-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O4gp31B2VFkrN1vb1Rr2kWPEFBYdiIwfBt0JcpazF7RlsRTHlGVKCBsqGj/NmB9w D3/SZaJJGk6wFUvRN7lOaQ== 0000950170-99-000470.txt : 19990402 0000950170-99-000470.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950170-99-000470 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARGO CARIBE INC CENTRAL INDEX KEY: 0000808493 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 592807561 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15336 FILM NUMBER: 99581381 BUSINESS ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 BUSINESS PHONE: 8098832570 MAIL ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 STREET 2: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 FORMER COMPANY: FORMER CONFORMED NAME: MARGO NURSERY FARMS INC DATE OF NAME CHANGE: 19920703 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-15336 MARGO CARIBE, INC. A PUERTO RICO CORPORATION - I.R.S. NO. 66-0550881 ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: ROAD 690, KILOMETER 5.8 VEGA ALTA, PUERTO RICO 00692 REGISTRANT'S TELEPHONE NUMBER: (787) 883-2570 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock, $.001 par value, held by non-affiliates of the registrant: $2,315,070 based on the last sales price of $35/8 per share on March 15, 1999 and 638,640 shares held by non-affiliates. The registrant had 1,875,322 shares of common stock, $.001 par value, outstanding as of March 15, 1999. ================================================================================ MARGO CARIBE, INC. 1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS PAGE ---- PART I ITEM 1. BUSINESS.................................................................................................1 ITEM 2. PROPERTIES...............................................................................................7 ITEM 3. LEGAL PROCEEDINGS....................................................................................... 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................................................... 9 ITEM 6. SELECTED FINANCIAL DATA.................................................................................10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION....................................................................12 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................................................................18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................................................18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................19 ITEM 11. EXECUTIVE COMPENSATION.................................................................................21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................................................23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........................................................................................26
PART I ITEM 1. BUSINESS GENERAL The principal business of Margo Caribe, Inc. and its subsidiaries (collectively, the "Company") is the production and distribution of tropical and flowering plants, the sale and distribution of lawn and garden products as well as landscaping design and installation services. During 1998, the Company was also engaged in seeking sites for the development of residential housing projects. Effective December 31, 1997, the Company changed its jurisdiction of incorporation from Florida to the Commonwealth of Puerto Rico. The reincorporation was accomplished by means of the merger of the Florida corporation into a newly created Puerto Rico corporation. As part of the merger, the Puerto Rico corporation changed its name to Margo Nursery Farms, Inc., and continued to operate the business previously conducted by the Florida corporation with the same officers and directors. Effective June 1, 1998, the Company adopted a holding company structure. The restructuring was accomplished by means of Margo Nursery Farms, Inc. ("Margo") transferring substantially all of its assets and liabilities to a newly formed Puerto Rico subsidiary ("Newco"), in return for all the outstanding stock of Newco. Newco continues to conduct the business previously operated by Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as the other existing subsidiaries of Margo. In connection with the holding company restructuring, Margo changed its corporate name to Margo Caribe, Inc. PRINCIPAL OPERATIONS During 1998 and 1997, the Company conducted operations in the Commonwealth of Puerto Rico ("Puerto Rico"). During 1997 the Company also conducted operations in South Florida. These operations are described below. PUERTO RICO OPERATIONS The Company's operations in Puerto Rico are conducted at a 117 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre farm is leased from Michael J. Spector and Margaret Spector, who are directors, officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Lease and Option to Purchase Puerto Rico Nursery Farm" herein. The 13 acre facility in the Municipality of Barranquitas is leased from Cali Orchids, Inc., an unrelated third party. The Company's operations in Puerto Rico include Margo Caribe, Inc. (the holding company), Margo Nursery Farms, Inc. ("Nursery Farms"), Margo Landscaping & Design, Inc. ("Landscaping"), Margo Garden Products, Inc. ("Garden Products"), Rain Forest Products Group, Inc. ("Rain Forest"), and Margo Development Corporation, all Puerto Rico corporations. Nursery Farms, which operates under the trade name of Margo Farms del Caribe, is engaged in the production and distribution of tropical and flowering plants. Its products are primarily utilized for the interior and exterior landscaping of office buildings, shopping malls, hotels and other commercial sites, as well as private residences. In Vega Alta, Nursery Farms produces various types of palms, flowering and ornamental plants, trees, shrubs, bedding plants and ground covers. In Barranquitas, Nursery Farms produces orchids, bromeliads, anthuriums, spathiphylum and poincettias. Its customers include wholesalers, retailers, chain stores and landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, Nursery Farms enjoys a 90% tax exemption under Puerto Rico law from income derived from its nursery business in Puerto Rico. Landscaping provides landscaping services to customers in Puerto Rico and the Caribbean, including commercial as well as residential landscape design and landscaping. Garden Products is engaged in sales of lawn and garden products, including plastic and terracotta pottery, planting media (soil, peat moss, etc.) and mulch. Among the various lawn and garden product lines it distributes, Garden Products is the exclusive distributor of Sunniland Corporation's fertilizer and pesticide products as well as DEROMA Italian terracotta pottery for Puerto Rico and the Caribbean. Rain Forest is engaged in the manufacturing of potting soils, mulch, professional growing mixes, river rock and gravels. Rain Forest's products are marketed by Garden Products. The Company enjoys a tax exemption grant from the Government of Puerto Rico for the manufacturing operations of Rain Forest. Margo Development Corporation, incorporated in January 1998, has been engaged in seeking real estate sites for the development of residential projects in Puerto Rico. SOUTH FLORIDA OPERATIONS After resuming sales in 1994 following the damage caused by Hurricane Andrew, the South Florida operation (Margo Bay Farms, Inc.) was not able to obtain adequate sales levels sufficient to make the operation feasible. On August 15, 1997, after a review of past and present performance of the South Florida operation, and in view of the strong competition in that market, the Company's Board of Directors determined to close this operation effective September 30, 1997, and dispose of all related assets. On September 29 and November 28, 1997, the Company sold the two nursery farms (a 54 acre and a 20 acre parcel) which comprised the Company's facilities in South Florida. PRODUCTION The Company's plants are propagated by using cuttings, plugs, liners, air layers, seeds and tissue cultures. Cuttings are obtained from the Company's own stock plants and from other nurseries for grow-out at the Company's facilities. The newly planted cuttings take from two months to five years to mature into finished products, depending on variety. Bedding plants and annuals take from four to eight weeks to mature. The Company's products are either field grown or container grown, depending on the variety of plants and where they are grown. Most of these products start out in small pots and are "stepped up" to larger pot sizes over time. The Company produces both field and container grown material, as well as flowering, bedding plants and hanging baskets. MARKETING The Company's marketing efforts have been primarily directed at customers throughout Puerto Rico and the Caribbean. The principal customers of the Company are wholesalers, mass merchandisers, chain stores, retailers, garden centers, hotels, landscapers, government projects and commercial businesses located in Puerto Rico and the Caribbean. The Company targets construction and government projects which require extensive landscaping. In addition, Margo Landscaping provides landscaping design, installation and maintenance services which complement the sales function. For large retailers in Puerto Rico, such as The Home Depot, 2 WalMart, Kmart, and Masso Expo) the Company develops promotional programs which include deliveries to customer outlets and special pricing based on volume. During 1998, 1997 and 1996, the Company's single largest customer, Masso Expo (formerly Builders Square) accounted for approximately 13%, 24%, and 27% , respectively, of the Company's net sales. The Company does not have any significant long-term (over one year) delivery contracts with customers, including landscaping contracts. FINANCIAL INFORMATION RELATING TO PRINCIPAL OPERATIONS The following table sets forth information regarding operations at each of the Company's operating locations for the years ended December 31, 1998, 1997 and 1996 as well as information regarding assets by location as of December 31, 1998, 1997 and 1996. The information is provided after the elimination of intercompany transactions.
1998 1997 1996 ---- ---- ---- (Amounts in 000's) SALES BY LOCATION: South Florida $ - $ 478 $ 471 Puerto Rico: Plants 3,019 2,957 3,192 Lawn and garden products 862 1,390 1,429 Landscaping 1,468 1,724 1,017 -------- ------- -------- $ 5,349 $6,549 $ 6,109 ======== ====== ======= OPERATING PROFIT (LOSS) BY LOCATION: South Florida $ - $ (517) $ (95) Puerto Rico (397) (722) 102 ------- ------- ------- $ (397) $ (1,239) $ 7 ========= ========= ======== IDENTIFIABLE ASSETS BY LOCATION: Puerto Rico $ 7,990 $ 8,952 $ 8,022 South Florida - - 2,370 Netherlands - - 4 ---------- --------- ---------- $ 7,990 $ 8,952 $ 10,396 ======== ======= ========
TRADE NAMES AND TRADEMARK The Company utilizes the Trade Names "Margo Farms" and "Margo Farms Del Caribe", and has registered the name "Margo Farms" as a trademark with the United States Department of Commerce Patent and Trademark Office. In addition, the Company has registered "Margo Farms del Caribe" (as a trade name) and "Rain Forest" (as a trademark) with the Department of State of the Commonwealth of Puerto Rico. 3 COMPETITION At the present time, the Company's sales efforts are primarily focused in Puerto Rico and the Caribbean. The Company enjoys a significant advantage over its competitors because it is the largest producer of quality nursery products in Puerto Rico. The Company continues expanding its operations in Puerto Rico. Most of the Company's competitors in Puerto Rico and the Caribbean are small nurseries and landscapers. SEASONALITY The demand for plants in Puerto Rico is year round, with increased demand during spring, late fall and winter. WORKING CAPITAL REQUIREMENTS OF THE INDUSTRY The nursery industry requires producers to maintain large quantities of stock plants and inventory to meet customer demand and to assure a new source of products in the future. As a result, producers need to invest significant amounts of capital in stock plants and inventory. The Company believes that it has sufficient working capital for its operations from cash flow generated from operations and short-term borrowings. EMPLOYEES At December 31, 1998, the Company had 138 full time employees, of which 120 were directly involved in nursery production activities, and 18 in sales, accounting and administration. None of its employees are represented by a union. GOVERNMENT REGULATION The United States Department of Agriculture ("USDA") inspects cuttings imported into the United States by the Company. In addition, USDA regulations control various aspects of the Company's plant production process, including restrictions on the types of pesticides and fertilizers. All pesticides and fertilizers utilized by the Company are approved by the Environmental Protection Agency, as required by USDA regulations. The USDA prohibits the importation of foreign soil into the United States and limits the size of plants that can be imported into the United States. Puerto Rico is considered part of the United States for purposes of the USDA regulations. Shipments of products may also be subject to inspections by certain Puerto Rico or state officials. These officials may quarantine or destroy plants that are contaminated or infected by hazardous organisms. The Company's operations are subject to the Fair Labor Standards Act which governs such matters as minimum wage requirements, overtime and other working conditions. A large number of the Company's personnel are paid at or just above the federal minimum wage level and, accordingly, changes in such minimum wage rate have an adverse effect on the Company's labor costs. NATURAL HAZARDS The Company's operations are vulnerable to severe weather, such as hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. As of March 30, 1999, the Company had been unable to obtain adequate crop and business interruption insurance coverage at a reasonable cost. The Company intends to continue to seek to obtain crop and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages. 4 The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's locations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants. INDUSTRY SEGMENTS The Company has three reportable segments identified by line of business: the production and marketing of tropical and flowering plants, the sale of related lawn and garden products and the provision of landscaping services. Certain financial information concerning this industry segment is set forth in Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Condition and in the Company's Consolidated Financial Statements included as Item 8 to this Annual Report on Form 10-K. FUTURE OPERATIONS The Company will continue to concentrate its economic and managerial resources in expanding and improving its present operations in Puerto Rico. The Company's Board of Directors has determined that these operations present the Company's most attractive opportunities for the near future. The Board believes that the Company should continue to capitalize its advantage as one of the largest, full service nurseries in the region. The Company is a supplier of plants and lawn and garden products for The Home Depot Puerto Rico ("Home Depot"), the largest mainland retailer of lawn and garden products according to NURSERY RETAILER magazine. Home Depot entered the Puerto Rico market with one store opening in September 1998, and has announced plans to open eight additional stores in Puerto Rico over the next three years. During March 1999, the Company leased two additional parcels of land (approximately 320 acres) from the Puerto Rico Land Authority. The Company intends to relocate its existing Vega Alta facilities and corporate offices to this property, as well as to use this additional land to increase the Company's volume of field grown material and to diversify within the nursery business by growing turf (sod). The Company was recently awarded a contract for approximately $668,000 by the Municipality of San Juan for the purchase of trees in connection with an ongoing reforestation program. The Company was also awarded a landscaping project for the Puerto Rico Art Museum. This landscaping project is scheduled for commencement during 1999 at an approximate contract price of $650,000. The Company is also exploring the possibility of diversifying into other activities within Puerto Rico, including but not limited to, real estate development. In this regard, during January 1998, the Company incorporated a new subsidiary, Margo Development Corporation. During 1999, the Company will be seeking to acquire options to purchase and/or purchase real estate sites for the development of residential projects in Puerto Rico. At March 15, 1999, the Company was in process of formalizing an option agreement for the purchase of approximately 20 acres of land near the Municipality of Loiza, Puerto Rico for future real estate development. INCOME TAXES FEDERAL TAXES As a Florida corporation, through December 31, 1997, the Company was subject to federal income taxes on its worldwide operations. For U.S. income tax purposes, the Company had elected the benefits of Section 5 936 ("Section 936") of the Internal Revenue Code ("the "Code"), which provided a credit against the Company's income tax liability based generally on a portion of wages paid by the Company in Puerto Rico. The Small Business Job Protection Act of 1996 (the "1996 Amendments") enacted into law on August 20, 1996, further amended Section 936 by repealing the credit available under this Section subject to a ten-year grandfather rule applicable only for corporations that were actively conducting a trade or business in Puerto Rico on October 13, 1995. In light of the phase-out of the benefits of Section 936, the Company decided to change its jurisdiction of incorporation to Puerto Rico, where it enjoys substantial tax benefits as discussed below. As a Puerto Rico corporation, effective January 1, 1998, the Company is generally only subject to U.S. income taxation to the extent it is engaged in a trade or business in the United States or receives income from sources in the United States. PUERTO RICO TAXES The Company is also subject to Puerto Rico income taxes from its Puerto Rico operations. Subject to certain limitations, during 1997 and 1996 the Company's federal income tax liability was creditable against its Puerto Rico income tax liability. The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico (Act. No. 225 of December 1, 1995, as amended) provides the Company with a 90% tax exemption for income derived from "bonafide" agricultural activities within Puerto Rico, including sales within and outside Puerto Rico, as well as a 100% exemption from property, municipal and excise taxes. The Act defines "bona fide agricultural activity" to include the nursery business. The Act became effective for taxable years commencing on or after December 1, 1995. Prior to the adoption of the Agricultural Incentives Act, the Company had obtained a grant of tax exemption from the Puerto Rico government under the Puerto Rico Tax Incentives Act of 1987, granting it an exemption from income tax on 90% of its income derived on the Company's export sales from Puerto Rico. The grant expired in 2002. Due to the benefits of Act. No. 225, the Company relinquished the export sales grant. Rain Forest obtained a grant of tax exemption for its manufacturing operations from the Puerto Rico Government under the Tax Incentives Act of 1987. The grant provides a 90% tax exemption from income and property taxes and a 60% exemption from municipal taxes. The grant is for a period of 15 years, commencing January 1, 1997. 6 ITEM 2. PROPERTIES During 1998, the Company conducted its operations from nursery facilities located in Puerto Rico. VEGA ALTA NURSERY FACILITY The Company leases a 117 acre nursery facility in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan. The facility, which includes the Company's corporate offices, consists of approximately 1,130,000 square feet of shade houses, propagation and mist facilities, as well as a 10,000 square foot warehouse for the Company's lawn and garden products. The nursery facility also has irrigation equipment and pump houses, shipping and storage areas, as well as a home for a field supervisor. The Vega Alta facility is leased from Michael J. Spector and Margaret D. Spector (the "Spectors"), who are officers, directors and the major shareholders of the Company, pursuant to a lease agreement dated as of January 1, 1993. The lease provides for an initial term of five years subject to one additional renewal term of five years at the option of the Company. During the initial term of the lease, rent was $19,000 per month. The lease also provides that during the renewal term, the rent increases to the greater of $24,000 per month, or the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. Under the lease, the Company must pay all taxes on the property, maintain certain insurance coverage and otherwise maintain and care for the property. The lease also contains an option which permits the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company must pay $1,000 per month. On January 1, 1998, the Company exercised its renewal option at a monthly rental of $24,000. On January 1, 1994, the lease agreement was amended to include an additional 27 acres of land adjacent to the nursery facility at a monthly rental of $1,750. This amendment did not provide for renewal or purchase options for this tract of land. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001, the unamortized value of the leasehold improvements applicable to such parcel as of the date of termination. During the years ended December 31, 1998 and 1997, total lease payments to the Spectors amounted to$309,000 and $249,000, respectively (not including the monthly payments for the option referred to above). BARRANQUITAS NURSERY FACILITY Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. During the first year of the initial term of the lease, monthly payments amount to $4,500. During the remaining four years of the initial term of the lease, monthly payments amount to $5,000. During the first and second renewal terms, monthly payments increase to $6,000 and $7,000, respectively. The lease agreement does not provide for any purchase option. For the year ended December 31, 1998, and 1997 total lease payments amounted to $45,000 and $54,000, respectively. Lease payments for 1998 reflect a rent abatement of $15,000 due to damages caused by Hurricane Georges. 7 NEW VEGA ALTA FACILITY On March 24, 1999, the Company leased two additional parcels of land from the Puerto Rico Land Authority (an instrumentality of the Government of the Commonwealth of Puerto Rico). The two parcels are adjacent to each other, have a total capacity of 321 acres, and are located approximately one mile from the Company's main nursery facility in Vega Alta. Among other things, the lease agreement provides for an initial lease term of five years subject to three additional renewal terms of five years, at the option of the Company. During the initial term, total lease payments amount to $33,625 per year. Lease payments for renewal terms are to be negotiated 90 days prior to each renewal term. ITEM 3. LEGAL PROCEEDINGS In the opinion of the Company's management, any pending or threatened legal proceedings of which management is aware will not have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER 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 1998 and 1997. The last reported sales price for the Common Stock on March 15, 1999 was $35/8 per share.
1998 1997 ------------------------ ------------------------ QUARTER: HIGH LOW HIGH LOW - -------- ---- --- ---- --- First $3 $1 7/8 $3 5/8 $2 1/2 Second 2 1/2 1 5/16 3 1 1/2 Third 4 1 7/16 3 3/8 1 3/8 Fourth 3 2 2 7/8 1 1/2
There were approximately 80 holders of record of the common stock as of December 31, 1998. This amount includes custodians, brokers and other institutions which hold the common stock as nominees for an undetermined number of beneficial owners. On February 27, 1998, the Company purchased 20,000 shares of common stock at a cost of $47,500 in connection with the payment of shares to shareholders who exercised their statutory dissenter's rights in connection with the reincorporation of the Company. As of March 15, 1999, the Company had 1,875,332 shares of common stock outstanding. The Company did not pay any dividends on its common stock during 1998 or 1997. 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. 9 The Company recommends that shareholders consult their own tax advisors regarding the above tax issues. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been taken from the Consolidated Financial Statements included with this Annual Report on Form 10-K. The selected financial data should be read in conjunction with Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Condition and the Company's Consolidated Financial Statements. 10
MARGO CARIBE, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- Earnings Statement Data: 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Sales $ 5,349,244 $ 6,548,912 $6,108,865 $4,933,718 $3,679,367 Gross Profit 1,726,173 1,365,335 2,137,340 1,777,358 1,467,202 Selling, general and administrative expenses 2,122,976 2,604,106 2,130,114 2,110,380 1,782,840 Income (loss) from operations (396,803) (1,238,771) 7,226 (333,022) (315,638) Loss before income tax provision (1,112,837) (750,534) (553,722) (386,334) (386,798) Net loss (1,112,837) (750,534) (577,214) (396,334) (510,798) Net loss per common share - basic ($.59) ($.40) ($.30) ($.21) ($.27) Weighted average number of common shares outstanding 1,878,655 1,895,322 1,895,322 1,895,322 1,895,322 Balance Sheet Data: Working capital $ 3,396,453 $ 4,151,894 $ 4,113,799 $ 5,020,099 $ 5,580,916 Total assets 7,990,208 8,952,088 10,396,211 15,400,582 15,930,657 Long-term debt 85,880 252,883 427,078 354,707 372,424 Stockholders' equity 6,369,643 7,529,980 8,271,350 8,848,402 9,244,855
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW For the year ended December 31, 1998, the Company incurred a net loss of approximately $1,113,000, compared to a net loss of $751,000 and $577,000 in 1997 and 1996, respectively. These amounts represent a loss per common share (basic) of $.59, $.40 and $.30 for 1998, 1997 and 1996, respectively. The Company's net loss for the year ended December 31, 1998 is primarily the result of three unrelated events experienced during the year. The first of these events was a decrease in sales of approximately $1.2 million, which precluded additional gross profit to absorb selling, general and administrative expenses. The second and third events were non-operational in nature. These included the write-down of approximately $202,000 to the carrying value of a note receivable and a loss of $609,000 as a result of damages caused by Hurricane Georges. On September 21, 1998 Hurricane Georges struck Puerto Rico. The hurricane caused moderate to severe damage to the Company's inventory of plant material and its infrastructure at both of its locations in Vega Alta and Barranquitas. Additionally, the Company was not able to resume sales until late October 1998. The Company believes that it currently maintains adequate insurance coverage for its facilities and equipment. However, as of March 30, 1999, the Company had been unable to obtain adequate crop insurance coverage at a reasonable cost for its inventories nor business interruption coverage for its operations. The Company intends to continue to seek to obtain crop insurance and business interruption insurance coverage at reasonable rates. However, no assurance can be given that the Company will be successful in obtaining such coverages. During the year ended December 31, 1997 the Company closed its South Florida operation and sold its major assets, represented by two parcels of land. Although the sale of these two properties resulted in a gain of $474,574 for 1997, this gain was more than offset, however, by a loss from operations of $517,000 from the South Florida operation, arising from storage and maintenance costs as well as the write down associated with unsalable inventory and certain other administrative costs related to the closing of the operation. Operations in Puerto Rico during 1997 were negatively impacted by two increases in minimum wage effective September 1996 and 1997, both representing an increase of approximately 21% in production, warehouse and shipping, and landscaping labor costs. All of the Company's production costs (including labor) are capitalized as part of inventory. These wage increases combined with storage and maintenance costs of slow moving inventory caused significant provisions to the inventory valuation reserve in Puerto Rico. Operations for the year ended December 31, 1996 were also affected with storage and maintenance costs of slow moving inventory, as well as other events which were non-operational in nature. 12 RESULTS OF OPERATIONS SALES Consolidated net sales for the year ended December 31, 1998 were approximately $5,349,000, representing a decrease of 18% from sales of $6,549,000 in 1997. This decrease in sales for 1998 was principally due to a reduction in sales of approximately $857,000 to one of the Company's major customers (principally in sales of lawn and garden products), a decrease in the volume of landscaping services of approximately $256,000 and the absence of sales of the discontinued South Florida operation which had sales of approximately $478,000 in 1997. These decreases were offset by increases from new customer base as well as a sales contract with the Puerto Rico Department of Transportation and Public Works of approximately $221,000. Consolidated net sales for the year ended December 31, 1997 were approximately $6,549,000, representing a 7% increase from sales of $6,109,000 in 1996. This increase in sales for 1997 was principally due to increased sales of landscaping services of approximately $707,000. The increase in sales of landscaping services was offset by a decrease in sales of plant material of approximately $235,000. This decrease was due to a reduction in sales to two of the Company's major customers during the third and fourth quarters of 1997. 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, ---------------------------------- 1998 1997 1996 ---- ---- ---- Net sales........................................ 100.0% 100.0% 100.0% Cost of sales.................................... 67.8 79.2 65.0 ----- ----- ----- Gross profit..................................... 32.2 20.8 35.0 Selling, general and administrative expenses..... 39.7 39.8 34.9 ----- ---- ----- Income (loss) from operations.................... (7.5) (19.0) .1 Interest income (expense), net................... 1.2 - (.2) Other income (expenses) - net.................... (14.5) 7.5 (9.0) Loss before income tax provision................. (20.8) (11.5) (9.1) Income tax provision............................. - - (.3) ----- ----- ---- Net loss......................................... (20.8) (11.5) (9.4) ===== ===== ====
The table above reflects that consolidated gross profits as a percentage of net sales were approximately 32%, 21%, and 35%, for the years ended December 31, 1998, 1997 and 1996, respectively. 13 The Company's gross profit for the year ended December 31, 1998 was 32% compared to 21% for 1997, representing an aggregate increase of 11%. This increase is principally due to several events experienced during 1997 (as explained below), including but not limited to, significantly lower charges to the inventory valuation reserve (only $30,000 for 1998) and increased margins in sales of lawn and garden products. Sales of landscaping services also resulted in increased margins principally as a result of improved efficiency during 1998. Gross profit for 1997 (21%) was adversely affected by the following: (i) regarding the South Florida operations, during the second quarter of 1997, the Company charged approximately $340,000 (in addition to $170,000 previously included in the inventory valuation reserve at December 31, 1996) to cost of sales, representing a substantial write down of inventory at this location. As result, sales of the South Florida operation did not provide any gross profit during 1997; (ii) charges to cost of sales during 1997 also included a provision of $250,000 to the Puerto Rico inventory valuation reserve, arising from storage and maintenance costs associated with overproduction and slow moving inventory; and (iii) during 1997, the Company experienced the effect of two minimum wage increases of approximately 21%. Production labor comprised approximately 35% of production costs, being the single highest production cost. Selling prices are controlled by the market, and as inventory is sold and its cost expensed, any increase in its components reduced gross profit. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The Company's selling, general and administrative expenses (SG&A) for 1998 were approximately $2,123,000 compared to $2,604,000 in 1997, representing an 18% decrease. This decrease was due to the non-recurrence of approximately $220,000 incurred at the discontinued South Florida operation during 1997, as well as decreases in shipping, travel and legal services during 1998. The Company's SG&A for 1997 were approximately $2,604,000, compared to $2,130,000 in 1996, representing a 22% increase. These increases were due to minimum wage increases, (specifically in warehouse and shipping), increase in repairs and maintenance, as well as professional fees incurred in connection with the Company's reorganization. In addition to the above, certain costs associated with the closing of the South Florida operation were expensed as SG&A during 1997. OTHER INCOME AND EXPENSE The increase in interest income for 1998 when compared to 1997, was due to higher average yields obtained during 1998 with similar investments. The decrease in interest expense for 1998 compared to 1997 was the result of reductions in the outstanding principal balances of long-term debt. HURRICANE GEORGES As previously mentioned, Hurricane Georges struck Puerto Rico on September 21, 1998. As with other hurricanes, the agricultural industry was the hardest hit. At its Vega Alta facilities, the Company suffered moderate damage to all of its fabricated steel structures (shadehouses) and near total destruction of all its wooden shadehouses and its irrigation systems. Total property written down as a result of the damages had a book value of approximately $171,000 at December 31, 1998. At its Barranquitas facilities, moderate damage was also sustained to a portion of its pull and cable shadehouses and its irrigation system, however, all of the shadecloth covers were blown away. As of December 31, 1998 the Company had incurred expenses of approximately $694,000 in connection with clean-up, restoration and debris removal at both locations. 14 The Company's inventory of lawn and garden products did not suffer any damages. However, inventory of plant material sustained significant damages as a result of damage and destruction to shadehouses at both Company locations. Inventory destroyed at both of the Company's locations as of December 31, 1998 had a cost of approximately $492,000 and a net realizable value of $362,000. As of December 31, 1998, the Company had received approximately $618,000 from its insurers for property damages. WRITE DOWN OF NOTE RECEIVABLE The Company owns a note receivable (refer to Note 5 to the accompanying consolidated financial statements) from the sale of a former subsidiary to a Dominican Republic company, which had a carrying value of approximately $302,000 at December 31, 1997. The note has been in default since December 1995 and is collateralized by a second mortgage on property and equipment located in the Dominican Republic. On September 23, 1998, Hurricane Georges struck the Dominican Republic. The hurricane severely damaged the former subsidiary's facilities. As a result of the damages caused by the hurricane, the Company determined to write down the carrying value of the note to $100,000 as of September 30, 1998. The write down, amounting to $201,621 was included as an other expense in the accompanying consolidated statements of operations for the year ended December 31, 1998. SALE OF LAND IN SOUTH FLORIDA During 1997, the Company sold two parcels of land in South Florida at an aggregate gain of $474,574, arising from the Company's decision to close its South Florida operation. 15 FINANCIAL CONDITION Although the Company's financial condition at December 31, 1998 was affected by the damages caused by Hurricane Georges, the Company's current ratio continues to be strong, with a ratio of 3.2 to 1 at December 31, 1998, compared to 4.6 to 1 at December 31, 1997. At December 31, 1998, the Company had cash of approximately $747,000 and short term investments of $500,000, compared to cash of $1,230,000 and short term investments of $500,000 at December 31, 1997. The decrease in cash at December 31, 1998 is principally due to cash flows provided by operations ($25,000) and collection of notes receivable ($40,000), offset by cash outflows resulting from additions to property and equipment ($374,000), repayment of long-term debt ($126,000), and acquisition of treasury stock ($47,500). The increase in current liabilities resulted from expenses incurred in connection with Hurricane Georges as well as purchases of inventory. As a result, the Company's debt to equity ratio at December 31, 1998 was 25%, compared to 19% at December 31, 1997. Stockholders' equity at December 31, 1998 decreased due to results of operations for the year. Stockholders' equity also decreased by $47,500 from the acquisition of treasury stock as a result of the exercise of statutory dissenters rights by shareholders in connection with the reincorporation of the Company. There were no dividends declared nor issuance of capital stock during the year ended December 31, 1998. INFLATION The primary inflationary factors which may affect the Company's results of operations and financial condition are the costs of labor and production materials such as soil, pots, chemicals, fertilizer and plant cuttings. During the last three years, the impact of inflation on the results of operations and financial condition of the Company has been minimal due to the stability of wage rates (except for the increase in minumium wage experienced during 1997) 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. YEAR 2000 ISSUE The inability of computer hardware and software to recognize and properly process data fields using a four-digit year to define the applicable year is commonly referred to as the "Year 2000 Issue". As the year 2000 approaches, computer systems using a two-digit year data field may be unable to accurately process certain information. The Company has completed a review and evaluation of its hardware and software programs and applications and is in the process of modifying and testing its software and operating systems for Year 2000 compliance. The Company expects such testing to be complete by September 30, 1999. The testing for the Company's operating hardware has been completed and is Year 2000 compliant. All test results are being verified by an external consultant. While the Company has not initiated formal communications with its suppliers, management also anticipates there will not be any major Year 2000 compliance issues with them due to the nature of the Company's operations and due to the fact that the Company does not order or communicate with its suppliers using any computer based information system. 16 The Company estimates that the total cost of being Year 2000 compliant will not exceed $75,000, of which approximately $25,000 had been incurred as of December 31, 1998. The cost of being Year 2000 compliant will be funded through operating cash flows. The Company anticipates being Year 2000 compliant by late September 1999. The costs of and completion date on which the Company believes it will be year 2000 compliant are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. While the Company is taking steps to ensure that its systems are Year 2000 compliant, Year 2000 problems sufferred by third parties, including providers of basic services, such as telephone, water and electricity, could have an adverse impact on the daily operations of the Company. The Company does not have a formal contingency plan to deal with disruptions that may be caused by Year 2000 problems. In the event of any such disruptions, the Company intends to perform most operational functions manually. 17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference to the Company's Consolidated Financial Statements and Schedules and the Auditors' Report beginning on page F-1 of this Form 10-K. Supplementary data is not required. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the directors and executive officers of the Company as of March 15, 1999. The background and experience of these persons are summarized in the paragraphs following the table.
NAME (AGE AT MARCH 15, 1999) POSITIONS WITH THE COMPANY - ---------------------------- -------------------------- Michael J. Spector (52) Chairman, President, Chief Executive Officer and Director Margaret D. Spector (47) Secretary and Director Blas R. Ferraiuoli (54) Director Frederick D. Moss (70) Director Michael A. Rubin (56) Director Guillermo Fradera (49) Vice President - Production Alfonso Ortega (45) Vice President, Treasurer and Chief Financial Officer Rene Llerandi (39) Vice President - Marketing
Each director of the Company holds office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. Officers serve at the discretion of the Board of Directors. All of the executive officers of the Company except Margaret D. Spector devote their full time to the operations of the Company. BACKGROUND OF OFFICERS AND DIRECTORS Set forth below is a summary of the background of each person who was an officer or director of the Company as of March 15, 1999. MR. SPECTOR currently serves as the Chairman of the Board, Chief Executive Officer and President of the Company. He has held these positions since the organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary and a director of the Company. MRS. SPECTOR currently servers as the Secretary and as a director of the Company. She has held these positions since the organization of the Company in 1981. Since July 1993, Mrs. Spector supervises the Company's lawn and garden distribution business. MR. FERRAIUOLI was elected a director of the Company in 1988 and continues to hold that position. Since June 1994, he manages his own law firm in San Juan, Puerto Rico. He was a partner in the law firm of Axtmayer, Adsuar, Muniz & Goyco, San Juan, Puerto Rico from March 1994 to June 1994. Prior to March 1994, he was a partner in the firm of Goldman, Antonetti, Cordova and Axtmayer. Mr. Ferraiuoli practices civil, corporate and administrative law and has provided services to the Company since 1987. 19 MR. MOSS was elected a director of the Company in 1988 and continues to hold that position. Since 1986, he has been an independent financial consultant in New York City. He has also served as the Chairman of the Board of Trustees of the Cincinnati Stock Exchange since 1989. Mr. Moss is a director of Summit High Yield Fund (mutual fund) and the Summit Energy Market Fund (mutual fund). 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. FRADERA currently serves as the Vice President of Production effective October 1, 1997. Prior to October 1, 1997, he served as Vice President and General Manager of the Company's South Florida operation. He held these positions since December 1989. He joined the Company in 1984 and served as Vice President for Corporate Development from 1987 to 1989. 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 1, 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, 1998. Based solely on its review of the copies of the report received by it, the Company believes that all such filing requirements were satisfied, except that Michael Rubin filed a late report related to one transaction. 20 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information regarding compensation of the Company's chief executive officer during each of the three years ended December 31, 1998, 1997 and 1996. No other executive officer of the Company earned more than $100,000 during 1998.
NUMBER OF ANNUAL COMPENSATION STOCK NAME OF INDIVIDUAL AND --------------------- OPTIONS OTHER ANNUAL POSITION WITH THE COM YEAR SALARY BONUS GRANTED(2) COMPENSATION ------------------------- ---- ------ ----- ------------ ------------ Michael J. Spector 1998 $104,000 $ - 2,500 $8,000(1) Chairman, President, Chief 1997 160,000 - - 0 Executive Officer and Director 1996 160,000 13,600 17,500 0
- ------------ (1) Represents matching contribution under the Company's Salary Deferral Retirement Plan. (2) Includes 2,500 options granted to Mr. Spector for each of 1996 and 1998. 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 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 1998, Messrs. Ferraiuoli, Moss, Rubin and Mrs. Spector each received an option to acquire 2,500 shares of Common Stock at an exercise price of $1 1/2, expiring on May 29, 2008, in accordance with the 1998 Plan. GRANT OF STOCK OPTIONS No stock options were granted to Mr. Michael J. Spector during the year ended December 31, 1998. However, the table below provides certain information regarding stock options granted to Mrs. Margaret D. Spector as discussed above, which for SEC reporting purposes, Mr. Spector is deemed to beneficially own. 21
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK $ OF SHARES % OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS FOR OPTION TERM OPTIONS GRANTED IN EXERCISE PRICE EXPIRATION --------------------- NAME GRANTED(2) FISCALYEAR ($/SHARE)(3) DATE 5% 10% - -------------------- ------------- ---------- ---------------- ----------- --- ------ Michael J. Spector(1) 2,500 8% $1.65 06-01-03 $625 $1,925
- ------------ (1) Represents options to acquire 2,500 shares granted to Margaret D. Spector. (2) Options become exercisable at the rate of 20% on the first, second, third, fourth and fifth anniversary of the grant date. (3) The exercise price is based on the last sales price for the Company's common stock on June 1, 1998, the date of grant. OPTIONS EXERCISED DURING 1998 AND OPTION VALUES AT DECEMBER 31, 1998 The following table sets information on outstanding options held by the Company's chief executive officer and their value at December 31, 1998. There were no exercises of options during 1998. Value is calculated as the difference between the last sales price of the Common Stock and the exercise price at as of December 24, 1998, the last day the common stock traded during 1998.
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT SHARES AT 12/31/98 12/31/98(1)(2) ACQUIRED VALUE ------------------------------ ------------------------------ NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Michael J. Spector(1) - - 27,000 13,000 $ - $1,500
- ------------------ (1) Includes 10,000 options held by Margaret D. Spector, the wife of Michael J. Spector. (2) Based on the last sales price of $2 1/4 per share on December 24, 1998 and an exercise price of $3.16 and $3.44 for 20,000 and 7,000 exercisable options, respectively, and an exercise price of $3.44 and $1.65 for 10,500 and 2,500 of unexercisable options, respectively. EMPLOYMENT CONTRACTS The Company does not have any employment contracts with its executive officers. 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 who are at least 21 years of age and have completed one year of service. Under the terms of the retirement plan, the Company matches up to 100% of the pre-tax contributions made by employees in an amount equal to 10% of their basic salary subject to a maximum of $8,000. For the year ended December 31, 1998, the Company accrued $8,000 representing the matching contribution under the retirement plan for Mr. Spector. 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth, as of March 15, 1999, the number of shares of common stock of the Company owned beneficially by the following persons: (a) each director of the Company; (b) all executive officers and directors of the Company as a group; and (c) each person known to the Company who owns more than 5% of the outstanding common stock of the Company. Unless otherwise stated, all shares are held with sole investment and voting power. 23
SECURITY OWNERSHIP AS OF MARCH 15, 1999 NAME (POSITION WITH THE COMPANY) AMOUNT BENEFICIALLYOWNED(1) PERCENT OF CLASS(1) --------------------------- --------------------------- ------------------- Michael J. Spector 1,276,682(2) 66.7% (Executive Officer and Director) Margaret D. Spector 1,276,682(2) 66.7% Carr. 690, Km. 5.8 Vega Alta, Puerto Rico 00646 (Executive Officer and Director) J. Morton Davis 185,249(3) 9.9% D.H. Blair Holdings, Inc. D.H. Blair Investment Banking Corp. 44 Wall Street New York, New York 1005 (Five Percent Shareholder) Frederick D. Moss (Director) 14,500(4) (7) Blas Ferraiuoli (Director) 10,000(4) (7) Michael A. Rubin (Director) 7,000(5) (7) All Executive Officers and 1,333,162(6) 68.6% Directors as a Group (8 persons)
- ------------ (1) The percent of class held by each person includes the number of shares of Common Stock the named person(s) has the right to acquire upon exercise of stock options that are exercisable within 60 days of March 15, 1999 (except in the case of Mr. and Mrs. Spector in which case all shares issuable upon exercise of stock options are included whether or not exercisable within 60 days of March 15, 1999), but does not include shares of Common Stock issuable upon exercise of stock options held by other persons. (2) Includes 939,394 shares held directly by Mr. Spector and 297,288 shares held by Mrs. Spector. Also includes stock options to acquire 30,000 and 10,000 shares held by Mr Spector and Mrs. Spector, respectively. The Spectors share voting and investment power over the shares owned by each other. (3) This amount consists of 184,149 shares held in the name of D.H. Blair Investment Banking Corp., a registered broker-dealer which is wholly-owned by D.H. Blair Holdings, Inc., which in turn is wholly-owned by J. Morton Davis and of 1,100 shares owned by Rosalind Davidowitz, the spouse of Mr. Davis. This amount is based upon a Schedule 13G dated February 9, 1995, as amended, filed with the Securities and Exchange Commission. (4) Includes 6,000 shares issuable upon stock options exercisable on or within 60 days of March 15, 1999 (5) Includes 2,000 shares issuable upon stock option exercisable on or within 60 days of March 15, 1999 (6) Includes 40,000 shares issuable upon exercise of stock options granted to Mr. and Mrs. Spector as described in footnote (1) above and 27,400 shares issuable upon exercise of stock options granted to other officers and directors that are exercisable on or within 60 days of March 15, 1999. (7) Less than one percent. 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AMOUNT DUE FROM/TO PRINCIPAL SHAREHOLDER In connection with the settlement of the Company's litigation with First Union on May 29, 1996, the Company advanced $340,158 on behalf of Michael J. Spector, which was the portion of the settlement that corresponded to claims made by First Union against Mr. Spector in his individual capacity. This amount was reduced by $66,506 that was due to Mr. Spector in connection with the purchase in 1996 of the residence from a partnesship controlled by Mr. Spector. During 1997, the Company charged Mr. Spector for certain expenses paid on his behalf. During March 1998, the amount owed by Mr. Spector were converted into a non-interest bearing note due on March 2001. At December 31, 1998 and 1997, Mr. Spector owed the Company $290,226 and $291,481, respectively. LEASE AND OPTION TO PURCHASE PUERTO RICO NURSERY FARM Effective January 1, 1993, the Company and the Spectors entered into a lease agreement with respect to the Puerto Rico nursery farm. The lease had an initial term of five years renewable for one additional term of five years at the option of the Company. During the initial term of the lease, rent was set at $19,000 per month. During the renewal term, the rent increases to the greater of (x) $24,000 per month or (y) the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. Additionally, the Company must pay all taxes on the property, maintain certain insurance coverages and otherwise maintain and care for the property. The lease also contains an option which permits the Company to purchase the property at its appraised value at any time during the term of the lease. In consideration of the option, the Company must pay the Spectors $1,000 per month. On January 1, 1998, the Company exercised its renewal option at a monthly rental of $24,000. Effective January 1, 1994, the lease agreement was amended to include an additional 27-acre tract of land adjacent to the existing nursery facility for $1,750 per month. The lease terms for this additional tract did not include renewal or purchase options. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001, the unamortized value of the leasehold improvements applicable to said parcel as of the date of termination. See "Item 2 - Properties." CERTAIN OTHER RELATIONSHIPS During 1998 the Company engaged Blas Ferraiuoli and Michael A. Rubin, each a director of the Company, to render legal services on behalf of the Company. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- (a)(1) and FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. (a)(2) The information called for by this section of Item 14 is set forth in the Financial Statements and Auditor's Report beginning on page F-1 of this Form 10-K. The index to Financial Statements and Schedules is set forth on page F-2 of this Form 10-K. (a)(3) EXHIBITS. The Exhibits set forth in the following Index of the Exhibits are filed as a part of this report: (2)(a) Agreement and Plan of Merger dated November 17, 1997 between Margo Nursery Farms, Inc. and Margo Transition Corp., (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated December 31, 1997). (2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(a) to the Company's Form 8-K dated December 31, 1997). (2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into Margo Transition Corp., dated December 15, 1997, (incorporated by reference to Exhibit 2(b) to the Company's Form 8-K dated December 31, 1997). (3)(a) Certificate of Incorporation as currently in effect, filed herewith. (3)(b) Certificate of Amendment to Certificate 6 of Incorporation is incorporated by reference to the Company's Form 8-K dated December 31, 1997. (3)(c) By-Laws as of January 1, 1998 are incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (4)(a) Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 of Form S-8 Registration Statement (No. 333-59619). (4)(b) 1998 Stock Option Agreement (Incorporated by reference to Exhibit No. 4.2 of Form S-8 Registration Statement (No. 333-59619). (4)(c) Form of Stock Option Agreement (Incorporated by reference to Exhibit No. 4.3 of Form S-8 Registration Statement (No. 333-59619). (10) (a) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 filed April 15,1993: (i) Lease Agreement dated January 1, 1993 between the Company and the Spectors. (b) Material contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993 filed April 15, 1994: (i) First Amendment to Lease Agreement dated January 1, 1994 between the Company and the Spectors. (c) Material Contracts incorporated by reference from the Company's Annual Report on Form 10- K for the year ended December 31, 1994:
26
EXHIBIT NUMBER DESCRIPTION ------- ----------- (i) Loan Commitment Agreement, dated December 15, 1994 between Puerto Rico Farm Credit ACA and the Company. (d) Material contract incorporated by reference from Form 8-K dated November 28, 1997 (i) Mortgage Note, dated November 28, 1997, in the amount of $475,000 (e) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997 (i) Lease and Purchase Agreement, dated October 31, 1996 among Cali Orchids, Inc. and the Company. (ii) Stock Option Agreement, dated August 9, 1996, with Frederick D. Moss. (iii) Stock Option Agreement, dated August 9, 1996, with Blas 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 Ferraiuoli. (viii) Stock Option Agreement, dated August 9, 1996, with Margaret D. Spector. (f) Material Contracts incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. (i) Promissory note of the Spectors dated as of March 1, 1998. (ii) Second Amendment to lease Agreement dated as of January 1, 1998, between the Company and the Spectors. (g) Material Contracts filed with this Form 10-K (i) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority (ii) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority (21) List of Registrant's Subsidiaries (filed herewith) (23)(a) Consent of Deloitte & Touche LLP (23)(b) Consent of Kaufman, Rossin & Co. (27) Financial Data Schedule (filed herewith)
(b) REPORTS ON FORM 8-K. None. 27 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 30, 1999 By: /s/ MICHAEL J. SPECTOR ------------------------------------- Michael J. Spector, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated. Dated: March 30, 1999 By: /S/ MICHAEL J. SPECTOR --------------------------------------- Michael J. Spector, Chairman of the Board and Chief Executive Officer Dated: March 30, 1999 By: /S/ MARGARET D. SPECTOR --------------------------------------- Margaret D. Spector, Director Dated: March 30, 1999 By: /S/ BLAS R. FERRAIUOLI --------------------------------------- Blas R. Ferraiuoli, Director Dated: March 30, 1999 By: /S/ MICHAEL A. RUBIN --------------------------------------- Michael A. Rubin, Director Dated: March 30, 1999 By: /S/ FREDERICK D. MOSS --------------------------------------- Frederick D. Moss, Director Dated: March 30, 1999 By: /S/ ALFONSO A. ORTEGA PEREZ --------------------------------------- Alfonso A. Ortega Perez, Vice President, Treasurer, Principal Financial and Accounting Officer 28 MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS FOR INCLUSION IN FORM 10-K ANNUAL REPORT FILED WITH SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998 MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) INDEX TO FINANCIAL STATEMENTS AND SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1998 PAGE ---- Independent Auditors' Reports.......................................... F-2 Financial Statements Consolidated Balance Sheets......................................... F-4 Consolidated Statements of Operations............................... F-5 Consolidated Statements of Shareholders' Equity..................... F-6 Consolidated Statements of Cash Flows............................... F-7 Notes to Consolidated Financial Statements.......................... F-8 SCHEDULES Schedule II - Valuation and Qualifying Accounts..................... F-29 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. F-1 DELOITTE & TOUCHE LLP [LETTER HEAD] 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index as Schedule II for the years ended December 31, 1998 and 1997. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such 1998 and 1997 consolidated financial statements present fairly, in all material respects, the financial position of Margo Caribe, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, such 1998 and 1997 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 19, 1999 (March 24, 1999 as to Note 22) F-2 KAUFMAN ROSSIN [LETTER HEAD] INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Margo Caribe, Inc. Vega Alta, Puerto Rico We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of Margo Caribe, Inc. (f/k/a Margo Nursery Farms, Inc.) and Subsidiaries for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Margo Caribe, Inc. (f/k/a Margo Nursery Farms, Inc.) and Subsidiaries for the year ended December 31, 1996 in conformity with generally accepted accounting principles. In connection with our audit of the consolidated financial statements referred to above, we audited the consolidated financial statement schedule listed under Item 14(a)(2) for the year ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information stated therein, when considered in relation to the consolidated financial statements taken as a whole. /s/ Kaufman, Rossin & Co. KAUFMAN, ROSSIN & CO. Miami, Florida February 25, 1997 F-3
MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 ----------- ----------- Current Assets: Cash and equivalents $ 747,390 $ 1,230,250 Short term investments 500,000 500,000 Accounts receivable, net 1,228,572 1,050,949 Inventories 2,264,372 2,438,128 Prepaid expenses 190,804 101,792 ----------- ----------- Total current assets 4,931,138 5,321,119 Property and equipment, net 2,094,799 2,419,595 Due from shareholder 290,226 291,481 Notes receivable 620,413 860,982 Other assets 53,632 58,911 ----------- ----------- Total assets $ 7,990,208 $ 8,952,088 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 158,468 $ 117,694 Notes payable 500,000 500,000 Accounts payable 665,140 388,318 Accrued expenses 211,077 163,213 Income taxes payable - - ----------- ----------- Total current liabilities 1,534,685 1,169,225 Long-term debt 85,880 252,883 ----------- ----------- Total liabilities 1,620,565 1,422,108 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; 250,000 shares authorized, no shares issued - - Common stock, $.001 par value; 10,000,000 shares authorized, 1,915,122 shares issued, 1,875,322 and 1,895,322 shares outstanding in 1998 and 1997 1,915 1,915 Additional paid-in capital 4,637,706 4,637,706 Retained earnings 1,826,310 2,939,147 Treasury stock, 39,800 and 19,800 common shares in 1998 and 1997, at cost (96,288) (48,788) ----------- ----------- Total shareholders' equity 6,369,643 7,529,980 ----------- ----------- Total liabilities and shareholders' equity $ 7,990,208 $ 8,952,088 =========== ===========
See accompanying notes to consolidated financial statements. F-4
MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997, 1996 1998 1997 1996 ----------- ----------- ----------- Net Sales $ 5,349,244 $ 6,548,912 $ 6,108,865 Cost of Sales 3,623,071 5,183,577 3,971,525 ----------- ----------- ----------- Gross profit 1,726,173 1,365,335 2,137,340 Selling, general and administrative expenses 2,122,976 2,604,106 2,130,114 ----------- ----------- ----------- Income (loss) from operations (396,803) (1,238,771) 7,226 ----------- ----------- ----------- Other income (expense): Interest income 122,683 73,060 189,924 Interest expense (62,020) (73,274) (206,316) Write-down of note receivable (201,621) - - Loss from damages caused by Hurricane Georges, net of insurance proceeds (609,009) - - Gain on sale of land in South Florida - 474,574 - Litigation expenses - - (87,961) Litigation settlement - - (255,174) Provision for impairment of assets of subsidiary - - (250,000) Other income 33,933 13,877 48,579 ----------- ----------- ----------- (716,034) 488,237 (560,948) ----------- ----------- ----------- Loss before income tax provision (1,112,837) (750,534) (553,722) Income tax provision - - 23,492 ----------- ----------- ----------- Net loss $(1,112,837) $ (750,534) $ (577,214) =========== =========== =========== Loss per common share - basic $ (.59) $ (.40) $ (.30) =========== =========== =========== Weighted average common shares 1,878,655 1,895,322 1,895,322 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5
MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 COMMON COMMON ADDITIONAL CUMULATIVE STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL --------- ------- ---------- ---------- -------- ------- ----------- Balance at December 31, 1995 1,895,322 $ 1,915 $4,637,706 $4,266,895 $(48,788) $(9,326) $ 8,848,402 Net loss - - - (577,214) - - (577,214) Foreign currency translation gain - - - - - 162 162 --------- ------- ---------- ---------- -------- ------- ----------- Balance at December 31, 1996 1,895,322 1,915 4,637,706 3,689,681 (48,788) (9,164) 8,271,350 Realized loss on translation adjustment - - - - - 9,164 9,164 Net loss - - - (750,534) - - (750,534) --------- ------- ---------- ---------- -------- ------- ----------- Balance at December 31, 1997 1,895,322 1,915 4,637,706 2,939,147 (48,788) - 7,529,980 Net loss - - - (1,112,837) - - (1,112,837) Acquisition of treasury stock, at cost (20,000) - - - (47,500) - (47,500) --------- ------- ---------- ---------- -------- ------- ----------- Balance at December 31, 1998 1,875,322 $ 1,915 $4,637,706 $1,826,310 $(96,288) $ - $ 6,369,643 ========= ======= ========== ========== ======== ======= ===========
See accompanying notes to consolidated financial statements. F-6
MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net loss $(1,112,837) $ (750,534) $ (577,214) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 527,791 491,634 467,261 Provision for inventory valuation reserve 30,000 420,000 252,000 Write-down of note receivable 201,621 - - Loss on disposal of property and equipment related to Hurricane Georges 171,039 - - Realized loss on translation adjustment - 9,164 - Gain on sale of land in South Florida - (474,574) - Provision for possible bad debts 35,900 37,515 4,000 Provision for impairment of assets of subsidiary - - 250,000 Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable (213,523) (80,517) (319,782) Inventories 143,756 (121,019) (648,736) Prepaid expenses (89,012) 14,244 53,571 Advances from (to) shareholders 1,255 (17,829) (106,786) Other assets 5,279 8,238 74,525 Accounts payable 276,822 (242,254) 258,547 Accrued expenses 46,812 (12,421) (1,379,553) Income taxes payable - (23,492) 23,492 ----------- ----------- ----------- Net cash provided by (used in) operating activities 24,903 (741,845) (1,648,675) ----------- ----------- ----------- Cash flows from investing activities: Decrease in restricted cash - - 6,732,597 Decrease (increase) in short-term investments - 504,000 (504,000) Purchases of property and equipment (374,034) (109,639) (497,308) Increase in due from shareholder - - (340,158) Proceeds from sale of land in South Florida - 812,630 - Increase in notes receivable - (6,800) - Collection on notes receivable 40,000 - 7,667 ----------- ----------- ----------- Net cash provided by (used in) investing activities (334,034) 1,200,191 5,398,798 ----------- ----------- ----------- Cash flows from financing activities: Acquisition of treasury stock (47,500) - - Proceeds from long-term debt - - 122,000 Repayments of long-term debt (126,229) (174,586) (3,711,285) ----------- ----------- ----------- Net cash used in financing activities (173,729) (174,586) (3,589,285) ----------- ----------- ----------- Net increase (decrease) in cash and equivalents (482,860) 283,760 160,838 Effect of change in exchange rates on cash - - 162 Cash and equivalents at beginning of year 1,230,250 946,490 785,490 ----------- ----------- ----------- Cash and equivalents at end of year $ 747,390 $ 1,230,250 $ 946,490 =========== =========== ===========
See accompanying notes to consolidated financial statments. F-7 MARGO CARIBE, INC. AND SUBSIDIARIES (FORMERLY MARGO NURSERY FARMS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Margo Caribe, Inc. and subsidiaries (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. During 1998, the Company was also engaged in seeking real estate sites for the development of residential housing projects. The Company's primary facility is located in Vega Alta, Puerto Rico. From this facility, the Company sells principally to customers in Puerto Rico and the Caribbean. Effective December 31, 1997, the Company changed its jurisdiction of incorporation from Florida to the Commonwealth of Puerto Rico. The reincorporation was accomplished by means of a merger of the Florida corporation into a newly created Puerto Rico corporation, with the new company being the surviving corporation of such merger. As part of the merger, the new Puerto Rico corporation then changed its name to Margo Nursery Farms, Inc. Prior to the consummation of the above reincorporation, Margo Bay Farms, Inc. a wholly-owned subsidiary operating in South Florida, was merged with and into its parent company, Margo Nursery Farms, Inc. This merger was effective December 12, 1997, after the Company closed its South Florida operations due to its lack of profitability, and sold the two nursery farms which comprised its operations. Furthermore, effective June 1, 1998, the Company adopted a holding company structure. The restructuring was accomplished by means of Margo Nursery Farms, Inc. ("Margo") transferring substantially all of its assets and liabilities to a newly formed Puerto Rico subsidiary ("Newco") in return for all the outstanding stock of Newco. Newco continued to conduct the business previously operated by Margo as a wholly-owned subsidiary of Margo and operates under the name of Margo Nursery Farms, Inc. Margo now acts as the holding company for Newco as well as the other existing subsidiar ies of Margo. In connection with the holding company restructur ing, Margo changed its corporate name to Margo Caribe, Inc. F-8 (a) PRINCIPLES OF CONSOLIDATION For the year ended December 31, 1998 the accompanying consolidated financial statements include the financial statements of Margo Caribe, Inc. and its wholly-owned subsidiaries, Margo Nursery Farms, Inc., Margo Landscaping and Design, Inc., Margo Garden Products, Inc., Rain Forest Products Group, Inc. and Margo Development Corporation. For the years ended December 31, 1997 and 1996, these consolidated financial statements also include the financial statements of Margo Bay Farms, Inc. and its wholly owned subsidiaries, Tropiflower, Inc. and Margo Imports, B.V. (a Netherlands company). 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 or less to be cash equivalents. At December 31, 1998 and 1997, cash and cash equivalents include $500,000 invested in a certificate of deposit bearing interest at 4.6% and 5.65%, respectively. (c) INVENTORIES Inventory of plant material includes the cost of seeds, cuttings, pots, soil, chemicals, fertilizer, direct labor and an allocation of overhead costs such as depreciation and rent, among others. Inventories of plants are stated at the lower of cost (first-in, first-out) or market. Inventories of lawn and garden products are stated at the lower of average cost or market. (d) PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION Property and equipment are carried at acquisition cost. Deprecia tion 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, equipment and stock plants as a direct cost of production of inventory. As inventory is sold, such cost is charged to cost of sales. (e) FOREIGN CURRENCY TRANSLATION Assets and liabilities outside the United States and Puerto Rico are translated to U.S. Dollars using exchange rates at the balance sheet date. Revenues and expenses are translated at the average rates of exchange during the applicable period. Effects of translation adjustments are deferred and included as a separate component of shareholders' equity. There were no balances or F-9 transactions involving foreign currency translation as of December 31, 1998, or for the year then ended. (f) REVENUE RECOGNITION The Company recognizes sales of foliage and lawn and garden products upon shipment from its facilities to customers. (g) 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. Prior to the reincorporation, the Company was a Florida Corporation and, therefore, was required to file a final federal corporate income tax return for the taxable year ended December 31, 1997. However, the Company elected to be treated as a possessions corporation under Section 936 of the Internal Revenue Code, and accordingly, received a credit of federal income tax payable for operations in Puerto Rico. During 1993, the Internal Revenue Code was amended to reduce the benefits available under Section 936. During 1996, the Internal Revenue Code was further amended and Section 936 was repealed subject to a ten-year grandfather rule. During the ten-year grandfather period, the credit is limited to certain caps based on the taxpayer's Puerto Rico income over a base period ending in October 1995. These changes were effective for taxable years commencing after December 31, 1993. For the years ended December 31, 1997 and 1996, there were no tax effects arising as a result of these changes. Margo Bay Farms, Inc., also a former Florida corporation, filed a final federal income tax return for the year ended December 31, 1997. 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. The Act became efective for taxable years commencing on or after December 1, 1995. Prior to the enactment of the Agricultural Tax Incentives Act, Margo Nursery Farms, Inc. had been granted a 90% exemption from property taxes and from income derived from its export sales, and a 60% exemption from volume of business tax related to export sales, under the Puerto Rico Industrial Incentives Act of 1987. The exemption is for a period of 15 years commencing on July 6, F-10 1987. Due to the benefits of Act. No. 225, the Company relin quished this grant. (h) LOSS PER COMMON SHARE In 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share ("EPS"). It replaces the presentation of primary EPS with basic EPS, and requires dual presentation of basic and diluted EPS on the face of the statement of operations. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Loss per share amounts for each of the years presented have been computed in accordance with the provisions of SFAS 128. Dilutive loss per share has not been presented as the effect of considering outstanding stock options is antidilutive. (i) FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts included in the consolidated financial statements for cash and cash equivalents, short-term investments, accounts receivable, notes payable, accounts payable and accrued expenses reflect their fair value due to the short-term maturity of these instruments. The fair values of the Company's other financial instruments are discussed in Notes 5 and 9. (j) IMPAIRMENT OF LONG-LIVED ASSETS The carrying value of property and equipment is evaluated periodi cally for recoverability when considered in relation to the expected future undiscounted cash flows of the underlying business over the estimated remaining useful life of the asset. No indications of impairment are evident as a result of such review as of December 31, 1998. (k) ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans pursuant to the provisions of Accounting Principles Board Opinion 25 and related interpretations, which generally require that compensation cost be recognized to the extent the market price of the related stock exceeds the exercise price at the measurement date. However, Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, provides an alternative method for measuring compensation cost by measuring the fair value of the option at the award date. Although the compensa tion cost measurement criteria is not required to be adopted, SFAS F-11 123 requires disclosure of pro forma information regarding the effects of the application of its compensation cost measurement criteria and of other information. (l) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for doubtful accounts is an amount that management believes will be adequate to absorb possible losses on existing accounts receivable that may become uncollectible based on evaluations of collectibility and prior credit experience. Because on uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the existing accounts receivable and related allowance may change in the near term. The inventory valuation allowance is also an estimate which is established through charges to cost of goods sold. Management's judgement in determining the adequacy of the allowance is based on several factors which include, but are not limited to, costs of specific inventory items, sales histories of these items and management's judgement with respect to future marketability of the inventory. Based on the above, it is reasonably possible the Company's estimate of the inventory valuation allowance will change in the near term. The valuation allowance at December 31, 1998 and 1997 was $200,000 and $300,000, respectively. Set forth below is the movement of the inventory valuation allowance for the years ended December 31, 1998 and 1997:
DESCRIPTION 1998 1997 ----------- -------- -------- Beginning balance $300,000 $420,000 Provisions 30,000 420,000 Write downs (130,000) (540,000) -------- -------- Ending balance $200,000 $300,000 ======== ========
The Company has recorded a deferred tax asset of approximately $358,000 which is offset by a valuation allowance. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. The amount of the deferred tax asset considered realizable could change in the near term if estimates of future taxable income are increased. F-12 (m) COMPREHENSIVE INCOME Effective January 1, 1998, the Financial Accounting Standards Board issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". Comprehensive income is any change in shareholders' equity during a period, arising from transactions, events or circumstances through nonowner sources. SFAS 130 establishes standards for disclosing the elements and amounts of comprehensive income. The Company did not adopt of SFAS 130 since its applica tion would not have a significant effect on the accompanying consolidated financial statements. NOTE 2 - INVENTORIES At December 31, 1998 and 1997, inventories comprised the following:
DESCRIPTION 1998 1997 ----------- ---------- ---------- Plant material $1,900,250 $2,152,249 Lawn and garden products 347,637 359,112 Raw material and supplies 216,485 226,767 ---------- ---------- 2,464,372 2,738,128 Less valuation allowance (200,000) (300,000) ---------- ---------- $2,264,372 $2,438,128 ========== ==========
NOTE 3 - ACCOUNTS RECEIVABLE At December 31, 1998 and 1997, accounts receivable comprised the following:
DESCRIPTION 1998 1997 ----------- ---------- ---------- Trade receivables $1,260,629 $1,010,653 Government reimbursement 57,887 70,336 Accrued interest 6,140 11,149 Employee advances 16,063 28,011 Other accounts receivable 11,553 6,800 ---------- ---------- 1,352,272 1,126,949 Less allowance for doubtful accounts (123,700) (76,000) ---------- ---------- $1,228,572 $1,050,949 ========== ==========
NOTE 4 - SHORT TERM INVESTMENTS At December 31, 1998 and 1997, short term investments consisted of a $500,000 certificate of deposit bearing interest at 4.5% and F-13 5.35%, respectively, which was pledged as collateral for notes payable (refer to Note 8). NOTE 5 - NOTES RECEIVABLE The Company owns a note receivable with an outstanding principal balance of $996,962, from the sale of Cariplant S.A. (a former Dominican Republic subsidiary) to Altec International, C. por A. ("Altec"), another Dominican Republic company. The note is collateralized by the common stock and personal guarantee of the major shareholder of Cariplant. From the inception of the note in March 1993, the Company received several payments through December 1995. However, Altec has been unable to comply with the terms of the note. Due to the unfavorable collection experience as well as the difficulties of operating in the Dominican Republic, in 1994 Company management wrote down the carrying amount of the note to $316,000 ($301,621 at June 30, 1998), representing the estimated value of Cariplant's land and related improvements, including buildings, shadehouses, and fixed and installed equipment. On February 12, 1997, the Company obtained a junior lien on Cariplant's property and equipment and entered into an agreement with Altec to modify the repayment terms of the unpaid principal balance of $996,962, with payments of principal and interest commencing in the year 2000. Payment of interest on the note was waived through January 1, 2000. On September 23, 1998, the Dominican Republic was struck by Hurricane Georges severely damaging Cariplant's facilities. As a result of the damages caused by the hurricane, the Company determined to write down the carrying value of the note to $100,000. The write down, amounting to $201,621 was included as an other expense in the accompanying consolidated statements of operations for the year ended December 31, 1998. At December 31, 1998 and 1997, notes receivable comprised the following: F-14
DESCRIPTION 1998 1997 ----------- -------- -------- Note receivable from Altec $100,000 $301,621 8% mortgage note, collateralized by land in South Florida, with interest payments due monthly and principal due in a balloon payment on November 28, 2000 (refer to Note 16(a)) 475,000 475,000 10% note, collateralized by real property 26,331 26,331 Non-interest bearing notes, due on demand, personally guaranteed by present and former Company personnel. 19,082 58,030 -------- -------- $620,413 $860,982 ======== ========
Amounts reflected in the balance sheet for notes receivable approximate their current fair values based on market interest rates for comparable risks, maturities and collateral. With respect to the Altec note, management believes it is not practica ble to estimate its fair value because of the difference between the face value of the note and its carrying amount, deferral of principal and interest payments until the year 2000 and other factors. NOTE 6 - PROPERTY AND EQUIPMENT At December 31, 1998 and 1997, property and equipment comprised the following:
1998 1997 ---------- ---------- Leasehold improvements $1,590,145 $1,860,754 Equipment and fixtures 1,618,312 1,504,103 Transportation equipment 407,266 747,180 Real estate property 224,327 224,327 ---------- ---------- 3,840,050 4,336,364 Less accumulated depreciation and amortization (1,745,251) (1,916,769) ---------- ---------- $2,094,799 $2,419,595 ========== ==========
During the years ended December 31, 1998, 1997, and 1996, deprecia tion expense charged to production was approximately $276,000, $258,000, and $287,000, respectively. F-15 NOTE 7 - DUE FROM SHAREHOLDER At December 31, 1998 and 1997, amounts due from shareholder principally arise from the settlement of litigation with the Company's former principal lender (refer to Notes 12 and 16(a)). In March 1998, the Company's major shareholder signed a non-interest bearing note due on March 2001 for $285,538 of the outstanding balance. NOTE 8 - NOTES PAYABLE At December 31, 1998 and 1997, the Company had short-term borrowings of $500,000 with a commercial bank in Puerto Rico collateralized by a certificate of deposit. The notes bear interest at 1% over the rate earned by a $500,000 certificate of deposit (5.5% and 6.35% at December 31, 1998 and 1997, respec tively). NOTE 9 - LONG-TERM DEBT At December 31, 1998 and 1997, long-term debt comprised the following:
DESCRIPTION 1998 1997 ----------- ---------- ---------- Five-year term loans, variable interest rate, 8.0% and 8.5% at December 31, 1998 and 1997, respectively, payable in quarterly in- stallments of approximately $31,000 through January 2000 and $8,000 through October 2001, including interest. The loans are collatera- lized by transportation and farm equipment $ 214,871 $ 316,997 9.25% commercial loan, payable in monthly installments of $2,000, including interest, through April 2000, collateralized by real estate property 29,477 53,580 ---------- ---------- 244,348 370,577 Less current portion (158,468) (117,694) ---------- ---------- Long-term debt $ 85,880 $ 252,883 ========== ==========
Based on borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term debt approximates the recorded amounts. F-16 The annual aggregate maturities of long-term debt and other financing obligations are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------ -------- 1999 $158,468 2000 61,605 2001 24,275 -------- $244,348 ========
NOTE 10 - HURRICANE GEORGES On September 21, 1998, Puerto Rico was struck by Hurricane Georges, a category 3 hurricane on the Saffir/Simpson scale. The hurricane severely damaged a portion of the Company's facilities (shadehouses) and inventory of plant material. For the year ended December 31, 1998, as a result of the damages caused by the hurricane, the Company recorded the following loss:
DESCRIPTION AMOUNT ----------- ---------- Inventory damaged or destroyed (cost of $491,767 less valuation allowance of $130,000) $ 361,767 Restoration, clean-up and debris removal 696,373 Book value of property destroyed 171,039 ---------- 1,229,179 Less: Proceeds from insurance claims (620,170) ---------- Loss from damages caused by the hurricane $ 609,009 ==========
NOTE 11 - INCOME TAXES The Company provides for income taxes using the applicable statutory tax rates in the related jurisdictions where it operates. The provision for income taxes, as reflected in the accompanying statements of operations for 1998, 1997 and 1996, does not bear a normal relationship to results of operations due to several items, such as the 90% tax exemption and unutilized net loss carryforwards. F-17 Income tax expense for the years ended December 31, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996 ------- -------- ------- Current: Puerto Rico $ - $ - $ - United States - - 23,492 Deferred - - - ------- -------- ------- $ - $ - $23,492 ======= ======== =======
Set forth below are explanations for the differences between the income tax provision and the amount computed by applying the Puerto Rico statutory income tax rate of 39% (for 1997 and 1996, the federal statutory income tax rate of 34% was used) to loss before income tax provision:
1998 1997 1996 --------- --------- --------- Income tax benefit computed by applying tax rate $(434,005) $(255,181) $(188,265) (Increase) decrease in in- come tax benefit resulting from: Tax-exempt income - - (17,170) Puerto Rico tax exemption 334,951 141,706 (67,563) Effect of Florida and Puerto Rico taxes (benefits) - (11,807) (10,022) Increase (decrease) in valuation allowance 99,054 (469,100) 338,697 Federal tax attributes lost as a result of reorganiza- tion, including net operat- ing loss carryforwards - 580,960 - Unutilized losses (untaxed income) of foreign subsi- diaries - - (4,094) Other differences - 13,422 (28,091) --------- --------- --------- $ - $ - $ 23,492 ========= ========= =========
F-18 Deferred income taxes were recognized in the consolidated balance sheet at December 31, 1998 and 1997 due to the tax effect of temporary differences and loss carryforwards as follows:
1998 1997 --------- --------- DEFERRED TAX ASSETS: Net operating loss carryforwards $ 352,880 $ 97,470 Valuation allowances for inventory and accounts receivable 5,029 16,920 --------- --------- 357,909 114,390 Less valuation allowance (357,909) (114,390) --------- --------- Net deferred tax asset $ - $ - ========= =========
NOTE 12 - COMMITMENTS AND CONTINGENCIES On May 29, 1996, the Company (including all related entities) and Michael J. Spector, President and the principal stockholder of the Company entered into a Settlement Agreement with First Union National Bank of Florida ("the Bank"). The Settlement Agreement covered all claims brought by the Bank against the Company and related entities and settled all counterclaims brought by the Company against the Bank. The Company had also guaranteed $400,000 of personal loans made to its major shareholder by the Bank, with an outstanding principal balance of $230,000 at the time of the settlement. The Settlement Agreement provided for a payment to the Bank of $5,625,000, of which $5,285,000 corresponded to the Company and $340,000 corresponded to Mr. Spector. The settlement payment made by the Company resulted in a charge of $255,174 to other expenses for the year ended December 31, 1996. 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 of the Company. NOTE 13 - SHAREHOLDERS' EQUITY (a) PREFERRED STOCK The articles of incorporation of the Company authorize the issuance of 250,000 shares of one cent ($0.01) par value series preferred stock, and the Board of Directors is authorized to amend the articles of incorporation 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. F-19 (b) TREASURY STOCK At December 31, 1997, the Company had 19,800 common shares in treasury at a cost of $48,788, which were acquired during 1988. As previously discussed in Note 1, effective December 31, 1997, the Company reincorporated its parent company from a Florida to a Puerto Rico corporation. On February 27, 1998, the Company purchased 20,000 shares of common stock at a cost of $47,500 in connection with the payment of shares to shareholders who exercised their statutory dissenter's rights regarding the reincorporation. NOTE 14 - 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 its major shareholders for an initial five year period at a monthly rental of $19,000. In addition, the lessors have released the Company from responsibility for any claims arising from the Company's use of a defective fungicide in its operations at the nursery facility. The Company had an option to renew this lease for an additional five year period at the greater of $24,000 per month, or the original $19,000 per month adjusted on the basis of the increase in the Wholesale Price Index ("WPI") published by the United States Department of Labor, Bureau of Labor Statistics, from the WPI which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998. On January 1, 1998, the Company exercised its option to renew the lease agreement with the Spectors at a monthly rental of $24,000. Under the above lease agreement, the Company has the option to purchase the nursery facility at any time during the term of the lease, based on the property's appraised value. The Company pays $1,000 per month for this purchase option. Effective January 1, 1994, the Company amended the lease agreement with its major shareholders to include an additional 27 acres of land adjacent to the nursery facility at a monthly rental of $1,750. This amendment did not provide for renewal nor purchase options towards the additional 27 acres of land. Effective January 1, 1998, the Company and the Spectors entered into an amendment to the lease agreement which grants the Company the right to continue to lease the 27 acre parcel on a month to month basis. Either party may terminate this portion of the lease upon 30 days prior written notice. In connection with this lease amendment, the Spectors also agreed to reimburse the Company by no later than March 1, 2001, the F-20 unamortized value of the leasehold improvements applicable to said parcel as of the date of termination. Total rental payments amounted to approximately $309,000 in $249,000 in 1998 and 1997. (b) PROPERTY IN BARRANQUITAS, PUERTO RICO Effective January 1, 1997, the Company entered into a lease agreement with Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of Barranquitas, Puerto Rico. The lease has an initial term of five years and may be renewed for two additional five-year terms at the Company's option. During the first year of the initial five-year term of the lease, monthly payments amount to $4,500. During the remaining four years of the initial term of the lease, monthly payments amount to $5,000. During the first and second renewal terms, monthly payments increase to $6,000 and $7,000, respectively. The lease agreement does not provide for any purchase option. Total rental payments amounted to $45,000 and $54,000 for the years ended December 31, 1998 and 1997, respectively. Lease payments for 1998 reflect a rent abatement of $15,000 due to damages caused by Hurricane Georges. (c) AGGREGATE LEASE OBLIGATIONS AND EXPENSES The Company's obligations under the above operating lease agree ments in force at December 31, 1998, assuming the Company exercises its renewal option on the Barranquitas, Puerto Rico property, are as follows:
YEAR ENDING MINIMUM DECEMBER 31, LEASE PAYMENTS ------------ -------------- 1999 $ 348,000 2000 348,000 2001 348,000 2002 360,000 2003 72,000
Total rental expense under all operating lease agreements amounted to approximately $354,000, $303,000, and $249,000, for the years ended December 31, 1998, 1997, and 1996, respectively. F-21 NOTE 15 - STOCK OPTION PLAN Effective April 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan") to replace the Company's existing 1988 Stock Benefits Plan (the "1988 Plan"). Outstanding options granted under the previous plan, including all related obligations and commit ments, 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 generally vest 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, 1996, 1997 and 1998, and changes during the years ended on those dates, are as follows:
PRICE PER SHARE ------------------------ WEIGHTED AVERAGE DESCRIPTION SHARES RANGE PRICE ----------- ------- -------------- -------- Outstanding, January 1, 1996 67,250 $2.00 to $3.16 $2.93 Granted 46,500 3.13 to 3.44 3.25 Exercised - - - ------- -------------- ----- Outstanding, December 31, 1996 113,750 2.00 to 3.44 3.06 Granted - - - Exercised - - - Forfeited 27,500 2.00 TO 3.13 2.88 ------- -------------- ----- Outstanding, December 31, 1997 86,250 2.00 to 3.44 3.12 Granted 31,000 1.50 to 1.94 1.81 Exercised - - - Forfeited 1,250 2.00 2.00 ------- -------------- ----- Outstanding, December 31, 1998 116,000 $1.50 to $3.44 $2.78 ======= ============== =====
F-22 The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE - -------- ----------- ----------- -------- ----------- -------- $2.88-$3.16 43,500 4.5 $3.01 43,500 $3.01 3.13- 3.44 41,500 7.6 3.26 16,600 3.26 1.50- 1.94 31,000 9.4 1.81 - - - ----------- ------- --- ----- ------ ----- $1.50-$3.44 116,000 6.9 $2.78 60,100 $3.08 =========== ======= === ===== ====== =====
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 the Plan. Had compensation expense been determined based upon the fair value at the grant date for awards under the Plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation, ("SFAS No. 123") the Company's net loss and net loss per share, on a pro forma basis, would not have significantly changed from those reported. The Company did not recognize compensation cost for the options granted to non-employees pursuant to the requirements of SFAS No. 123 because its effect was not significant. During 1998, the Company established a Salary Deferral Retirement Plan (the "Retirement Plan") under the provisions of Article 1165(a)(4) of the regulations under the Puerto Rico Internal Revenue Code of 1994. The retirement plan covers all employees who are at least 21 year old and have completed one year of service. The Company did not make any cash contributions to the retirement plan during 1998. NOTE 16 - SUPPLEMENTAL DISCLOSURES FOR THE STATEMENTS OF CASH FLOWS (a) NON-CASH INVESTING ACTIVITIES During the year ended December 31, 1998, the Company wrote off fully depreciated equipment with a cost of $505,070. Also during 1998, the Company wrote off leasehold improvements with a cost of $365,278 and a book value of $171,039, as a result of damages caused by Hurricane Georges. F-23 During the year ended December 31, 1997, the Company wrote off stock plants with a cost of $97,277 and a book value of $72,951. The write off was charged to an accrual made as of December 31, 1996, for the possible impairment of assets at the Company's South Florida location. During 1997, the Company sold two properties at its South Florida location with a cost of $1,088,594 and a book value of $990,105. Included in the determination of the $474,574 gain on the sale of the property sold were $177,049 representing the remaining balance of the accrual made at December 31, 1996 for the possible impair ment of assets at the Company's South Florida location. In connection with the sale of one of the properties, the Company received a $475,000 mortgage note from the buyer as part of the sales price. During the year ended December 31, 1996, the Company acquired a residence (previously leased by the Company) from a partnership. The purchase price of the residence, determined by an independent certified real estate appraiser, amounted to $220,800. Regarding the acquisition, the Company assumed a commercial loan amounting to $87,789, owed by the partnership, recorded an account payable to the Company's major shareholders amounting to $66,506, and applied $57,562 and $8,943 to the principal and interest, respectively, of a note receivable owed by a Company employee. During 1996, the Company acquired a vehicle with a cost of $28,477 (including a 7 year maintenance contract of $2,660) by assuming a loan for the same amount. (b) OTHER CASH FLOW TRANSACTIONS During the years ended December 31, 1998, 1997 and 1996, the Company made interest payments of approximately $62,000, $75,500, and $1,513,000, respectively, and made income tax payments of $23,500 during the year ended December 31, 1997. During the years ended December 31, 1998 and 1996, the Company did not make any income tax payments. NOTE 17 - MAJOR CUSTOMERS During 1998, 1997 and 1996 the Company's single largest customer accounted for approximately 13% ($683,000) 24% ($1,540,000), and 27% ($1,621,000), respectively, of the Company's net sales. NOTE 18 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1996, the Company recorded a $250,000 provision for impairment of assets for its South Florida operation (Margo Bay Farms, Inc.). F-24 NOTE 19 - DISPOSAL OF MARGO IMPORTS, B.V. AND MARGO BAY FARMS, INC. In 1991, the Company formed Margo Imports, B. V., a Netherlands corporation, to market Company products in Europe. In March 1993, the Company discontinued these operations in connection with the sale of Cariplant, S.A. (refer to Note 5). Effective January 1, 1997, the Company disposed of Margo Imports, B. V. recording the accumulated deficit in Margo Bay Farms, Inc., owner of all its outstanding common stock. Regarding the Company's South Florida operation (Margo Bay Farms, Inc.), due to the strong competition, inadequate sales levels and lack of profitability, on August 15, 1997, the Company's Board of Directors determined to close this operation effective September 30, 1997 and dispose of all related assets. On September 29 and November 28, 1997, the Company sold two nursery farms (a 54 acre and a 20 acre tract) which comprised the Company's South Florida operation. The sale of these two properties resulted in a gain of $474,574. On December 12, 1997, Margo Bay Farms, Inc. was merged with and into its parent company, Margo Nursery Farms, Inc., prior to the reincorporation of the parent company. The South Florida operation which closed effective September 30, 1997, accounted for net sales of approximately $478,000, $471,000 and incurred net losses of $27,000, $708,000 and for the years ended December 31, 1997 and 1996, respectively. 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, 1998, 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 interrup tion insurance coverage at reasonable rates. However, no assurance can be given that the Company will be able to obtain such insurance coverages. The Company believes it has taken reasonable precautions to protect its plants and operations from natural hazards. The Company's newer facilities are being constructed with fabricated steel in an attempt to reduce the damage from any future storms. Each of the Company's operations currently has access to a plentiful water supply and facilities for the protection of many of their weather-sensitive plants. F-25 Accounts receivable are due from customers resident in Puerto Rico. Concentration of credit risk with respect to accounts receivable is mitigated by monitoring the operations and financial strength of the Company's customers. Certain short-term certificates of deposit are placed with local financial institutions. Such credit risk is mitigated by depositing the funds with high credit quality financial institutions and limiting the amount of credit exposure in any financial institution. NOTE 21 - SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way an enterprise reports information about operating segments in annual financial statements and requires that enter prises 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. The Statement requires a reconciliation of total segment revenue and expense items and segment assets to the amounts in the enterprise's financial statements. SFAS 131 also requires a descriptive report on how the operating segments were determined, the products and services provided by the operating segments, and any measurement differences used for segment reporting and financial statement reporting. The Company's management monitors and manages the financial performance of three primary business segments: the production and distribution of plants, sales of lawn and garden products and landscaping services. The accounting policies of the segments are the same as those described in the summary of significant account ing 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 are based on internal management accounting policies. The information presented does not necessarily represent each segments's financial condition and results of operations as if they were independent entities. F-26
1998 -------------------------------------------------------- LAWN & GARDEN PLANTS PRODUCTS LANDSCAPING TOTALS ---------- ---------- ------------- ----------- Revenues from external customers $3,019,406 $ 862,050 $1,467,788 $ 5,349,244 Intersegment revenues 247,785 26,736 - 274,521 Interest income 122,683 - - 122,683 Interest expense 62,020 - - 62,020 Depreciation and amortization 447,285 22,436 58,070 527,791 Segment loss 899,698 142,692 70,447 1,112,837 Segment assets 6,405,425 761,623 823,160 7,990,208 Expenditures for segment assets 374,034 - - 374,034
1997 -------------------------------------------------------- LAWN & GARDEN PLANTS PRODUCTS LANDSCAPING TOTALS ---------- ---------- ------------- ----------- Revenues from external customers $3,435,291 $1,389,617 $1,724,004 $ 6,548,912 Intersegment revenues 415,896 57,487 - 473,383 Interest income 73,060 - - 73,060 Interest expense 73,274 - - 73,274 Depreciation & Amortization 412,716 22,652 56,266 491,634 Segment loss 331,731 239,249 179,554 750,534 Segment assets 7,411,884 827,389 712,815 8,952,088 Expenditures for segment assets 66,826 7,304 35,509 109,639
1996 -------------------------------------------------------- LAWN & GARDEN PLANTS PRODUCTS LANDSCAPING TOTALS ---------- ---------- ------------- ----------- Revenues from external customers $3,662,732 $1,429,537 $1,016,596 $ 6,108,865 Intersegment revenues 290,223 - - 290,623 Interest income 189,924 - - 189,924 Interest expense 206,316 - - 206,316 Depreciation and amortization 415,939 24,600 26,722 467,261 Segment loss 424,592 18,677 133,945 577,214 Segment assets 8,997,313 1,398,898 - 10,396,211 Expenditures for segment assets 497,308 - - 497,308
F-27 NOTE 22 - SUBSEGUENT EVENT 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 capacity of 321 acres, and are located approximately one mile from the Company's main nursery facility in Vega Alta. Among other things, the lease agreement provides for an initial lease term of five years subject to three additional renewal terms of five years, at the option of the Company. During the initial term, total lease payments amount to $33,625 per year. Lease payments for renewal terms are to be negotiated 90 days prior to each renewal term. F-28
SCHEDULE II MARGO CARIBE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ---------------------- --------- -------- BALANCE CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ----------- --------- ---------- ---------- ---------- ----------- YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $ 76,000 $ 35,900 $ 11,800 $ - $123,700 Allowance for inventory valuation $300,000 $ 30,000 - $(130,000) 200,000 -------- -------- --------- --------- -------- $376,000 $ 65,900 $ 11,800 $(130,000) $323,700 ======== ======== ========= ========= ======== YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts $ 79,000 $ 37,515 $ - $ (40,515) $ 76,000 Allowance for inventory valuation $420,000 $420,000 - (540,000) 300,000 -------- -------- --------- --------- -------- $499,000 $457,515 $ - $(580,515) $376,000 ======== ======== ========= ========= ======== YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful account $136,100 $ 4,000 $ - $ (61,100) $ 79,000 Allowance for inventory valuation $350,000 $252,000 - (182,000) 420,000 -------- -------- --------- --------- -------- $486,100 $256,000 $ - $(243,100) $499,000 ======== ======== ========= ========= ========
F-29 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 10(g)(i) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority 10(g)(ii) Lease agreement dated March 24, 1999 with the Puerto Rico Land Authority (21) List of Registrant's Subsidiaries (filed herewith) (23)(a) Consent of Deloitte & Touche LLP (23)(b) Consent of Kaufman, Rossin & Co. (27) Financial Data Schedule (filed herewith) EX-10.(G)(I) 2 TRANSLATION EXHIBIT 10(g)(i) LEASE AGREEMENT In the city of Vega Alta, Puerto Rico, on the twenty-fourth (24th) day of the month of March of nineteen hundred and ninety-nine (1999). APPEAR AS PARTY OF THE FIRST PART: The PUERTO RICO LANDS AUTHORITY, hereinafter called the "Lessor," a public corporation and government instrumentality of the Commonwealth of Puerto Rico, represented herein by its Executive Director, MR. FERNANDO MANUEL MACHADO-ECHEVARRIA, of legal age, married, attorney and agronomist, and resident of Toa Baja, Puerto Rico, Social Security Number 584- 57-6622. AND AS PARTY OF THE SECOND PART: MARGO NURSERY FARMS, INC., hereinafter called the "Lessee," a corporation duly authorized under the laws of the Commonwealth of Puerto Rico, with employer Social Security Number 66-0557816, represented herein by its President, MR. MICHAEL J. SPECTOR, of legal age, married, farm operator, and resident of Dorado, Puerto Rico, Social Security Number ###-##-####. And they hereby: STATE FIRST: That Lessor is the owner in fee simple of the real property described as follows: Translation Page 1 of 22 TRANSLATION RUSTIC: Parcel of land located in the Sabana Ward, of the Municipality of Vega Alta, Puerto Rico, with a surface area of approximately 260.00 cuerdas, and bordering: on the NORTH, channel easement; on the SOUTH, with a road of the Regadera farm and remnant lands of said farm owned by the Lands Authority; on the EAST, with remnant lands of the Regadera farm, owned by the Lands Authority; and on the WEST, with easement of PR Road Number 690. Recorded at Page 7 of Tome 20 of the Registry of Property of Vega Alta. And it hereby ASSIGNS and GIVES in lease to Lessee said real property under the terms and conditions contained herein. The real property object of the lease and described in this agreement forms part of the Regadera farm located in the Sabana Ward of the Municipality of Vega Alta, Puerto Rico. SECOND: The premises object of this lease have a superficial area of approximately 260.00 cuerdas belonging to the Regadera farm which appears geographically delimited in the sketch attached hereto and made to form a part hereof as Exhibit "A". THIRD: The terms and conditions of this lease are as follows: 1) The lease term shall be for a period of five (5) years, as of the date of delivery of the premises, with the right to three (3) extension periods of five (5) years each. Lessee shall have a period of ninety (90) days after expiration of each term to exercise its right to extend the terms and conditions of this agreement. Upon expiration of said ninety (90) days, Lessor shall notify Lessee in writing that the latter shall have sixty (60) days Translation Page 2 of 22 TRANSLATION to exercise its right in writing, otherwise the automatic extension will be canceled. It is hereby clarified that the right to said extension is conditioned on compliance with the terms and conditions of this agreement. 2) During the terms of this agreement or in the exercise of any of its extensions, Lessee may request and state its interest in exchanging the leased property. In the event that Lessee wishes to exchange another property of equal capacity, property of Lessee, which is not leased property, Lessor agrees to evaluate such exchange. 3) In spite of the fact that it is not part of the public policy of Lessor to offer for sale lands used for agricultural purposes, in the event that Lessor intends to totally or partially encumber the leased property due to the fact that it ceases to be of public use, it shall grant the right of first refusal pursuant to Section 31a of the Public Lands Sale or Lease Act of April 18, 1952, as amended. 4) Lessor may terminate the lease in the event that the property becomes necessary for the ends and purposes of Lessor or of another Government or Municipal Agency, in which case Lessee shall only be entitled to be indemnified or compensated for the permanent unrecovered improvements it has made on the property whose lease was so terminated by lessor prior to its expiration Translation Page 3 of 22 TRANSLATION provided that such improvements have been previously authorized. Lessee must submit verifiable evidence of the improvements made on the property at the time of termination of the lease or part thereof by Lessor. It is hereby clarified that should Lessee be entitled to be compensated for any type of improvements, such compensation shall be for the Account of the Agency or Municipality interested in the lands, releasing Lessor from any liability in this type of claim. 5) The annual rent on the lease shall be $26,000.00, at the rate of $100.00 per cuerda per lease year for the next five (5) year extension periods, to be timely negotiated between the parties, Lessor agreeing not to increase the rent beyond what Lessor charges to other corporations dedicated to the same or similar industry of approximate capacity. Responsibility for the total payment of property taxes is transferred to Lessee, which at present are estimated at an average of $1,560.00, at the rate of $6.00 per cuerda per year; provided, that any tax increase imposed on the property during the term of this agreement shall also be the responsibility of Lessee. It is hereby clarified that should Lessee accept the services of a tax exemption it shall always be responsible for the payment of the rent in the pre-agreed manner. The payments are to be made quarterly in advance at the offices of Lessor, located on Stop 19 1/2, 1311 Fernandez Juncos Avenue, in Translation Page 4 of 22 TRANSLATION Santurce, Puerto Rico. Also, at the time of execution hereof, Lessee must pay the sum of seven hundred eighty dollars ($780.00) to cover part of the administrative expenses. It is hereby clarified that should Lessor participate in the improvements of the infrastructures of these lands, the rent may be revised for purposes of adjusting the same to what other lessees pay in similar situations. 6) Lessor shall grant Lessee a sixty (60) days curing period for the payment of the rent and the use of the leased property, provided that it is not contrary to the law, morals or public order. Failure to pay the rent in the manner stipulated under the preceding condition shall entitle Lessor to terminate the lease and to immediately proceed to the eviction of Lessee, as well as to exercise any right or action which may be proper. 7) Lessee agrees not to construct on the leased property any building, except for sheds and other facilities directly related with the activity or uses authorized herein, such as buildings for storage and offices, including structures for employees, all after Lessee arranges, on its own and for its own account, for the corresponding permits from the pertinent agencies. Lessee shall be entitled to construct any structure within the farm to protect our inventory from theft or vandalism, to pave roads in the perimeter upon prior written authorization of Lessor, and to improve the Translation Page 5 of 22 TRANSLATION drainage which includes ditches, provided that Lessee arranges, on its own and for its own account, for the permits from the pertinent agencies. Lessee shall not allow any person to build, other than Lessee or its agents, Lessor being liable for any damages which the violation of such condition causes. 8) Lessee agrees to use the leased property solely and exclusively for the production and sale of ornamental plants, trees, palm trees, the planting of grass, the manufacture and distribution of gardening products in general, such as pots and chemical gardening products, provided that Lessee complies with all of the state and/or federal laws and regulations in connection with the production, and provided that, should this condition be violated, Lessor may resolve the lease agreement immediately. However, it is hereby clarified that the planting of grass, trees and palm trees on land will be permitted after submitting proper guarantees for the replacement of the top soil. Upon concluding the planting and extraction of grass, Lessee shall replace the organic layer of the top soil at a thickness of not less than eight (8) inches in the entire area used for planting grass. In order to guarantee compliance with this condition, Lessee accepts and agrees to post and to maintain in effect during the term of this agreement, a bond of three thousand dollars ($3,000.00) per cuerda used for the planting and extraction of grass, trees and palm trees Translation Page 6 of 22 TRANSLATION as other farmers have done. Said bond may be made through an insurance company authorized to do business in Puerto Rico. Lessee shall notify the number of cuerdas to be used for this purpose and on the basis of such number it shall post the bond. Lessee shall be responsible for any contamination in connection with the manufacture and distribution of chemical gardening products on the leased premises, releasing Lessor from all liability in connection with said operation. 9) The parties agree that access to the lease property shall be through the easement of State Road 690. Lessee shall maintain and preserve with durable material the access road in transitable condition and shall install a control system which will maintain permanently clean the access road and internal roads of the leased property. 10) All improvements of any kind, whether they are useful, necessary or permanent, which Lessee has introduced into the leased property, as well as all plantings or sprouts which Lessee has not removed, shall enure to the benefit of Lessor upon termination of the lease agreement, whether because said agreement expired or because Lessor must resolve the same due to breach by Lessee or voluntary surrender of the property by Lessee unless Lessor provides otherwise in writing using the same formalities of this agreement. Lessee it entitled to remove any improvements Translation Page 7 of 22 TRANSLATION introduced provided that such removal does not cause damage to the land leased and it agrees to leave the land used in like or better condition as when it found the same. 11) Lessee shall be entitled to mortgage the improvements to removable structures without impairing the real property, such as green houses, shade houses, and warehouses for agricultural product equipment up to a maximum of three million dollars ($3,000,000.00), pursuant to the Civil Code of Puerto Rico, the applicable Regulations and case law. 12) In order to guarantee the payment of the rents corresponding to the five (5) years and the three (3) extension periods of five (5) years each, Lessee shall deliver to Lessor and shall maintain in effect during the term of the lease agreement a bond by depositing thirteen thousand seven hundred eighty dollars ($13,780.00). Said amount shall not accrue interest in favor of lessee. The bond must be accepted by Lessor. 13) Lessee agrees to guarantee, through the same deposit mentioned in the preceding clause, that upon conclusion of the lease agreement it shall remove the structures constructed by it on the leased premises and to cover any expense which the Lands Authority must incur for such removal, including reasonable legal and other expenses. Translation Page 8 of 22 TRANSLATION 14) Any damage caused to any individual person or properties or to Lessor as a result of the use for which the leased property will be dedicated shall be the responsibility of Lessee. 15) Expanding on the preceding condition, it is hereby provided that in the event that Lessor is sued for the reasons contained in the condition mentioned herein, Lessee shall assume the defense of Lessor and, should it fail to do so, Lessee shall be liable to Lessor for any expenses incurred by the latter in such defense, in addition to being liable for the payment of any judgment which may be entered. 16) Lessee agrees to care for the leased property with the diligence of a good father of a family committing to surrender the same in equal or better condition than those in which it was received at the commencement of the lease, except for any natural deterioration it may undergo. 17) Lessee shall maintain in good condition the use of the roads or paths which run through the leased property. 18) The parties agree that the leased area was determined through a planimeter and should Lessee wish to have measurements taken to determine the exact area of the lease property it must do so on its own and for its own account within a term of not more than six (6) months as of the date on which the agreement is executed. The adjustment resulting in the area, if any, shall be Translation Page 9 of 22 TRANSLATION made after Lessor corroborates the measurement plan. Likewise, an adjustment in rent as a result of the change in area shall be made retroactive to the date on which the lease agreement was executed or the lands delivered to Lessee. 19) In the event that the measurements are taken subsequent to the six (6) months period, the rent shall be adjusted and shall enter into effect thirty (30) days following the date on which Lessee notifies Lessor in writing of the results of said measurement. Neither Lessee nor Lessor shall be entitled to file a claim between them for payments made prior to the rent adjustment, unless the measurement and notice mentioned herein are made within said six (6) months period. 20) The payment of property taxes imposed on the leased property shall be the responsibility of Lessee, provided that any tax increase imposed thereon shall also be the responsibility of Lessee, who must pay to Lessor as of delivery of the land and as provided in condition number five (5) hereof. 21) The payments of electrical energy, aqueduct waters, telephone and other general services, if any, shall be for the account of Lessee. 22) Lessee agrees to perform on the leased property, during the term of the lease, any work which may be necessary in order to put it and preserve it in serviceable condition for the use for Translation Page 10 of 22 TRANSLATION which it will be destined, all for its own account without any expense or disbursement by lessor. 23) During the term of the lease, Lessee shall repair the fences of the leased property, if any, and replace any of the same which may for any reason be destroyed or disappear; and in the event that no fences exist, Lessee agrees to properly fence in the leased property, to maintain the fences in good condition, in addition to not moving or altering in any way the boundary points or fences established, or allow any person to move, change or alter said boundary points or to remove fences. It shall also clean the trenches, irrigation ditches, and/or drains on said property, if any, and to prune and/or weed said property, as necessary, and as is usual and customary. 24) Lessee agrees not to cut down the trees and palm trees on the leased premises, if any, without the prior written authorization of Lessor. 25) Lessee shall permit the entry of Lessor's employees onto the leased property to perform any activity necessary for Lessor, such as taking measurements, preparing topographic maps, inspections, etc. Similarly, it shall permit the entry of the officials of the Department of Agriculture, of its ascribed Agencies, or of any other state or federal instrumentality which has an interest in or has jurisdiction over the land to carry out Translation Page 11 of 22 TRANSLATION studies on the development of the agricultural project, as well as to perform any necessary investigation. 26) Lessor reserves the right to use any roads existing on the leased property belonging to Lessor which are necessary to provide access to lands which are used by programs of Lessor, the Sugar Corporation, and other lessees of Lessor or for any other use which may enure to the public good. 27) Lessor reserves the right to exploit directly or through contract with third parties the mineral deposits which exist or may exist on the leased property. 28) Lessee may not assign the lease agreement, in whole or in part, nor may it assign the administration of the leased property and its operations thereon, nor any right derived therefrom to any person or entity, nor may it sublease, in whole or in part, the property object of this lease to any person or entity unless such assignment is to an affiliate. Any damage caused to the leased property by the affiliates of Lessee shall be the primary responsibility of Lessee. 29) The fact that Lessor, upon the occurrence of any violation of the conditions mentioned herein, does not terminate immediately the term of the lease, nor takes any steps to have Lessee evicted from the leased property shall not be construed as Lessor consenting to such violation or to waiving the right to Translation Page 12 of 22 TRANSLATION terminate the agreement, and Lessor may at any time make use of any and all rights and actions which our laws grant it provided that thirty (30) days advance notice is given to Lessee. 30) In the event that Lessor must establish or file and files or established any judicial action against Lessee for the collection of any sums of money in terms of rents owed or for damages stemming from the lease agreement and/or for the eviction of Lessee, whether because the term of the agreement has expired, for failure to comply with any of the lease conditions as stipulated, Lessee expressly accepts and agrees to pay all costs, expenses and disbursements originating from the processing of the action or actions established or filed as well as the payment of attorney's or attorneys' fees incurred by Lessor therefor, even if such attorneys are employees of Lessor and Lessee shall expressly submit to the competence of the courts chosen by Lessor for the processing of any action filed by the latter against Lessee by reason of the lease agreement. 31) Lessee agrees to comply with all of the applicable laws and regulations of the Commonwealth of Puerto Rico and of the Municipalities where the leased property(ies) is/are located. 32) Lessee accepts and agrees to pay to Lessor annual interest on any amount owed and in default, using as the basis the primary interest in effect at the Government Development Bank, plus Translation Page 13 of 22 TRANSLATION one percent (1%) over same, as of the date of occurrence of such action. 33) Lessee agrees to respect the easements established on the real property object of this lease and shall impede the establishment of new easements and rights of passage without the written consent of Lessor. 34) Lessor reserves the right to cut handspikes, if any, on the leased property upon prior notice to Lessee. 35) Lessor shall notify Lessee in writing of any breach of the agreement and may, at its option, grant Lessee a term to cure the same. 36) In the event that Lessee wishes to resolve the lease agreement prior to the date of expiration, it must notify the same in writing to Lessor not less than thirty (30) days prior to the date it wishes to terminate the same and accompany together with the notice of resolution the amount corresponding to six (6) months rent. Should the lease agreement have less than six (6) months remaining in its term, Lessee shall only be required to pay Lessor the rent corresponding to the time left on the agreement, excluding the extension period, if any. 37) Lessee shall respect the rights of the families residing on the leased property, if any, and shall agree to allow said families to have free access to their respective dwellings. Translation Page 14 of 22 TRANSLATION Likewise, it agrees to allow them to plans the short term crops which they have on the property at the time the same is leased. This condition is expanded in order to establish that the following peons exist on the leased property: NONE. 38) Lessee freely accepts and agrees to grant in favor of the Lands Authority an Assignment of Credit authorizing the Animal Husbandry Service and Development Administration, the Agricultural Insurance Corporation, the Puerto Rico Farm Credit Bank, Farms Services Agency or other income which may be received from legal suits in which Lessee is involved to make any deductions necessary up to the total amount of the debt. 39) Lessee accepts and is aware that the leased property represents a major risk for purposes of floods or access thereto, for which it assumes full responsibility for complying with the requirements and provisions of the regulation on Areas Susceptible to Flooding for any construction, use or development, including the total cost of any studies or works necessary to make its project viable. 40) Lessee accepts and agrees that any change in residential or postal address or telephone number, if any, shall be notified to Lessor within the term of thirty (30) days after such change is made. Translation Page 15 of 22 TRANSLATION 41) Lessee accepts and agrees that once work on the premises begins on the agricultural activity to be engaged, it assumes, in turn, the risk of any losses or damages due to natural causes, such as flooding, rains, droughts, earthquakes, stormy squalls, hurricane and/or for other types of damages, such as fires, diseases and plagues, and Lessor need not compensate Lessee in any manner for such damages or losses. 42) The Lands Authority and/or the Programs ascribed thereto shall not be responsible for any inconveniences caused to the plantings and/or animals which Lessee has on the leased property resulting from the application of herbicides or insecticides on the plantings developed on adjacent lands. 43) The parties expressly agree that this agreement shall not be recordable at the Registry of Property. In event that Lessor decides to assign or transfer the title or assets of the leased property to another Government Agency, it shall be the duty of Lessor to notify Lessee in writing and to all future titleholders or purchases of the existence of this lease agreement, and Lessor shall inform Lessee of the name and address of the future purchaser prior to the act of disposition of the leased property. 44) This agreement shall not be valid in any of its parts until an authorized officer of the Lands Authority makes physical delivery of the property to Lessee and Lessee accepts the same. Translation Page 16 of 22 TRANSLATION 45) Lessee acknowledges that the activity in which it will be engaged could at some of its stages generate contaminants or damaging toxic substances, both for humans as well as for the environment in general if the best handling practices are not undertaken. This situation is aggravated if the premises object of the lease are located in an area next to or bordering structures used as residences or to bodies of water, thus Lessee agrees to ensure that all safety measures are followed in compliance with all of the standards and provisions of the state and federal statutes created to prevent or minimize any possible adverse act of its actions on the quality of human environment; therefore, Lessee is also cautioned that it will be solely responsible for any damages to life or the leased property and the property of third persons, litigations, judgments, fines or penalties imposed by courts of state or federal administrative agencies on Lessee or the Lands Authority. Expanding on the foregoing, should the Lands Authority have to pay files and penalties for Lessee's breach of any state and federal laws, Lessee shall be responsible for total payment of said fine and penalty plus an additional twenty-five percent (25%) for costs, expenses and attorney's fees as well as for any interest accrued on the fine and penalty paid by the Lands Authority. 46) Expanding on condition number eight (8) and number forty-five (45), in order to guarantee payment of any claim which may Translation Page 17 of 22 TRANSLATION arise for damages caused to individual persons or properties or of properties of the Lands Authority as a result of Lessee's activities on the leased property, Lessee accepts and agrees to obtain and maintain in effect during the term of this lease agreement a public liability insurance policy with an insurance company duly registered and authorized to do business in Puerto Rico, including the Lands Authority as additional co-insured, with the following limits: $500,000.00 for accident and $500,000.00 for property damages. Said policy must include a Hold Harmless Agreement clause. Should both liabilities be combined (C.S.L.) the amount of the policy shall not be less than the sum of both amounts, with aggregate equal to the sum of the amounts of the policy limits. 47) The parties expressly agree that upon expiration of the agreement without Lessor requiring that Lessee surrender possession of the leased lands, the agreement shall not be considered renewed and there will be no tacit re-extension. The fact that Lessor accepts rental payments on the lease from Lessee after the agreement has expired shall not be interpreted as the agreement having been renewed or that such tacit re-extension exists. In such event, should Lessee continue in possession of the property due to Lessor's tolerance or inadvertence, it shall be subject to a month-to-month agreement until the parties agree, at the will of Translation Page 18 of 22 TRANSLATION Lessor, that a new agreement will be executed. The monthly rent shall be the result of dividing the last annual rent agreed to in this agreement into twelve (12) months. This agreement shall in no way limit the authority of Lessor to recover possession of the leased land if it is necessary for its purposes or because Lessee has failed to comply with any of the provisions of this agreement. 48) Lessor agrees to give the endorsement of its agency to obtain agricultural credits and to adopt the infrastructure program on irrigation and drainage following the procedure established to qualify for funds assigned under the infrastructure program, provided that Lessee qualifies as a bona fide farmer and has complied with the terms of this agreement. 49) Lessee expressly accedes, accepts and authorizes the Puerto Rico Lands Authority to disclose any information relative to the credit and form of rent payments to any public or private entity dedicated in turn to disclosing or distributing credit information. 50) The parties expressly agree that any claim which one party has against the other for damages due to the alleged breach of its obligations under this agreement shall be discussed exclusively through an arbitration proceeding to which they will submit expressly waiving the judicial forum of a Court. Excluded from the arbitration proceeding are all other claims, matters, Translation Page 19 of 22 TRANSLATION rights or procedures under this agreement which have nothing to do with damages, such as, but not limited to, evictions and replevies judicially filed by Lessor for breach of any of the obligations contracted by Lessee, claims for collections of monies for any concept of Lessor against Lessee; the authority of Lessor to resolve the lease agreement for any of the causes stated and acknowledged by the parties therein. The specific proceeding for the claim to be arbitrable in any claim for damages of the parties shall be the following: either of the parties who claims damages from the other within the term of thirty (30) days after the latter becomes aware of the facts and damages which gave rise to its claim must notify in writing, by certified mail, return receipt requested, said claim to the other party indicating in the content of its written communication a summary of the facts on which it bases its claim, in which it shall further indicate the specific contractual provision(s) invoked in support of its claim, the amount claimed and it shall also describe the documentary and testimonial evidence it has in support of its allegations. The claimee shall have thirty (30) days to respond to the claim. Should the claimee respond by denying the claim or should it fail to respond within the above-indicated term, then the claimant may demand in writing, within thirty (30) days, that the case be submitted to arbitration, indicating in its communication the name Translation Page 20 of 22 TRANSLATION of the arbitrator it has selected. The claimee, in turn, shall select another arbitrator. The arbitrator selected by Lessee and the arbitrator selected by Lessor shall select by mutual agreement a third arbitrator so that together they can discuss the controversy. The parties shall be entitled to a discovery period, which shall be regulated by the arbitrators. The decision or award of the arbitrators, after the evidentiary hearing has been held, shall be by majority and shall be final and unappealable for the parties from the date on which the same is issued. 51) The parties agree freely, voluntarily and will full understanding of the agreements and their consequences, that no claim for damages and no decision or award of the arbitrators may exceed in the granting or compensation for damages more than three (3) times the amount represented by the total amount which Lessor may collect in rents during the full term of the agreement without including any extensions thereof. 52) These are the terms and conditions which the parties have reached freely and voluntarily, and which they manifest they have read and understood. The parties finally agree that no verbal or written agreement or representation of either of the parties may vary of modify the conditions and terms of this agreement unless they are executed in writing and under the same formalities as this agreement. Translation Page 21 of 22 TRANSLATION SUCH IS THE LEASE AGREEMENT, which the parties sign as they have found it to be in accordance with the stipulations agreed to on the date indicated hereinabove. PUERTO RICO LANDS AUTHORITY (SIGNED) ---------------------------------- FERNANDO MANUEL MACHADO-ECHEVARRIA EXECUTIVE DIRECTOR (SIGNED) ---------------------------------- MICHAEL J. SPECTOR AFFIDAVIT NO. 7636 Subscribed and sworn to before me by MR. MICHAEL J. SPECTOR, of the personal circumstances stated above, personally known to me. In Vega Alta, Puerto Rico, on March 24, 1999. [Notarial Seal] (SIGNED) BLAS R. FERRAIUOLI-MARTINEZ ------------------------------------ NOTARY PUBLIC AFFIDAVIT NO. 7636 Subscribed and sworn to before me by MR. FERNANDO MANUEL MACHADO-ECHEVARRIA, of the personal circumstances stated above, personally known to me. In Vega Alta, Puerto Rico, on March 24, 1999. [Notarial Seal] (SIGNED) BLAS R. FERRAIUOLI-MARTINEZ ------------------------------------ NOTARY PUBLIC Translation Page 22 of 22 EX-10.(G)(II) 3 EXHIBIT 10(g)(ii) TRANSLATION LEASE AGREEMENT In the city of Vega Alta, Puerto Rico, on the twenty-fourth (24th) day of the month of March of nineteen hundred and ninety-nine (1999). APPEAR AS PARTY OF THE FIRST PART: The PUERTO RICO LANDS AUTHORITY, hereinafter called the "Lessor," a public corporation and government instrumentality of the Commonwealth of Puerto Rico, represented herein by its Executive Director, MR. FERNANDO MANUEL MACHADO-ECHEVARRIA, of legal age, married, attorney and agronomist, and resident of Toa Baja, Puerto Rico, Social Security Number 584- 57-6622. AND AS PARTY OF THE SECOND PART: MARGO NURSERY FARMS, INC., hereinafter called the "Lessee," a corporation duly authorized under the laws of the Commonwealth of Puerto Rico, with employer Social Security Number 66-0557816, represented herein by its President, MR. MICHAEL J. SPECTOR, of legal age, married, farm operator, and resident of Dorado, Puerto Rico, Social Security Number ###-##-####. And they hereby: STATE FIRST: That Lessor is the owner in fee simple of the real property described as follows: Translation Page 1 of 23 TRANSLATION RUSTIC: Parcel of land located in the Sabana Ward, of the Municipality of Vega Alta, Puerto Rico, with a surface area of approximately 61.00 cuerdas, and bordering: on the NORTH, with the easement of PR Road 689 and 690; on the SOUTH, with private lands of the Carmelita community; on the EAST, with the easement of Highway #690 and with private lands; and on the WEST, with the easement of PR Road Number 690. Recorded at Page 105 of Tome 17 of the Registry of Property of Vega Alta. And it hereby ASSIGNS and GIVES in lease to Lessee said real property under the terms and conditions contained herein. The real property object of the lease and described in this agreement forms part of the Cibuco farm located in the Sabana Ward of the Municipality of Vega Alta, Puerto Rico. SECOND: The premises object of this lease have a superficial area of approximately SIXTY-ONE POINT ZERO ZERO (61.00) cuerdas belonging to the Cibuco farm which appears geographically delimited in the sketch attached hereto and made to form a part hereof as Exhibit "A". THIRD: The terms and conditions of this lease are as follows: 1) The lease term shall be for a period of five (5) years, as of the date of delivery of the premises, with the right to three (3) extension periods of five (5) years each. Lessee shall have a period of ninety (90) days after expiration of each term to exercise its right to extend the terms and conditions of this agreement. Upon expiration of said ninety (90) days, Lessor shall Translation Page 2 of 23 TRANSLATION notify Lessee in writing that the latter shall have sixty (60) days to exercise its right in writing, otherwise the automatic extension will be canceled. It is hereby clarified that the right to said extension is conditioned on compliance with the terms and conditions of this agreement. 2) During the terms of this agreement or in the exercise of any of its extensions, Lessee may request and state its interest in exchanging the leased property. In the event that Lessee wishes to exchange another property of equal capacity, property of Lessee, which is not leased property, Lessor agrees to evaluate such exchange. 3) In spite of the fact that it is not part of the public policy of Lessor to offer for sale lands used for agricultural purposes, in the event that Lessor intends to totally or partially encumber the leased property due to the fact that it ceases to be of public use, it shall grant the right of first refusal pursuant to Section 31a of the Public Lands Sale or Lease Act of April 18, 1952, as amended. 4) Lessor may terminate the lease in the event that the property becomes necessary for the ends and purposes of Lessor or of another Government or Municipal Agency, in which case Lessee shall only be entitled to be indemnified or compensated for the permanent unrecovered improvements it has made on the property Translation Page 3 of 23 TRANSLATION whose lease was so terminated by lessor prior to its expiration provided that such improvements have been previously authorized. Lessee must submit verifiable evidence of the improvements made on the property at the time of termination of the lease or part thereof by Lessor. It is hereby clarified that should Lessee be entitled to be compensated for any type of improvements, such compensation shall be for the Account of the Agency or Municipality interested in the lands, releasing Lessor from any liability in this type of claim. 5) The annual rent on the lease shall be SEVEN THOUSAND SIX HUNDRED TWENTY-FIVE DOLLARS ($7,625.00) at the rate of ONE HUNDRED TWENTY-FIVE DOLLARS ($125.00) per cuerda per lease year for the next five (5) year extension periods, to be timely negotiated between the parties, Lessor agreeing not to increase the rent beyond what Lessor charges to other corporations dedicated to the same or similar industry of approximate capacity. Responsibility for the total payment of property taxes is transferred to Lessee, which at present are estimated at an average of ONE THOUSAND FIVE HUNDRED TWENTY-FIVE DOLLARS ($1,525.00), at the rate of TWENTY-FIVE DOLLARS ($25.00) per cuerda per year; provided, that any tax increase imposed on the property during the term of this agreement shall also be the responsibility of Lessee. It is hereby clarified that should Lessee accept the services of a tax exemption it shall Translation Page 4 of 23 TRANSLATION always be responsible for the payment of the rent in the pre-agreed manner. The payments are to be made quarterly in advance at the offices of Lessor, located on Stop 19 1/2, 1311 Fernandez Juncos Avenue, in Santurce, Puerto Rico. Also, at the time of execution hereof, Lessee must pay the sum of TWO HUNDRED TWENTY-EIGHT DOLLARS AND SEVENTY-FIVE CENTS ($228.75) to cover part of the administrative expenses. It is hereby clarified that should Lessor participate in the improvements of the infrastructures of these lands, the rent may be revised for purposes of adjusting the same to what other lessees pay in similar situations. 6) Lessor shall grant Lessee a sixty (60) days curing period for the payment of the rent and the use of the leased property, provided that it is not contrary to the law, morals or public order. Failure to pay the rent in the manner stipulated under the preceding condition shall entitle Lessor to terminate the lease and to immediately proceed to the eviction of Lessee, as well as to exercise any right or action which may be proper. 7) Lessee agrees not to construct on the leased property any building, except for sheds and other facilities directly related with the activity or uses authorized herein, such as buildings for storage and offices, including structures for employees, all after Lessee arranges, on its own and for its own account, for the corresponding permits from the pertinent agencies. Lessee shall be Translation Page 5 of 23 TRANSLATION entitled to construct any structure within the farm to protect our inventory from theft or vandalism, to pave roads in the perimeter upon prior written authorization of Lessor, and to improve the drainage which includes ditches, provided that Lessee arranges, on its own and for its own account, for the permits from the pertinent agencies. Lessee shall not allow any person to build, other than Lessee or its agents, Lessor being liable for any damages which the violation of such condition causes. 8) Lessee agrees to use the leased property solely and exclusively for the production and sale of ornamental plants, trees, palm trees, the planting of grass, the manufacture and distribution of gardening products in general, such as pots and chemical gardening products, provided that Lessee complies with all of the state and/or federal laws and regulations in connection with the production, and provided that, should this condition be violated, Lessor may resolve the lease agreement immediately. However, it is hereby clarified that the planting of grass, trees and palm trees on land will be permitted after submitting proper guarantees for the replacement of the top soil. Upon concluding the planting and extraction of grass, Lessee shall replace the organic layer of the top soil at a thickness of not less than eight (8) inches in the entire area used for planting grass. In order to guarantee compliance with this condition, Lessee accepts and agrees Translation Page 6 of 23 TRANSLATION to post and to maintain in effect during the term of this agreement, a bond of THREE THOUSAND DOLLARS ($3,000.00) per cuerda used for the planting and extraction of grass, trees and palm trees as other farmers have done. Said bond may be made through an insurance company authorized to do business in Puerto Rico. Lessee shall notify the number of cuerdas to be used for this purpose and on the basis of such number it shall post the bond. Lessee shall be responsible for any contamination in connection with the manufacture and distribution of chemical gardening products on the leased premises, releasing Lessor from all liability in connection with said operation. 9) The parties agree that access to the lease property shall be through the easement of State Road 690. Lessee shall maintain and preserve with durable material the access road in transitable condition and shall install a control system which will maintain permanently clean the access road and internal roads of the leased property. 10) All improvements of any kind, whether they are useful, necessary or permanent, which Lessee has introduced into the leased property, as well as all plantings or sprouts which Lessee has not removed, shall enure to the benefit of Lessor upon termination of the lease agreement, whether because said agreement expired or because Lessor must resolve the same due to breach by Lessee or Translation Page 7 of 23 TRANSLATION voluntary surrender of the property by Lessee unless Lessor provides otherwise in writing using the same formalities of this agreement. Lessee it entitled to remove any improvements introduced provided that such removal does not cause damage to the land leased and it agrees to leave the land used in like or better condition as when it found the same. 11) Lessee shall be entitled to mortgage the improvements to removable structures without impairing the real property, such as green houses, shade houses, and warehouses for agricultural product equipment up to a maximum of THREE MILLION DOLLARS ($3,000,000.00), pursuant to the Civil Code of Puerto Rico, the applicable Regulations and case law. 12) In order to guarantee the payment of the rents corresponding to the five (5) years and the three (3) extension periods of five (5) years each, Lessee shall deliver to Lessor and shall maintain in effect during the term of the lease agreement a bond by depositing FOUR THOUSAND EIGHT HUNDRED TWELVE DOLLARS AND FIFTY CENTS ($4,812.50). Said amount shall not accrue interest in favor of lessee. The bond must be accepted by Lessor. 13) Lessee agrees to guarantee, through the same deposit mentioned in the preceding clause, that upon conclusion of the lease agreement it shall remove the structures constructed by it on the leased premises and to cover any expense which the Lands Translation Page 8 of 23 TRANSLATION Authority must incur for such removal, including reasonable legal and other expenses. 14) Any damage caused to any individual person or properties or to Lessor as a result of the use for which the leased property will be dedicated shall be the responsibility of Lessee. 15) Expanding on the preceding condition, it is hereby provided that in the event that Lessor is sued for the reasons contained in the condition mentioned herein, Lessee shall assume the defense of Lessor and, should it fail to do so, Lessee shall be liable to Lessor for any expenses incurred by the latter in such defense, in addition to being liable for the payment of any judgment which may be entered. 16) Lessee agrees to care for the leased property with the diligence of a good father of a family committing to surrender the same in equal or better condition than those in which it was received at the commencement of the lease, except for any natural deterioration it may undergo. 17) Lessee shall maintain in good condition the use of the roads or paths which run through the leased property. 18) The parties agree that the leased area was determined through a planimeter and should Lessee wish to have measurements taken to determine the exact area of the lease property it must do so on its own and for its own account within a term of not more Translation Page 9 of 23 TRANSLATION than six (6) months as of the date on which the agreement is executed. The adjustment resulting in the area, if any, shall be made after Lessor corroborates the measurement plan. Likewise, an adjustment in rent as a result of the change in area shall be made retroactive to the date on which the lease agreement was executed or the lands delivered to Lessee. 19) In the event that the measurements are taken subsequent to the six (6) months period, the rent shall be adjusted and shall enter into effect thirty (30) days following the date on which Lessee notifies Lessor in writing of the results of said measurement. Neither Lessee nor Lessor shall be entitled to file a claim between them for payments made prior to the rent adjustment, unless the measurement and notice mentioned herein are made within said six (6) months period. 20) The payment of property taxes imposed on the leased property shall be the responsibility of Lessee, provided that any tax increase imposed thereon shall also be the responsibility of Lessee, who must pay to Lessor as of delivery of the land and as provided in condition number five (5) hereof. 21) The payments of electrical energy, aqueduct waters, telephone and other general services, if any, shall be for the account of Lessee. Translation Page 10 of 23 TRANSLATION 22) Lessee agrees to perform on the leased property, during the term of the lease, any work which may be necessary in order to put it and preserve it in serviceable condition for the use for which it will be destined, all for its own account without any expense or disbursement by lessor. 23) During the term of the lease, Lessee shall repair the fences of the leased property, if any, and replace any of the same which may for any reason be destroyed or disappear; and in the event that no fences exist, Lessee agrees to properly fence in the leased property, to maintain the fences in good condition, in addition to not moving or altering in any way the boundary points or fences established, or allow any person to move, change or alter said boundary points or to remove fences. It shall also clean the trenches, irrigation ditches, and/or drains on said property, if any, and to prune and/or weed said property, as necessary, and as is usual and customary. 24) Lessee agrees not to cut down the trees and palm trees on the leased premises, if any, without the prior written authorization of Lessor. 25) Lessee shall permit the entry of Lessor's employees onto the leased property to perform any activity necessary for Lessor, such as taking measurements, preparing topographic maps, inspections, etc. Similarly, it shall permit the entry of the Translation Page 11 of 23 TRANSLATION officials of the Department of Agriculture, of its ascribed Agencies, or of any other state or federal instrumentality which has an interest in or has jurisdiction over the land to carry out studies on the development of the agricultural project, as well as to perform any necessary investigation. 26) Lessor reserves the right to use any roads existing on the leased property belonging to Lessor which are necessary to provide access to lands which are used by programs of Lessor, the Sugar Corporation, and other lessees of Lessor or for any other use which may enure to the public good. 27) Lessor reserves the right to exploit directly or through contract with third parties the mineral deposits which exist or may exist on the leased property. 28) Lessee may not assign the lease agreement, in whole or in part, nor may it assign the administration of the leased property and its operations thereon, nor any right derived therefrom to any person or entity, nor may it sublease, in whole or in part, the property object of this lease to any person or entity unless such assignment is to an affiliate. Any damage caused to the leased property by the affiliates of Lessee shall be the primary responsibility of Lessee. 29) The fact that Lessor, upon the occurrence of any violation of the conditions mentioned herein, does not terminate Translation Page 12 of 23 TRANSLATION immediately the term of the lease, nor takes any steps to have Lessee evicted from the leased property shall not be construed as Lessor consenting to such violation or to waiving the right to terminate the agreement, and Lessor may at any time make use of any and all rights and actions which our laws grant it provided that thirty (30) days advance notice is given to Lessee. 30) In the event that Lessor must establish or file and files or established any judicial action against Lessee for the collection of any sums of money in terms of rents owed or for damages stemming from the lease agreement and/or for the eviction of Lessee, whether because the term of the agreement has expired, for failure to comply with any of the lease conditions as stipulated, Lessee expressly accepts and agrees to pay all costs, expenses and disbursements originating from the processing of the action or actions established or filed as well as the payment of attorney's or attorneys' fees incurred by Lessor therefor, even if such attorneys are employees of Lessor and Lessee shall expressly submit to the competence of the courts chosen by Lessor for the processing of any action filed by the latter against Lessee by reason of the lease agreement. 31) Lessee agrees to comply with all of the applicable laws and regulations of the Commonwealth of Puerto Rico and of the Municipalities where the leased property(ies) is/are located. Translation Page 13 of 23 TRANSLATION 32) Lessee accepts and agrees to pay to Lessor annual interest on any amount owed and in default, using as the basis the primary interest in effect at the Government Development Bank, plus one percent (1%) over same, as of the date of occurrence of such action. 33) Lessee agrees to respect the easements established on the real property object of this lease and shall impede the establishment of new easements and rights of passage without the written consent of Lessor. 34) Lessor reserves the right to cut handspikes, if any, on the leased property upon prior notice to Lessee. 35) Lessor shall notify Lessee in writing of any breach of the agreement and may, at its option, grant Lessee a term to cure the same. 36) In the event that Lessee wishes to resolve the lease agreement prior to the date of expiration, it must notify the same in writing to Lessor not less than thirty (30) days prior to the date it wishes to terminate the same and accompany together with the notice of resolution the amount corresponding to six (6) months rent. Should the lease agreement have less than six (6) months remaining in its term, Lessee shall only be required to pay Lessor the rent corresponding to the time left on the agreement, excluding the extension period, if any. Translation Page 14 of 23 TRANSLATION 37) Lessee shall respect the rights of the families residing on the leased property, if any, and shall agree to allow said families to have free access to their respective dwellings. Likewise, it agrees to allow them to plans the short term crops which they have on the property at the time the same is leased. This condition is expanded in order to establish that the following peons exist on the leased property: NONE. 38) Lessee freely accepts and agrees to grant in favor of the Lands Authority an Assignment of Credit authorizing the Animal Husbandry Service and Development Administration, the Agricultural Insurance Corporation, the Puerto Rico Farm Credit Bank, Farms Services Agency or other income which may be received from legal suits in which Lessee is involved to make any deductions necessary up to the total amount of the debt. 39) Lessee accepts and is aware that the leased property represents a major risk for purposes of floods or access thereto, for which it assumes full responsibility for complying with the requirements and provisions of the regulation on Areas Susceptible to Flooding for any construction, use or development, including the total cost of any studies or works necessary to make its project viable. 40) Lessee accepts and agrees that any change in residential or postal address or telephone number, if any, shall be notified to Translation Page 15 of 23 TRANSLATION Lessor within the term of thirty (30) days after such change is made. 41) Lessee accepts and agrees that once work on the premises begins on the agricultural activity to be engaged, it assumes, in turn, the risk of any losses or damages due to natural causes, such as flooding, rains, droughts, earthquakes, stormy squalls, hurricane and/or for other types of damages, such as fires, diseases and plagues, and Lessor need not compensate Lessee in any manner for such damages or losses. 42) The Lands Authority and/or the Programs ascribed thereto shall not be responsible for any inconveniences caused to the plantings and/or animals which Lessee has on the leased property resulting from the application of herbicides or insecticides on the plantings developed on adjacent lands. 43) The parties expressly agree that this agreement shall not be recordable at the Registry of Property. In event that Lessor decides to assign or transfer the title or assets of the leased property to another Government Agency, it shall be the duty of Lessor to notify Lessee in writing and to all future titleholders or purchases of the existence of this lease agreement, and Lessor shall inform Lessee of the name and address of the future purchaser prior to the act of disposition of the leased property. Translation Page 16 of 23 TRANSLATION 44) This agreement shall not be valid in any of its parts until an authorized officer of the Lands Authority makes physical delivery of the property to Lessee and Lessee accepts the same. 45) Lessee acknowledges that the activity in which it will be engaged could at some of its stages generate contaminants or damaging toxic substances, both for humans as well as for the environment in general if the best handling practices are not undertaken. This situation is aggravated if the premises object of the lease are located in an area next to or bordering structures used as residences or to bodies of water, thus Lessee agrees to ensure that all safety measures are followed in compliance with all of the standards and provisions of the state and federal statutes created to prevent or minimize any possible adverse act of its actions on the quality of human environment; therefore, Lessee is also cautioned that it will be solely responsible for any damages to life or the leased property and the property of third persons, litigations, judgments, fines or penalties imposed by courts of state or federal administrative agencies on Lessee or the Lands Authority. Expanding on the foregoing, should the Lands Authority have to pay files and penalties for Lessee's breach of any state and federal laws, Lessee shall be responsible for total payment of said fine and penalty plus an additional twenty-five percent (25%) Translation Page 17 of 23 TRANSLATION for costs, expenses and attorney's fees as well as for any interest accrued on the fine and penalty paid by the Lands Authority. 46) Expanding on condition number eight (8) and number forty-five (45) hereinabove, in order to guarantee payment of any claim which may arise for damages caused to individual persons or properties or of properties of the Lands Authority as a result of Lessee's activities on the leased property, Lessee accepts and agrees to obtain and maintain in effect during the term of this lease agreement a public liability insurance policy with an insurance company duly registered and authorized to do business in Puerto Rico, including the Lands Authority as additional co-insured, with the following limits: FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) for accident and FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) for property damages. Said policy must include a Hold Harmless Agreement clause. Should both liabilities be combined (C.S.L.) the amount of the policy shall not be less than the sum of both amounts, with aggregate equal to the sum of the amounts of the policy limits. 47) The parties expressly agree that upon expiration of the agreement without Lessor requiring that Lessee surrender possession of the leased lands, the agreement shall not be considered renewed and there will be no tacit re-extension. The fact that Lessor accepts rental payments on the lease from Lessee after the Translation Page 18 of 23 TRANSLATION agreement has expired shall not be interpreted as the agreement having been renewed or that such tacit re-extension exists. In such event, should Lessee continue in possession of the property due to Lessor's tolerance or inadvertence, it shall be subject to a month-to-month agreement until the parties agree, at the will of Lessor, that a new agreement will be executed. The monthly rent shall be the result of dividing the last annual rent agreed to in this agreement into twelve (12) months. This agreement shall in no way limit the authority of Lessor to recover possession of the leased land if it is necessary for its purposes or because Lessee has failed to comply with any of the provisions of this agreement. 48) Lessor agrees to give the endorsement of its agency to obtain agricultural credits and to adopt the infrastructure program on irrigation and drainage following the procedure established to qualify for funds assigned under the infrastructure program, provided that Lessee qualifies as a bona fide farmer and has complied with the terms of this agreement. 49) Lessee expressly accedes, accepts and authorizes the Puerto Rico Lands Authority to disclose any information relative to the credit and form of rent payments to any public or private entity dedicated in turn to disclosing or distributing credit information. Translation Page 19 of 23 TRANSLATION 50) The parties expressly agree that any claim which one party has against the other for damages due to the alleged breach of its obligations under this agreement shall be discussed exclusively through an arbitration proceeding to which they will submit expressly waiving the judicial forum of a Court. Excluded from the arbitration proceeding are all other claims, matters, rights or procedures under this agreement which have nothing to do with damages, such as, but not limited to, evictions and replevies judicially filed by Lessor for breach of any of the obligations contracted by Lessee, claims for collections of monies for any concept of Lessor against Lessee; the authority of Lessor to resolve the lease agreement for any of the causes stated and acknowledged by the parties therein. The specific proceeding for the claim to be arbitrable in any claim for damages of the parties shall be the following: either of the parties who claims damages from the other within the term of thirty (30) days after the latter becomes aware of the facts and damages which gave rise to its claim must notify in writing, by certified mail, return receipt requested, said claim to the other party indicating in the content of its written communication a summary of the facts on which it bases its claim, in which it shall further indicate the specific contractual provision(s) invoked in support of its claim, the amount claimed and it shall also describe the documentary and Translation Page 20 of 23 TRANSLATION testimonial evidence it has in support of its allegations. The claimee shall have thirty (30) days to respond to the claim. Should the claimee respond by denying the claim or should it fail to respond within the above-indicated term, then the claimant may demand in writing, within thirty (30) days, that the case be submitted to arbitration, indicating in its communication the name of the arbitrator it has selected. The claimee, in turn, shall select another arbitrator. The arbitrator selected by Lessee and the arbitrator selected by Lessor shall select by mutual agreement a third arbitrator so that together they can discuss the controversy. The parties shall be entitled to a discovery period, which shall be regulated by the arbitrators. The decision or award of the arbitrators, after the evidentiary hearing has been held, shall be by majority and shall be final and unappealable for the parties from the date on which the same is issued. 51) The parties agree freely, voluntarily and will full understanding of the agreements and their consequences, that no claim for damages and no decision or award of the arbitrators may exceed in the granting or compensation for damages more than three (3) times the amount represented by the total amount which Lessor may collect in rents during the full term of the agreement without including any extensions thereof. Translation Page 21 of 23 TRANSLATION 52) These are the terms and conditions which the parties have reached freely and voluntarily, and which they manifest they have read and understood. The parties finally agree that no verbal or written agreement or representation of either of the parties may vary of modify the conditions and terms of this agreement unless they are executed in writing and under the same formalities as this agreement. SUCH IS THE LEASE AGREEMENT, which the parties sign as they have found it to be in accordance with the stipulations agreed to on the date indicated hereinabove. PUERTO RICO LANDS AUTHORITY (SIGNED) ---------------------------------- FERNANDO MANUEL MACHADO-ECHEVARRIA EXECUTIVE DIRECTOR (SIGNED) ---------------------------------- MICHAEL J. SPECTOR AFFIDAVIT NO. 7635 Subscribed and sworn to before me by MR. MICHAEL J. SPECTOR, of the personal circumstances stated above, personally known to me. In Vega Alta, Puerto Rico, on March 24, 1999. [Notarial Seal] (SIGNED) BLAS R. FERRAIUOLI-MARTINEZ ------------------------------------- NOTARY PUBLIC AFFIDAVIT NO. 7635 Subscribed and sworn to before me by MR. FERNANDO MANUEL MACHADO-ECHEVARRIA, of the personal circumstances stated above, personally known to me. Translation Page 22 of 23 TRANSLATION In Vega Alta, Puerto Rico, on March 24, 1999. [Notarial Seal] (SIGNED) BLAS R. FERRAIUOLI-MARTINEZ ------------------------------------ NOTARY PUBLIC Translation Page 23 of 23 EX-21 4 EXHIBIT 21 LIST OF SUBSIDIARIES OF MARGO CARIBE, INC. JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION - ------------------ ------------- Margo Nursery Farms, Inc. Puerto Rico Margo Landscaping & Design, Inc. Puerto Rico Margo Garden Products, Inc. Puerto Rico Rain Forest Products Group, Inc. Puerto Rico Margo Development Corporation Puerto Rico Margo Flora, Inc. Puerto Rico EX-23.(A) 5 EXHIBIT 23.(a) [DELOITTE & TOUCHE LLP LETTER HEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Margo Caribe, Inc. on Form S-8 No. 333-56919 of our report dated March 19, 1999 (March 24, 1999 as to Note 22 to the financial statements) appearing in the Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 30, 1999 EX-23.(B) 6 EXHIBIT 23.(b) [KAUFMAN ROSSIN LETTER HEAD] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 No. 333-59619 of Margo Caribe, Inc. (formerly Margo Nursery Farms, Inc.) of our report dated February 25, 1997, appearing on page F-3 of this Form 10-K. /s/ Kaufman, Rossin & Co. KAUFMAN, ROSSIN & CO. Miami, Florida March 31, 1999 EX-27 7 ART. 5 FOR YEAR 10-K
5 1 12-MOS DEC-31-1998 DEC-31-1998 1,247,390 0 1,352,272 (123,700) 2,264,372 4,931,138 3,840,050 (1,745,251) 7,990,208 1,534,685 85,880 0 0 1,915 6,367,728 7,990,208 5,349,244 5,505,860 3,623,071 6,556,677 0 0 62,020 (1,112,837) 0 0 0 0 0 (1,112,837) (0.59) (0.59)
-----END PRIVACY-ENHANCED MESSAGE-----