --------- ------ ---------- ---------- -------- -------- ---------- Balance at December 31, 1998 1,875,322 1,915 4,637,706 1,826,310 (96,288) - 6,369,643 Net loss - - - (127,867) - - (127,867) --------- ------ ---------- ---------- -------- -------- ---------- Balance at December 31, 1999 1,875,322 $1,915 $4,637,706 $ 1,698,443 $(96,288) $ - $ 6,241,776 ========= ====== ========== ========== ======== ======== ==========
See accompanying notes to consolidated financial statements. F-5 MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Cash flows operating activities: Net loss $ (127,867) $(1,112,837) $ (750,534) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 543,165 527,791 491,634 Write-down of note receivable 80,000 201,621 - Loss on disposal of property and equipment related to Hurricane Georges - 171,039 - Realized loss on translation adjustment - - 9,164 Gain on sale of land in South Florida - - (474,574) Provision for bad debts 86,000 35,900 37,515 Gain on sale of equipment (16,451) - - Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable 152,735 (213,523) (80,517) Inventories (844,036) 173,756 298,981 Prepaid expenses (72,643) (89,012) 14,244 Advances from (to) shareholder - 1,255 (17,829) Other assets (71,176) 5,279 8,238 Accounts payable 147,532 276,822 (242,254) Accrued expenses (28,682) 46,812 (12,421) Income taxes payable - - (23,492) ---------- ---------- ----------- Net cash provided by (used in) operating activities (151,423) 24,903 (741,845) ---------- ---------- ----------- Cash flows from investing activities: Decrease in short term investments - - 504,000 Purchases of property and equipment (394,688) (374,034) (109,639) Proceeds from sale of equipment 59,910 - - Proceeds from sale of land in South Florida - - 812,630 Increase in notes receivable (5,611) - (6,800) Collection on notes receivable 3,109 40,000 - ---------- ---------- ----------- Net cash provided by (used in) investing activities (337,280) (334,034) 1,200,191 ---------- ---------- ----------- Cash flows from financing activities: Increase in notes payable 600,000 - - Acquisition of treasury stock - (47,500) - Proceeds from long-term debt 395,418 - - Repayments of long-term debt (171,513) (126,229) (174,586) ---------- ---------- ----------- Net cash provided by (used in) financing activities 823,905 (173,729) (174,586) ---------- ---------- ----------- Net increase (decrease) in cash and equivalents 335,202 (482,860) 283,760 Cash and equivalents at beginning of year 747,390 1,230,250 946,490 ---------- ---------- ----------- Cash and equivalents at end of year $1,082,592 $ 747,390 $ 1,230,250 ========== ========== ===========
See accompanying notes to consolidated financial statements. F-6 MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Note 1 - Business and Summary of Significant Accounting Policies Margo Caribe, Inc. and subsidiaries (all Commonwealth of Puerto Rico corporations and collectively, the "Company") are primarily engaged in the production and distribution of a wide range of tropical plants for sale to interior and exterior landscapers, wholesalers and retailers. The Company is also engaged in the manufacturing and distribution of its own line ("Rain Forest") of planting media, sales and distribution of lawn and garden products, and provides landscaping design installation and maintenance services. The Company is also engaged in seeking real estate sites for the development of residential housing projects. The Company's primary facility is located in Vega Alta, Puerto Rico. From this facility, the Company sells principally to customers in Puerto Rico and the Caribbean. Effective June 1, 1998, the Company adopted a holding company structure. The restructuring was accomplished by means of Margo Nursery Farms, Inc. ("Margo") transferring substantially all of its assets and liabilities to a newly formed Puerto Rico subsidiary ("Newco") in return for all the outstanding stock of Newco. Newco continued to conduct the business previously operated by Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as the other existing subsidiaries of Margo. In connection with the holding company restructuring, Margo changed its corporate name to Margo Caribe, Inc. As further described in Note 22, during 2000 the Company may dispose of all of its operating businesses as part of a proposed merger. (a) Principles of Consolidation For the years ended December 31, 1999 and 1998, the accompanying consolidated financial statements include the financial statements of Margo Caribe, Inc. and its wholly-owned subsidiaries, Margo Nursery Farms, Inc., Margo Landscaping and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc. and Margo Development Corporation. For the year ended December 31, 1997, the consolidated financial statements F-7 also include the financial statements of Margo Bay Farms, Inc. and its wholly owned subsidiaries, Tropiflower, Inc. and Margo Imports, B.V. (a Netherlands company). These entities were merged with and into Margo Bay Farms, Inc. in 1997, in connection with the Company's decision to close operations in South Florida. 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, 1999 and 1998, cash and equivalents include $500,000 invested in a certificate of deposit bearing interest at 5.3% and 4.6%, respectively, which has been pledged as collateral for notes payable (refer to Note 8). (c) Inventories Inventory of plant material includes the cost of seeds, cuttings, pots, soil, chemicals, fertilizers, direct labor and an allocation of overhead costs such as depreciation and rent, among others. Inventories of plant material are stated at the lower of cost (first-in, first-out) or market. Inventories of lawn and garden products are stated at the lower of average cost of market. (d) Property and Equipment and Related Depreciation and Amortization Property and equipment are carried at acquisition cost. Depreciation and amortization are provided over the estimated useful lives of the respective assets on a straight-line basis. Such useful lives range from four to twenty years. 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. F-8 (e) Foreign Currency Translation Assets and liabilities outside the United States and Puerto Rico are translated to U.S. Dollars using exchange rates at the balance sheet date. Revenues and expenses are translated at the average rates of exchange during the applicable period. Effects of translation adjustments are deferred and included as a separate component of shareholders' equity. There were no balances or transactions involving foreign currency translation as of December 31, 1999 and 1998, or for the years then ended. (f) Revenue Recognition The Company recognizes sales of foliage and lawn and garden products upon shipment from its facilities to customers. Revenues from landscaping services are recognized as plants are installed at the customers' facilities. Certain hurricane-related government assistance has been deferred and will be recognized into income on a straight-line basis over a ten-year period during which certain conditions must be complied with. (g) Income Tax The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the use of the asset and liability method in accounting for income taxes. Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Through December 31, 1997, the Company was a Florida corporation and filed a final federal corporate income tax return for the taxable year then ended. However, the Company elected to be treated as a possessions corporation under Section 936 of the Internal Revenue Code, and accordingly, received a credit of federal income tax payable for operations in Puerto Rico. Margo Bay Farms, Inc., a former wholly-owned Florida subsidiary, filed a final federal income tax return for the year ended December 31, 1997. F-9 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. (h) Loss per Common Share The Company reports its earnings per share ("EPS") using Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted EPS. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. (i) Fair Value of Financial Instruments The amounts included in the consolidated financial statements for cash and equivalents, short term investments, accounts receivable, notes payable, accounts payable and accrued expenses reflect their fair value due to the short-term maturity of these instruments. The fair values of the Company's other financial instruments are discussed in Notes 5 and 9. (j) Impairment of Long-Lived Assets The carrying value of property and equipment is evaluated periodically for recoverability when considered in relation to the expected future undiscounted cash flows of the underlying business over the estimated remaining useful life of the asset. (k) Accounting for Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans pursuant to the provisions of Accounting Principles Board Opinion 25 and related interpretations, which generally require that compensation cost be recognized to the extent the market price of the related stock exceeds the exercise price at the F-10 measurement date. However, Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", provides an alternative method for measuring compensation cost by measuring the fair value of the option at the award date. Although the compensation cost measurement criteria is not required to be adopted, SFAS 123 requires disclosure of pro forma information regarding the effects of the application of its compensation cost measurement criteria and of other information. (l) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for doubtful accounts is an amount that management believes will be adequate to absorb estimated losses on existing accounts receivable that may become uncollectible based on evaluations of collectibility and prior credit experience. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the existing accounts receivable and related allowance may change in the near term. The Company has recorded a deferred tax asset of approximately $608,000 which is offset in full by a valuation allowance. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. The amount of the deferred tax asset considered realizable could change in the near term if estimates of future income are increased. F-11 Note 2 - Inventories At December 31, 1999 and 1998, inventories comprised the following: Description 1999 1998 - -------------------------------- ---------- ------- Plant material $2,417,102 $1,700,250 Lawn and garden products 485,017 347,637 Raw material and supplies 206,289 216,485 ---------- ---------- $3,108,408 $2,264,372 Note 3 - Accounts Receivable At December 31, 1999 and 1998, accounts receivable comprised the following: Description 1999 1998 - --------------------------- ---------- ------- Trade receivables $1,054,120 $1,260,629 Hurricane assistance(Note 10) 111,885 - Government reimbursement 50,000 57,887 Accrued interest 13,823 6,140 Employee advances 12,180 16,063 Other accounts receivable 17,714 11,553 ---------- ---------- 1,259,722 1,352,272 Less allowance for doubtful accounts (158,000) (123,700) ---------- ---------- $1,101,722 $1,228,572 ========== ========== Note 4 - Short Term Investments At December 31, 1999 and 1998, short term investments consisted of a $500,000 certificate of deposit bearing interest at 5.4% and 4.5%, respectively, which was pledged as collateral for notes payable (refer to Note 8). F-12 Note 5 - Notes Receivable The Company owns a note receivable with an outstanding principal balance of $996,962, from the sale of Cariplant S.A. ("Cariplant") a former Dominican Republic subsidiary, to Altec International C. por A. ("Altec"), another Dominican Republic company. The note is collateralized by the common stock and personal guarantee of the major shareholder of Cariplant. From the inception of the note in March 1993, the Company received several payments through December 1995. However, Altec has been unable to comply with the terms of the note. Due to the unfavorable collection experience as well as the difficulties of operating in the Dominican Republic, in 1994 Company management wrote down the carrying amount of the note to $316,000, representing the estimated value of Cariplant's land and related improvements, including buildings, shadehouses, and fixed and installed equipment. On February 12, 1997, the Company obtained a junior lien in Cariplant's property and equipment and entered into an agreement with Altec to modify the repayment terms of the unpaid principal balance of $996,962, with payments of principal and interest commencing in the year 2000. Payment of interest on the note was waived through January 1, 2000. On September 23, 1998, the Dominican Republic was struck by Hurricane Georges severely damaging Cariplant's facilities. As a result of the damages caused by the hurricane, the Company determined to write down the carrying value of the note to $100,000. The write down, amounting to $201,621 was included as an other expense in the accompanying consolidated statement of operations for the year ended December 31, 1998. Altec is now in default with the modified repayment terms. As a result, the Company wrote down the carrying value of the note to $20,000, and has included the $80,000 charge as other expense in the accompanying consolidated statement of operations for the year ended December 31, 1999. F-13 At December 31, 1999 and 1998, notes receivable comprised the following:
Description 1999 1998 - --------------------------------------------------------------------- -------------- ----------- Note receivable from Altec $ 20,000 $100,000 8% mortgage note, collateralized by land in South Florida with interest payments due monthly and principal due in a balloon payment on November 28, 2000 (refer to Note 17(a)) 475,000 475,000 10% note, collateralized by real property 26,331 26,331 Non-interest bearing notes, due on demand, Personally guaranteed by present Company personnel 21,584 19,082 -------- -------- 542,915 620,413 Less current portion (475,000) - -------- -------- $ 67,915 $620,413 ======== ========
Amounts reflected in the balance sheet for notes receivable approximate their current fair values based on market interest rates for comparable risks, maturities and collateral. With respect to the Altec note, management believes it is not practicable to estimate its fair value because of the difference between the face value of the note and its carrying amount, as well as other factors. Note 6 - Property and Equipment At December 31, 1999 and 1998, property and equipment comprised the following: 1999 1998 ---- ---- Leasehold improvements $1,609,137 $1,590,145 Equipment and fixtures 1,534,280 1,618,312 Transportation equipment 326,422 407,266 Real estate property 224,327 224,327 ---------- ---------- 3,694,166 3,840,050 Less accumulated depreciation and amortization (1,791,303) (1,745,251) ---------- ---------- $1,902,863 $2,094,799 ========== ========== F-14 During the years ended December 31, 1999, 1998 and 1997, depreciation expense charged to production was approximately $293,000, $276,000, and $258,000, respectively. Note 7 Due from Shareholder At December 31, 1999 and 1998, amounts due from shareholder principally arise from the settlement of litigation with the Company's former principal lender as well as other advances of $4,688 made by the Company on his behalf. In March 1998, the Company's major shareholder signed a non-interest bearing note due in March 2001 for $285,538 of the outstanding balance. Note 8 - Notes Payable At December 31, 1999 and 1998, the Company had short-term borrowings with a commercial bank in Puerto Rico, comprised of the following: Description 1999 1998 - ------------------------------------ ---- ---- Unsecured commercial line of credit of $1 million, bearing interest at 2% over Libor rate (8.15% at December 31,1999)due in February 2000 $ 100,000 $ - Note payable, collateralized by cash equivalent invested in a certifi- cate of deposit, bearing interest at 1% over interest earned by the certificate (6.3% at December 31, 1999)due on demand 500,000 - Note payable, collateralized by short term borrowings invested in a certificate of deposit, bearing interest at 1% over interest earned by the certificate (6.4% and 5.5% at December 31, 1999 and 1998, respectively)due on demand 500,000 500,000 ---------- -------- $1,100,000 $500,000 ========== ======== F-15 Note 9 - Long-Term Debt At December 31, 1999 and 1998, long-term debt comprised the following: Description 1999 1998 - ------------------------------------ ---- ---- Five-year term loans, bearing interest at 2% over Libor rate (8.15% at December 31, 1999), payable in quarterly installments of $19,781, through December 2004 $395,418 $ - Five-year term loans, variable interest rate, 8.25% and 8.0% at December 31, 1999 and 1998, respectively, payable in quarterly installments of approximately $31,000 through January 2000 and $8,000 through October 2001, including interest. The loans are collateralized by transportation and farm equipment 72,835 214,871 9.25% commercial loan, payable in monthly installments of $2,000, including interest, through April 2000, collateralized by real estate property (prepaid during 1999) - 29,477 -------- -------- 468,253 244,348 Less current portion (129,656) (158,468) -------- -------- Long-term debt $338,597 $ 85,880 ======== ======== Based on borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term debt approximates the recorded amounts. The annual aggregate maturities of long-term debt are as follows: Year Ending December 31, Amount ------------ ------ 2000 $129,656 2001 103,403 2002 79,128 2003 79,128 2004 76,938 ------- $468,253 ======== F-16 Note 10 - Hurricane Georges On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3 hurricane on the Saffir/Simpson scale. The hurricane severely damaged a portion of the Company's facilities (shadehouses) and inventory of plant material. For the year ended December 31, 1998, as a result of the damages caused by the hurricane, the Company recorded the following loss: Description Amount ----------- ------ Inventory damaged or destroyed $ 361,767 Restoration, clean-up and debris removal 696,373 Net carrying value of property destroyed 171,039 ---------- 1,229,179 Less: Proceeds from insurance claims (620,170) ---------- Loss from damages caused by the hurricane $ 609,009 ========== During 1999, the Company received an assistance payment of $12,880 from the Farm Service Agency of the United States Department of Agriculture for debris removal from damages caused by the hurricane. This assistance was recorded as other income in the accompanying consolidated statement of operations for the year ended December 31, 1999. The Puerto Rico Department of Agriculture has committed to provide assistance to bona-fide agricultural enterprises for damages caused by the hurricane. At December 31, 1999, the Puerto Rico Department of Agriculture had approved $111,885 in assistance, subject to the formalization of an agreement, which among other things requires the facility to be operated as a nursery farm for a minimum period of ten years from the date of signing. Accordingly, the Company recorded a receivable and a deferred revenue to account for the assistance at December 31, 1999. Note 11 - Income Taxes The Company provides for income taxes using the applicable statutory tax rates in the related jurisdiction where it operates. F-17 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% (for 1997, the federal statutory income tax rate of 34% was used) to loss before income tax provision:
1999 1998 1997 ----- ---- ---- Income tax benefit computed by applying tax rate $(49,870) $(434,005) $(255,181) (Increase) decrease in income tax benefit resulting from: Puerto Rico tax exemption (66,519) 334,951 141,706 Effect of Florida and Puerto Rico taxes (benefits) - - (11,807) Increase (decrease) in valuation allowances 116,389 99,054 (469,100) Federal tax attributes lost as result of reorganization, including net operating loss carryforwards - - 580,960 Other differences - - 13,422 ---------- ---------- ---------- $ - $ - $ - ========= ========== ==========
Deferred income taxes were recognized in the consolidated balance sheet at December 31, 1999 and 1998 due to the tax effect of temporary differences and loss carryforwards as follows: 1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards $603,048 $352,880 Valuation allowance for accounts receivable 5,371 5,029 -------- ------- 608,419 357,909 Less valuation allowance (608,419) (357,909) -------- ------- Net deferred tax asset $ - $ - ======== ======== F-18 Note 12 - Loss Per Common Share Basic and diluted loss per common share for the years ended December 31, 1999, 1998 and 1997 were determined as follows: Basic loss per common share: 1999 1998 1997 - --------------------------- --------- ----------- -------- Net loss available to common shareholders $(127,867) $(1,112,837) $(750,534) ========= =========== ========= Weighted average number of common shares outstanding 1,875,322 1,878,655 1,895,322 ========= =========== ========= Basic loss per common share $ (.07) $ .59) $ (.40) ========= =========== ========= Diluted loss per common share: - ----------------------------- Net loss available to common shareholders $(127,867) $(1,112,837) $(750,534) ========= =========== ========= Weighted average number of common shares outstanding 1,875,322 1,878,655 1,895,322 Plus incremental shares from assumed exercise of stock options - - - ---------- ----------- --------- Adjusted weighted average shares 1,875,322 1,878,655 1,895,322 ========== =========== ========= Diluted loss per common share $ (.07) $ (.59) $ (.40) ========== =========== ========= For the years ended December 31, 1999, 1998 and 1997, the effect of the assumed exercise of stock options determined by using the treasury stock method was antidilutive; thus no incremental shares were added to the weighted average number of common shares outstanding. Note 13 - Commitments and Contingencies The Company is a party to various legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. On August 31, 1999, the Company entered into an option agreement to purchase approximately 109 acres of land in the Municipality of Barceloneta, Puerto Rico. The Company paid $47,500 for the option agreement, which will be applied to the purchase price of the land of $950,000. The option expires on April 16, 2000. F-19 Note 14 - Shareholders' Equity (a) Preferred stock The certificate of incorporation of the Company authorizes the issuance of 250,000 shares of one cent ($0.01) par value serial preferred stock, and the Board of Directors is authorized from time to time to divide the preferred stock into series and to determine the number of shares of each series and the relative rights, preferences and limitations of each such series. (b) Treasury Stock At December 31, 1999, the Company had 39,800 shares of common stock in treasury, of which 19,800 shares were acquired in 1988 at a cost of $48,788, and 20,000 shares were acquired in 1998 at a cost of $47,500. Note 15 - Lease and Option Agreements (a) Property in Vega Alta, Puerto Rico The primary Puerto Rico facility is leased from Michael J. Spector and Margaret D. Spector (the "Spectors"), who are officers, directors and major shareholders of the Company. Effective January 1, 1993, the Company entered into a lease agreement with the Spectors for an initial five year period at a monthly rental of $19,000. In addition, the Spectors have released the Company from responsibility from any claims arising from the Company's use of a defective fungicide in its operations at the nursery facility. The Company had an option to renew this lease for an additional five year period at the greater of $24,000 per month, or the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. On January 1, 1998, the Company exercised its option to renew the lease agreement with the Spectors at a monthly rental of $24,000. The Spectors have committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. F-20 Under the above lease agreement, the Company has the option to purchase the nursery facility at any time during the term of the lease, based on the property's appraised value. The Company pays $1,000 per month for this purchase option, which amount is expensed when paid. Effective January 1, 1994, the Company amended the lease agreement with the Spectors to include an additional 27 acres of land adjacent to the nursery facility at a monthly rental of $1,750. This amendment did not provide for renewal nor purchase options towards the additional 27 acres of land. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this lease amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001 for the unamortized value (approximately $45,000 at February 1, 2000) of the leasehold improvements applicable to said parcel as of the date of termination. Effective February 1, 2000, the lease agreement with respect to the 27 acre parcel terminated. Total rental payments amounted to approximately $309,000 in 1999 and 1998 and $249,000 in 1997. (b) Property in Barranquitas, Puerto Rico Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc. to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. During the first year of the initial five-year term of the lease, monthly payments amount to $4,500. During the remaining four years of the initial term of the lease, monthly payments amount to $5,000. During the first and second renewal terms, monthly payments increase to $6,000 and $7,000, respectively. The lease agreement does not provide for any purchase option. F-21 Total rental payments amounted to $60,000, $45,000 and $54,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Lease payments for 1998 reflect a rent abatement of $15,000 due to damages caused by Hurricane Georges. (c) Other Properties in Vega Alta, Puerto Rico On March 24, 1999, the Company leased two additional parcels of land from the Puerto Rico Land Authority (an instrumentality of the Commonwealth of Puerto Rico). The two parcels are adjacent to each other, have a total area of 321 acres, and are located approximately one mile from the Company's main nursery facility in Vega Alta. Among other things, the lease agreement provides for an initial lease term of five years subject to three additional renewal terms of five years, at the option of the Company. During the initial term, total lease payments amount to $33,625 per year. During 1999, lease payments of $25,219 were made. Lease payments for renewal terms are to be negotiated 90 days prior to each renewal term. (d) Aggregate Lease Obligations and Expenses The Company's obligations under the above and other non-cancelable operating lease agreements in force at December 31, 1999, assuming the Company exercises its renewal option on the Barranquitas, Puerto Rico property and excluding the monthly payments for the purchase option previously mentioned, are as follows: Year ending Minimum December 31, Lease Payments ------------ -------------- 2000 $ 416,500 2001 415,700 2002 426,700 2003 132,200 2004 99,400 Thereafter 600,500 --------- $2,091,000 ========== Total rental expense under all operating lease agreements amounted to approximately $400,000, $354,000 and $303,000, for the years ended December 31, 1999, 1998 and 1997, respectively. F-22 Note 16 - Stock Option and Salary Deferral Plans Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan"). Outstanding options granted under the previous plan, including all related obligations and commitments, will continue to be honored by the Company. Under the 1998 Plan, the Company's Board of Directors, through a committee, can award options to purchase up to 200,000 shares of common stock (exclusive of outstanding options under the previous plan) to eligible employees at 100% of the fair market value at the time of the grant, except that options granted to persons owning 10% or more of the outstanding common stock carry an exercise price equal to 110% of the fair market value at the date of grant. The 1998 Plan also provides for the automatic grant of options to purchase 2,500 shares of common stock to each non-employee director on the first business day following every annual meeting of shareholders. Options vest ratably over a period of five years, become exercisable one year from the date of grant and expire ten years after the date of grant. The status of the stock options granted under the 1998 Plan and the prior 1988 Plan as of December 31, 1997, 1998 and 1999, and changes during the years ended on those dates, are as follows:
Price per Share --------------------------------------- Weighted Average Description Shares Range Price - ----------------------------------------------- --------------- ----------------------- ----- Outstanding, January 1, 1997 113,750 $2.00 to $3.44 $3.06 Granted - - - Exercised - - - Forfeited (27,500) 2.00 to 3.13 2.88 -------- -------------- ---- Outstanding, December 31, 1997 86,250 2.00 to 3.44 3.12 Granted 31,000 1.50 to 1.94 1.81 Exercised - - - Forfeited (1,250) 2.00 2.00 -------- -------------- ---- Outstanding, December 31, 1998 116,000 1.50 to 3.44 2.78 Granted 20,000 2.25 to 2.75 2.41 Exercised - - - Forfeited (1,500) 1.94 to 3.13 2.73 -------- -------------- ---- Outstanding, December 31, 1999 134,500 $1.50 to $3.44 $2.72 ======== ============== =====
F-23 The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Excercisable -------------------------------------------- -- --------------------------------- Weighted Average Weighted Remaining Average Weighted Average Range of Contractual Exercise Exercise Exercise Price Outstanding Life (years) Price Exercisable Price - --------------- ----------- ------------- -------- ----------- -------------- $2.88 - $3.16 43,500 3.5 $ 3.01 43,500 $3.01 3.13 - 3.44 40,500 6.6 3.26 24,300 3.26 1.50 - 1.94 30,500 8.4 1.81 6,100 1.81 2.25 - 2.75 20,000 9.4 2.41 - - - ---------------- --------- ----------- ------- -------- ------ $1.50 - $3.44 134,500 6.4 $2.72 73,900 $2.99 =============== ========= =========== ======= ======== ======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in measuring stock based compensation, including options. Accordingly, no compensation expense has been recognized for options granted under both plans. Had compensation expense been determined based upon the fair value at the grant date for awards under any plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS No. 123") the Company's net loss and net loss per share, on a pro forma basis, would not have significantly changed from those reported. The Company did not recognize compensation cost for the options granted to non-employees pursuant to the requirements of SFAS No. 123 because its effect was not significant. During 1998, the Company established a Salary Deferral Retirement Plan (the "Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers all employees who are at least 21 years old and have completed one year of service. The Company did not make any cash contributions to the retirement plan during 1998. For the year ended December 31, 1999, the Company paid approximately $38,000, representing the matching contributions under the retirement plan for all participants. F-24 Note 17 - Supplemental Disclosures for the Statements of Cash Flows (a) Non-Cash Investing Activities During the year ended December 31, 1999, fully depreciated equipment with a cost of $454,877 was written off, and equipment with a cost of $66,129 and a book value of $43,459 was sold at a gain of $16,451. Also, during 1999, an account receivable and a deferred revenue in the amount of $111,885 were established in connection with certain government assistance. During the year ended December 31, 1998, the Company wrote off fully depreciated equipment with a cost of $505,070. Also during 1998, the Company wrote off leasehold improvements with a cost of $365,278 and a book value of $171,039, as a result of damages caused by Hurricane Georges. During the year ended December 31, 1997, the Company wrote off stock plants with a cost of $97,277 and a book value of $72,951. The write off was charged to an accrual made as of December 31, 1996, for the possible impairment of assets at the Company's South Florida location. During 1997, the Company sold two properties at its South Florida location with a cost of $1,088,594 and a book value of $990,105. Included in the determination of the $474,574 gain on the sale of the property sold were $177,049 representing the remaining balance of the accrual made at December 31, 1996 for the possible impairment of assets at the Company's South Florida location. In connection with the sale of one of the properties, the Company received a $475,000 mortgage note from the buyer as part of the sales price. (b) Other Cash Flow Transactions During the years ended December 31, 1999, 1998 and 1997, the Company made interest payments of approximately $44,400, $62,000, and $75,500, respectively. During the years ended December 31, 1999, 1998 and 1997, the Company did not make any income tax payments. F-25 Note 18 - Major Customers During 1999, the Company's two largest customers accounted for approximately 26% ($1,592,000) of the Company's net sales. The first customer accounted for 14% ($864,000) and the second customer accounted for 12% ($728,000) of the Company's net sales. During 1998 and 1997 the Company's single largest customer accounted for approximately 13% ($683,000) and 24% ($1,540,000), respectively, of the Company's net sales. Note 19 - Disposal of Margo Bay Farms, Inc. On August 15, 1997, after a review of past and present performance of the Company's South Florida operation, and in view of the strong competition in that market, inadequate sales levels and lack of profitability, the Company's Board of Directors made the determination to close this operation effective September 30, 1997, and dispose of all related assets. On September 29 and November 28, 1997, the Company sold the two nursery farms (a 54 acre and a 20 acre parcel) which comprised the Company's facility in South Florida, resulting in a gain of $474,574. The South Florida operation which closed effective September 30, 1997, accounted for net sales of approximately $478,000, and incurred a net loss of $27,000 for the year ended December 31, 1997. Note 20 - Significant Concentration of Risk As discussed in Note 1, the Company's operations are principally concentrated in Puerto Rico. The Company's operations are vulnerable to severe weather, such as hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. As of December 31, 1999, the Company had been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages. F-26 The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's operations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants. Accounts receivable are due from customers resident in Puerto Rico. Concentration of credit risk with respect to accounts receivable is mitigated by monitoring the operations and financial strength of the Company's customers. Certain short-term certificates of deposit are placed with local financial institutions. Such credit risk is mitigated by depositing the funds with high credit quality financial institutions and limiting the amount of credit exposure in any financial institution. Note 21 - Segment Information In June 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosure about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way an enterprise reports information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 requires a reconciliation of total segment revenue and expense items and segment assets to the amount in the enterprise's financial statements. SFAS 131 also requires a descriptive report on how the operating segments were determined, the products and services provided by the operating segments, and any measurement differences used for segment reporting and financial statement reporting. The Company's management monitors and manages the financial performance of three primary business segments: the production and distribution of plants, sales of lawn and garden products and landscaping services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on net income or loss. F-27 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 segments' financial condition and results of operations as if they were independent entities.
1999 ------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------ -------------------- ----------------- --------------- Revenue from external customers $3,780,645 $1,120,342 $1,300,246 $6,201,233 Intersegment revenues 186,453 24,727 - 211,180 Interest income 105,914 - - 105,914 Interest expense 46,876 - - 46,876 Depreciation and amortization 444,765 33,868 64,532 543,165 Segment income (loss) 167,844 (132,515) (163,196) (127,867) Segment assets 7,472,038 939,588 505,355 8,916,981 Expenditures for segment assets 296,380 53,015 45,293 394,688 1998 ------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------ -------------------- ----------------- --------------- Revenue from external customers $3,019,406 $ 862,050 $1,467,788 $5,349,244 Intersegment revenues 247,785 26,736 - 274,521 Interest income 122,683 - - 122,683 Interest expense 62,020 - - 62,020 Depreciation and amortization 447,285 22,436 58,070 527,791 Segment loss 899,698 142,692 70,447 1,112,837 Segment assets 6,405,425 761,623 823,160 7,990,208 Expenditures for segment assets 374,034 - - 374,034 1997 ------------------------------------------------------------------------- Lawn & Garden Plants Products Landscaping Totals ------------------ -------------------- ----------------- --------------- Revenue from external customers $3,435,291 $1,389,617 $1,724,004 $6,548,912 Intersegment revenues 415,896 57,487 - 473,383 Interest income 73,060 - - 73,060 Interest expense 73,274 - - 73,274 Depreciation and amortization 412,716 22,652 56,266 491,634 Segment loss 331,731 239,249 179,554 750,534 Segment assets 7,411,884 827,389 712,815 8,952,088 Expenditures for segment assets 66,826 7,304 35,509 109,639
F-28 Note 22 - Subsequent Event On February 9, 2000 the Company announced that it entered into a non-binding letter of intent to merge with iTract, LLC ("iTract"), a privately held developmental stage internet company building a communication tool that is designed to allow its users to deliver a targeted marketing campaign using e-mail, fax and postal mail. To date, iTract has not earned any significant revenues. iTract will seek to address the needs of businesses that desire more efficient, expedient and cost- effective ways to promote and communicate products and services to their target audiences. iTract will target small to medium sized businesses that want to reach potential customers at a lower cost than traditional direct marketing. iTract's system is designed to allow users to send out faxes, e-mails and postal mail in volume from the same document directly off the computer at the same time. iTract is also building a permission-based fax and e-mail list that is demographically organized and can be custom configured to meet the client's marketing needs. Under the proposed transaction, the Company would first reincorporate as a Delaware corporation pursuant to a merger (the "Reincorporation Merger") with a newly created Delaware corporation. A subsidiary of the new Delaware corporation would then merge with iTract (the "iTract Merger"). As a result of the iTract Merger, iTract members would receive 88% of the issued and outstanding shares of common stock of the new Delaware corporation (on a fully diluted basis assuming exercise of all outstanding stock options) in exchange for all the outstanding membership interests of iTract. Thus, following the iTract Merger, iTract members would control the new Delaware corporation, holding 88% of its common stock, with the Company's current shareholders holding 12%. Prior to the effective time of the iTract Merger, all outstanding stock options held by officers, directors and employees of the Company would vest and become immediately exercisable. Following the merger, the new corporation will be named iTract, Inc. A majority of the Board of Directors of the merged company would be composed of members designated by iTract, and iTract's management would manage the merged company. The letter of intent does not provide for any break-up fee. It is anticipated that the Reincorporation Merger will be a taxable transaction for U. S. shareholders for federal income tax purposes. F-29 It is a condition to the consummation of the iTract Merger that the Company sell prior to the iTract Merger its nursery and other operating businesses. In addition, as of the effective time of the merger, the Company must have at least $5 million in cash and cash equivalents and not be subject to liabilities exceeding $10,000 in the aggregate. In connection with the execution of the letter of intent, Michael J. Spector, President, Chief Executive Officer and the controlling shareholder of the Company, and another major shareholder of the Company made a $2.0 million loan to International Commerce Exchange Systems, Inc. ("ICES"), an indirect parent company of iTract. The loan is payable in a single balloon payment on the closing day of the iTract Merger. If the iTract Merger is not consummated, such loan will be converted into common stock of ICES. The parties anticipate that the transaction would close during the latter part of the second quarter or early part of the third quarter of 2000, subject to the negotiation of definitive agreements, the satisfactory completion of due diligence examinations, and the satisfaction of various other conditions customary and appropriate for this type of transaction, including the approval of the merger by the majority of the Company's and iTract's equity holders, the qualification of the iTract Merger as a tax-free reorganization for federal and Puerto Rico income tax purposes, continued listing of the shares on the NASDAQ Small Cap Market and obtaining an opinion from an investment banking firm satisfactory to the Company that the transaction is fair to shareholders from a financial point of view. The letter of intent provides that concurrent with the execution of the merger agreement, Michael J. Spector will agree to vote his Company shares, representing approximately 66% of the Company's outstanding common stock, in favor of the merger. No assurance can be given that the Company will reach a definitive merger agreement or that, if reached, the parties will be able to satisfy the conditions to the consummation of the merger. If the parties do not execute a merger agreement by April 14, 2000, the letter of intent will be automatically terminated. Note 23 - Reclassifications Certain reclassifications were made to the 1998 and 1997 consolidated financial statements in order for them to be in conformity with the 1999 presentation. F-30 SCHEDULE II MARGO CARIBE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLLUMN D COLLUMN E --------- --------- ---------------------------------- ----------------- ------------- BALANCE CHARGED TO COSTS CHARGED TO BEGINNING AND OTHER BALANCE DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ----------- --------- ---------------- ---------- ---------- ------------ YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts $123,700 $86,000 $ - $(51,700) $158,000 ======== ======= ======= ======== ======== YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $ 76,000 $35,900 $11,800 $ - $123,700 ======== ======= ======= ========== ======== YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts $ 79,000 $37,515 $ - $(40,515) $ 76,000 ======== ======= =========== ======== ========
F-31 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 3.(a) Certificate of Incorporation as currently in effect 23 Consent of Deloitte & Touche 27 Financial Data Schedule EX-3.(A) 2 EXHIBIT 3.(a) CERTIFICATE OF INCORPORATION OF MARGO CARIBE, INC. (AS CURRENTLY IN EFFECT) The undersigned, for the purpose of organizing a corporation under the General Corporation Law of 1995 of the Commonwealth of Puerto Rico (the "General Corporation Law") does execute this Certificate of Incorporation and does hereby certify as follows: FIRST: NAME OF CORPORATION. The name of this Corporation is Margo Caribe, Inc. (hereinafter referred to as the "Corporation"). SECOND: DURATION. This Corporation shall have perpetual existence. THIRD: PURPOSE. The Corporation is organized for the purpose of transacting any and all lawful business and engaging in any lawful act or activity for which corporations may be organized under the General Corporation Law. FOURTH: CAPITAL STOCK. (a) The Corporation is authorized to issue 10,000,000 shares of one tenth of one cent ($0.001) par value common stock, which shall be designated "Common Stock." Except as provided in this article or otherwise by law, the entire voting power for the election of directors and for all other purposes shall be vested exclusively in the holders of the Common Stock. 2 (b) The Corporation is authorized to issue 250,000 additional shares of one cent ($.01) par value series preferred stock, which shall be designated "Preferred Stock." The Board of Directors is authorized to amend this Certificate of Incorporation from time to time to divide the Preferred Stock into series and to determine the number of shares of each such series and the relative rights, preferences and limitations of the shares of each such series. Whenever the Board of Directors acts under the preceding sentence, it shall adopt a resolution setting forth its actions and stating the designations and number of shares, and the relative rights, preference and limitations of the shares of each series thereby created or with respect to which it has made a determination or change, which rights, preference and limitations may differ with respect to the various series, and shall execute and file in the office of the Secretary of State a Certificate of Designation to the Certificate of Incorporation, as provided by law, with respect to such actions. Without limiting the foregoing, the Board of Directors is expressly authorized to so fix and determine, with respect to each series: 1. The number of shares which shall constitute that series and the name or designation of the series; 2. The rate and times at which dividends on that series shall be paid, and whether and the extent to which such dividends shall be cumulative or non-cumulative; 3. The right or rights, if any, of the holders of shares of that series to receive dividends payable on a parity with or in preference to the dividends payable on shares of any other class or series; 3 4. The preferential rights of the holders of shares of that series upon the liquidation of, or upon any distribution of the assets of, the Corporation; 5. The terms, if any, upon which the holders of the shares of that series may convert such shares into shares of any class or classes or of any series; 6. The terms and conditions, if any, on which shares of that series may be redeemed, including the redemption price or prices and the period or periods of such redemption; 7. The terms or amount of any sinking fund or purchase fund for the purchase or redemption of shares of that series; 8. Voting rights, if any, of the shares of that series; and 9. Any other rights and preferences of such shares, to the full extent now or hereafter permitted by the laws of the Commonwealth of Puerto Rico. FIFTH: REGISTERED OFFICE AND RESIDENT AGENT. The physical and mailing address of its designated office in the Commonwealth of Puerto Rico is: Road 690, Kilometer 5.8, Vega Alta, Puerto Rico, 00762. The resident agent at said office is Michael J. Spector. SIXTH: INCORPORATOR. The name and address of the sole incorporator, who will exercise no further authority following the filing of this Certificate of Incorporation in the Department of State of the Commonwealth of Puerto Rico, is as follows: 4 Amneriz E. Veloso Suite 1901 Popular Center 209 Munoz Rivera Avenue San Juan, Puerto Rico 00918 SEVENTH: BOARD OF DIRECTORS. The Corporation shall have five (5) directors. The number of directors may be increased or diminished from time to time by the by-laws but shall never be less than one (1). The names and addresses of the initial directors who shall act until their successors are duly elected and qualified are set forth below: Michael J. Spector Road 690, Kilometer 5.8, Vega Alta, Puerto Rico 00762 Frederick Moss 37 Riverside Drive, Apt. 14A New York, New York 10023 Michael A. Rubin 7777 SW 114th St. Miami, Florida Margaret D. Spector Road 690, Kilometer 5.8, Vega Alta, Puerto Rico 00762 Blas R. Ferrauioli Banco Popular Center, Suite 1822 209 Munoz Rivera Avenue San Juan, Puerto Rico 00918 5 EIGHTH: BY-LAWS. The By-Laws of this Corporation may be adopted, altered, amended or repealed by either the stockholders or directors. NINTH: LIABILITY OF DIRECTORS. A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law, as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to or at the time of such amendment, modification or repeal. TENTH: INDEMNIFICATION. The Corporation shall indemnify any officer or director, or any former officer or director, to the full extent permitted by law. ELEVENTH: AMENDMENT. The Corporation reserves the right to amend or repeal any provisions contained in this Certificate of Incorporation, in accordance with the provisions of the General Corporation Law. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Incorporation this 10th day of November, 1997. By: /S/ AMNERIZ E. VELOSO -------------------------- AMNERIZ E. VELOSO EX-23 3 EXHIBIT 23 [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement of Margo Caribe, Inc. on Form S-8 No. 333-56919 of our report dated March 3, 2000 appearing in the Annual Report on Form 10-K for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP - -------------------------- DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 30, 2000 EX-27 4 FDS --
5 12-MOS DEC-31-1999 DEC-31-1999 1,082,592 500,000 1,259,722 (158,000) 3,108,408 6,531,169 3,694,166 (1,791,303) 8,916,981 2,224,723 450,482 0 0 1,915 6,239,861 8,916,981 6,201,233 6,365,481 3,971,122 6,366,472 0 80,000 46,876 (127,867) 0 0 0 0 0 (127,867) (.07) (.07)
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