ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS - --------------------------
This report contains certain "forward looking statements" concerning the Company's economic future performance. The words "expect", "anticipate" and similar expressions are meant to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, natural disasters, competitive and regulatory factors and legislative changes, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
GENERAL - -------
The principal business of Margo Caribe, Inc. and its subsidiaries (collectively, the "Company") is the production and distribution of a wide range of both indoor and outdoor tropical foliage and flowering plants. The Company also distributes lawn and garden products and provides landscaping design, installation and maintenance services. The Company is also engaged in the manufacturing and distribution of "Rain Forest" products, which include planting media and aggregates. The Company's real estate development division is currently permitting and designing an affordable housing project in the Municipality of Arecibo, Puerto Rico.
PRINCIPAL OPERATIONS - --------------------
The Company's operations are conducted at a 92 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 92 acre farm is leased from Michael J. Spector and Margaret D. Spector, who are directors, officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Lease and Option to Purchase Main Nursery Farm" herein. The 13 acre facility in the Municipality of Barranquitas is leased from an unrelated third party. During the fourth quarter of 2002, the Company entered into an agreement with the lessor to return the Barranquitas facility and intends to consolidate this operation into its main nursery farm in Vega Alta, Puerto Rico (refer to ITEM 2.
ITEM 2. PROPERTIES
During 2002, the Company conducted its operations from nursery facilities located in Puerto Rico.
Vega Alta Nursery Facility - --------------------------
The Company leases a 92 acre nursery facility in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan. This facility includes the Company's corporate offices, approximately 1,130,000 square feet of shadehouses, propagation and mist facilities, and a 10,000 square foot warehouse for the Company's lawn and garden products. The nursery facility also has irrigation equipment and pump houses, shipping and storage areas, as well as one residence for a field supervisor.
The Vega Alta facility is leased from Michael J. Spector and Margaret D. Spector (the "Spectors"), who are officers, directors and the major shareholders of the Company, pursuant to a lease agreement dated January 1, 1993. Under the lease, the Company is required to pay rent of $24,000 per month and pay all taxes on the property, maintain certain insurance coverage and otherwise maintain and care for the property. The lease also contains an option which permits the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company must pay $1,000 per month. The lease agreement (including the option) terminated on December 31, 2002. The Spectors committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. The Company is in the process of negotiating a new lease agreement with the Spectors. Pending the execution of a new lease agreement, the parties have agreed to a month to month lease arrangement with monthly lease payments of $24,000, as under the prior lease.
During the years ended December 31, 2002 and 2001, total lease payments to the Spectors amounted to approximately $288,000 (not including the monthly payments for the option referred to above).
Barranquitas Nursery Facility - -----------------------------
Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. For the years ended December 31, 2002 and 2001, total lease payments amounted to $72,000 and $60,000, respectively.
Effective December 23, 2002, the lessor and the Company entered into an agreement to terminate the lease agreement and return the facility on or before June 30, 2003.
The Company intends to consolidate the operations currently conducted at the Barranquitas nursery facility with its Vega Alta nursery facility. The Company considers that the Vega Alta facility is generally in good condition, is well maintained and is generally suitable and adequate to carry on the Company's business.
Land held for Future Development - --------------------------------
On December 13, 2000, the Company purchased approximately 109 acres of land in the Municipality of Arecibo, Puerto Rico for the development of a residential project. The Company paid $950,000 plus incidental expenses for this land. The Company is currently in the process of obtaining development permits. No assurance can be given how long it will take to obtain the necessary permits or whether said permits will in fact be obtained.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
Not applicable.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market ("NASDAQ") under the symbol MRGO.
The following table sets forth the high and low sales prices for the Company's common stock, as reported by NASDAQ, for each of the calendar quarters of 2002 and 2001. The last reported sales price for the Common Stock on March 14, 2003 was $5.18 per share. Common stock prices have been adjusted to give retroactive effect to the 10% stock dividend declared on the Company's common stock effective June 28, 2002.
2002 2001 ---------------- ----------------------- Quarter: High Low High Low -------- ---- --- ---- ---
First $ 4.32 $ 2.78 $ 3.07 $ 1.59 Second 3.74 2.73 3.18 1.82 Third 3.30 2.71 4.64 2.18 Fourth 4.45 3.00 4.77 2.82
There were approximately 60 holders of record of the common stock as of December 31, 2002. This amount includes custodians, brokers and other institutions which hold the common stock as nominees for an undetermined number of beneficial owners. As of March 14, 2003, the Company had 2,079,889 shares of common stock outstanding.
The Company did not pay any cash dividends on its common stock during 2002 or 2001. However, effective June 28, 2002, the Company issued a 10% stock dividend to shareholders of record as of June 14, 2002. This resulted in the issuance of 188,367 additional shares of common stock. The payment of cash dividends in the future is dependent upon the earnings, cash position and capital needs of the Company, as well as other matters deemed relevant by the Company's Board of Directors.
Dividends paid on the Company's Common Stock are generally subject to a 10% withholding tax at source under Puerto Rico tax laws. United States shareholders may be entitled to a foreign tax credit, subject to certain limitations, in connection with the imposition of the withholding tax.
Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular graduated rates, in which case the special 10% tax will not be withheld from such year's distributions.
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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data for Margo Caribe, Inc. on a historical basis, for each of the five years ended December 31, 2002. The selected financial data should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES - ----------------------------
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America .
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company's management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.
Revenue Recognition - ------------------- The Company recognizes sales of plants and lawn and garden products upon shipment from its facilities to customers. Revenues from sales of landscaping services are recognized as plants are installed at the customers' facilities.
Allowance for Doubtful Accounts - ------------------------------- The allowance for doubtful accounts is an amount that management believes will be adequate to absorb estimated losses on existing accounts receivable that are estimated to be uncollectible based on evaluations of collectibility of specific customers and their prior credit experience. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the existing accounts receivable and related allowance may change in the near term.
Capitalization of Inventory Costs - --------------------------------- Direct and indirect costs that are capitalized as part of inventory of plant material which management estimates cannot be recovered from future sales of plant inventory are charged to cost of sales. Management's determination of the amount of capitalized costs that should be charged to cost of sales is based on historical sales experience and its judgement with respect to the future marketability of the inventory.
Deferred Income Taxes - --------------------- The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the use of the asset and liability method in accounting for income taxes. Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities.
The Company records a valuation allowance to reduce its deferred tax asset to the amount that is more likely than not to be realized. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. The amount of the deferred tax asset considered realizable could change in the near term depending on future levels of taxable income.
OVERVIEW - --------
For the year ended December 31, 2002, the Company had consolidated net income of approximately $852,000, compared to net income of $338,000 in 2001, and a net loss of $1,023,000 in 2000. These amounts represent a consolidated diluted income (loss) per common share of $0.40, $0.16 and ($.49) for 2002, 2001 and 2000, respectively.
The Company's increase in net income for the year ended December 31, 2002 when compared to 2001, was due to a substantial increase in other income of approximately $473,000, principally from a gain upon the collection of a $405,000 note receivable previously written down to $20,000. Income from operations for the year ended December 31, 2002 was comparable to that of 2001.
The Company's increase in net income for the year ended December 31, 2001 when compared to 2000, was due to increases in sales and higher gross profits, which were offset, in part, by an increase in selling, general and administrative expenses.
The Company's net loss for the year ended December 31, 2000 was principally due to the write off of unsalable inventory charged to cost of sales, resulting in a loss from operations. This loss from operations was further increased by non-recurring expenses related to the termination of a proposed merger charged as other expenses.
RESULTS OF OPERATIONS - ---------------------
Sales - -----
Consolidated net sales for the year ended December 31, 2002 were approximately $9,751,000 representing an increase of 6% over sales of $9,185,000 in 2001. This increase in sales is principally due to a 14% increase in sales of plant material ($539,000). Sales of lawn and garden products increased by 1% and sales of landscaping services decreased by 0.5%. Increase in sales of plant material was principally due to increased sales to major chain stores as well as local landscapers. Sales of lawn and garden products as well as landscaping services remained comparable with sales for 2001. During 2002, approximately $525,000 (21%) of landscaping service revenues were provided to an entity controlled by the Company's major shareholder, compared to $279,000 (11%) for 2001.
Consolidated net sales for the year ended December 31, 2001 were approximately $9,185,000, representing an increase of 11% over sales of $8,303,000 in 2000. This increase in sales was principally due to a 35% increase in sales of lawn and garden products ($741,000), and an 8% increase in revenues from landscaping services ($182,000). Sales of plant material decreased by
$41,000. Increase in sales of lawn and garden products was spread among retail chain stores. Increase in revenues from landscaping services was due to increased project volume, specifically during the fourth quarter of 2001.
Gross Profits - -------------
The following table sets forth certain information regarding the Company's costs and expenses as a percentage of net sales.
Years ended December 31, ------------------------ 2002 2001 2000 ------- ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 60.3 63.1 74.3 ------- ------ ------ Gross profit 39.7 36.9 25.7 Selling, general and administrative expenses 35.7 32.9 31.1 ------- ------ ------ Income (loss) from operations 4.0 4.0 (5.4) Interest expense, net (.4) (.5) (.4) Other income (expenses), net 5.0 .3 (6.5) ------- ------ ------ Income (loss) before income deferred income tax credit 8.6 3.8 (12.3) Deferred income tax credit .1 - - ------- ------ ------ Net income (loss) 8.7 3.8 (12.3) ====== ====== ======
The table above reflects that consolidated gross profits as a percentage of net sales were approximately 40%, 37%, and 26%, for the years ended December 31, 2002, 2001and 2000, respectively.
The Company's consolidated gross profit for the year ended December 31, 2002 was 40%, compared 37% in 2001, representing an overall increase of 3%. This increase in gross profit was principally due to an increase in gross profit from sales of landscaping services of 7% (38% in 2002 and 31% in 2001). This increase was due to increased performance in project management during 2002. Gross profit from sales of lawn and garden products increased by 3% (44% in 2002 and 41% in 2001). This increase was principally due to improved efficiency in the production of the Company's Rain Forest line of soil and aggregates. Gross profit from sales of plant material remained comparable at 38% in 2002 and 2001.
The Company's consolidated gross profit for the year ended December 31, 2001 was 37%, compared to 26% in 2000, representing an overall increase of 11%. The increase in gross profit was spread among all business segments. Gross profit from sales of plant material during 2001 was approximately 38% compared to 25% in 2000. This increase was due to a higher volume of sales (although overall sales of plant material remained comparable) of certain varieties of plants with higher gross profit, and the fact that during 2001, there were significantly less charges to cost of sales from both the maintenance and write-off of unsalable inventory, as experienced in 2000. Gross profit from sales of lawn and garden products during 2001 was approximately 41% compared to 31% in 2000. This increase was also due to a higher volume of sales of products
with higher gross profit, and the fact that during 2001 there were no write-offs of unsalable inventory as experienced in 2000. Gross profit on revenues from landscaping services was approximately 31% in 2001 compared to 22% in 2000. This increase was the result of improved performance in project management and execution during 2001.
Selling, General and Administrative Expenses - --------------------------------------------
The Company's selling, general and administrative expenses ("SG&A") for 2002 were approximately $3,478,000 compared to $3,021,000 in 2001, representing an increase of 15% in dollar terms, and an increase of 3% as a percentage of sales. The increase (in dollar terms) was principally due to increases in administrative expenses, mainly due to additional sales and administrative personnel, and increase in executive compensation. Other administrative expenses increases included the provision for uncollectible receivables and repairs and maintenance of machinery and equipment in general. Shipping expenses also increased in dollar terms, but remained comparable as a percentage of sales.
The Company's SG&A for 2001 were approximately $3,021,000 compared to $2,583,000 in 2000, representing an increase of 17% in dollar terms, and an increase of 2% as a percentage of sales. The increase in SG&A (in dollar terms) was the result of increases in shipping and general and administrative expenses and were experienced evenly throughout the year. Increase in shipping expenses resulted from increased volume, specifically in sales of lawn and garden products; however, they remained comparable as a percentage of sales. Increase in general and administrative expenses was principally in compensation, as a result of the hiring of a new chief operating officer for the Company.
Other Income and Expense - ------------------------
Interest income for the year ended December 31, 2002 decreased when compared to that of 2001 due to a reduction of funds invested as well as lower yields obtained during 2002.
Interest expenses for the year ended December 31, 2002 decreased principally from lower interest rates experienced during 2002.
Interest income for the year ended December 31, 2001 decreased when compared to that of 2000 principally from the collection of a note receivable during the latter part of 2000 and the offsetting of short-term investments pledged as collateral on notes payable during 2001, as well as lower yields obtained during 2001 (from decreases in interest rates) on short-term investments and cash equivalents.
Interest expense for the year ended December 31, 2001 decreased when compared to that of 2000 as a result of lower interest rates experienced during 2001, as well as the offsetting of short-term investments to a related note payable. This decrease in interest expense was offset, in part, by an increase in long-term debt.
Other income for the year ended December 31, 2002, includes a gain from the sale of an investment of approximately $71,000. This investment had been previously classified and included as an other asset in the Company's balance sheet at an approximate cost of $41,000.
Also included as other income for the year ended December 31, 2002 is a gain of $405,000 from the collection of a note receivable which had been previously written down to a carrying value of $20,000 (refer to Note 5 in the accompanying Notes to Consolidated Financial Statements for the year ended December 31, 2002).
Other income for the year ended December 31, 2002 also includes a "Participation in loss of unconsolidated subsidiary" of $16,037. This represents the Company's 33.33% share in the loss of Salinas Holdings, Inc. for the period from November 1, 2002 (commencement of operations) through December 31, 2002. As stated under "ITEM I. Joint Venture in Salinas Holdings, Inc.", during 2002, the Company made an investment in Salinas Holdings, Inc. This investment was accounted for under the equity method for investments in common stock. Accordingly, at year end, the Company includes as other income (expense) its proportionate share of the results of operations of Salinas Holdings, Inc..
Other expenses for the year ended December 31, 2001 were approximately $30,000 compared to $574,000 for 2000. The decrease in other expenses for 2001 was principally due to the non-recurring merger related expenses of $553,000 in 2000, in connection with the terminated merger agreement described below.
During April 2000, the Company entered into an agreement to merge with a privately held development stage internet company (iTract, LLC). Because several of the conditions necessary for the merger to proceed did not occur by the agreed upon date of March 1, 2001, the Company's Board of Directors decided that it was not in the best interest of the Company or its shareholders to continue with the transaction and on March 5, 2001, voted to terminate the merger agreement.
FINANCIAL CONDITION - -------------------
At December 31, 2002, the Company had cash of approximately $1,418,000, compared to cash of $839,000 at December 31, 2001, or an increase of $579,000. The increase in cash at December 31, 2002 was principally due to net cash flows from operating activities of $1,001,000. These net cash flows from operations were offset by net cash outflows used in investing activities and financing activities of $109,000 and $313,000, respectively. Among the net cash outflows from investing activities were additions to property and equipment ($182,000) and the initial investment in the Company's unconsolidated equity subsidiary ($433,000). These were offset by proceeds from sale of investment ($113,000) and from the collection of notes receivable ($451,000). Among the cash outflows from financing activities were the repayment of long term debt ($128,000) and repayment of notes payable ($733,000). These were offset by an increase in notes payable ($533,000).
As a result of the Company's net income for the year ended December 31, 2002, the Company's debt to equity ratio improved to 51%, compared to 61% at December 31, 2001.
Stockholders' equity at December 31, 2002 increased principally due to results of operations for the year. During the year ended December 31, 2002, the Company issued 7,700 shares of common stock in connection with the conversion of stock options. The Company issued 188,367 shares of common stock in connection with a 10% stock dividend on June 28, 2002. There were no cash dividends declared during the year ended December 31, 2002.
CURRENT LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------------
The nursery industry requires producers to maintain large quantities of stock plants and inventory to meet customer demand and to assure a new source of products in the future. As a result, producers need to invest significant amounts of capital in stock plants and inventory. The Company believes it has adequate resources to meet its current and anticipated liquidity and capital requirements. The Company finances its working capital from cash flows from operations as well as borrowings under short-term credit facilities with a local commercial bank. At December 31, 2002, the Company had $2.5 million of credit under these facilities, of which approximately $1,081,000 was available. The credit facility for $2.5 million is secured by the Company's trade accounts receivable and inventory. On February 27, 2003, the credit facility was modified to create a subline of $150,000 to be used exclusively to finance vehicle purchases, reducing the amount available under the credit facility for general working capital to $2.35 million. As of March 15, 2003, the Company had not used the subline for vehicle loans.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS - --------------------------------------
There were no significant fourth quarter adjustments for the years ended December 31, 2002 and 2001.
During the fourth quarter of 2000, the Company wrote off unsalable inventory with an approximate carrying value of $439,000, which were charged to cost of sales.
INFLATION ---------
The primary inflationary factors which may affect the Company's results of operations and financial condition are the costs of labor and production materials such as soil, pots, chemicals, fertilizer, plant cuttings and shipping costs. During the last three years, the impact of inflation on the results of operations and financial condition of the Company has been minimal due to the stability of wage rates and the availability of production materials from a wide variety of sources.
The Company does not anticipate that inflation will have a significant effect on its future earnings or financial condition because increases caused by inflation are ordinarily recovered through increases in prices.
RISK MANAGEMENT - ---------------
The Company's operations are vulnerable to severe weather, such as hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. As of December 31, 2002, the Company had been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, the Company has been unsuccessful in obtaining such insurance coverage during the past five years and no assurance can be given that the Company will be able to obtain such insurance coverages in the foreseeable future.
The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's operations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico. Concentration of credit risk with respect to accounts receivable is mitigated by monitoring the operations and financial strength of the Company's customers. Certain short-term certificates of deposit are placed with local financial institutions. Such credit risk is mitigated by depositing the funds with high credit quality financial institutions and limiting the amount of credit exposure in any financial institution.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
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 of this Form 10-K. Supplementary data is not required.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors, nominee for director and executive officers of the Company as of March 15, 2003. The background and experience of these persons are summarized in the paragraphs following the table.
John A. Wing and Margaret D. Spector have informed the Company that they do not intend to stand for reelection at the 2003 annual meeting of shareholders. Mr. Jairo Estrada is being nominated for election as a director for the first time at the 2003 annual meeting of shareholders.
Each director of the Company holds office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. Officers serve at the discretion of the Board of Directors. All of the executive officers of the Company except Margaret D. Spector devote their full time to the operations of the Company.
Background of Officers and Directors - ------------------------------------
Set forth below is a summary of the background of each person who was an officer or director and nominee of the Company as of March 15, 2003.
MR. SPECTOR currently serves as the Chairman of the Board and Chief Executive Officer of the Company. He has held these positions since the organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary and a director of the Company.
MRS. SPECTOR currently serves as the Secretary and as a director of the Company. She has held these positions since the organization of the Company in 1981.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues to hold that position. Mr. Ferraiuoli practices civil, corporate and administrative law in his own law firm since June 1994.
MR. ESTRADA is being nominated to the Board of Directors for the first time at the Annual Meeting of Shareholders. Mr. Estrada has served as the Chairman of the Board of N.S.C. of Puerto Rico, a manufacturing company serving the pharmaceutical industry since 1999. From December 1985 to August 1996, Mr. Estrada was the Chairman of the Board and Chief Executive Officer of Garden Way Incorporated. Prior to joining Garden Way, in 1972 Mr. Estrada was a Senior Consultant with KPMG Peat Marwick in Albany, New York, the Caribbean Islands and South America. Mr. Estrada is a member of the Board of Directors of Flow Management Technologies, Inc. (a health company), World Wide Education Services (not for profit educational entity) and Velcero, Inc. (internet service solution provider). He is also a member of the Advisory Board of the American College of the Immaculate Conception of Leuven, Belgium; and the Board of Directors of Telefonos Publicos de Puerto Rico and MBTI of Puerto Rico.
MR. RUBIN was elected a director of the Company in 1995 and continues to hold that position. Mr. Rubin is an attorney engaged in private practice. He has been a partner in the law firm of Michael A. Rubin, P.A., Coral Gables, Florida, for more than the past five years. Mr. Rubin is a Director of The Herzfeld Caribbean Basin Fund, Inc.
MR. WING was elected a director of the Company on October 26, 2001. Mr. Wing has been a professor of Law and Finance at the Illinois Institute of Technology and the Chairman of its Center for the Study of Law and Financial Markets since July 1998. From 1981 to July 1998, Mr. Wing was the Chairman of the Board and Chief Executive Officer of the Chicago Corporation. Director, AmerUS Life Holdings and LDF, Inc. (bank holding company).
MR. DOMINGUEZ was elected as a director of the Company on October 26, 2001. Mr. Dominguez has served as the President of San Juan Holdings, Inc. (investment banking) since February 1998 and as the President of RD Capital, Inc. (broker-dealer) since July 1994.
MR. RODRIGUEZ commenced as President and Chief Operating Officer of the Company on March 5, 2001. He was elected as a director of the Company on October 26, 2001. From March 1995 to March 2000, Mr. Rodriguez served as executive vice president of Retail Banking for Banco Santander Puerto Rico.
MR. ORTEGA currently serves as the Vice President, Treasurer and Chief Financial Officer of the Company. He has held this position since he joined the Company in January 1993.
MR. LLERANDI currently serves as Vice President of Marketing. He has held this position since April 1993. He joined the Company in 1988 as Sales Manager for Puerto Rico.
Section 16(a) Beneficial Ownership Reporting Compliance - -------------------------------------------------------
Section 16 of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers to report their ownership of and transactions in the Company's Common Stock to the Securities and Exchange Commission (the "SEC") and the National Association of Securities Dealers. Copies of these reports are also required to be supplied to the Company. Specific dates for filing these reports have been established by the SEC, and the Company is required to report in the annual report any failure of its directors and executive officers to file by the relevant due date any of these reports during the fiscal year ended December 31, 2002. Based solely on its review of the copies of the report received by it, the Company believes that all such filing requirements were satisfied, except that Mark Greene, a former director, failed to timely file one report related to the purchase of 230 common shares and J. Fernando Rodriguez failed to timely file one report related to the purchase of 330 common shares.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table - --------------------------
The following table sets forth information regarding compensation of the Company's Chief Executive Officer and the Company's President and Chief Operating Officer during each of the three years ended December 31, 2002, 2001 and 2000. Mr. Rodriguez was employed by the Company in March 2001. No other executive officer of the Company earned more than $100,000 during 2002, 2001 or 2000. The amount (and related exercise price) of option grants shown in the table have been adjusted for the 10% stock dividend effective June 28, 2002.
Compensation of Directors - -------------------------
The directors of the Company who are not employees of the Company are paid a quarterly retainer fee of $1,000 and an additional $1,000 for each meeting of the board (or committee thereof) attended, plus any travel and out-of-pocket expenses incurred in connection with the performance of their duties. No separate fees are paid for committee meetings attended on the same day as a regular Board meeting. The directors of the Company who are employed by the Company do not receive additional compensation for serving as directors. The Company also provides directors liability insurance for its directors.
As provided under the Company's 1998 Stock Option Plan ("the 1998 Plan") adopted on April 23, 1998, any nonemployee director of the Company who is in office on the first business day following any annual meeting of shareholders shall automatically receive on such date an option to acquire 2,500 shares of Common Stock at the market price on such date.
During 2002, Messrs. Ferraiuoli, Rubin, Wing, Dominguez, and Mrs. Spector each received options to acquire 2,750 shares (adjusted due to the 10% stock dividend declared June 28, 2002) of Common Stock at an exercise price of $3.18 ($3.50 for Mrs. Spector), expiring on May 25, 2012, in accordance with the 1998 Plan. All share amounts and exercise prices have been adjusted for the 10% stock dividend effective June 28, 2002.
Grant of Stock Options - ----------------------
The table below provides certain information regarding stock options granted to the officers named in the Cash Compensation Table. No stock options were granted to Michael J. Spector during the year ended December 31, 2002, however, for SEC reporting purposes, Mr. Spector may be deemed to beneficially own the options granted to Margaret D. Spector. All share amounts and exercise prices have been adjusted for the 10% stock dividend effective June 28, 2002.
Options Exercised During 2002 and Option Values at December 31, 2002 - --------------------------------------------------------------------
The following table sets information on outstanding options held by the Company's executive officers and their values at December 31, 2002. There were no exercises of options during 2002 by any of the persons named in the Cash Compensation Table. Value is calculated as the difference between the last sales price of the Common Stock and the exercise price at December 31, 2002, the last day the common stock traded during 2002.
Employment Contracts - --------------------
The Company does not have an employment contract with any executive officer.
Salary Deferral Retirement Plan - -------------------------------
During 1998, the Company established a Salary Deferral Retirement Plan (the "Retirement Plan") under the provisions of the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers all employees of Margo Caribe, Inc. who are at least 21 years of age and is effective from the date of employment. Under the terms of the retirement plan, the Company matches up to 100% of the pre-tax contributions made by employees in an amount equal to 10% of their basic salary subject to a maximum of $8,000. For the year ended December 31, 2002, the Company paid approximately $58,000 representing the matching contributions under the retirement plan for all participants.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 15, 2003, the number of shares of common stock of the Company owned beneficially by the following persons: (a) each director of the Company; (b) each nominee for director; (c) all executive officers, directors and nominees of the Company as a group; and (c) each person known to the Company who owns more than 5% of the outstanding common stock of the Company. Unless otherwise stated, all shares are held with sole investment and voting power.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease and Option to Purchase Main Nursery Farm - ----------------------------------------------
Effective January 1, 1993, the Company and the Spectors entered into a lease agreement with respect to the main Puerto Rico nursery farm. The lease had an initial term of five years renewable for one additional term of five years at the option of the Company. During the initial term of the lease, rent was set at $19,000 per month. During the renewal term, the rent increases to the greater of (x) $24,000 per month or (y) the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. Additionally, the Company was required to pay all taxes on the property, maintain certain insurance coverages and otherwise maintain and care for the property. The lease also contained an option which permited the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company was required to pay the Spectors an additional $1,000 per month. On January 1, 1998, the Company exercised its renewal option at a monthly rental of $24,000. The lease to terminated on December 31, 2002. The Spectors have committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. The Company is in the process of negotiating a new lease agreement with the Spectors. The negotiations will be conducted on behalf of the Company by a committee of independent directors . Pending execution of a new lease agreement, the parties have agreed to a month to month arrangement with monthly lease payments of $24,000 as under the prior lease.
Landscaping services provided by the Company to Estancias de Cerro Mar, Inc. - ----------------------------------------------------------------------------
During 2002 and 2001, the Company provided landscaping and landscape maintenance services to Estancias de Cerro Mar, Inc., an entity controlled by the Spectors, and charged approximately $525,000 and $279,000, respectively, for these services. The Company believes that the prices and other terms granted to the Spectors were at least as favorable to the Company as those charged to unrelated entities.
Certain Other Relationships - ---------------------------
During 2002, the Company engaged Blas Ferraiuoli and Michael A. Rubin, each a director of the Company, to render legal services on behalf of the Company.
PART IV -------
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period preceding the filing of this Annual Report on Form 10-K, an evaluation was performed under the supervision of and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the design and operation of the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this subsection of Item 14 is set forth in the Financial Statements and Independent Auditors' Report, beginning on page of this Form 10-K. The index to Financial Statements is set forth on page of this Form 10-K.
(2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts is included on page 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 of this Form 10-K. The index to Financial Statements and Schedules is set forth on page of this Form 10-K. (a)(3) Exhibits. The Exhibits set forth in the following Index of the Exhibits are filed as a part of this report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between Margo Nursery Farms, Inc. and Margo Transition Corp., (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated December 31, 1997). (2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(a) to the Company's Form 8-K dated December 31, 1997). (2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(b) to the Company's Form 8-K dated December 31, 1997). (3)(a) Certificate of Incorporation as currently in effect (incorporated by reference to same exhibit number to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). (3)(b) Certificate of Amendment dated May 29, 1998 to Certificate of Incorporation (incorporated by reference to the Company's Form 8-K dated June 1, 1998) (3)(c) By-Laws as of January 1, 1998(incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). (4)(a) Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 of Form S-8 Registration Statement (No. 333-59619). (4)(b) 1998 Stock Option Agreement (Incorporated by reference to Exhibit No. 4.2 of Form S-8 Registration Statement (No. 333-59619). (4)(c) Form of Stock Option Agreement (Incorporated by reference to Exhibit No. 4.3 of Form S-8 Registration Statement (No. 333-59619). (10) (a) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 filed April 15,1993: (i) Lease Agreement dated January 1, 1993 between the Company and the Spectors. (b) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993 filed April 15, 1994: (i) First Amendment to Lease Agreement dated January 1, 1994 between the Company and the Spectors. (c) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997: (i) Lease and Purchase Agreement, dated October 31, 1996 among Cali Orchids, Inc. and the Company. (ii) Stock Option Agreement, dated August 9, 1996, with Frederick D. Moss. (iii)Stock Option Agreement, dated August 9, 1996, with Blas R. Ferraiuoli. (iv) Stock Option Agreement, dated August 9, 1996, with Michael A. Rubin. (v) Stock Option Agreement, dated July 9, 1993, with Frederick D. Moss.
(vi) Stock Option Agreement, dated July 9, 1993, with Margaret D. Spector. (vii)Stock Option Agreement, dated July 9, 1993, with Blas R. Ferraiuoli. (viii) Stock Option Agreement, dated August 9, 1996, with Margaret D. Spector. (d) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998: (ii) Second Amendment to lease Agreement dated as of January 1, 1998, between the Company and the Spectors. (e) Material contract incorporated by reference from the Company's Annual Report on Report on Form 10-K for the year ended December 31, 2001. (i) Master Promissory Note for %2.5 million with Scotiabank of Puerto Rico dated January 25, 2002. (f) Material Contract incorporated by reference from the Company's Report on Form 10-Q for the quarter ended September 30, 2002 (i) Management Agreement, dated October 14, 2002, between Salinas Holdings, Inc. and Margo Nursery Farms, Inc. (21) List of Registrant's Subsidiaries. (Incorporated by reference to same exhibit number of the Company's Annual Report on Form 10-K for the year ended December 31, 2001) (23) Consent of Deloitte & Touche.
(b) Reports on Form 8-K. -------------------
(i) Report on Form 8-K, dated December 2, 2002, reporting under Item 5, the collection of $425,000 on a past due note.
(ii) Report on Form 8-K, dated November 14, 2002, reporting under Item 7, the filing of Certifications by the Chief Executive and Chief Financial Officers of the Company.
(iii)Report on Form 8-K, dated October 14, 2002, reporting under Item 5, entering into Salinas Holding, Inc. joint venture.
I, Michael J. Spector, Chairman of the Board and Chief Executive Officer of Margo Caribe, Inc. certify that:
1. I have reviewed this Annual Report on Form 10-K of Margo Caribe, Inc.
2 . Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Michael J. Spector -------------- ---------------------- Michael J. Spector Chief Executive Officer
I, Alfonso Ortega, Chief Financial Officer of Margo Caribe, Inc. certify that:
1. I have reviewed this Annual Report on Form 10-K of Margo Caribe, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Alfonso Ortega -------------- ------------------ Alfonso Ortega Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 2003 By: /s/ Michael J. Spector, President ---------------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
Dated: March 26, 2003 By: /s/ Michael J. Spector ---------------------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer
Dated: March 26, 2003 By: /s/ Margaret D. Spector ---------------------------------------- Margaret D. Spector, Director
Dated: March 26, 2003 By: /s/ Blas R. Ferraiuoli ---------------------------------------- Blas R. Ferraiuoli, Director
Dated: March 26, 2003 By: /s/ Michael A. Rubin ---------------------------------------- Michael A. Rubin, Director
Dated: March 26, 2003 By: /s/ John A. Wing ---------------------------------------- John A. Wing, Director
Dated: March 26, 2003 By: /s/Ramon Dominguez ---------------------------------------- Ramon Dominguez, Director
Dated: March 26, 2003 By: /s/ J. Fernando Rodriguez ---------------------------------------- J. Fernando Rodriguez, Director President and Chief Operating Officer
Dated: March 26, 2003 By: /s/ Alfonso A. Ortega -------------------------------------- Alfonso A. Ortega Perez, Vice President, Treasurer, Chief Financial and Accounting Officer
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K Annual Report Filed with Securities and Exchange Commission
For the year ended December 31, 2002
MARGO CARIBE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES For the year ended December 31, 2002
Page ---------- Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules - ---------
Schedule II - Valuation and Qualifying Accounts
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.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Margo Caribe, Inc. Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheets of Margo Caribe, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index as Schedule II for each of the three years in the period ended December 31, 2002. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Margo Caribe, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 14, 2003
Stamp No. 1857194 affixed to original.
MARGO CARIBE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001
ASSETS ------
2002 2001 ----------- -----------
Current Assets: Cash and equivalents $ 1,417,879 $ 838,921 Accounts receivable, net 1,818,076 1,798,251 Inventories 3,378,779 3,510,381 Due from related entity 51,026 -- Current portion of notes receivable -- 26,331 Deferred tax asset 11,400 -- Prepaid expenses and other current assets 312,106 296,482 ----------- ----------- Total current assets 6,989,266 6,470,366
Property and equipment, net 1,249,889 1,398,689 Land held for future development 1,105,627 1,053,406 Investment in unconsolidated subsidiary 417,296 -- Notes receivable, net of current portion 28,112 42,164 Other assets 6,016 44,396 ----------- ----------- Total assets $ 9,796,206 $ 9,009,021 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
Current liabilities: Current portion of long-term debt $ 138,967 $ 129,047 Notes payable 1,730,500 1,930,500 Accounts payable 829,382 868,071 Accrued expenses 332,305 194,294 ----------- ----------- Total current liabilities 3,031,154 3,121,912 Deferred revenue 74,238 -- Long-term debt, net of current portion 244,425 307,528 ----------- ----------- Total liabilities 3,349,817 3,429,440 ----------- -----------
Commitments and contingencies
Shareholders' equity: Preferred stock, $0.01 par value; 250,000 shares authorized, no shares issued -- -- Common stock, $.001 par value; 10,000,000 shares authorized, 2,119,609 and 2,115,984 shares issued, 2,079,889 and 2,072,204 shares outstanding in 2002 and 2001, respec- tively 2,120 1,924 Additional paid-in capital 5,241,136 4,659,792 Retained earnings 1,299,421 1,014,153 Treasury stock, 39,800 common shares, at cost (96,288) (96,288) ----------- ----------- Total shareholders' equity 6,446,389 5,579,581 ----------- ----------- Total liabilities and shareholders' equity $ 9,796,206 $ 9,009,021 =========== ===========
See accompanying notes to consolidated financial statements.
MARGO CARIBE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
Note 1 - Business and Summary of Significant Accounting Policies - ----------------------------------------------------------------
Margo Caribe, Inc. and subsidiaries (all Commonwealth of Puerto Rico corporations and collectively, the "Company") are primarily engaged in the production and distribution of a wide range of tropical plants for sale to interior and exterior landscapers, wholesalers and retailers. The Company is also engaged in the manufacturing and distribution of its own line ("Rain Forest") of planting media, sales and distribution of lawn and garden products, and provides landscaping design installation and maintenance services. The Company is also engaged in seeking real estate sites for the development of residential housing projects.
The Company's primary facility is located in Vega Alta, Puerto Rico. From this facility, the Company sells principally to customers in Puerto Rico and the Caribbean.
(a) Principles of Consolidation ---------------------------
The accompanying consolidated financial statements include the financial statements of Margo Caribe, Inc. (the holding company) and its wholly-owned subsidiaries, Margo Nursery Farms, Inc., Margo Flora, Inc., Margo Landscaping and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc., Garrochales Construction and Development Corporation and Margo Development Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Cash Equivalents ----------------
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months of less to be cash equivalents. At December 31, 2002 and 2001, cash and equivalents include $500,000 invested in a certificate of deposit bearing interest at 1.7% and 1.5%, respectively, which has been pledged as collateral for notes payable (refer to Note 9).
(c) Inventories -----------
Inventories of plant material include the cost of seeds, cuttings, pots, soil, and an allocation of chemicals, fertilizers, direct labor and overhead costs such as depreciation and rent, among others. Inventories of plant material are stated at the lower of cost (first-in, first-out) or market. Inventories of lawn and garden products are stated at the lower of average cost or market.
(d) Property and Equipment and Land Held for Future Development -----------------------------------------------------------
Property and equipment are carried at acquisition cost. Depreciation and amortization are provided over the estimated useful lives of the respective assets on a straight-line basis. Such useful lives range from four to twenty years.
The Company considers depreciation of certain facilities and equipment as a direct cost of production of inventory. As inventory is sold, such cost is charged to cost of sales.
Land held for future development is stated at cost. Interest is capitalized at the effective interest rate paid on borrowings for interest costs incurred on real estate investment components during the pre-construction and planning stage, and the periods that the project is under development. Capitalization of interest is discontinued if development ceases at a project.
(e) Revenue Recognition -------------------
The Company recognizes sales of foliage and lawn and garden products upon shipment from its facilities to customers. Revenues from landscaping services are recognized as plants are installed at the customers' facilities.
(f) New Accounting Pronouncements -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", which addresses the financial accounting and reporting for the impairment or disposal of long lived assets. The Statement superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. This statement did not have a significant effect on the Company's results of operations or financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt - an amendment of APB Opinion No. 30", which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. This amendment is effective for fiscal years beginning after May 15, 2002.
SFAS No. 145 also amends SFAS No. 13 "Accounting for Leases", which requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment became effective for transactions occurring after May 15, 2002. SFAS No. 145 is not expected to have a significant effect on the Company's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 applies to costs associated with an exit activity, but
does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 146 does not apply to costs associated with a retirement of long-lived assets covered by SFAS No. 143. The Company is required to implement SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this statement to have a significant effect on its financial position or results of operations.
(g) Income Tax ----------
The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the use of the asset and liability method in accounting for income taxes. Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico ("Act No. 225" of December 1, 1995, as amended) provides the Company with a 90% tax exemption for income derived from "bonafide" agricultural business, including sales of nursery plants within Puerto Rico and outside Puerto Rico, as well as a 100% exemption from property, municipal and excise taxes.
Rain Forest Products Group, Inc.'s operations are covered under the Puerto Rico Industrial Tax Incentives Act of 1987 ("the Act"). Under the Act, the Company has a 90% tax exemption on income and property taxes and a 60% exemption on municipal taxes for a period of fifteen years, commencing January 1, 1997.
(h) Income (loss) per Common Share ------------------------------
The Company reports its earnings per share ("EPS") using SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
On May 14, 2002, the Company's Board of Directors declared a 10% stock dividend on the Company's common stock. The stock dividend was issued on June 28, 2002, to shareholders of record on June 14, 2002. The stock dividend resulted in the issuance of 188,367 additional shares of common stock. Accordingly, the weighted average number of common shares outstanding (and stock options) for the periods prior to December 31, 2002 have been adjusted to reflect the effect of the stock dividend as of the beginning of the earliest period pressented.
(i) Fair Value of Financial Instruments -----------------------------------
The amounts included in the consolidated financial statements for cash and equivalents, short term investments, accounts receivable, notes payable, accounts payable and accrued expenses reflect their fair value due to the short-term maturity of these instruments. The fair values of the Company's other financial instruments are discussed in Notes 5 and 10.
(j) Accounting for Stock-Based Compensation Plans ---------------------------------------------
The Company accounts for its stock-based compensation plans pursuant to the provisions of Accounting Principles Board Opinion 25 and related interpretations, which generally require that compensation cost be recognized to the extent the market price of the related stock exceeds the exercise price at the measurement date. However, SFAS No. 123, "Accounting for Stock-Based Compensation", provides an alternative method for measuring compensation cost by measuring the fair value of the option at the award date. Although the compensation cost measurement criteria is not required to be adopted, SFAS No. 123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123", requires disclosure of pro forma information regarding the effects of the application of its compensation cost measurement criteria and of other information.
(k) Use of Estimates in the Preparation of Financial Statements -----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The allowance for doubtful accounts is an amount that management believes will be adequate to absorb estimated losses on existing accounts receivable that are deemed to be uncollectible based on evaluations of collectibility of specific customers and their prior credit experience. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the existing accounts receivable and the related allowance may change in the near term.
Direct and indirect costs that are capitalized as part of inventory of plant material which management estimates cannot be recovered from future sales of plant inventory are charged to cost of sales. Management's determination of the amount of capitalized costs that should be charged to cost of sales is based on historical sales experience and its judgement with respect to the future marketability of the inventory.
The Company has a deferred tax asset (refer to Note 12) of $673,612, which is partially offset by a valuation allowance of $662,212. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. The amount of the deferred tax asset considered realizable could change in the near term depending on future levels of taxable income.
(l) Investment in Unconsolidated Subsidiary ---------------------------------------
Investment in unconsolidated subsidiary is accounted for by using the equity method of accounting for investments, under which the Company's share of earnings of the subsidiary is reflected in income as earned, and dividends are credited against the investment in subsidiary when received.
(m) Impairment of Long-Lived Assets -------------------------------
The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No indications of impairment are evident as a result of such review.
Note 2 - Inventories - --------------------
At December 31, 2002 and 2001, inventories comprised the following:
Description 2002 2001 - -------------------------------- ---------- ---------- Plant material $2,799,960 $2,813,920 Lawn and garden products 251,438 362,273 Raw material and supplies 327,381 334,188 ---------- ---------- $3,378,779 $3,510,381 ========== ==========
Note 3 - Accounts Receivable - ----------------------------
At December 31, 2002 and 2001, accounts receivable comprised the following:
Description 2002 2001 - --------------------------- ---------- ---------- Trade receivables $1,863,522 $1,822,315 Government reimbursement 75,000 64,277 Accrued interest 188 390 Employee advances 9,929 8,367 Other accounts receivable 65,137 37,902 ---------- --------- 2,013,776 1,933,251 Less allowance for doubtful accounts (195,700) (135,000) ---------- ---------- $1,818,076 $1,798,251 ========== ==========
Included within trade receivables as of December 31, 2002 are approximately $104,000 ($59,000 in 2001) due from Estancias de Cerro Mar, Inc. ("Estancias"), an entity controlled by the Company's principal shareholder. During the years ended December 31, 2002 and 2001, the Company billed approximately $525,000 and $279,000, respectively, to Estancias for landscaping and landscape maintenance services.
Note 4 - Due from Related Entity - --------------------------------
At December 31, 2002, the Company had advanced approximately $51,000 to its unconsolidated subsidiary, Salinas Holdings, Inc. for working capital purposes. This balance was collected during February 2003.
Note 5 - Notes Receivable - -------------------------
At December 31, 2002 and 2001, notes receivable comprised the following:
Description 2002 2001 - ------------------------------------------ --------- ---------
Note receivable from the sale of a former Dominican Republic subsidiary $ -- $ 20,000
10% note, collateralized by real property -- 26,331
Non-interest bearing notes, due on demand, personally guaranteed by present company personnel 28,112 22,164 --------- ---------
28,112 68,495 Less current portion -- (26,331) --------- ---------
$ 28,112 $ 42,164 ========= =========
The Company owned a note receivable with an outstanding principal balance of approximately $997,000, from the sale of Cariplant S.A. ("Cariplant") a former Dominican Republic subsidiary, to Altec International C. por A. ("Altec"), another unrelated Dominican Republic company. The note was collateralized by the common stock and personal guarantee of the major shareholder of Altec, as well as by a junior lien on Cariplant's property and equipment.
Due to the unfavorable collection experience, the note was written down on several occasions and reduced to a carrying value of $20,000 at December 31, 1999.
During December 2002, Altec agreed to settle the note for $450,000, in order to obtain the collateral pledged and remove the Company's junior lien from Cariplant's property. For the year ended December 31, 2002, the Company received $425,000, recognizing $405,000 as a gain in the accompanying statement of operations. The remaining $25,000 will be received during 2003 and recognized as income upon collection.
Amounts reflected in the balance sheet for notes receivable approximate their current fair values based on market interest rates for comparable risks, maturities and collateral.
Note 6 - Property and Equipment - -------------------------------
At December 31, 2002 and 2001, property and equipment comprised the following:
2002 2001 ----------- -----------
Leasehold improvements $ 1,456,960 $ 1,364,949 Equipment and fixtures 1,599,948 1,585,675 Transportation equipment 600,344 460,232 Real estate property 224,327 224,327 ----------- ----------- 3,881,579 3,635,183 Less accumulated depreciation and amortization (2,631,690) (2,236,494) ----------- ----------- $ 1,249,889 $ 1,398,689 =========== ===========
During the years ended December 31, 2002, 2001 and 2000, depreciation expense charged to production was approximately $234,000, $315,000, and $261,000, respectively.
Note 7 - Land Held for Future Development - -----------------------------------------
In December 2000, the Company purchased approximately 109 acres of land in Arecibo, Puerto Rico at a total cost of approximately $988,000. The Company intends to develop this land into lots for residential homes.
Note 8 - Investment in Unconsolidated Equity Subsidiary - -------------------------------------------------------
On October 14, 2002, the Company entered into an agreement with two other unrelated parties and organized Salinas Holdings, Inc.("Salinas"), a Puerto Rico corporation engaged in the production and distribution of sod (turf) and palms and trees grown in the ground. The Company has a 33.33% interest in Salinas. The Company further entered into a management agreement with Salinas to provide certain management services to the entity and to market its products. The Company earns $2,000 per month for such services and between 15% and 17% commission on the sales of its products. Salinas commenced operations on November 1, 2002.
The Company has accounted for its investment in Salinas using the equity method of accounting. At December 31, 2002, and for the period then ended, Salinas' unaudited condensed financial position and results of operations information was as follows:
Assets Amount ------ ---------- Current assets $ 839,162 Property and equipment 396,033 ---------- $1,235,195 ==========
Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities $ 83,306 Shareholders' equity 1,151,889 ---------- $1,235,195 ==========
Results of Operations Amount --------------------- ---------- Sales $ 10,144 Cost of sales 4,346 General and adminis- trative expenses 53,909 ----------
Net loss $ 48,111 ==========
At December 31, 2002, the Company's investment in Salinas Holdings, Inc., was as follows:
Description Amount - ----------------------- --------- Original investment $ 433,333 Participation in loss of unconsolidated equity subsidiary (16,037) ---------
Balance at December 31, 2002 $ 417,296 =========
Note 9 - Notes Payable
At December 31, 2002 and 2001, the Company had short-term borrowings with various commercial banks in Puerto Rico, comprised of the following:
Description 2002 2001 - ----------------------------------- ---- -----
Unsecured commercial line of credit of $1 million, bearing interest at 2% over Libor rate (4.6% at December 31,2001), expired in June 2002 $ - $ 800,000
Commercial line of credit of $2.5 million, bearing interest at 1.8% over Libor rate (3.13% at December 31, 2002) due on June 30, 2003, collateralized by land held for future development and the Company's accounts receivable and inventories 1,230,500 630,500
Notes payable, collateralized by cash equivalent invested in a certificate of deposit, bearing interest at 2.2% and 2.3% at December 31 2002 and 2001, respectively 500,000 500,000 ---------- ---------- $1,730,500 $1,930,500 ========== ==========
Note 10 - Long-Term Debt - ------------------------
At December 31, 2002 and 2001, long-term debt comprised the following:
Description 2002 2001 - ------------------------------------ ---- ----
Five-year term loans, bearing interest at 2% over Libor rate (3.8% at December 31, 2002), payable in monthly installments of $11,581, through December 2007 $383,392 $436,575
Less current portion (138,967) (129,047) -------- --------
Long-term debt $244,425 $307,528 ======== ========
Based on borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term debt approximates the recorded amounts.
The annual aggregate maturities of long-term debt are as follows:
Year Ending December 31, Amount ------------ ------ 2003 $138,967 2004 138,967 2005 71,730 2006 26,153 2007 7,575 -------- $383,392 ========
The Company's debt agreements contain various covenants, which among other things, require the Company to meet certain debt to asset ratios and a minimum working capital. At December 31, 2002 and 2001, the Company was in compliance with such covenants.
Note 11 - Deferred Revenue - --------------------------
As a result of damages caused by Hurricane Georges in September 1998, the Puerto Rico Department of Agriculture (the "Department of Agriculture") committed to providing assistance to bona-fide agricultural enterprises affected by the hurricane. During 2002, the Company received $74,238, representing the assistance approved by the Department of Agriculture to the Company, and signed an agreement with the Department of Agriculture, which among other things, requires the Company's Barranquitas facility to be operated as an agricultural enterprise for a minimum period of ten years from the date of the agreement. Accordingly, the Company recorded the amount received as deferred revenue, which will be credited to income prorata over the ten-year period of the commitment (refer to Note 16 (b)).
Note 12 - Income Taxes - ----------------------
The Company provides for income taxes using the applicable statutory tax rates in the Commonwealth of Puerto Rico.
Set forth below are explanations for the differences between the income tax provision (benefit) and the amount computed by applying the Puerto Rico statutory income tax rate of 39% to income (loss) before income tax provision:
2002 2001 2000 --------- --------- --------- Income tax provision (benefit) computed by applying tax rate $ 327,969 $ 131,992 $(398,865)
(Increase) decrease in income tax benefit resulting from Puerto Rico tax exemption (251,542) (80,452) 248,909
Tax loss carryover benefit (utilization) and other (76,427) (51,540) 149,956 --------- --------- ---------
$ -- $ -- $ -- ========= ========= =========
Deferred income taxes, prior to the valuation allowance, were recognized in the consolidated balance sheet at December 31, 2002 and 2001 due to the tax effect of temporary differences and loss carryforwards as follows:
2002 2001 --------- --------- Deferred tax assets: - ------------------- Net operating loss carryforwards $ 628,496 $ 734,345 Valuation allowance for accounts receivable 45,116 18,838 --------- --------- 673,612 753,183 Less valuation allowance (662,212) (753,183) --------- --------- Net deferred tax asset $ 11,400 $ -- ========= =========
Note 13 - Income (loss) Per Common Share - ----------------------------------------
Basic and diluted income (loss) per common share for the years ended December 31, 2002, 2001 and 2000 were determined as follows:
Basic income (loss) per common share: - ------------------------------------- 2002 2001 2000 ----------- ----------- -----------
Net income (loss) attributable to common shareholders $ 852,345 $ 338,443 $(1,022,733) =========== =========== =========== Weighted average number of common shares outstanding 2,073,997 2,071,174 2,069,584 =========== =========== =========== Basic income (loss) per common share $ .41 $ .16 $ (.49) =========== =========== ===========
Diluted income (loss) per common share: - ---------------------------------------
Net income (loss) attributable to common shareholders $ 852,345 $ 338,443 $(1,022,733) =========== =========== =========== Weighted average number of common shares outstanding 2,073,997 2,071,174 2,069,584
Plus incremental shares from assumed exercise of stock options 40,248 33,211 -- ----------- ----------- ----------- Adjusted weighted average shares 2,114,245 2,104,385 2,069,584 =========== =========== =========== Diluted income (loss) per common share $ .40 $ .16 $ (.49) =========== =========== ===========
For the year ended December 31, 2000, the effect of the assumed exercise of stock options determined by using the treasury stock method was antidilutive; thus no incremental shares were added to the weighted average number of common shares outstanding.
Note 14 - Commitments and Contingencies - ---------------------------------------
The Company is a party to various legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
Note 15 - Preferred Stock - -------------------------
The certificate of incorporation of the Company authorizes the issuance of 250,000 shares of one cent ($0.01) par value serial preferred stock, and the Board of Directors is authorized from time to time to divide the preferred stock into series and to determine the number of shares of each series and the relative rights, preferences and limitations of each such series. As of December 31, 2002, there were no outstanding shares of preferred stock.
Note 16 - Lease and Option Agreements - -------------------------------------
(a) Property in Vega Alta, Puerto Rico ----------------------------------
The primary Puerto Rico facility is leased from Michael J. Spector and Margaret D. Spector (the "Spectors"), who are officers, directors and major shareholders of the Company.
Effective January 1, 1993, the Company entered into a lease agreement with the Spectors for an initial five year period at a monthly rental of $19,000. In addition, the Spectors have released the Company from responsibility from any claims arising from the Company's use of a defective fungicide in its operations at the nursery facility. Under the lease, the Company is required to make monthly lease payments of $24,000, pay all taxes on property, maintain certain insurance coverages and otherwise maintain and care for the property. The lease agreement terminated on December 31, 2002. The Spectors have committed to grant the Company an option to extend the lease for an additional period of five years ending December 31, 2007. As of December 31, 2002, the Company was in the process of negotiating a new lease agreement with the Spectors.
Under the expired lease agreement, the Company had the option to purchase the nursery facility at any time during the term of the lease, based on the property's appraised value. The Company paid $1,000 per month for this purchase option, which amount was expensed when paid.
Effective January 1, 1994, the Company amended the lease agreement with the Spectors to include an additional 27 acres of land adjacent to the nursery facility at a monthly rental of $1,750. This amendment did not provide for renewal nor purchase options towards the additional 27 acres of land. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party could terminate this portion of the lease upon 30 days prior written notice. In connection with this lease amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001 for the unamortized value of the leasehold improvements applicable to said parcel as of the date of termination. Effective February 1, 2000, the lease agreement with respect to the 27 acre parcel was terminated. In March 2001, the Spectors paid the unamortized value of said improvements ($45,384) to the Company.
Total rental payments amounted to approximately $288,000 in 2002 and 2001 and $290,000 in 2000.
(b) Property in Barranquitas, Puerto Rico -------------------------------------
Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc. to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. During the first year of the initial five-year term of the lease, monthly payments amounted to $4,500. During the remaining four years of the initial term of the lease, monthly payments amounted to $5,000. During the first and second renewal terms, monthly payments increased to $6,000 and $7,000, respectively. Effective December 23, 2002, both the lessor and the Company executed a "Release and Settlement Agreement" in order to terminate the lease agreement. Under the terms of the agreement, the Company must vacate the facilities on or before June 30, 2003.
In connection with a certain requirement arising from an agreement for assistance proceeds received from the Puerto Rico Department of Agriculture, the lessor has represented to the Company within the Release and Settlement Agreement that he will comply with the ten-year requirement for this facility to be operated as an agricultural enterprise.
Total rental payments amounted to $72,000 in 2002 and $60,000 in 2001 and 2000.
(c) Other Properties in Vega Alta, Puerto Rico ------------------------------------------
On March 24, 1999, the Company leased two additional parcels of land from the Puerto Rico Land Authority (an instrumentality of the Commonwealth of Puerto Rico). The two parcels are adjacent to each other, have a total area of 321 acres, and are located approximately one mile from the Company's main nursery facility in Vega Alta. Among other things, the lease agreement provides for an initial lease term of five years subject to three additional renewal terms of five years, at the option of the Company. During the initial term, total lease payments amount to $33,625 per year. Lease payments amounted to $33,600 in 2001 and 2000. The agreement provides for termination upon 30 days written notice by either party. During December 2001, the Company terminated this lease agreement with the Puerto Rico Land Authority as a result of intense flooding experienced in these parcels of land.
(d) Aggregate Lease Obligations and Expenses ----------------------------------------
The Company's obligations under the above and other non-cancelable operating lease agreements in force at December 31, 2002, assuming the Company continues its lease payments at the Vega Alta facility at $24,000 per month, and vacates the Barranquitas facility by June 30, 2003, are as follows:
Year ending Minimum December 31, Lease Payments ------------ -------------- 2003 $324,000 2004 288,000 2005 288,000 2006 288,000 2007 288,000 ----------- $1,476,000 ==========
Total rental expense under all operating lease agreements amounted to approximately $360,000, $382,000 and $403,000, for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 17 - Stock Option and Salary Deferral Plans - ------------------------------------------------
Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan") to replace the Company's 1988 Stock Benefits Plan (the "1988 Plan"). Outstanding options granted under the previous plan, including all related obligations and commitments, will continue to be honored by the Company.
Under the 1998 Plan, the Company's Board of Directors, through a committee, can award options to purchase up to 200,000 shares of common stock (exclusive of outstanding options under the previous plan) to eligible employees at 100% of the fair market value at the time of the grant, except that options granted to persons owning 10% or more of the outstanding common stock carry an exercise price equal to 110% of the fair market value at the date of grant. The 1998 Plan also provides for the automatic grant of options to purchase 2,500 shares of common stock to each non-employee director on the first business day following every annual meeting of shareholders.
Options vest ratably over a period of five years, become exercisable one year from the date of grant and expire ten years after the date of grant. The status of the stock options granted under the 1998 Plan and the prior 1988 Plan as of December 31, 2000, 2001 and 2002, and changes during the years ended on those dates, are as follows:
- ------------------------------- ------------ ----------------- ------------- Weighted Price per Share Average Description Shares Range Price - ------------------------------- ------------ ----------------- -------------
Outstanding, December 31, 1999 147,950 $1.36 to $3.13 $2.47 Granted 11,000 1.59 to 1.75 1.63 Exercised (7,700) 1.36 to 2.85 2.57 Forfeited (2,200) 1.76 to 2.85 2.31 --------- -------------- ----
Outstanding, December 31, 2000 149,050 1.36 to 3.13 2.41 Granted 44,000 1.88 to 3.75 2.48 Exercised (1,650) 1.36 1.36 Forfeited (4,400) 1.76 to 2.85 2.08 -------- -------------- ---- Outstanding, December 31, 2001 187,000 1.36 to 3.75 2.44 Granted 71,500 2.89 to 3.50 2.97 Exercised (7,700) 1.76 to 2.05 1.88 Forfeited (1,100) 1.76 1.76 -------- -------------- ---- Outstanding, December 31, 2002 249,700 $1.36 to $3.75 $2.61 ======== ============== ===== Exercisable, December 31, 2002 125,180 $1.36 to $3.75 $2.45 ======== ============== =====
The following table summarizes information about stock options outstanding at December 31, 2002:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in measuring stock based compensation, including options. Accordingly, no compensation expense has been recognized for options granted under both plans. Had compensation expense been determined based upon the fair value at the grant date for awards under any plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income (loss) and net income (loss) per share, on a pro forma basis, would have been as follows:
Year ended December 31, ----------------------------------------- 2002 2001 2000 --------- --------- -------------
Net income as reported $ 852,345 $ 338,443 $ (1,022,733) Total stock based com- pensation expense determined under fair value based method for all awards (36,463) (34,527) (42,670) --------- --------- ------------- Pro forma net income (loss) $ 815,882 $ 303,916 $ (1,065,403) ========= ========= ============= Earnings per share: Basic - as reported $ 0.41 $ 0.16 $ (0.49) ========= ========= ============= Basic - pro forma $ 0.39 $ 0.15 $ (0.51) ========= ========= ============= Diluted - as reported $ 0.40 $ 0.16 $ (0.49) ========= ========= ============= Diluted - pro forma $ 0.39 $ 0.14 $ (0.51) ========= ========= =============
The weighted average fair value of an option granted in 2002, 2001 and 2000, was $1.35, $1.90 and $2.26, respectively. For purposes of fair market value disclosures, the fair market value of an option grant was estimated using the Black-Scholes option pricing model with the following assumptions:
2002 2001 2000 ---- ---- ----
Risk-free interest rate 5.36% 6.4% 7.0%
Average life of options 10 yrs. 10 yrs. 10 yrs.
Volatility 34% 72% 211%
Dividend yield 0% 0% 0%
During 1998, the Company established a Salary Deferral Retirement Plan (the "Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers all employees who are at least 21 years old and is effective from the date of
employment. For the years ended December 31, 2002, 2001 and 2000, the Company paid approximately $58,000 $53,000 and $50,000 respectively, representing the matching contributions under the retirement plan for all participants.
Note 18 - Supplemental Disclosures for the Statements of Cash Flows - -------------------------------------------------------------------
(a) Non-Cash Investing Activities -----------------------------
During the year ended December 31, 2002, the Company applied a certificate of deposit amounting to $500,000 to pay off a related note payable. Subsequently, on two separate occasions, the Company opened a certificate of deposit amounting to $500,000 with the proceeds from a related note payable. The Company also traded-in a vehicle with a cost of $31,500, receiving $7,000 as a trade-in value for the old vehicle, and assuming a related debt of $24,500. The Company also purchased various vehicles for $50,325 by assuming the related debt.
During the year ended December 31, 2001, fully depreciated equipment with a cost of $26,568 was written off. The Company exchanged equipment with a book value of $19,367 recording a $15,000 account receivable, after recognizing a loss of $4,367 on the transaction. The Company also applied $44,789 from lease payments due to the Company's major shareholder against amounts due from the major shareholder to the Company. In another non-cash transaction, the Company applied a certificate of deposit amounting to $500,000 to pay off a related note payable.
During the year ended December 31, 2000, fully depreciated equipment amounting to $166,820 was written off. The Company also transferred unamortized leasehold improvements with a cost of $331,456 and a book value of $45,384 as an amount due from shareholder, regarding the termination of a lease agreement of a 27 acre parcel of land previously leased to the Company.
(b) Non-Cash Financing Activities -----------------------------
The Company issued a 10% stock dividend, resulting in the capitalization of 188,367 common shares at a market price of $3.01 as of June 28, 2002.
(c) Other Cash Flow Transactions ----------------------------
During the years ended December 31, 2002, 2001, and 2000, the Company made interest payments of approximately $64,000, $125,000, and $134,000, respectively. During the years ended December 31, 2002, 2001 and 2000, the Company did not make any income tax payments.
Note 19 - Major Customers - -------------------------
During 2002, the Company's single largest customer accounted for approximately 30% ($2,961,000) of the Company's net sales.
During 2001, the Company's two largest customers accounted for approximately 35% ($3,275,000) of the Company's net sales. The first customer accounted for 24% ($2,220,000) and the second customer accounted for 11% ($1,055,000) of the Company's net sales.
During 2000, the Company's two largest customers accounted for approximately 30% ($2,429,000) of the Company's net sales. The first customer accounted for 17% ($1,379,000) and the second customer accounted for 13% ($1,050,000) of the Company's net sales.
Note 20 - Significant Concentration of Risk - -------------------------------------------
As discussed in Note 1, the Company's operations are principally concentrated in Puerto Rico. The Company's operations are vulnerable to severe weather, such as hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. As of December 31, 2002, the Company has been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages.
The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's operations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico. Concentration of credit risk with respect to accounts receivable is mitigated by monitoring the operations and financial strength of the Company's customers. Certain short-term certificates of deposit are placed with local financial institutions. Such credit risk is mitigated by depositing the funds with high credit quality financial institutions and limiting the amount of credit exposure in any financial institution.
Note 21 - Segment Information - -----------------------------
In June 1997, the FASB issued Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way an enterprise reports information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 requires a reconciliation of total segment revenue and expense items and segment assets to the amount in the enterprise's financial statements. SFAS No. 131 also requires a descriptive report on how the operating segments were determined, the products and services provided by the operating segments, and any measurement differences used for segment reporting and financial statement reporting.
The Company's management monitors and manages the financial performance of three primary business segments: the production and distribution of plants, sales of lawn and garden products and landscaping services. The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income or loss.
The financial information presented below was derived from the internal management accounting system and is based on internal management accounting policies. The information presented does not necessarily represent each segment's financial condition and results of operations as if they were independent entities. At December 31, 2002 and 2001, the Company had $1,105,627 and $1,053,406, respectively, in assets pertaining to a new real estate development segment (which had not generated any revenues or expenses), of which $52,221 and $64,921 were acquired during 2002 and 2001, respectively. These assets have been included as part of the segment assets under the plants segment presented below.
Note 22 - Terminated Merger Agreement - -------------------------------------
During April 2000, the Company entered into an agreement to merge with a privately held development stage internet company (iTract, LLC). Certain conditions for the Company's obligation to proceed with the merger were not met as of March 1, 2001, and the Company's Board of Directors decided that it was not in the best interest of the Company or its shareholders to proceed with the transaction and terminated the merger agreement. The accompanying consolidated statement of operations for the year ended December 31, 2000 includes all expenses incurred in connection with the terminated merger agreement amounting to approximately $553,000.