Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction · Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4/A Pre-Effective Amendment to Registration of 294 1,184K
Securities Issued in a
Business-Combination Transaction
2: EX-10.1 Agreement 4 14K
3: EX-10.2 Rental Api Agreement 2 16K
4: EX-10.3 Moore Business Communications Service Agreement 6 32K
5: EX-10.4 Letter 4 19K
6: EX-10.5 Employment Agreement 10 34K
7: EX-10.6 Material Contract 2 13K
8: EX-23.4 Consent of Deloitte & Touche 1 8K
9: EX-23.5 Consent of Anchin, Block & Achin Llp 1 6K
S-4/A · Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents
| Page | (sequential) | | | | (alphabetic) | Top |
|---|
| | |
- Alternative Formats (RTF, XML, et al.)
- Accounting Treatment
- Acquisitions
- Background of the Transaction
- Background to Sale of Businesses
- Board of Directors and Management of the New Delaware Holding Company After the Merger with itract
- Business
- Business Overview
- Certain Relationships and Related Transactions
- Closing
- Common Stock
- Companies, The
- Comparative Per Share Information
- Comparative Rights of Members of Itract and Shareholders of the New Delaware Holding Company
- Comparative Rights of Shareholders of Margo and the New Delaware Holding Company
- Competition
- Conditions of Sale
- Customer Relationship Management Tools
- Description of Securities
- Directors and Officers
- Directors and Principal Officers of iTract, Inc. after the Merger
- Dissenters' Rights of Appraisal
- Employees and Facilities
- Employment Agreements
- Exhibits and Financial Statement Schedules
- Experts
- Federal and Puerto Rico Income Tax Consequences
- Federal Income Tax Consequences
- Financial Statements
- Forward-Looking Statements
- General
- Government Regulation
- Historical Results of Operations
- Income Taxes
- Indemnification and Insurance
- Indemnification of Directors and Officers
- Independent Auditors' Report
- Industry Overview
- Information About Itract
- Information About the New Delaware Holding Company
- Intellectual Property Rights
- Interests of Certain Persons in the Merger
- Interests of Persons Involved in the Merger
- ITract
- Itract Sales and Marketing
- Itract's Business
- Legal Matters
- Legal Proceedings
- Liquidity and Capital Resources
- Long Term Incentive Plan
- Management's Discussion and Analysis of Financial Condition and Results of Operations of Itract
- Management's Discussion and Analysis of Financial Condition and Results of Operations of Margo
- Margo
- Market for Common Equity and Related Shareholder Matters
- Material Federal Income Tax Consequences
- Merger Agreement
- Merger with itract, The
- Merger with the New Delaware Holding Company, The
- No Listing on the NASDAQ SmallCap Market
- Notes to Consolidated Financial Statements
- Notes to the Financial Statements
- Opinion of Financial Advisor Regarding Merger with itract
- Opinion of Financial Advisor Regarding Sale of Margo's Businesses
- Opinions of Financial Advisors
- Other Risks Relating to Your Investment in Margo and, Following the Merger with iTract, Inc., in the New Delaware Holding Company
- Overview
- Preferred Stock
- Principal Operations
- Property
- Puerto Rico Tax Consequences
- Purpose, Time and Place
- Questions and Answers About the Transaction
- Recently Issued Accounting Standards
- Recommendations of Margo's Board of Directors
- Recommendations of Margo's Board of Directors and Reasons for the Transaction
- Recommendations to Margo Shareholders
- Record Date; Voting Power
- Restriction on Resales by Affiliates
- Results of Operations for Each of the Years Ended December 31, 1999, 1998 and 1997
- Revenue Sources
- Revocability of Proxies
- Risks Associated with itract's Business
- Risks Associated with itract's Technology
- Risks Associated with the Internet
- Sale of Margo's Assets, The
- Selected Financial Data of Margo
- Share Ownership of Management and Certain Shareholders
- Solicitation of Proxies
- Stock Purchase Agreement
- Summary
- Summary Historical and Pro Forma Financial Information
- Technology
- Terms of the Merger Agreement with itract
- Terms of the Merger Agreement with iTract, Inc
- Terms of the Stock Purchase Agreement
- The Companies
- The Merger with itract
- The Merger with the New Delaware Holding Company
- The Sale of Margo's Assets
- Undertakings
- Votes Required
- Voting of Proxies
- Web site Development Costs
- Where You Can Find More Information
|
| 1 | 1st Page
|
| 4 | The Sale of Margo's Assets
|
| " | The Merger with the New Delaware Holding Company
|
| " | Information About the New Delaware Holding Company
|
| " | Information About Itract
|
| 6 | Questions and Answers About the Transaction
|
| 8 | Summary
|
| " | The Companies
|
| 9 | The Merger with itract
|
| 10 | Recommendations to Margo Shareholders
|
| " | Board of Directors and Management of the New Delaware Holding Company After the Merger with itract
|
| " | Opinions of Financial Advisors
|
| 11 | Interests of Persons Involved in the Merger
|
| " | Dissenters' Rights of Appraisal
|
| 12 | Federal and Puerto Rico Income Tax Consequences
|
| " | No Listing on the NASDAQ SmallCap Market
|
| 13 | Summary Historical and Pro Forma Financial Information
|
| " | Comparative Per Share Information
|
| 16 | Risks Associated with itract's Business
|
| 21 | Risks Associated with itract's Technology
|
| 23 | Risks Associated with the Internet
|
| " | Other Risks Relating to Your Investment in Margo and, Following the Merger with iTract, Inc., in the New Delaware Holding Company
|
| 25 | Forward-Looking Statements
|
| 26 | Background to Sale of Businesses
|
| 27 | Recommendations of Margo's Board of Directors
|
| 28 | Terms of the Stock Purchase Agreement
|
| " | Closing
|
| 29 | Conditions of Sale
|
| 30 | Opinion of Financial Advisor Regarding Sale of Margo's Businesses
|
| 34 | General
|
| " | Background of the Transaction
|
| 36 | Recommendations of Margo's Board of Directors and Reasons for the Transaction
|
| 37 | Opinion of Financial Advisor Regarding Merger with itract
|
| 41 | Terms of the Merger Agreement with iTract, Inc
|
| 45 | Federal Income Tax Consequences
|
| " | Margo
|
| 46 | Puerto Rico Tax Consequences
|
| 48 | Terms of the Merger Agreement with itract
|
| 53 | Indemnification and Insurance
|
| 54 | Material Federal Income Tax Consequences
|
| 57 | Directors and Principal Officers of iTract, Inc. after the Merger
|
| 58 | Interests of Certain Persons in the Merger
|
| 59 | Accounting Treatment
|
| " | Restriction on Resales by Affiliates
|
| 61 | Selected Financial Data of Margo
|
| 68 | Directors and Officers
|
| " | Description of Securities
|
| " | Common Stock
|
| " | Preferred Stock
|
| 69 | Long Term Incentive Plan
|
| 71 | Business Overview
|
| " | Industry Overview
|
| 72 | Itract's Business
|
| 74 | Revenue Sources
|
| " | Itract Sales and Marketing
|
| 76 | Customer Relationship Management Tools
|
| " | Technology
|
| 77 | Acquisitions
|
| " | Competition
|
| 78 | Intellectual Property Rights
|
| 79 | Government Regulation
|
| 80 | Employees and Facilities
|
| " | Legal Proceedings
|
| " | Certain Relationships and Related Transactions
|
| 81 | Employment Agreements
|
| 82 | Financial Statements
|
| " | Management's Discussion and Analysis of Financial Condition and Results of Operations of Itract
|
| " | Overview
|
| 83 | Historical Results of Operations
|
| 84 | Liquidity and Capital Resources
|
| 85 | Web site Development Costs
|
| " | Recently Issued Accounting Standards
|
| 87 | Business
|
| " | Principal Operations
|
| 90 | Income Taxes
|
| 91 | Property
|
| 92 | Market for Common Equity and Related Shareholder Matters
|
| 93 | Share Ownership of Management and Certain Shareholders
|
| 94 | Management's Discussion and Analysis of Financial Condition and Results of Operations of Margo
|
| 95 | Results of Operations for Each of the Years Ended December 31, 1999, 1998 and 1997
|
| 97 | Purpose, Time and Place
|
| " | Record Date; Voting Power
|
| " | Votes Required
|
| 98 | Voting of Proxies
|
| " | Revocability of Proxies
|
| 99 | Solicitation of Proxies
|
| 100 | Comparative Rights of Shareholders of Margo and the New Delaware Holding Company
|
| 103 | Comparative Rights of Members of Itract and Shareholders of the New Delaware Holding Company
|
| " | ITract
|
| 105 | Legal Matters
|
| " | Experts
|
| 106 | Where You Can Find More Information
|
| 108 | Independent Auditors' Report
|
| 113 | Notes to Consolidated Financial Statements
|
| 115 | Merger Agreement
|
| 144 | Notes to the Financial Statements
|
| 214 | Stock Purchase Agreement
|
| 288 | Item 20. Indemnification of Directors and Officers
|
| 289 | Item 21. Exhibits and Financial Statement Schedules
|
| 290 | Item 22. Undertakings
|
As filed with the Securities and Exchange Commission on January 24, 2001
Registration No. 333-40762
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
iTract, Inc.
(Exact name of Registrant as specified in its charter)
--------------
[Download Table]
Delaware 7310 66-0584851
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
Highway 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
(787) 883-2570
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------
Michael J. Spector
Chief Executive Officer
iTract, Inc.
P.O. Box 706
Dorado, Puerto Rico 00646
(787) 883-2570
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
Copies to:
Ignacio Alvarez, Esq. Alfred G. Smith, Esq.
Pietrantoni Mendez & Alvarez LLP Shutts & Bowen LLP
Suite 1901, Banco Popular Center 1500 Miami Center
209 Munoz Rivera Avenue 201 South Biscayne Boulevard
San Juan, Puerto Rico 00918 Miami, Florida 33131
(787) 274-4911 (305) 379-9147
--------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective and all other
conditions under the merger agreements (described in the Proxy
Statement/Prospectus herein) are satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________________
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
[LOGO]
MARGO CARIBE, INC.
MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT
The board of directors of Margo Caribe, Inc. is asking its shareholders to
approve the sale of substantially all of Margo's assets and the merger of Margo
with a newly formed Delaware holding company that will be engaged in the
internet marketing business. The new Delaware holding company will enter the
Internet marketing business through the merger of its newly formed subsidiary
with itract, LLC, a privately held early-stage company. Upon completion of these
transactions, Margo shareholders will own, on a fully diluted basis, 13.2% of
the new Delaware holding company and itract, LLC members will own, on a fully
diluted basis, 86.8% of the new Delaware holding company.
--------------------------------------------------------------------------------
Margo's special meeting will be held:
______________, 2001
10:00 a.m.
The Bankers Club of Puerto Rico
Banco Popular Center
209 Munoz Rivera Avenue
San Juan, Puerto Rico
--------------------------------------------------------------------------------
We cannot complete these transactions unless we receive the approval of the
shareholders of Margo holding a majority of Margo's outstanding common stock.
Michael J. Spector, the Chairman of the Board, Chief Executive Officer and
President of Margo, and Margaret D. Spector, the Secretary of Margo, who hold
approximately 65.7% of Margo's outstanding common stock, have agreed to vote all
of their shares in favor of the proposed transactions. Thus, approval of these
transactions is assured.
Margo's board of directors recommends that you vote in favor of the
proposed transactions. We believe the proposed transactions will offer us
significant opportunities to create shareholder value.
MICHAEL J. SPECTOR
Chairman of the Board, Chief Executive
Officer and President
Margo Caribe, Inc.
Consider the risks described on pages II-1 through II-10 of this document.
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities to be issued under this
document or determined if this document is truthful or complete. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Since itract, LLC is a privately held company, its securities are not
registered under the Securities Act of 1933 or the Securities Exchange Act of
1934. This proxy statement/prospectus is a prospectus with respect to the
issuance of common stock of the new Delaware holding company to Margo
shareholders and itract, LLC members. However, this proxy statement/ prospectus
is a proxy statement only with respect to Margo.
This proxy statement/prospectus is dated _________, 2000, and is first
being mailed to the shareholders of Margo on or about ________, 2000.
MARGO CARIBE, INC.
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on ________, 2001
------------------------
To the Shareholders of Margo Caribe, Inc.:
Margo Caribe, Inc. will hold its special meeting of shareholders at The
Bankers Club of Puerto Rico, Banco Popular Center, 209 Munoz Rivera Avenue, San
Juan, Puerto Rico, on _________, 2001, at 10:00 a.m., local time, to vote on:
1. Approval of the merger between Margo and a newly-formed Delaware
corporation named iTract, Inc.
2. Approval of the sale of substantially all of Margo's assets to Empresas
Margo, Inc.
3. Any other matters that properly come before the meeting, or any
adjournments or postponements of the meeting.
Record holders of Margo common stock at the close of business on ________,
2001, will receive notice of and may vote at the meeting, including any
adjournments or postponements. A list of these shareholders will be available
for inspection for ten days before the meeting at Margo's offices at Road 690,
Kilometer 5.8, Vega Alta, Puerto Rico 00692.
The approval and adoption of the merger with the new Delaware holding
company and the sale of substantially all of Margo's assets to Empresas Margo,
Inc. will require the affirmative vote of the holders of a majority of the
shares of Margo common stock outstanding on the record date.
Under Puerto Rico law, Margo shareholders are entitled to assert
dissenters' rights in connection with the merger.
Your vote is important. Please mark, sign, date and return your proxy
promptly, whether or not you plan to attend our special meeting. Our board of
directors unanimously recommends that you vote FOR approval of the matters to be
voted on at our special meeting.
Margaret D. Spector
Secretary
_________, 2001
TABLE OF CONTENTS
Page
CHAPTER ONE
FREQUENTLY ASKED QUESTIONS
AND SUMMARY
QUESTIONS AND ANSWERS ABOUT
THE TRANSACTION......................................................I-1
SUMMARY....................................................................I-3
The Companies...........................................................I-3
The Sale of Margo's Assets..............................................I-3
The Merger with the New Delaware Holding
Company..............................................................I-4
The Merger with itract..................................................I-4
Recommendations to Margo Shareholders...................................I-5
Board of Directors and Management of the
New Delaware Holding Company After
the Merger with itract...............................................I-5
Opinions of Financial Advisors..........................................I-5
Interests of Persons Involved in the Merger.............................I-6
Dissenters' Rights of Appraisal.........................................I-6
Regulatory..............................................................I-7
Federal and Puerto Rico Income Tax
Consequences.........................................................I-7
No Listing on the NASDAQ
SmallCap Market......................................................I-7
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION...................................................I-8
COMPARATIVE PER SHARE
INFORMATION.............................................................I-8
CHAPTER TWO
RISK FACTORS AND
FORWARD-LOOKING STATEMENTS
Risks Associated with itract's Business................................II-1
Risks Associated with itract's Technology..............................II-6
Risks Associated with the Internet.....................................II-8
Other Risks Relating to Your Investment
in Margo and, Following the Merger
with iTract, Inc., in the New Delaware
Holding Company.....................................................II-8
FORWARD-LOOKING STATEMENTS...............................................II-10
CHAPTER THREE
THE SALE OF MARGO'S ASSETS
Background to Sale of Businesses......................................III-1
Recommendations of Margo's Board
of Directors.......................................................III-2
Terms of the Stock Purchase Agreement.................................III-3
Opinion of Financial Advisor Regarding
Sale of Margo's Businesses.........................................III-5
CHAPTER FOUR
THE MERGER WITH THE NEW DELAWARE
HOLDING COMPANY
General................................................................IV-1
Background of the Transaction..........................................IV-1
Recommendations of Margo's Board
of Directors and Reasons for the
Transaction.........................................................IV-2
Opinion of Financial Advisor Regarding
Merger with itract..................................................IV-4
Terms of the Merger Agreement
with iTract, Inc....................................................IV-8
Federal Income Tax Consequences.......................................IV-12
Puerto Rico Tax Consequences..........................................IV-13
Terms of the Merger Agreement
with itract........................................................IV-15
Material Federal Income Tax
Consequences.......................................................IV-20
Directors and Principal Officers of
iTract, Inc. after the Merger......................................IV-24
Interests of Certain Persons in
the Merger.........................................................IV-25
Indemnification and Insurance.........................................IV-26
Accounting Treatment..................................................IV-26
Restriction on Resales by Affiliates..................................IV-26
CHAPTER FIVE
SELECTED FINANCIAL DATA
Selected Financial Data of Margo........................................V-1
CHAPTER SIX
INFORMATION ABOUT THE NEW
DELAWARE HOLDING COMPANY
General................................................................VI-1
Directors and Officers.................................................VI-1
Description of Securities..............................................VI-1
Long Term Incentive Plan...............................................VI-2
CHAPTER SEVEN
INFORMATION ABOUT ITRACT
Business Overview.....................................................VII-1
Industry Overview.....................................................VII-1
Itract's Business.....................................................VII-2
-i-
Revenue Sources.......................................................VII-4
Itract Sales and Marketing............................................VII-4
Customer Relationship Management
Tools..............................................................VII-6
Technology............................................................VII-6
Acquisitions..........................................................VII-7
Competition...........................................................VII-7
Intellectual Property Rights..........................................VII-8
Government Regulation.................................................VII-9
Employees and Facilities.............................................VII-10
Legal Proceedings....................................................VII-10
Certain Relationships and Related
Transactions......................................................VII-10
Employment Agreements................................................VII-11
Financial Statements.................................................VII-12
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS OF ITRACT.................................................VII-12
Overview.............................................................VII-12
Historical Results of Operations.....................................VII-13
Liquidity and Capital Resources......................................VII-14
Web site Development Costs...........................................VII-15
Recently Issued Accounting Standards.................................VII-15
CHAPTER EIGHT
INFORMATION ABOUT MARGO
Business.............................................................VIII-1
Principal Operations.................................................VIII-1
Income Taxes.........................................................VIII-4
Property.............................................................VIII-5
Legal Proceedings....................................................VIII-6
Market for Common Equity and Related
Shareholder Matters...............................................VIII-6
Financial Statements.................................................VIII-7
Share Ownership of Management and
Certain Shareholders..............................................VIII-7
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS OF MARGO..................................................VIII-8
Results of Operations for Each of the
Years Ended December 31, 1999,
1998 and 1997.....................................................VIII-9
Results of Operations for the Nine
Months Ended September 30, 2000
and 1999..........................................................VIII-9
CHAPTER NINE
INFORMATION ABOUT THE MEETING
AND VOTING
Purpose, Time and Place................................................IX-1
Record Date; Voting Power..............................................IX-1
Votes Required.........................................................IX-1
Voting of Proxies......................................................IX-2
Revocability of Proxies................................................IX-2
Solicitation of Proxies................................................IX-3
CHAPTER TEN
CERTAIN LEGAL INFORMATION
COMPARATIVE RIGHTS OF
SHAREHOLDERS OF MARGO AND
THE NEW DELAWARE HOLDING
COMPANY.................................................................X-1
COMPARATIVE RIGHTS OF MEMBERS
OF ITRACT AND SHAREHOLDERS
OF THE NEW DELAWARE HOLDING
COMPANY.................................................................X-4
LEGAL MATTERS..............................................................X-6
EXPERTS....................................................................X-6
CHAPTER ELEVEN
ADDITIONAL INFORMATION FOR
SHAREHOLDERS
Where You Can Find More Information....................................XI-1
APPENDICES
APPENDIX A - Merger Agreement with iTract, Inc.
APPENDIX B - Merger Agreement with
itract, LLC
APPENDIX C - Stock Purchase Agreement
APPENDIX D - Opinion of Schwartz Heslin
Group, Inc.
APPENDIX E - Opinion of San Juan
Holdings, Inc.
APPENDIX F - Section 10.12 of the Puerto
Rico General Corporations
Law - Appraisal Rights
APPENDIX G - Certificate of Incorporation of iTract, Inc.
APPENDIX H - Bylaws of iTract, Inc.
-ii-
Chapter One -- Frequently Asked Questions and Summary
--------------------------------------------------------------------------------
CHAPTER ONE
FREQUENTLY ASKED QUESTIONS
AND SUMMARY
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q: Why is Margo proposing these transactions?
A: Margo believes that it will be able to create more value for its shareholders
by participating in itract's Internet based business than in its current
nursery farm business. To review Margo's reasons for the merger in greater
detail, see pages III-1 and IV-1 to IV-2.
Q: What are the risks associated with these transactions?
A: Margo will sell substantially all of its assets, which includes all
operations that have been responsible for Margo's revenues, and enter a new
line of business through itract. itract is a development stage company. Thus,
its revenues to date have been limited. itract's ability to continue as a
going concern is in substantial doubt. To review the risks associated with
the proposed transactions, see pages II-1 to II-10.
Q: When does Margo expect the proposed transactions to be completed?
A: We are working to complete the proposed transactions during the first quarter
of 2001.
Q: Will Margo sell its assets even if the merger with itract is not consummated?
A: No. All of the proposed transactions would occur concurrently. The sale of
assets or the merger with the new Delaware holding company cannot occur
unless both transactions and the merger with itract are consummated.
Q: What do you need to do now?
A: After you carefully read this document, indicate on your proxy card how you
wish to vote your shares and sign and mail the completed proxy card in the
enclosed return envelope as soon as possible so that your shares can be
represented and voted at the meeting. In order to assure that your vote is
obtained, please vote your proxy as instructed in your proxy card even if you
currently plan to attend the meeting in person.
Q: If you own shares of Margo common stock held in "street name" by a broker,
can that broker vote those shares for you?
A: No. If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them. You
should therefore be sure to provide your broker with instructions on how to
vote your shares following the procedure provided by your broker.
Q: Can you change your vote after mailing your signed proxy card?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways:
o timely delivery of a valid, later dated, proxy;
o written notice to Margaret D. Spector, Margo's Secretary, before the
meeting stating that you have revoked your proxy;
o attending the special meeting and voting in person.
If you have instructed a broker to vote your shares, you must follow
directions from your broker to change those instructions.
Q: Should I send in my stock certificates now?
A: No. Certificates of Margo common stock will be deemed to be certificates for
an equal number of shares in the new Delaware holding company. After the
merger is completed, Margo
--------------------------------------------------------------------------------
I-1
Chapter One -- Frequently Asked Questions and Summary
--------------------------------------------------------------------------------
shareholders may exchange their stock certificates.
Q: Who can help answer your questions?
A: If you are a Margo shareholder and have more questions about the proposed
transaction, you can contact:
Alfonso Ortega
Chief Financial Officer
Margo Caribe, Inc.
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
Telephone: (787) 883-2570
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I-2
Chapter One -- Frequently Asked Questions and Summary
--------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents which are referred to in this proxy statement/prospectus. Together,
these documents will give you a more complete description of the transactions
Margo is proposing.
The Companies
Margo Caribe, Inc.
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
(787) 883-2570
Margo is a Puerto Rico corporation engaged in 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. Margo is also
engaged in seeking sites for the development of residential housing projects.
itract, LLC
18 West 18th Street, 10th Floor
New York, New York 10011
(212) 647-8483
itract is a privately-held Internet based company that was organized in May
1999 to address the needs of small to medium-sized businesses that desire a more
efficient and cost- effective means to market their products and services
directly to prospective businesses and consumers. itract's services, which are
provided online from its Web site, are intended to allow these businesses to
analyze, assemble and launch their direct marketing campaigns in a simple
low-cost and effective manner. By accessing itract's Web site, users are able to
develop and launch comprehensive direct marketing campaigns delivering fax,
e-mail and postal mail to a targeted audience of both on-line and off-line
prospective customers. itract launched its Web site on June 30, 2000. However,
to date, itract has had limited funds to operate its business and has generated
minimal revenues of $1,197 through September 30, 2000.
iTract, Inc.
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
(787) 883-2570
iTract, Inc. is the new Delaware holding company into which Margo is
proposing to merge. It was formed by Margo on April 5, 2000 as a wholly-owned
subsidiary for the sole purpose of effecting the merger with itract. It has no
assets other than a wholly-owned subsidiary, which also has no assets, that will
merge with and into itract. Following these transactions, it will be a holding
company whose sole assets will be its 100% membership interest in itract and the
$5,000,000 to be received by Margo from the sale of its assets. Immediately
after these transactions, this cash amount will be reduced by approximately
$2,600,000. In addition, iTract, Inc. will be required to pay dissenting Margo
shareholders exercising appraisal rights the amount determined by a Puerto Rico
court to be the fair value of their Margo shares. After the consummation of
these transactions, the current shareholders of Margo and members of itract will
be shareholders of iTract, Inc.
Timing of the Proposed Transactions
Although the closing of the proposed transactions will take place
concurrently on the same closing date, from a legal standpoint the transactions
will take place in the following order:
1. Margo will sell substantially all of its assets to Empresas Margo;
2. Margo will merge with and into iTract, Inc., the new Delaware holding
company; and
3. a wholly-owned subsidiary of iTract, Inc. will merge with and into itract.
The Sale of Margo's Assets
Description. Margo will sell substantially all of its assets to Empresas
Margo for a price of $5,000,000 plus the assumption of Margo's outstanding debt.
Margo's assets consist principally of its shares of stock in its nursery
subsidiary and other subsidiaries. As of September 30, 2000, Margo's outstanding
debt to be assumed amounted to approximately $966,500.
Conflict of Interest. Michael J. Spector, the Chairman, Chief Executive
Officer and President
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Chapter One -- Frequently Asked Questions and Summary
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of Margo, owns all of the outstanding capital stock of Empresas Margo and will
act as its Chief Executive Officer.
Conditions to Sale. Margo is not required to consummate the sale to Empresas
Margo unless it receives evidence that the merger of Margo into the new Delaware
holding company and the merger with itract will occur concurrently or
immediately following the sale.
The Merger with the New Delaware Holding Company
Description. Margo will merge into iTract, Inc., the new Delaware holding
company.
What Margo Shareholders will Receive. Margo shareholders will receive one
share of common stock of the new Delaware holding company for each share of
Margo common stock.
Conditions to the Completion of the Merger. The completion of the merger
depends upon the satisfaction or waiver of a number of conditions, including the
following:
o approval of the merger by the Margo shareholders; and
o receipt of a ruling from the Puerto Rico Treasury Department that the
merger constitutes a tax-free reorganization for Puerto Rico income tax
purposes.
Termination of Merger Agreement. Margo can terminate the merger agreement
without any liability at any time. If the conditions set forth above are not
satisfied, Margo would abandon the merger.
The Merger with itract
Description. Immediately after the sale of Margo's assets and the merger of
Margo with the new Delaware holding company, a wholly-owned subsidiary of the
Delaware holding company will merge into itract. Following this merger, the new
Delaware holding company will have a 100% ownership of itract.
What itract Members will Receive. Holders of itract membership units will
receive an amount of shares of common stock in the new Delaware holding company
that will constitute, on a fully diluted basis, 86.8% of the outstanding shares
of common stock of the new Delaware holding company immediately following the
merger.
Ownership of the New Delaware Holding Company. After the merger with itract,
Margo shareholders will own, on a fully diluted basis, 13.2% of the new Delaware
holding company.
Conditions to the Completion of the Merger. The completion of the merger
depends upon the satisfaction or waiver of a number of conditions, including the
following:
o approval by the Margo shareholders and consummation of the sale of Margo's
assets and the merger of Margo with the new Delaware holding company;
o at the effective time of the merger, the new Delaware holding company
shall have at least $5 million in cash and cash equivalents and not be
subject to liabilities exceeding $10,000 in the aggregate, excluding any
liabilities for amounts required to be paid to dissenting Margo
shareholders exercising appraisal rights and liabilities for legal and
accounting fees incurred by Margo after July 1, 2000 in an amount up to
$250,000;
o no more than ten percent of Margo shareholders exercise dissenters'
rights;
o the shares of the new Delaware holding company shall be listed on the
Nasdaq SmallCap Market;
o receipt of a ruling from the Puerto Rico Treasury Department that the
merger of Margo with the new Delaware holding company qualifies as a
tax-free reorganization for Puerto Rico income tax purposes;
o absence of any court or administrative order prohibiting the merger;
o evidence that loans made by Michael J. Spector and J. Morton Davis to
itract's indirect parent company shall be repaid immediately following the
merger;
o material accuracy of the representations and warranties;
o receipt of opinions of counsel that the merger with itract qualifies as a
tax-free exchange for federal income tax purposes and is not subject to
Puerto Rico taxation;
o execution of lock-up agreements by
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Chapter One -- Frequently Asked Questions and Summary
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Michael J. Spector, Margaret D. Spector and D.H. Blair Investment Banking
Corp., an entity wholly-owned by J. Morton Davis, agreeing not to dispose
of their shares in the new Delaware holding company until four months
after the merger;
o execution of lock-up agreements by itract members agreeing not to dispose
of their shares in the new Delaware holding company until eight months
after the merger.
The parties do not currently anticipate that the Nasdaq SmallCap Market
listing condition will be met. If this condition is not met, any of the parties
could terminate the merger agreement.
Termination of Merger Agreement. Margo, the new Delaware holding company and
itract can agree to terminate the merger agreement without completing the merger
at any time.
Margo or the new Delaware holding company may terminate the merger agreement
if any of the following occurs:
o satisfaction of any of the closing conditions becomes impossible and is
not waived or the merger has not occurred by December 31, 2000, subject to
a 60-day extension, other than as a result of a material breach or default
by Margo, the new Delaware holding company or Michael J. Spector; or
o itract materially breaches the merger agreement and the breach remains
uncured for ten days.
itract may terminate the merger agreement if any of the following occurs:
o satisfaction of any of the closing conditions becomes impossible and is
not waived or the merger has not occurred by December 31, 2000, subject to
a 60-day extension, other than as a result of a material breach or default
by itract; or
o Margo or the new Delaware holding company materially breaches the merger
agreement and the breach remains uncured for ten days.
Expenses Upon Termination. If the merger agreement is terminated, there is no
further liability or obligation of any party except:
o if Margo or the new Delaware holding company terminates the merger
agreement because of a material breach by itract, itract and International
Commerce Exchange Systems, Inc., itract's indirect parent company, have to
reimburse Margo for expenses up to $100,000; and
o if itract terminates the merger agreement because of a material breach by
Margo or the new Delaware holding company, Margo and the new Delaware
holding company have to reimburse itract for expenses up to $100,000.
Recommendations to Margo Shareholders
Margo's board of directors believes that the proposed transactions are fair
to Margo's shareholders and in their best interests, and unanimously recommends
that the Margo shareholders vote "FOR" the following items:
o approval of the sale of substantially all of Margo's assets to Empresas
Margo; and
o approval of the merger with the new Delaware holding company.
These proposals are conditions to the merger with itract.
Board of Directors and Management of the New Delaware Holding Company After the
Merger with itract
Following the merger with itract, the board of directors of the new Delaware
holding company will consist of six directors designated by itract. The present
management team of itract will serve as the management team of the new Delaware
holding company.
Opinions of Financial Advisors
Schwartz Heslin Group, Inc. provided a written opinion to Margo's board of
directors that the merger with itract was fair from a financial point of view to
Margo's shareholders. This written opinion is attached as Appendix D to this
document. You should read this entire opinion carefully to understand the
procedures followed, assumptions made, matters considered and limitations of the
review undertaken by Schwartz Heslin Group in providing its opinion.
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Chapter One -- Frequently Asked Questions and Summary
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San Juan Holdings, Inc. provided a written opinion to Margo's board of
directors that the sale by Margo of its assets to Empresas Margo was fair from a
financial point of view to Margo's shareholders. This written opinion is
attached as Appendix E to this document. You should read this entire opinion
carefully to understand the procedures followed, assumptions made, matters
considered and limitations of the review undertaken by San Juan Holdings, Inc.
in providing its opinion.
These opinions are directed to Margo's board of directors and do not
constitute a recommendation to any of Margo's shareholders as to how they should
vote at the special meeting. The opinions speak only as of their respective
dates and the financial advisors are under no obligation to confirm their
opinions as of a later date. Further, the Margo board of directors does not
intend to request a confirmation of the opinions as of a later day.
Interests of Persons Involved in the Merger
When you consider the board of directors' recommendations that you vote in
favor of the sale of Margo's assets to Empresas Margo and the merger of Margo
with the new Delaware holding company, you should be aware that several of
Margo's officers and directors may have interests in the proposed transactions
that may be different from, or in addition to, your interests. For example:
o In connection with the execution of the letter of intent between Margo and
itract, Michael J. Spector, the Chairman of the Board and Chief Executive
Officer of Margo, and J. Morton Davis, who beneficially own 65.7% and
9.8%, respectively, of Margo's outstanding common stock, made loans of
$1,715,000 and $285,000, respectively, to International Commerce Exchange
Systems, the indirect parent company of itract. The entire principal
balance plus accrued interest on the loans is payable immediately
following the effective time of the merger with itract. However, Mr. Davis
has agreed in principle to defer the repayment of his loan until the first
anniversary of the closing of the merger. If the itract merger is not
consummated by December 31, 2000, subject to a 60-day extension, these
loans will be converted into common stock of International Commerce
Exchange Systems.
o From November 2000 through January 2001, Rosalind Davidowitz, Mr. Davis'
wife, together with another affiliate of Mr. Davis, loaned itract
$350,000. $250,000 of the principal amount of these loans are repayable
upon the earlier to occur of the first anniversary of the closing of the
merger and May 15, 2002. The remaining $100,000 in principal amount of
these loans is currently due on the earlier to occur of the closing of the
merger and May 15, 2001. However, the parties to these loans and
International Commerce Exchange Systems have agreed in principle to modify
these loans so that all of these loans will be due upon the earlier to
occur of the first anniversary of the closing of the merger and May 15,
2002. The parties have also agreed that the obligor on these loans will be
International Commerce Exchange Systems and itract will be relieved of all
obligations under these loans. In connection with these loans, Ms.
Davidowitz was issued warrants to purchase 75,000 shares of common stock
of International Commerce Exchange Systems.
o Michael J. Spector owns all of the
outstanding capital stock of Empresas
Margo, Inc. and will act as its Chief
Executive Officer.
o In addition, all options to purchase shares of Margo common stock held by
Margo's officers and directors will be converted into options to purchase
the same number of shares of the new Delaware holding company's common
stock and these options will become immediately exercisable upon
consummation of the merger of Margo with the new Delaware holding company.
Dissenters' Rights of Appraisal
Holders of Margo common stock who dissent to the merger of Margo with the new
Delaware holding company have the right to seek an appraisal of, and to be paid
in cash an amount that the Puerto Rico Court decides is the fair value of their
shares. This amount may be more or less than the value of the shares of the new
Delaware holding company's common stock you would receive pursuant to the
merger. If more than ten percent of Margo shareholders exercise their appraisal
rights, itract may terminate the merger agreement.
If you wish to exercise your dissenter's rights
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Chapter One -- Frequently Asked Questions and Summary
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of appraisal, you must not vote in favor of the merger of Margo with the new
Delaware holding company and must take a series of steps which are described in
this proxy statement/prospectus. We have attached the provisions of Puerto Rico
law that govern appraisal rights as Appendix F.
Regulatory Approval
No submissions to the Antitrust Division of the Department of Justice and the
Federal Trade Commission are required of Margo pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act.
Federal and Puerto Rico Income Tax Consequences
The exchange of shares of common stock of Margo for shares of common stock of
the new Delaware holding company will be a taxable transaction for U.S.
shareholders for federal income tax purposes.
It is a condition to the closing of the transactions contemplated by the
merger agreement with itract that Margo receive a ruling from the Puerto Rico
Treasury Department confirming that the merger of Margo into the new Delaware
holding company qualifies as a tax-free reorganization for Puerto Rico income
tax purposes.
The merger of a subsidiary of the new Delaware holding company with itract
has been structured so that neither the new Delaware holding company, its
shareholders, nor itract will recognize any gain or loss for Federal income
taxes in that merger. itract's members will not recognize any gain or loss for
Federal income tax purposes in that merger to the extent they exchange property
for stock.
No Listing on the NASDAQ SmallCap Market
Margo's common stock is currently listed on the Nasdaq SmallCap Market under
the symbol "MRGO." It is a condition to the merger agreement that the shares of
the new Delaware holding company be listed on the Nasdaq SmallCap Market. To
obtain a listing on the Nasdaq SmallCap Market, the new Delaware holding company
will need to meet Nasdaq's requirements for initial listing. Because it is not
currently anticipated that the new Delaware holding company will meet these
requirements, itract and Margo will have to waive this requirement in order for
the merger to take place.
If as anticipated, following the itract merger the common stock of the new
Delaware holding company is not listed on the Nasdaq SmallCap Market, it will
most likely trade on the OTC Bulletin Board or in the "pink sheets." This may
make it more difficult to dispose of, or to obtain accurate quotations for the
price of, the common stock of the new Delaware holding company following the
itract merger, as compared to the common stock of Margo prior to the merger.
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I-7
Chapter One -- Frequently Asked Questions and Summary
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table shows the historical financial results actually achieved
by each of Margo and itract as well as the pro forma results as if the companies
had been combined for the period shown under the following circumstances: (1)
that the sale of substantitally all of Margo's assets to Empresas Margo has been
consummated, and (2) that no Margo shareholder dissents to the merger or that
10% of Margo shareholders dissent to the merger, exercise appraisal rights and
as a result are entitled to receive payment at a per share price of $2.88, based
on the highest closing price of Margo's shares of common stock during the fourth
quarter of 1999, instead of shares of iTract, Inc. If more than 10% of Margo's
shareholders exercise their appraisal rights, itract can terminate the merger
agreement. You should not assume that Margo and itract would have achieved the
combined pro forma results if they had actually been combined during the periods
shown.
Margo's and itract's historical figures for the nine months ended September
30, 2000 are unaudited, but management of Margo and itract each believes that
its own figures reflect all normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations for that
period. You should not assume that the results for the nine months ended
September 30, 2000 will be repeated in later periods.
Selected Historical and Pro Forma Data as of September 30, 2000
(Unaudited)
[Enlarge/Download Table]
Pro Forma Pro Forma
Margo itract Equivalent Equivalent
Historical Historical (No Dissenting Shares) (10% Dissenting Shares)
---------- ---------- ---------------------- -----------------------
Total assets $4,875,000 $ 1,066,176 $3,459,838 $3,459,838
Cash and cash equivalents $ 728,878 $ 833 $2,394,495 $2,394,495
Total liabilities $ - $ 3,154,096 $1,119,666 $1,661,775
Shareholders' equity (deficiency) $4,875,000 $(2,087,920) $2,340,172 $1,798,063
Selected Historical and Pro Forma Data for the Year Ended
June 30, 2000(1) and the Three Months Ended September 30, 2000
[Enlarge/Download Table]
Three Months Ended Year Ended
September 30, 2000 June 30, 2000(1)
(Unaudited) (Unaudited)
-------------------------------- -----------------------------------
Margo itract Pro Forma Margo itract Pro Forma
Historical Historical Equivalent Historical Historical Equivalent
---------- ---------- ---------- ---------- ---------- ----------
Net Sales $ - $ 1,197 $ 1,197 $ - $ - $ -
Net Loss $ - $(550,992) $(550,992) $(1,564,401) $(1,852,352) $(1,852,352)
-------------
(1) Margo's fiscal year is the calendar year ending December 31, while itract's
fiscal year ends June 30. This period refers to Margo's period from July 1, 1999
to June 30, 2000, and covers for itract the fiscal year ended June 30, 2000.
COMPARATIVE PER SHARE INFORMATION
The following table sets forth unaudited data concerning the net income
(loss), dividends or distributions and book value per share of common stock for
the new Delaware holding company on a pro forma basis after giving effect to the
proposed mergers. The weighted average common shares outstanding have been
computed assuming the new Delaware holding company issues 13,216,102 shares of
common stock in exchange for the iTract membership units, which will constitute
86.8% of the outstanding shares of common stock immediately following the
merger. The book value per share or unit is not presented for the period ended
June 30, 2000 as a pro forma balance sheet was not prepared as of this date.
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I-8
Chapter One -- Frequently Asked Questions and Summary
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Pro Forma Per Share Data (Unaudited)
[Enlarge/Download Table]
Three Months Ended Year Ended Three Months Ended Year Ended
September 30, 2000 June 30, 2000(1) September 30, 2000 June 30, 2000(1)
(No Dissenting Shares) (No Dissenting Shares) (10% Dissenting Shares) (10% Dissenting Shares)
---------------------- ---------------------- ----------------------- -----------------------
Net loss per weighted average
common share
(basic and diluted) ($0.04) ($0.12) ($0.04) ($0.12)
Weighted average common
shares outstanding 15,098,424 15,098,424 14,910,192 14,910,424
Dividends declared per share -- -- -- --
Book value per share at
end of period $0.20 N/A $0.17 N/A
-------------
(1) This period refers to Margo's period from July 1, 1999 to June 30, 2000, and
covers for itract the fiscal year ended June 30, 2000.
The following tables set forth data concerning the historical net income
(loss), dividends or distributions and book value per share of common stock for
Margo and per membership unit for itract. The weighted average common shares or
membership units outstanding have been computed based on the relation between
the portion of time during the relevant period that common shares or units were
outstanding to the total time in that period.
Margo Historical Per Share Data
[Enlarge/Download Table]
Nine Months Ended
September 30, Year Ended December 31,
(Unaudited)
-------------------- -------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
Net income (loss) per weighted
average common share
(basic and diluted) ($0.74) $0.14 ($0.07) ($0.59) ($0.40)
Weighted average common shares
outstanding 1,882,322 1,875,322 1,875,322 1,878,655 1,895,322
Dividends declared per share -- -- -- -- --
Book value per share at
end of period $2.59 $3.54 $3.33 $3.39 $3.97
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I-9
Chapter One -- Frequently Asked Questions and Summary
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itract Historical Per Unit Data
[Enlarge/Download Table]
Period from May 12, Three Months
1999 (inception) through Ended
Fiscal Year September 30, 2000 September 30, 2000
Ended June 30, 2000 (Unaudited) (Unaudited)
---------------------- -------------------------- --------------------
Net loss per weighted average
membership unit
(basic and diluted) ($0.18) ($0.25) ($0.05)
Weighted average membership unit
outstanding 10,362,174 10,395,890 10,728,700
Distributions declared per
membership unit -- -- --
Book value per membership unit at
end of period ($0.14) ($0.19) ($0.19)
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I-10
Chapter Two -- Risk Factors and Forward-Looking Statements
CHAPTER TWO
RISK FACTORS AND
FORWARD-LOOKING STATEMENTS
In addition to the other information contained in this proxy
statement/prospectus, shareholders of Margo should carefully review the
following factors in deciding whether to vote in favor of approval of the
proposed transactions.
Risks Associated with itract's Business
itract is a Development Stage Company and its Prospects are Uncertain.
itract was organized in May 1999 and is a development stage company. In
addition, although itract's services have been available to the public since it
launched its Web site on June 30, 2000, to date, itract has generated minimal
revenue of $1,197 to September 30, 2000. While itract believes that the funds
available to it upon the consummation of the mergers will permit it to increase
the promotion of its services and upgrade its Web site to include additional
features, which in turn may generate increased revenues, itract's revenue and
income potential are unproven. itract has expended and will continue to expend
substantial resources to create, launch and enhance its services. Because of
itract's limited operating history, it is extremely difficult to evaluate its
business and prospects.
itract Has a History of Losses, itract's Ability to Continue as a Going Concern
is in Doubt and itract May Never Achieve Profitability.
itract has incurred losses since inception, including a net loss of $550,992
for the quarter ended September 30, 2000. As of September 30, 2000, itract had
an accumulated deficit of $2,087,920 representing accumulated losses of
$2,634,445 offset by capital contributions of $546,525. itract expects to
continue to incur losses and have negative cash flow from operations for the
foreseeable future. As a result of these factors as well as itract's need for
additional capital, itract's independent auditors have stated in their financial
report and the notes accompanying itract's financial statements that there is
substantial doubt about itract's ability to continue as a going concern.
itract has invested substantial capital in technology and infrastructure
development, and expects to expend even greater amounts in these areas as it
begins to provide its services to customers on its Web site. itract will need to
invest substantial financial and other resources to upgrade its Web site and
develop and introduce new services. In addition, itract will be required to
expend substantial financial resources to expand its sales and marketing efforts
and operating infrastructure. itract expects that its cost of revenue, and sales
and marketing, general and administrative, and customer support expenses, as
well as other expenses, will increase if and when revenues are realized. itract
will need to generate significant revenue to achieve profitability. Further,
even if itract were to achieve profitability, itract may not be able to sustain
profitability in the future.
itract Has Substantial Debt Does Not Have Sufficient Capital to Fund its
Operations.
itract does not currently have sufficient cash available to it to execute its
business plan. At September 30, 2000, itract had total liabilities of
approximately $3,100,000, including approximately $2,800,000 due to its
affiliates. itract will be required to repay a substantial portion of these
liabilities upon the closing of the merger. After these payments, itract expects
to have liabilities in excess of $1,000,000. itract expects that the cash
available to it after the consummation of the mergers, together with anticipated
revenues from its services, will be sufficient to fund its capital requirements
for a period of at least 12 months following the mergers. However, in the event
of delays, cost overruns or unanticipated expenses or in the event itract does
not realize anticipated revenues, itract may require additional cash within that
period. In addition, itract's capital requirements are subject to numerous
contingencies associated with development stage companies. itract will be
required to seek additional financing after it has exhausted the cash that will
be available to it upon completion of the mergers. There can be no assurance
that financing will be available, or that, if available, financing will be on
terms favorable to itract.
II-1
Chapter Two -- Risk Factors and Forward-Looking Statements
If itract cannot obtain adequate funds on acceptable terms, itract may be
unable to:
o fund its capital requirements;
o develop or enhance its services; and
o respond to competitive pressures.
If additional funds are raised through the issuance of equity securities,
shareholders of the new Delaware holding company following the mergers may
experience dilution, and if funds are raised by issuing debt, itract may be
subject to limitations on its operations imposed by the agreements providing for
the issuance of the debt.
itract's Business Will Suffer If the Market for Outsourced Direct Marketing
Fails to Grow.
The market for outsourced Internet-based direct marketing and direct
marketing via email and fax is new and rapidly evolving. If sufficient demand
for itract's services does not develop, itract may not generate sufficient
revenue to offset its costs and itract may never become profitable. Market
acceptance of itract's services will depend on the acceptance and use of
outsourced email and fax direct marketing services. These services are very
different from the traditional advertising and direct mail methods that itract's
targeted customers have historically used to attract new customers and maintain
customer relationships. Businesses that have already invested substantial
resources in traditional or other methods of marketing and communications may be
reluctant to adopt new marketing strategies and methods.
Delays in Upgrading itract's Web site and Offering New Services May Harm
itract's Business.
Delays or failure to improve the itract system, introduce additional features
or develop new services could result in itract's failure to attract and retain
clients. itract completed the testing of a "beta"version of its software and
launched a basic "version 1.0" of its Web site on June 30, 2000. itract
experienced delays in the development and launch of its Web site. Several
features intended to be provided by the itract system were not included in
version 1.0. These features, which are expected to be made available following
the consummation of the mergers, are intended to provide itract's clients with a
wide variety of targeted marketing capabilities, a feature currently provided by
competitors of itract, and the use of "reward points." Several factors,
including unforeseen delays and the failure of third-party consultants to meet
deadlines, may delay the development and launch of these additional features as
well as any other new services which may be developed in the future. itract also
expects to improve the itract system on an ongoing basis to increase its ease of
use and to remedy any defects that it may discover.
Intense Competition Exists in Internet-Based Direct Marketing Services and
itract Expects Competition to Continue to Intensify.
Competition for Internet-based direct marketing in general, and email and fax
services in particular, is intense. If itract does not respond successfully to
competitive pressures, itract may not be able to develop sufficient market share
to support its operations. itract may not be able to compete successfully
against current or future competitors. These competitors include the in-house
email capabilities of many businesses. An increasing number of companies are
entering the market for direct marketing alternatives via the Internet. Many of
itract's competitors have greater brand recognition, longer operating histories,
larger customer bases and greater financial, marketing and other resources than
itract. In addition, features that are not yet available from itract, such as
analytical tools, are already available from some of itract's Internet-based
competitors. These factors may place itract at a disadvantage when itract
responds to its competitors' pricing strategies, technological advances and
other initiatives. Additionally, itract's competitors may develop or provide
services that are superior to itract's or that achieve greater market
acceptance. itract expects competition to persist and intensify. Barriers to
entry may be substantial and itract may face substantial and growing competitive
pressures from companies both in the United States and abroad. See "Information
About itract - Competition" for a list of itract's competitors.
II-2
Chapter Two -- Risk Factors and Forward-Looking Statements
itract Does Not Employ its own Technology Personnel and May Be Unable to
Upgrade, Improve or Maintain the Itract System in a Timely or Effective Manner.
itract does not employ any computer programmers or engineers and depends, and
intends to continue to depend, on employees of affiliated companies and outside
consultants to upgrade and maintain its Web site and the software and hardware
that allows itract to deliver its services. The software at the core of the
itract system was created for itract by an affiliated company. To enable itract
to launch "version 1.0," itract retained outside consultants to modify and
improve itract's proprietary software. itract was dissatisfied with the
performance of these consultants and has since replaced them with new
consultants. itract has retained these new consultants to enable itract to
upgrade and make available from its Web site new features and functions. Because
itract relies on third parties to develop and maintain its technological
capabilities, itract is subject to a greater risk of delays in upgrading and
maintaining the software and hardware that enables it to deliver its services
and respond to system failures.
itract's Inability to Comply with Laws Relating to the Transmission of
Unsolicited Faxes May Harm itract's Business.
If itract is found to have violated federal or state laws relating to the
transmission of unsolicited faxes, itract may have to pay significant damages,
its reputation will be harmed and its business will suffer. Federal and state
laws make it unlawful to use a computer or other device to send an unsolicited
advertisement to a telephone facsimile machine. In particular, federal law
provides a private right of action to recover $500 for each violation. To the
extent itract sells fax numbers to its customers, itract intends that all of
these numbers will belong to individuals that have explicitly agreed to receive
advertisements transmitted to their fax machines. In addition, itract will
require its customers that use their own fax mailing lists to acknowledge that
their lists consist only of individuals that have agreed to receive the
information being transmitted. However, despite itract's efforts, there can be
no assurance that itract will be able to comply with applicable laws, and itract
may also be held responsible for violations of its customers.
itract's Failure to Manage its Planned Rapid Growth Could Cause its Business to
Suffer.
itract's failure to manage its growth effectively could result in service
disruptions, loss of competitive position and lack of adequate financial
controls. itract plans to expand its operations rapidly and to significantly
augment its infrastructure. itract must effectively manage its operational,
customer service and financial systems, procedures and controls to manage this
planned growth. Any growth will result in increased responsibility for existing
and new management personnel. Growth will place a significant strain on itract's
managerial, operational and financial resources.
itract's Faxing Capabilities are Dependent on Third Party Licenses and
Relationships.
itract licenses software technology from an unrelated third-party and
utilizes the fax servers of this licensor to enable it to send faxes through the
Internet. itract is dependent on this third party service provider for the
transmission of faxes and for support services provided by this licensor for the
integration of the fax servers and licensed software with itract's hardware and
proprietary software. If this licensor ceases operations or otherwise becomes
unavailable to itract, and itract is not able to promptly find a suitable
replacement, the itract system will be unable to transmit faxes. Prior to the
launch of "version 1.0" of the itract system, itract anticipated licensing fax
transmission software and obtaining support services from a particular entity
which subsequently ceased operations. As a result, itract was forced to delay
the launch of version 1.0 of its Web site and incur additional costs. If a
similar occurrence were to occur in the future, itract's business could be
disrupted.
itract May Need to License Additional Technologies to Succeed in its Business.
In the future, itract may need to license additional technologies to remain
competitive. There is no assurance that itract will be able to license these
technologies on commercially reasonable terms, or at all. itract's inability to
obtain any license could delay the development of its services until equivalent
technology can be identified, licensed and integrated. These delays could cause
itract's business to suffer. Further, third party licenses may expose itract to
increased risks. These risks include:
II-3
Chapter Two -- Risk Factors and Forward-Looking Statements
o risks related to the integration of new technology;
o the diversion of resources from the development of itract's own
proprietary technology; and
o itract's inability to generate revenue from licensed technology sufficient
to offset associated acquisition and maintenance costs.
Unknown Software Defects Could Disrupt itract's Services.
itract's service offerings depend on its complex proprietary software.
Complex software often contains defects, particularly when first introduced or
when new versions are released. These defects may not be discovered until after
the software has been in use for a significant amount of time. Accordingly, the
itract system may be subject to unknown defects. These defects could:
o cause service interruptions;
o increase itract's service costs;
o cause itract to lose revenue;
o delay market acceptance; and
o divert itract's development resources.
Although itract tests its software, itract may not discover software defects
that affect current or planned services or enhancements until after they are
deployed.
itract's Quarterly Operating Results May Fluctuate and Fall below Market
Expectations Which Could Negatively Affect The Value of the new Delaware Holding
Company's Common Stock Following the itract Merger.
itract's operating results will be difficult to predict. itract's future
quarterly operating results may fluctuate significantly. If this occurs, the new
Delaware holding company's results may not meet the expectations of investors
and the price of the new Delaware holding company's common stock would likely
decline, perhaps substantially. Factors that may cause fluctuations of itract's
operating results include the following:
o the level of market acceptance of itract's products and services;
o delays itract may encounter in introducing new products and services;
o competitive developments; and
o changes in pricing policies and resulting margins.
itract expects that most of its revenues will be derived from email, fax and
postal marketing services. The volume and timing of orders are difficult to
predict because the market for these products is in its infancy and the sales
cycle may vary substantially from customer to customer. Moreover, itract's sales
are expected to fluctuate due to seasonal or cyclical marketing campaigns.
itract's Business Will Suffer If it Does Not Attract and Retain Additional
Highly Skilled Personnel.
itract currently has only six full-time and two part-time employees. In order
for itract to succeed, it must identify, attract, retain and motivate highly
skilled technical, managerial, sales and marketing personnel. Failure to retain
and attract necessary personnel will limit itract's ability to compete
effectively and provide services to its customers. itract plans to significantly
expand its operations and will need to hire additional personnel as its business
grows. Competition for qualified personnel is intense. itract may experience
difficulties in hiring highly skilled technical personnel due to significant
competition for experienced personnel in the Internet industry.
II-4
Chapter Two -- Risk Factors and Forward-Looking Statements
Need to Attract and Retain Executive Personnel.
Following the itract merger, itract will need to recruit and hire additional
executive officers, including a Chief Executive Officer and a full time Chief
Financial Officer. Qualified executives are in short supply, and the competition
for their services is intense. The process of identifying and recruiting
executive personnel with the requisite combination of skills may be lengthy.
Failure to recruit qualified executives may prevent itract from adequately
managing its business.
Entities Affiliated With itract Will Have Significant Control of the new
Delaware Holding Company after the itract Merger; Conflicts of Interest.
International Commerce Exchange Systems, Inc., also known as "ICES", through
its subsidiary The TechDepartment.com, Inc., currently owns approximately 91.7%
of itract's outstanding units. Upon the consummation of the itract merger, the
TechDepartment.com will own approximately 80% of the outstanding common stock of
itract, Inc., the new Delaware holding company. Henry Kauftheil is currently the
sole manager of itract and, upon the effectiveness of the itract merger, will be
the Chairman of the Board of itract, Inc. Mr. Kauftheil is also the sole
director of the TechDepartment.com and the Chairman and a controlling
shareholder of ICES. Mr. Kauftheil controls the voting capital stock of both
ICES and, as Chairman of ICES, of The TechDepartment.com. In addition, as
described in the section of this proxy statement/prospectus entitled
"Information About itract-Relationship with ICES and its Affiliates," itract
currently occupies space leased by ICES and is provided various services from
ICES and its affiliates such as investment banking, legal and accounting
services as well as computer hardware, software and network services. itract was
also indebted to ICES and its affiliates in the amount of $2,881,026 as of
September 30, 2000. These arrangements may create conflicts of interest for Mr.
Kauftheil and the entities that he controls in acting in the best interests of
himself and these entities as opposed to the shareholders of itract, Inc.
Additionally, Mr. Kauftheil and these entities will be able to significantly
influence all matters requiring approval by shareholders, including the election
of directors and the approval of mergers or other business combination
transactions. This concentration of ownership might also have the effect of
delaying or preventing a change in control.
itract May Face Claims for Activities of its Customers Which Could Harm itract's
Business.
A wide variety of laws and regulations govern the content of advertisements
and regulate the sale of products and services. There is also uncertainty as to
the application of these laws to the emerging world of advertising on the
Internet. itract cannot predict whether its role in facilitating the marketing
activities of its customers would expose it to liability under these laws.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. In addition, some of
the content may be compiled by itract or other parties. If this content is
improperly used, it could result in liability. itract may also face civil or
criminal liability for unlawful advertising or other activities of its
customers. If itract is exposed to this kind of liability, itract could be
required to pay substantial fines or penalties, redesign its business methods,
discontinue some of its services or otherwise expend resources to avoid
liability. Any costs incurred as a result of that liability or asserted
liability could harm itract's business.
itract May Lose Customers and its Reputation May Suffer Because of Spam;
Government Regulation of Email Transmissions.
itract is subject to laws regulating the unsolicited transmission of e-mail
("spam"), violations of which laws may subject itract to damages. A number of
states have passed statutes prohibiting and/or regulating the transmission of
spam. In addition, due to the convergence of email and fax technology, federal
law relating to the transmission of unsolicited faxes may also be applicable to
the transmission of unsolicited email. A number of statutes have also been
introduced in Congress and state legislatures to impose penalties for sending
unsolicited email which, if passed, could impose additional restrictions on
itract's business. In addition, a California court recently held that
unsolicited email distribution is actionable as an illegal trespass for which
the sender could be subject for monetary damages.
While itract believes that its system and controls comply with current laws,
there is no assurance that the itract system will not be utilized to transmit
spam. Further, the growth and development of the market for online email may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online.
II-5
Chapter Two -- Risk Factors and Forward-Looking Statements
If itract fails in its efforts to limit the distribution of unsolicited bulk
email, or spam, itract's business and reputation may be harmed and itract may be
subject to claims for violations of Federal or state civil or criminal law. In
addition, spam-blocking efforts by others may also result in the blocking of
legitimate messages forwarded by itract on behalf of its customers. itract's
reputation may be harmed if email addresses with its domain names are used in
this manner. Any of these events may cause itract's customers to become
dissatisfied with itract's services and its customers may terminate their
relationship with itract.
itract Depends on Third-party Vendors for the Delivery of Postal Mail.
itract is dependent on a third-party vendor to handle the physical packaging
and mailing of the postal mail to be delivered through the itract system.
Accordingly, the failure of this vendor to satisfy on a timely basis the
requirements of itract's customers could harm itract's business, operations and
reputation. In addition, the termination of itract's relationship with this
vendor without itract finding a prompt replacement could cause itract to lose
customers and revenue.
Risks Associated with itract's Technology
If itract is Unable to Adequately Protect its Intellectual Property, its
Business Will Suffer.
itract's ability to successfully compete is substantially dependent upon its
internally developed technology, which it protects through a combination of
copyright, trade secret and trademark law. itract has no issued patents or
patent applications pending. In addition, effective copyright and trademark
protection may be unenforceable or limited in some countries. The failure of
itract to adequately protect its proprietary rights may harm its business. In
addition, unauthorized parties may attempt to copy or otherwise obtain and use
itract's products or technology. Policing unauthorized use of itract's products
is difficult, and itract cannot be certain that the steps it has taken will
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect its proprietary rights as fully as in the United
States. For a more detailed description of the protection of itract's
intellectual property, please see "Information About itract -- Intellectual
Property Rights."
itract's Proprietary Technology May Be Subject to Infringement Claims Which
Could Harm its Business.
There is a substantial risk of litigation regarding intellectual property
rights in the Internet industry. Claims against itract may be asserted based on
itract's use of its own proprietary technology or technology which it licenses
from third parties. Third parties may assert exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are utilized by itract. Future claims of infringement against
itract with respect to it and its technology, with or without merit, could:
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources;
o cause delays in delivering products and services;
o require the payment of monetary damages;
o result in an injunction which would prohibit itract from offering a
particular product or service; or
o require itract to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be negotiated by itract
on acceptable terms, or at all. For additional information, please see
"Information About itract -- Intellectual Property Rights."
II-6
Chapter Two -- Risk Factors and Forward-Looking Statements
If itract Fails to Upgrade its Systems and Infrastructure to Expand its Business
and to Accommodate Increases in Email and Fax Transmissions, itract May
Experience Slower Response Times or System Failures.
itract will need to add Web, fax and email servers and modify its software as
the number of its customers increases. If itract does not add sufficient
capacity to handle the growing volume and complexity of messages, itract could
suffer slower response times or system failures which could result in a loss of
customers. itract intends to continually monitor its needs and available
capacity. The expansion of itract's capacity will also require substantial
financial, operational and managerial resources.
In addition, itract may not be able to accurately project the rate or timing
of email and fax transmission increases or upgrade its systems and
infrastructure to accommodate future traffic levels. As itract upgrades its
infrastructure to increase capacity available to its customers, itract may
encounter delays in implementation. itract may not be able to expand or adapt
its network infrastructure to meet demand of its clients in a timely manner or
at all.
Failure to Keep Pace with Rapidly Changing Technology and Market Conditions
Could Affect itract's Competitiveness.
itract will operate in an industry that is characterized by:
o rapid technological change;
o changing client demands; and
o the emergence of new industry standards and practices that could render
itract's services, proprietary technology and systems obsolete.
itract must continually improve the performance, features and reliability of
itract's services. itract's ability to generate revenues will depend, in part,
on itract's ability to enhance its services and to develop new services,
functionality and technology that address the increasingly sophisticated and
varied needs of itract's prospective clients. The development of itract's
technology and necessary service enhancements entail significant technical and
business risks and require substantial expenditures and lead-time. itract may
not be able to keep pace with the latest technological developments or adapt
itract's services to client requirements or emerging industry standards.
If itract Encounters System Failure, it May Not Be Able to Provide Adequate
Service and its Business and Reputation Could Be Damaged.
itract's ability to successfully receive orders for its services from
customers and send email, fax and postal messages and provide acceptable levels
of customer service largely depends on the efficient and uninterrupted operation
of itract's computer and communications hardware and network systems. itract's
operations will depend on its ability to protect its computer systems against
damage from a variety of sources, including telecommunications failures,
malicious human acts, including computer viruses, and natural disasters. All of
itract's communications systems will be located in New York, New York. As a
result, if there were to be a natural disaster affecting the New York area,
itract's communications systems could be disrupted and itract's business would
be harmed. itract may not be able to relocate quickly under those circumstances.
If any of these events occur, itract may be unable to provide its customers with
services for indefinite periods of time.
Service Interruptions from itract's Third Party Internet and Telecommunications
Providers Could Harm its Business.
itract will depend heavily on third party providers of Internet and
telecommunications services. Any interruption by itract's Internet and
telecommunications providers would likely disrupt the operation of itract's
business, causing a loss of revenue and a potential loss of clients.
II-7
Chapter Two -- Risk Factors and Forward-Looking Statements
Risks Associated with the Internet
itract's Business Will Suffer If the Internet Does Not Achieve Continuing,
Widespread Acceptance as a Marketing and Communications Medium.
itract's revenue and ability to be profitable will be adversely affected if
the Internet does not achieve continuing, widespread acceptance as a marketing
and communications medium. itract's future profitability will depend
substantially upon the continued evolution of the Internet as an attractive
platform for marketing and communications applications and the use of
outsourcing to solve businesses' marketing needs. Most businesses and consumers
have only limited experience with the Internet as a marketing and communications
medium.
Even if consumers and businesses increase their use of the Internet, the
Internet infrastructure may not be able to support the demands of this growth.
The Internet infrastructure must be continually improved and expanded in order
to alleviate overloading and congestion. Failure to do so will degrade the
Internet's performance and reliability. Internet users may experience service
interruptions as a result of outages and other delays occurring throughout the
Internet. Frequent outages or delays may cause consumers and businesses to slow
or stop their use of the Internet as a communications medium.
Increased Governmental Regulation and Legal Uncertainties May Impair the Growth
of the Internet and Decrease Demand for itract's Services or Increase itract's
Cost of Doing Business.
With the exception of state anti-spam laws, there are currently few laws and
regulations directly applicable to the Internet and commercial email services.
However, the adoption of additional laws or regulations may impair the growth of
itract's business and the use of the Internet thereby decreasing the demand for
itract's services and increasing itract's cost of doing business. A number of
laws have been proposed involving the Internet, including laws addressing:
o user privacy;
o pricing;
o content;
o copyrights;
o characteristics and quality of services; and
o consumer protection.
Other Risks Relating to Your Investment in Margo and, Following the Merger with
iTract, Inc., in the New Delaware Holding Company
Margo's stock price in particular has fallen, and may continue to fall, and
Internet stocks in general have been extremely volatile.
Following Margo's announcement of the itract merger, Margo's stock price has
fallen from a high of $35.37 on February 9, 2000 to $1.75 on January 3, 2001.
Following the consummation of the proposed transactions, the new Delaware
holding company's stock price may continue to fall.
In addition, many publicly held Internet companies have recently experienced
extreme price declines and volume fluctuations and in general have tended to be
volatile. These fluctuations and declines are often unrelated or
disproportionate to the operating performance of these companies. The market
price of the new Delaware holding company's common stock may be adversely
affected by stock market conditions regardless of its actual operating
performance.
II-8
Chapter Two -- Risk Factors and Forward-Looking Statements
Your investment in the new Delaware holding company's stock may become illiquid
and you may lose your entire investment.
It is unlikely that the new Delaware holding company will be able to meet the
listing requirements of the Nasdaq SmallCap Market. These requirements are the
following:
o net tangible assets of at least $4 million, or a market capitalization
exceeding $50 million, or net income in the latest fiscal year or two of
the last three fiscal years exceeding $750,000;
o at least 1 million shares in the public float with a market value of at
least $5 million, but not including shares held directly or indirectly by
any of its officers or directors or by any other person who beneficially
owns more than ten percent of the total outstanding shares;
o a minimum bid price for the common stock of $4 per share;
o at least three market makers for the common stock;
o at least 300 shareholders of the common stock, each of which holds at
least 100 shares of common stock; and
o an operating history of at least one year or a market capitalization
exceeding $50 million.
In addition, the new Delaware holding company will be required to meet
corporate governance tests promulgated by Nasdaq.
Therefore, although the listing of the new Delaware holding company's common
stock on Nasdaq is a condition to the closing of the itract merger, the parties
do not currently anticipate that this condition will be met. If as anticipated
this condition is not met, it will have to be waived by the parties in order for
the merger to take place. Thus, the common stock of the new Delaware holding
company will likely trade on the OTC Bulleting Board or in the "pink sheets". As
a consequence, an investor could find it more difficult to dispose of or to
obtain accurate quotations as to the market value of the holding company's
common stock. Among other things, failure to list on Nasdaq may cause a decline
in stock price as well as difficulty in obtaining future financing.
Penny stock regulations may affect your ability to sell the new Delaware holding
company's securities.
If the common stock is not listed on Nasdaq, it may become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker dealers which sell these securities to persons other than
established customers and accredited investors. The application of this Rule
would reduce the liquidity of an investment in the common stock and may depress
the price of the common stock. Under these rules, broker-dealers who recommend
penny stocks to persons other than established customers and "accredited
investors" must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale.
The SEC has adopted regulations that generally define a penny stock to be any
equity security that has a market price of less than $5.00 per share, subject to
some exceptions. These exceptions include equity securities listed on the Nasdaq
Stock Market and equity securities issued by an issuer that meets financial
requirements established by the SEC. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the
associated risks.
Anti-takeover provisions in the new Delaware holding company's charter could
negatively impact the trading price of its securities.
Following the mergers, the board of directors of the new Delaware holding
company will have the authority to issue up to 5,000,000 shares of preferred
stock without the need for shareholder approval. The board may also determine
the economic and voting rights of this preferred stock. The holders of the new
Delaware holding company's common stock could be adversely affected by the
issuance of preferred stock. Issuance of preferred stock could impede or prevent
transactions that would cause a change in control of the new Delaware holding
company. This might discourage bids for the common stock at a premium over its
market price and adversely
II-9
Chapter Two -- Risk Factors and Forward-Looking Statements
affect the trading price of the common stock. The new Delaware holding company
has no current plans to issue shares of preferred stock.
Following the Mergers, the new Delaware holding company will be Required to
Indemnify the Former Officers and Directors of Margo and its Affiliates.
Under the merger agreement, the new Delaware holding company is required to
indemnify and hold harmless each present and former officer and director of the
new Delaware holding company, Margo, and Margo's other subsidiaries, from and
against all claims and losses incurred in connection with any claim or lawsuit
pertaining to any matter that existed or occurred at or prior to the time of the
itract merger. The new Delaware holding company may be required to pay a
significant amount in connection with indemnification claims made by any of
these persons.
No Dividends will be Paid in the Near Future.
Following the consummation of the proposed transactions, the new Delaware
holding company does not anticipate that it will pay dividends in the
foreseeable future. The new Delaware holding company is likely to reinvest any
funds that might otherwise be available for the payment of dividends in further
development of its business following the mergers.
FORWARD-LOOKING STATEMENTS
The forward looking statements made in this proxy statement/prospectus might
prove inaccurate, resulting in a material difference between these statements
and the actual results of Margo, the new Delaware holding company or itract.
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business", "Information About itract" and elsewhere in this proxy
statement/prospectus constitute forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, levels of activity, performance or achievements following the
consummation of the proposed transactions to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by these forward-looking statements. These factors include, among other
things, those listed under "Risk Factors" and elsewhere in this proxy
statement/prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "thinks," "estimates," "predicts," "potential" or
"continue" or the negative of these terms and other comparable terminology.
II-10
Chapter Three -- The Sale of Margo's Assets
CHAPTER THREE
THE SALE OF MARGO'S ASSETS
Background to Sale of Businesses
On February 8, 2000, Margo entered into a non-binding letter of intent with
itract which established that as a condition to the proposed merger transaction
with itract, Margo would have to sell all of its operating businesses
immediately prior to the consummation of the merger. The letter of intent also
required that Margo have at least $5,000,000 in cash and liabilities not in
excess of $10,000 at the time of the merger.
In accordance with the letter of intent, Margo promptly commenced its due
diligence investigation of itract and the negotiation of a definitive merger
agreement. On March 17, 2000 Margo retained the services of San Juan Holdings,
Inc. ("SJ Holdings"), an investment banking firm based in San Juan, Puerto Rico.
SJ Holdings was engaged to seek potential buyers for Margo's existing nursery
business and to act as Margo's financial advisor in any sale.
On April 11, 2000, Margo executed the merger agreement with itract. One of
the conditions to the obligation of itract to consummate the merger is that
Margo have sold all assets, other than cash and cash equivalents, owned or used
by Margo and its subsidiaries in any of the businesses presently conducted by
any of them, including all the capital stock of Margo's subsidiaries owned by
Margo, other than the shares of common stock presently owned by Margo in the new
Delaware holding company. Further, the merger agreement with itract provides
that the new Delaware holding company must have at least $5,000,000 of cash and
cash equivalents and not be subject to liabilities exceeding $10,000 in the
aggregate, excluding liabilities for the payment of dissenters' rights and for
legal and accounting fees incurred by Margo after July 1, 2000 not exceeding
$250,000. At the time Margo executed the merger agreement with itract, Margo did
not have any assurance it could find a buyer for its assets that would pay the
minimum price required under the merger agreement. However, the merger agreement
was structured so that if Margo was unable to satisfy these conditions, it could
terminate the merger agreement with itract without any liability.
Following the execution of the merger agreement with itract, SJ Holdings
prepared a Confidential Information Memorandum containing operational and
financial information regarding Margo's nursery operations. Between April 24 and
May 5, 2000, SJ Holdings contacted by phone 57 firms which had either previously
expressed an interest in purchasing Margo's nursery operations or which SJ
Holdings had identified as persons in the nursery business that might be
interested in pursuing the purchase of Margo's nursery operations. During that
period, SJ Holdings sent letters of inquiry to the approximately 16 firms that
expressed preliminary interest. The letters of inquiry stated that the minimum
purchase price would be $5,000,000. All parties were informed that a
Confidential Information Memorandum would be forwarded to them upon receipt of
an executed confidentiality agreement. Four persons executed confidentiality
agreements between May 1 and May 15, 2000 and requested a Confidential
Information Memorandum. On the advise of Margo's board, SJ Holdings gave those
persons until May 26, 2000 to provide their indications of interest. Prior to
sending out the Confidential Information Memorandum, representatives of Margo
informally contacted representatives of Color Spot Nurseries, Inc., a large
nursery in the United States, to see if it would be interested in purchasing
Margo's nursery operations. Margo sent a copy of the Confidential Information
Memorandum to Color Spot Nurseries, but it did not express any interest in
pursuing a transaction with Margo. SJ Holdings and Margo did not make any other
efforts to find a purchaser for Margo's assets or contact any other prospective
purchasers.
Indications of interest were received from only two firms, Pennock Growers,
Inc., a Puerto Rico based nursery company and Empresas Margo, a corporation
organized by Michael J. Spector. Mr. Spector owns all of the outstanding capital
stock of Empresas Margo.
The indication of interest received from Pennock Growers was for $4.0
million, subject to possible increase if they could obtain evidence to their
satisfaction supporting the projections contained in the Confidential
Information Memorandum. The Pennock Growers proposal provided for a structure
involving the sale of assets versus the stock of the subsidiaries and was
subject to a due diligence investigation. In addition, it provided that accounts
receivable over 90 days would not be purchased, that the existing inventory of
Margo's subsidiaries would be subject to
III-1
Chapter Three -- The Sale of Margo's Assets
adjustment based on a market evaluation and that Margo would be required to pay
all severance obligations under Puerto Rico law with respect to existing
employees. The Pennock Growers proposal also stated that they would have to
conduct further due diligence before agreeing to assume any existing
indebtedness of Margo. This proposal would not have satisfied the condition to
the itract merger that there be at least $5,000,000 in cash and liabilities not
exceeding $10,000.
Empresas Margo's indication of interest was for $5.0 million in cash plus the
assumption of $600,000 in debt. It was structured as a stock purchase rather
than an asset purchase and was not subject to due diligence investigation or
possible reduction in price due to valuation of accounts receivable and
inventory or payment of severance obligations. In addition, Empresas Margo's
proposal indicated that no post closing indemnification would be required from
Margo, a condition that itract had informed Margo they would insist on.
Based on the structural considerations discussed above, the board of Margo
determined that it was very unlikely that they could obtain a binding offer from
Pennock Growers that would exceed the price proposed by Empresas Margo or that
would allow Margo to comply with the requirement in the itract merger agreement
that there be at least $5.0 million in cash and cash equivalents in Margo at the
time of the merger and liabilities not in excess of $10,000. Accordingly, the
Board decided to pursue further negotiations with Empresas Margo.
Negotiations between Margo and Empresas Margo ensued. On June 6, 2000, a
special meeting of the board of directors was held and based on the
considerations discussed above and the opinion of Margo's financial advisor, SJ
Holdings, the board of directors voted to approve the stock purchase agreement
with Empresas Margo.
Recommendations of Margo's Board of Directors
Margo's board of directors believes that the proposed sale of substantially
all of its assets to Empresas Margo pursuant to the stock purchase agreement is
fair to, and in the best interest of, Margo and its shareholders. Margo's board
of directors, with Michael J. Spector and Margaret D. Spector abstaining, has
unanimously approved the stock purchase agreement with Empresas Margo and
recommends shareholders vote for the approval of the sale of all the stock of
Margo's subsidiaries pursuant to the stock purchase agreement.
In reaching its decision to approve the sale of its subsidiaries to Empresas
Margo, the board of directors consulted with Margo's financial and legal
advisors, and considered a variety of factors, including the following:
o that the merger agreement with itract provides that it is a condition to
closing that Margo shall have sold all of its assets, other than cash
equivalents, and the Board determined that the itract merger was in the
best interest of Margo and its shareholders;
o the fact that Margo had not received and the Board felt it was unlikely it
would receive competing offers that could comply with the minimum price
and structural requirements of the itract merger agreement;
o the structure and terms of the stock purchase agreement, including the
absence of post-closing indemnification or severance obligations or the
ability to abandon the transaction on the basis of due diligence
investigations;
o in light of the Board's familiarity with Mr. Spector, the principal
stockholder of Empresas Margo, the Board was confident that Empresas Margo
could obtain the financing required to complete the transaction.
In making its determination, the Board considered the fact that Michael J.
Spector, the current Chairman of the Board and Chief Executive Officer of Margo
owned all of Empresas Margo, and that his ownership of Empresas Margo raised
various conflicts of interest.
The above discussion of the information and factors considered by Margo's
board of directors is not intended to be exhaustive, but includes all material
factors considered by the board. In reaching its determination to approve and
recommend the stock purchase agreement, Margo's board of directors did not
assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
III-2
Chapter Three -- The Sale of Margo's Assets
Because Margo shareholders must approve the stock purchase agreement before
itract is obligated to consummate the merger, Margo's board of directors
unanimously recommends that each of Margo shareholders vote "FOR" approval of
the stock purchase agreement.
Terms of the Stock Purchase Agreement
The following is a summary of the material terms of the stock purchase
agreement. This summary does not purport to describe all the terms of the stock
purchase agreement and is qualified by the complete stock purchase agreement
which is attached as Appendix C to this proxy statement/prospectus and
incorporated by reference. All Margo shareholders are urged to read the stock
purchase agreement carefully and in its entirety.
Purchase and Sale of Assets; Purchase Price
The stock purchase agreement provides for the sale by Margo to Empresas Margo
of substantially all of Margo's assets, which consist of the shares of stock
owned by Margo in its subsidiaries except for the shares of the new Delaware
holding company. The purchase price to be paid by Empresas Margo is $5,000,000
plus the assumption of the outstanding debt of Margo after application of the
cash collateral securing the debt. As of September 30, 2000, the outstanding
principal amount of the debt to be assumed was approximately $966,500.
Closing
Unless the parties agree otherwise, the closing will take place on the first
business day after all closing conditions have been satisfied or waived. See
"--Conditions of Sale" below.
Representations and Warranties
Margo has made customary representations and warranties in the stock purchase
agreement relating to, among other things:
o its organization and the organization of its subsidiaries;
o the authorization, execution, delivery and enforceability of the stock
purchase agreement;
o the power and authority of each of its subsidiaries to conduct its
business;
o the capitalization of its subsidiaries;
o title to the shares of common stock of its subsidiaries;
o its financial statements;
o the absence of material changes and events;
o taxes and tax returns for each of its subsidiaries;
o material contracts;
o the absence of conflicts of its subsidiaries with proprietary rights of
third parties;
o employee benefit plans;
o litigation;
o labor matters and relations;
o insurance;
o the absence of conflicts under its charter, by-laws and contracts or those
of its subsidiaries;
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Chapter Three -- The Sale of Margo's Assets
o title to assets and properties of its subsidiaries;
o compliance with laws; and
o environmental matters.
Empresas Margo has also made customary representations and warranties in the
stock purchase agreement relating to:
o its organization;
o the authorization and enforceability of the stock purchase agreement; and
o the absence of conflicts under its charter, by-laws or governmental
orders.
Certain Covenants
Margo has agreed that until the closing of the purchase and sale of the
shares, Margo will cause its subsidiaries to conduct their businesses in the
ordinary course and use their best efforts to maintain satisfactory commercial
relationships.
Empresas Margo has agreed to retain all current employees of Margo's
subsidiaries and to honor their years of service for purposes of some employee
benefits, without limiting its ability to terminate employees in the ordinary
course or as deemed necessary or advisable.
Conditions of Sale
The obligation of Empresas Margo to consummate the purchase and sale of the
shares is subject to the satisfaction or waiver of several customary conditions,
including:
o the accuracy of the representations and warranties of Margo as of the
closing date;
o the absence of any governmental order or proceeding affecting the
transaction; and
o the receipt of all governmental consents necessary for the consummation of
the transaction.
The obligation of Margo to consummate the purchase and sale of the shares is
subject to the satisfaction or waiver of several conditions, including:
o the effectiveness of the registration statement filed by iTract, Inc., the
new Delaware holding company, with the SEC and evidence that the merger of
Margo with the new Delaware holding company and the merger with itract
will occur concurrently with or immediately following the closing of the
sale of the shares.
o the accuracy of the representations and warranties of Empresas Margo as of
the closing date;
o the absence of any governmental order or proceeding affecting the
transaction;
o the receipt of all governmental consents necessary for the consummation of
the transaction; and
o the receipt of approval by Margo's shareholders of the transactions
contemplated by the stock purchase agreement.
Survival of Representations
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Chapter Three -- The Sale of Margo's Assets
All representations, warranties, covenants and agreements made by Margo and
Empresas Margo in the stock purchase agreement or pursuant thereto expire on the
closing date and Margo has no liability with respect to these representations,
warranties, covenants and agreements.
Termination
The stock purchase agreement may be terminated prior to the closing only as
follows:
o by mutual consent of Margo and Empresas Margo;
o by either Margo or Empresas Margo at any time after December 31, 2000
(subject to a 60-day extension if the itract merger has not been
consummated and Margo is using its best efforts to consummate the merger
with itract) if, through no fault of the party seeking termination, the
closing shall not have occurred;
o by Empresas Margo, if Margo has materially breached the agreement in a way
that has rendered the satisfaction of any condition to the obligations of
Empresas Margo impossible and the breach has not been waived by Empresas
Margo;
o by Margo, if Empresas Margo has materially breached the agreement in a way
that has rendered the satisfaction of any condition to the obligations of
Margo impossible and the breach has not been waived by Margo; and
o by either Margo or Empresas Margo if a final order from a court of
competent jurisdiction permanently enjoins the transaction.
Expenses
Each party will bear its own expenses in connection with the consummation of
the purchase and sale of the shares. In the event of the termination of the
stock purchase agreement as set forth above, there is no further obligation or
liability of any party, except that:
o if the agreement is terminated by Margo as a result of a material breach
by Empresas Margo, Empresas Margo shall be obligated to reimburse Margo
for all out-of-pocket expenses incurred by Margo in connection with the
agreement and the transactions contemplated thereby up to a maximum of
$100,000; and
o if the agreement is terminated by Empresas Margo as a result of a material
breach by Margo, Margo shall be obligated to reimburse Empresas Margo for
all out-of-pocket expenses incurred by Empresas Margo in connection with
the agreement and the transactions contemplated thereby up to a maximum of
$100,000.
Opinion of Financial Advisor Regarding Sale of Margo's Businesses
Margo retained SJ Holdings to act as its financial advisor to render a
fairness opinion in connection with the sale of substantially all of Margo's
assets, based on SJ Holdings' qualifications, expertise and reputation. On June
30, 2000, SJ Holdings rendered to Margo's board of directors its written opinion
that, as of that date and based upon the considerations set forth in the
opinion, the consideration to be received by Margo for the sale of its assets,
consisting of $5,000,000 and the assumption of debt as set forth above, was fair
to Margo from a financial point of view. The full text of the SJ Holdings
opinion is attached as Appendix E to this proxy statement/prospectus.
Margo's stockholders are urged to read the opinion carefully and in its
entirety. The SJ Holdings opinion is directed to Margo's board of directors,
addressed only the fairness to Margo of the consideration to be received by
Margo for the sale of its assets from a financial point of view, and does not
address any other aspect of the sale of the assets or the merger with itract or
constitute a recommendation to any of Margo's stockholders as to how they should
vote on the proposed sale of Margo's assets.
SJ Holdings is a privately-owned merchant banking firm with principal offices
in San Juan, Puerto Rico, that also provides financial advisory and investment
banking services to small and middle market businesses and investor groups. SJ
Holdings has not previously provided any financial advisory services to Margo or
itract.
III-5
Chapter Three -- The Sale of Margo's Assets
However, in the ordinary course of business, an affiliate of SJ Holdings
holds accounts for customers that may, at any time, hold a position in Margo's
common stock.
For purposes of its opinion and in connection with its review of the sale of
the assets, SJ Holdings reviewed and analyzed, among other things, the stock
purchase agreement with Empresas Margo, some publicly available business
and financial information relating to Margo and Margo's financial forecasts. SJ
Holdings had discussions with some officers of Margo about the business and
prospects of Margo. SJ Holdings also considered other information, financial
studies, analyses, investigations and financial, economic and market criteria
that it deemed relevant. At the request of Margo's board of directors, SJ
Holdings solicited indications of interest in acquiring Margo's assets from U.S.
nursery companies and other third parties identified to it by Margo.
In connection with its opinion, with Margo's permission and without any
independent verification, SJ Holdings relied on the accuracy and completeness of
all the financial and other information reviewed by it, furnished, or otherwise
communicated to it by Margo or obtained by SJ Holdings from publicly available
sources. SJ Holdings did not make an independent valuation or appraisal of the
assets or liabilities of Margo and was not furnished with any such valuation or
appraisal. Any inaccuracies in the information on which SJ Holdings relied could
materially affect its opinion.
In conjunction with rendering its written opinion dated June 30, 2000 to the
board of directors of Margo, SJ Holdings presented an oral summary of its
analysis to the Board on June 6, 2000. Set forth below is a brief summary of the
analyses performed by SJ Holdings in reaching its June 30, 2000 opinion.
Historical Trading Valuation Analysis.
-------------------------------------
Under this approach, SJ Holdings reviewed the historical trading prices of
Margo's common stock for the period from June 1997 through February 8, 2000, the
date of the announcement of the itract merger, and analyzed the implied premium
of Empresas Margo's offer to Margo's market capitalization during these periods.
For purposes of this analysis, SJ Holdings assumed Empresas Margo's offer to be
$5,600,000, consisting of $5,000,000 in cash plus the assumption of $600,000 in
debt. The results of this analysis are summarized in the following table:
[Enlarge/Download Table]
Premium
--------------------------
Period Average Market Capitalization Amount Percent
---------------------------- ----------------------------- ------------ ---------
1997 (June to December) $4,264,475 $ 1,335,525 36.8%
1998 $4,021,496 $ 1,578,504 45.7%
1999 $4,675,094 $ 924,906 21.1%
2000 (January to February 8) $6,765,611 $(1,165,611) --
Empresas Margo's offer represents an average premium of approximately 37%,
46% and 21% during the years 1997, 1998 and 1999, respectively. Based on these
premiums, SJ Holdings believes that Empresas Margo's offer, as compared to
Margo's historical market capitalization, is reasonable. Although there is no
implied premium for the period from January 2000 to February 8, 2000, SJ
Holdings believes that Margo's stock price for this period reflected speculation
related to the itract merger and therefore is not indicative of Margo's
intrinsic value.
Acquisition Premium Over Public Market Valuation Analysis.
---------------------------------------------------------
Under this approach, SJ Holdings analyzed selected publicly announced
acquisition transactions during the period from January 1996 through June 2000
for companies in comparable industry groups, since there was no public
acquisition transaction in Margo's same industry group. SJ Holdings further
analyzed which specific transactions were more closely related to Margo's
business operations. SJ Holdings determined that target companies in the
following comparable industry groups were most closely related to Margo's
business: wholesale food products, wholesale natural and organic food products
and wholesale and retail general merchandise. For these companies, SJ Holdings
analyzed the premium of the offer price over the public market price one month
prior to the announcement date. This analysis showed a mean premium of 21.4% and
a median premium of 23.5% over
III-6
Chapter Three -- The Sale of Margo's Assets
the public trading price of these companies one month prior to announcement of
the proposed transactions. Based on these acquisition premiums, SJ Holdings
derived a range of market valuations for Margo ranging from $5.7 million to $5.8
million. SJ Holdings discounted these valuations by applying discount rates of
10%, 15% and 20% which it believed, based on its experience, would be reasonable
discounts due to the fact that the terms of the stock purchase agreement with
Empresas Margo does not contain any indemnification by Margo for breach of
representations and warranties, which would have been typical in transactions of
this nature but was not permitted by the terms of the itract merger agreement.
This analysis resulted in an adjusted implied valuation of Margo of between $4.5
million and $5.2 million.
Comparable Public Company Analysis.
----------------------------------
SJ Holdings analyzed some financial information of the following comparable
public companies in the nursery and florist business: Callaway's Nursery Inc.,
Dimon, Inc., Griffin Land & Nurseries, Hines Horticulture and USA Floral
Products, Inc. SJ Holdings considered the mean and median range of the market
value of these companies to their sales, assets, book value, tangible book value
and earnings before interest, taxes, depreciation and amortization, as shown in
the following table:
Market Value as Multiple of
-----------------------------------------------------------
Tangible
Sales EBITDA Assets Book Value Book Value
Mean 0.3 3.7 0.2 0.7 0.1
Median 0.2 2.8 0.3 0.6 0.2
Based on this analysis, SJ Holdings determined that the measure of market
value to book value represents a reasonable valuation measure for Margo.
Applying to Margo's book value the mean and median ranges of the comparable
public companies' ratio of market value to book value, and factoring acquisition
premiums ranging from 14% to 24% derived from the analysis of publicly announced
transactions, provided an implied acquisition value of Margo from $4.3 million
to $5.7 million. Discounting these valuations for the lack of indemnification in
the stock purchase agreement as discussed above, the valuation under this
analysis ranges from $3.4 million to $5.1 million.
No company or transaction used in the above analyses is identical to Margo.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other facts that
could affect the public trading value of the companies to which Margo is being
compared.
Discounted Cash Flow Analysis.
-----------------------------
Under this approach, SJ Holdings analyzed the financial and operational
projections provided by Margo's management and performed discounted cash flow
analyses. SJ Holdings discounted Margo's projected earnings for the years 2000
through 2004 under three scenarios, assuming that Margo grows at 50%, 75% and
100% of management's projected levels. SJ Holdings also applied a multiple of
6.4x to Margo's projected EBITDA for 2004 to obtain a terminal value. SJ
Holdings applied discount rates to the projected earnings ranging from 20% to
25% in order to reflect the risk in Margo's cash flows and the lack of
indemnification to Empresas Margo. Assuming that Margo's sales grow at 75% of
their projected level, and applying the discount rates of 20% and 25% mentioned
above, Margo's valuation ranges from $4.9 million to $5.8 million. The
projections used were based on numerous variables and assumptions which are
inherently unpredictable and must be considered not certain of occurrence as
projected.
Analysis of Market Solicitation of Indications of Interest.
----------------------------------------------------------
As previously discussed, SJ Holdings solicited indications of interest from
selected U.S. and Puerto Rico based potential buyers. Besides Empresas Margo's
offer, this solicitation resulted in only one indication of interest for
approximately $4 million.
III-7
Chapter Three -- The Sale of Margo's Assets
The material analyses performed by SJ Holdings have been summarized above.
Nonetheless, the summary set forth above does not purport to be a complete
description of the analyses performed by SJ Holdings. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances. Therefore, a fairness opinion is not readily
susceptible to a summary description. SJ Holdings did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness. Rather, in reaching its conclusion, SJ
Holdings considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. SJ Holdings did not place a particular reliance or weight on any
particular analysis, but instead concluded that its analyses, taken as whole,
supported its determination.
SJ Holdings' opinion does not address the relative merits of the itract
merger as compared to any alternative business strategies that might exist for
Margo or the effect of any other business combination in which Margo might
engage.
Pursuant to the terms of SJ Holdings' engagement, Margo has agreed to pay SJ
Holdings a fee of $25,000 in connection with its rendering of the fairness
opinion. Margo has also agreed to pay SJ Holdings for its financial advisory
services in connection with the sale of the assets an additional fee of $50,000
contingent on the closing of the sale. Margo also has agreed to reimburse SJ
Holdings for reasonable out-of-pocket expenses incurred by it in performing its
services, including fees and expenses for legal counsel, and to indemnify SJ
Holdings and certain related persons and entities against certain liabilities,
including liabilities under the federal securities laws, arising out of SJ
Holdings' engagement. In the ordinary course of its business, SJ Holdings and
its affiliates may actively trade the equity securities of Margo for their own
accounts and for the accounts of customers and, accordingly, may at any time
hold long or short positions in Margo's securities.
III-8
Chapter Four -- The Merger with the New Delaware Holding Company
CHAPTER FOUR
THE MERGER WITH THE NEW DELAWARE HOLDING COMPANY
General
This proxy statement/prospectus is being furnished to Margo shareholders in
connection with the solicitation of proxies by Margo's board of directors from
Margo shareholders for use at the special shareholders' meeting to be held on
________, 2001. This proxy statement/prospectus also constitutes a prospectus of
iTract, Inc., the new Delaware holding company, which is part of a registration
statement on Form S-4 filed with the SEC under the Securities Act, in order to
register the shares of iTract, Inc. common stock to be issued to the holders of
shares of Margo common stock and holders of itract membership units.
Background of the Transaction
Since the early part of 1998, the board of directors of Margo determined that
it had to seek alternatives to enhance shareholder value. Margo began by looking
for ways to become more efficient such as eliminating its unprofitable Florida
operations. These efforts began to bear results with sales increasing by 16%
during 1999 and the net losses from operations being reduced to $128,000 for
1999, compared to $1,113,000 for 1998. The board also examined the possibility
of diversifying into real estate development. Puerto Rico's residential
construction market has experienced various years of strong growth. To this end,
Margo organized a real estate development company in the early part of 1998 and
in August 1999 Margo optioned a 109 acre site for possible development as a real
estate project. Despite these efforts the stock price of Margo continued to
trade below book value.
During the later part of December 1999, Michael J. Spector, the Chairman of
the Board and Chief Executive Officer of Margo, was approached by Alan Stahler,
an investment banker based in New York City. Mr. Stahler asked Mr. Spector
whether Margo would consider the possibility of merging with an early-stage
Internet company. Mr. Stahler is the son-in-law of J. Morton Davis, the sole
shareholder of D.H. Blair Investment Banking Corporation, which owns
approximately 9.8% of Margo's outstanding common stock prior to the contemplated
transactions.
Mr. Stahler explained that this type of transaction would allow Margo
shareholders the ability to participate at an early stage in an Internet
company. It would also provide the Internet company with a vehicle for becoming
a publicly held company without some of the costs and uncertainties involved in
a public offering.
On December 30, 1999, Mr. Spector met in New York City with Mr. Davis and Mr.
Henry Kaufthiel, Chairman of ICES. ICES owns equity interests in various
early-stage Internet companies that it helps develop. Mr. Davis, through several
entities which he controls, and together with several family members,
beneficially owns, inclusive of shares that may be acquired upon the exercise of
warrants, approximately 50.8% of ICES' outstanding shares of Class A common
stock, which constitutes approximately 20.5% of the outstanding voting shares of
ICES. ICES through another entity owns approximately 92% of the equity interests
of itract. At the meeting, Mr. Kaufthiel explained to Mr. Spector the various
Internet businesses that were being developed by ICES.
During the first two weeks of January 2000, Mr. Spector met various times
with Margo's outside counsel as well as with Blas Ferraiuoli and Michael Rubin,
two of Margo's outside directors, to generally discuss the type of transaction
that Margo might engage in with one of the Internet companies affiliated with
ICES. Mr. Spector outlined that ICES was proposing having one of their Internet
companies engage in a reverse merger with Margo. Mr. Spector explained that
typically a reverse merger involves a privately-held operating company merging
into a publicly held shell company with no operations. As part of the merger,
the amount of shares the shell company issues to the shareholders of the
operating company is an amount that allows them to become the majority
shareholders of the surviving company in the merger. The reverse merger allows
the operating company access to the public securities markets without incurring
the cost associated with a registered underwritten public offering. It also
provides the operating company with access to the capital or cash resources held
by the shell company.
Mr. Spector then explained that since Margo was an operating company, it
would have to sell its operating assets prior to the reverse merger. In that way
it would also obtain the cash that the privately held operating company would
require.
IV-1
Chapter Four -- The Merger with the New Delaware Holding Company
On January 18, 2000, Mr. Spector met in New York with Mr. Stahler, Mr. Davis
and Mr. Kaufthiel and other representatives of ICES. At the meeting,
representatives of itract presented their business plan for the first three
years of operations.
On January 19, 2000, Mr. Davis informed Mr. Spector that he felt that itract
would be willing to pursue a reverse merger transaction with Margo in which the
members of itract would receive approximately 88% of the outstanding common
stock of the resulting company in the merger. Mr. Davis explained to Mr. Spector
that among the various Internet companies owned by ICES, itract was the most
suitable candidate for a reverse merger because its business was attractive and
at a stage where it required the capital that would be available to it as a
result of the reverse merger in order to complete the development of its system
to commence commercial operations.
During the next two weeks, Mr. Spector discussed the idea of a possible
reverse merger with members of Margo's board of directors and outside attorneys.
During this period, Mr. Spector requested more detailed financial projections
from itract, which he received on January 27, 2000.
During the week of January 31, 2000 Mr. Spector invited Mr. Kaufthiel and
other members of the itract management to come to Puerto Rico and make a
detailed presentation to Margo's board of directors. Mr. Spector also invited
Mr. Stahler and Mr. Davis to attend the meeting.
Mr. Kaufthiel accepted Mr. Spector's invitation and itract made a
presentation of its business plan and projections to Margo's board of directors
on February 7, 2000 in San Juan, Puerto Rico. Immediately following the meeting,
Margo's board of directors held a special meeting and authorized Mr. Spector to
negotiate and execute a non-binding letter of intent with itract. Negotiations
between the parties continued during February 7 and February 8 and a non-binding
letter of intent was executed in the evening of February 8, 2000. Under the
terms of the letter of intent, the holders of membership units of itract were
entitled to receive approximately 88% of the outstanding common stock of Margo
following the merger.
On February 10, 2000, Margo's board of directors voted to create a committee
consisting of its independent board members to review the proposed transaction
with itract. On March 9, 2000, Margo retained the services of the Schwartz
Heslin Group, Inc., an independent investment banking firm, to render an opinion
on the fairness of the proposed merger to Margo's shareholders from a financial
point of view.
In the weeks following the signing of the letter of intent, representatives
of Margo and itract conducted due diligence investigations, studied the tax
implications of the transaction and negotiated the terms of the merger
agreement. On April 4, 2000, Margo's board of directors held a special meeting
to review the recommendations of the special committee and the report made by
the Schwartz Heslin Group, Inc. The board subsequently voted to approve the
merger agreement, subject to any minor changes management might deem advisable.
As part of the study of the tax consequences of the transaction, Margo was
advised by its counsel that in order for the reverse merger with itract to
qualify as a tax-free exchange for federal income tax purposes, Margo would
first have to merge with a corporation organized under a state of the United
States. This was due to the fact that Margo, as a Puerto Rico corporation, is
treated as a foreign corporation under the U.S. internal revenue code. Thus, a
merger of Margo or a subsidiary of Margo with and into itract would have been a
taxable transaction to itract's members for federal income tax purposes. Since
one of the conditions of itract's members for doing the transaction was that it
be tax-free, Margo decided to first merge with and into a Delaware corporation.
For this purpose, Margo then organized iTract, Inc. as a wholly-owned
subsidiary.
As part of its due diligence review, Margo discussed with itract's management
that the approximately $1,000,000 owed at that time by itract to ICES and its
affiliated entities for services rendered during the development of the itract
system reduced the value of itract. As a result of this debt, the parties agreed
that the percentage ownership to be received by the members of itract should be
reduced from 88% to 86.8%. A special board meeting was held on April 11, 2000 to
approve the final terms of the merger agreement. Margo's board of directors once
again approved the agreement and the merger agreement was executed in the
evening of April 11, 2000.
IV-2
Chapter Four -- The Merger with the New Delaware Holding Company
Recommendations of Margo's Board of Directors and Reasons for the Transaction
Margo's board of directors believes that the proposed transactions are fair
to, and in the best interests of, Margo and its shareholders. Accordingly,
Margo's board of directors has unanimously approved the merger agreement with
iTract, Inc., the new Delaware holding company, and the stock purchase agreement
with Empresas Margo, Inc. and recommends that Margo shareholders vote FOR the
approval and adoption of those agreements and the transactions contemplated
thereby.
Margo's board of directors believes that the consummation of the proposed
transactions present an opportunity for Margo shareholders to participate in a
growing sector of commerce and the economy--the Internet.
In reaching its decision to approve the sale of substantially all of Margo's
assets and the merger with the new Delaware holding company and recommend their
approval to Margo's shareholders, Margo's board of directors consulted with
Margo's management, as well as with its financial and legal advisors, and
considered a variety of factors, including the following:
o Market prices of its common stock over recent periods. The board
considered that Margo's common stock has historically traded at a
discount to its book value, and that many times the discount has been
substantial. The board did not have any reason to believe that this
trend was likely to change in the foreseeable future. As a result, the
board felt that the proposed transaction presented the best way to
maximize the value of Margo shareholders' investment in the company.
o The business prospects of its existing nursery and related operations.
The board considered that the nursery business has not been growing in
the United States or Puerto Rico and that Margo had not been profitable
during recent years.
o Margo's going concern value. The board considered that if Margo were to
sell its business as a going concern, it was unlikely that it would
obtain an attractive offer due to the limited number of persons that
could be interested in purchasing a nursery business in Puerto Rico.
o Margo's inability to obtain crop insurance for damage caused by
hurricanes. The board considered the fact that Margo's inability to
obtain crop insurance during the past several years subjected the
business and its shareholders to a significant risk of loss due to
damages caused by hurricanes.
o The future prospects of itract in the Internet marketing business, as
contemplated by itract's business plan. The board analyzed itract's
business plan and its proposed technology and concluded that it
presented an attractive opportunity for Margo's shareholders to
participate in the developing industry of Internet marketing.
o A review of possible alternatives, including continuing as a publicly
or privately held corporation. The board considered the low stock
prices of Margo in recent years and the costs related to continuing as
a public corporation. In particular, the board believed that Margo does
not have the need to access the capital markets to fund its operations
that justifies the costs of being a public company. The board
considered that the proposed transaction provides Margo shareholders
with an attractive opportunity of exiting the nursery business and
obtaining a higher value for their shares than they would otherwise
obtain if Margo was taken private or sold to a third party.
o The written opinion of Schwartz Heslin Group, Inc. The board considered
the opinion of Schwartz Heslin that the conversion ratio is fair, from
a financial point of view, to Margo's shareholders. A copy of this
opinion, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix D to this
proxy statement/prospectus and is incorporated by reference.
o The structure and terms of the merger agreement with itract. The board
studied the provisions of the merger agreement and concluded that they
were fair to and in the best interests of Margo shareholders. In
particular, the board considered that (1) the merger agreement contains
an adequate lock-up period of eight months for itract's members, (2)
Margo's obligation to merge with itract was conditioned on Margo being
able to find a buyer for the nursery operations, (3) any issuance of
itract units or grant of
IV-3
Chapter Four -- The Merger with the New Delaware Holding Company
options to purchase itract units prior to the merger would not dilute
Margo shareholders, and (4) if Margo is unable to satisfy the
conditions to their obligation to consummate the merger, the maximum
liability is limited to $100,000.
The above discussion of the information and factors considered by Margo's
board of directors is not intended to be exhaustive, but includes all material
factors considered by the board. In reaching its determination to approve and
recommend the merger, Margo's board of directors did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors. Margo's board of directors
unanimously recommends that Margo shareholders vote FOR adoption and approval of
the transactions contemplated by the merger agreement.
Opinion of Financial Advisor Regarding Merger with itract
Margo retained Schwartz Heslin Group, Inc. ("Schwartz Heslin") to act as its
financial advisor to render a fairness opinion in connection with the itract
merger, based on Schwartz Heslin's qualifications, expertise and reputation. On
April 11, 2000, Schwartz Heslin rendered to Margo's board of directors its
written opinion that, as of that date and based upon the considerations set
forth in the opinion, the itract merger was fair from a financial point of view
to the holders of the shares of Margo's common stock. The full text of the
Schwartz Heslin opinion is attached as Appendix D to this proxy
statement/prospectus.
Margo's stockholders are urged to read the opinion carefully and in its
entirety. The Schwartz Heslin opinion is directed to Margo's board of directors,
addressed only the fairness of the itract merger transaction from a financial
point of view to the holders of the shares of Margo common stock, and does not
address any other aspect of the itract merger or constitute a recommendation to
any of Margo's stockholders or the members of itract as to how they should vote
on the merger. The opinion speaks only as of its date and Schwartz Heslin is
under no obligation to confirm its opinion as of a later date. This summary is
qualified in its entirety by reference to the full text of the opinion.
Pursuant to an engagement agreement dated March 8, 2000, Schwartz Heslin was
engaged by Margo's board of directors to render an opinion as to whether the
itract merger was fair to the shareholders of Margo from a financial point of
view. In rendering the opinion, it was Schwartz Heslin's understanding that the
itract merger is the merger of a subsidiary of iTract, Inc., the new Delaware
holding company, with itract whereby iTract, Inc. would acquire itract in an all
stock transaction. In the merger of Margo with iTract, Inc., Margo's existing
common stock would be exchanged for shares of common stock of iTract, Inc.
itract's members would receive shares of iTract, Inc. common stock representing
86.8% of iTract, Inc.'s common stock after the itract merger on a fully diluted
basis.
Schwartz Heslin is a firm that provides a broad range of financial consulting
and advisory services. Schwartz Heslin has been engaged in a number of
transactions to render valuation and fairness opinions for both private and
public companies. Schwartz Heslin has previously not provided any financial
advisory services to Margo or itract.
For purposes of its opinion and in connection with its review of the itract
merger, Schwartz Heslin reviewed and analyzed, among other things, the
following:
o the itract merger agreement;
o the letter of intent, dated February 8, 2000;
o itract's Business Plan, dated March 17, 2000;
o internal information, financial and operational in nature, including
projections prepared by management of itract and ICES, concerning the
business and operations of itract;
o the unaudited balance sheet and income statement of itract as of
February 29, 2000; and
o audited financial statements for Margo for the years ended December 31,
1999 and 1998.
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Chapter Four -- The Merger with the New Delaware Holding Company
Schwartz Heslin considered other information, financial studies, analyses,
investigations and financial, economic and market criteria that it deemed
relevant. Schwartz Heslin also had discussions with some officers and employees
of Margo and itract to review the foregoing as well as other matters it believed
relevant to its analysis.
In connection with its opinion, with Margo's permission and without any
independent verification, Schwartz Heslin relied on the accuracy and
completeness of all the financial and other information reviewed by it,
furnished, or otherwise communicated to it by Margo or obtained by Schwartz
Heslin from publicly available sources. Schwartz Heslin did not make an
independent valuation or appraisal of the assets or liabilities of Margo and was
not furnished with any such valuation or appraisal. Any inaccuracies in the
information on which Schwartz Heslin relied could materially affect its opinion.
In conjunction with rendering its written opinion dated April 11, 2000 to the
board of directors of Margo, Schwartz Heslin presented an oral summary of its
analysis to the Board on April 4, 2000. Set forth below is a brief summary of
the analyses performed by Schwartz Heslin in reaching its April 11, 2000
opinion.
Market Approach.
---------------
Under this approach, Schwartz Heslin used three valuation methods:
1. the guideline company method,
2. the merger and acquisition method, and
3. the industry performance guideline method.
Guideline Company Method. This valuation method is based on the premise that
pricing multiples of publicly traded companies can be used as a tool in valuing
a closely held or start-up venture business. Under this method, Schwartz Heslin
selected six companies that provide a broad range of marketing and business
services, some of which were to be provided by itract. Using publicly available
information on these six companies, Schwartz Heslin calculated median market
multiples (as of March 31, 2000) based on the ratio of market value to revenues,
earnings before interest and taxes ("EBIT") and net income. It is important to
note that no company used or referenced in this analysis is identical to Margo,
itract or the merged company. The comparable public companies were:
o Clickaction, Inc.,
o Doubleclick, Inc.,
o Siebel Systems, Inc.,
o Digital Impact, Inc.,
o Exactis.com, Inc., and
o 24/7 Media, Inc.
The following multiples for these comparable companies were calculated:
Market Value as a Multiple of: Median
Revenue
Most recent year 36.21
Two year average 51.05
Three year average 70.05
EBIT
Most recent year (43.95)
Two year average (68.04)
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Chapter Four -- The Merger with the New Delaware Holding Company
Three year average (83.73)
Net Income
Most recent year (43.95)
Two year average (68.04)
Three year average (83.26)
Schwartz Heslin assigned more weight to the most recent year multiples
because those should better represent future performance. Applying these
multiples to itract's projected revenues, EBIT and net income, and weighting the
resulting value for each multiple equally, produced a potential value for itract
of $119 million.
Merger and Acquisition Method. Under this method, Schwartz Heslin determined
price multiples for selected similar businesses that have recently been sold.
The price multiples used were:
o price to total assets, finding a multiple range of 2.53 to 22.6,
o price to equity, finding a multiple range of 4.23 to 29.3, and
o price to revenue for each of three projected years, weighted more for
the first year, finding a multiple range of 1.50 to 5.2.
The median multiples calculated were applied to the projected itract values.
Each multiple was also weighted based on observations of current Internet
company valuations. The application of this method produced a potential value
for itract of $43 million.
Industry Performance Guideline Method. Under this method, industry multiples
were selected for similar businesses that have publicly available financial
information. The price multiples used were:
o price to total assets, finding a multiple of 17.45,
o price to equity, finding a multiple range of 6.44 to 18.43, and
o price to revenue for each of three projected years, weighted more for
the first year, finding a multiple range of 2.99 to 9.66.
The median multiples calculated were applied to the projected itract values.
Each multiple was also weighted based on observations of current Internet
company valuations. The application of this method produced a potential value
for itract of $90.5 million.
Income Approach.
---------------
Under the income approach, Schwartz Heslin performed a discounted cash flow
analysis of itract based on the forecasted information provided by itract's
management. The projected cash flows were discounted to present values using a
discount rate of 33.41%, which reflect different assumptions regarding the
required rates of return of holders and prospective buyers of iTract, Inc.
common stock. The application of this method produced a potential value for
itract of $41 million.
Implied Market Value.
--------------------
Schwartz Heslin considered the public market's reaction to the announcement
of the itract merger. The publicly traded stock of Margo rose substantially
after the announcement of the itract merger, indicating that the market views
the itract merger favorably. The price of Margo's common stock increased from
$5.75 per share immediately prior to the announcement to $35 per share shortly
after the announcement, and closed at $17 per share on February 9, 2000, the day
of the announcement. The stock price fluctuated between approximately $11 and
$30 per share from February 10, 2000 to March 31, 2000, on relatively low
volume. The volatility in the stock price tends to indicate that trading in
Margo's common stock is being done in a highly speculative manner with respect
to the value of itract. Nevertheless, the trading prices for Margo's common
stock provides an indication of the perceived value of itract, although not
necessarily its fair value. Using the implied premium on Margo's common stock
price
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Chapter Four -- The Merger with the New Delaware Holding Company
due to the announcement, based on the difference between the price per share of
Margo's common stock on March 31, 2000 and on February 8, 2000, the day prior to
the announcement, Schwartz Heslin obtained a potential value for itract of $38
million.
Valuation Summary.
-----------------
Schwartz Heslin applied different weights to the itract potential values
obtained from the valuation analyses described above, as shown in the following
table. Schwartz Heslin determined the weighting factors based on its experience
as to which of the valuation methods is more relevant for valuing a start-up
company such as itract.
Valuation Summary
March 31, 2000
(in millions)
Potential Weighting Weighted
Value Factor Potential Value
----------- ----------- ---------------
MARKET APPROACH
Guideline Company Method $119.0 10.0% $11.9
Merger & Acquisition Method $ 43.0 45.0% $19.4
Industry Performance $ 90.5 10.0% $ 9.1
INCOME APPROACH
Discounted Future Cash Flow Method $ 41.0 25.0% $10.2
IMPLIED MARKET VALUE OF ITRACT $ 38.0 10.0% $ 3.8
TOTAL WEIGHTED POTENTIAL
VALUE 100.0% $54.4
MEDIAN OF ALL POTENTIAL
VALUES $46.5
TOTAL UNWEIGHTED AVERAGE $63.5
As shown in the preceding table, Schwartz Heslin determined that the weighted
potential value of itract is $54.4 million, while the mean of all potential
values is $46.5 million.
No company or transaction used in the above analyses is identical to Margo,
itract or the itract merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other facts that could affect the public trading value of the
companies to which they are being compared.
The material analyses performed by Schwartz Heslin have been summarized
above. Nonetheless, the summary set forth above does not purport to be a
complete description of the analyses performed by Schwartz Heslin. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances. Therefore, a fairness opinion is
not readily susceptible to a summary description. Schwartz Heslin did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness. Rather, in reaching
its conclusion, Schwartz Heslin considered the results of the analyses in light
of each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. Schwartz Heslin did not place a particular reliance
or weight on any particular analysis, but instead concluded that its analyses,
taken as whole, supported its determination.
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Chapter Four -- The Merger with the New Delaware Holding Company
In performing its analyses, Schwartz Heslin made numerous assumptions with
respect to itract's performance, general business and economic conditions and
other matters. The analyses performed by Schwartz Heslin are not necessarily
indicative of future actual values or future results, which may be significantly
more or less favorable than suggested by those analyses. The analyses do not
purport to be appraisals or to reflect prices at which a company might actually
be sold or the prices at which any securities may trade at the present time or
at any time in the future. Schwartz Heslin used in its analyses various
projections of future performance prepared by the management of itract. The
projections were based on numerous variables and assumptions which are
inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those
assumed in the projections and any related analyses. Schwartz Heslin has not
expressed an opinion or given any form of assurance for the underlying data
presented in their opinion and/or their valuation report nor has Schwartz Heslin
expressed any opinion or given any form of assurance that itract can achieve its
business plan. Furthermore, Schwartz Heslin's opinion does not address the
relative merits of the itract merger as compared to any alternative business
strategies that might exist for Margo or the effect of any other business
combination in which Margo might engage.
Pursuant to the terms of Schwartz Heslin's engagement, Margo has agreed to
pay Schwartz Heslin for its financial advisory services in connection with the
fairness opinion an aggregate fee of $25,000. Margo also has agreed to reimburse
Schwartz Heslin for reasonable out-of-pocket expenses incurred by it in
performing its services, including fees and expenses for legal counsel and other
advisors, and to indemnify Schwartz Heslin and certain related persons and
entities against certain liabilities, including liabilities under the federal
securities laws, arising out of Schwartz Heslin's engagement.
Terms of the Merger Agreement with iTract, Inc.
This section of the proxy statement/prospectus describes material provisions
of the merger agreement with iTract, Inc. The description of the merger
agreement contained in this proxy statement/prospectus does not purport to be
complete. For a complete understanding of the terms and conditions of the merger
agreement, all of Margo's shareholders are urged to read the entire merger
agreement, attached as Appendix A to this proxy statement/prospectus carefully
and in its entirety.
General
iTract, Inc., a corporation organized under the laws of the State of
Delaware, was established to accomplish the merger of Margo into a Delaware
corporation pursuant to the proposed merger of Margo and iTract, Inc. As a
result of this merger, all current Margo shareholders will have the same equity
interest in iTract, Inc. as they now have in Margo. However, upon consummation
of the merger of a subsidiary of iTract, Inc. with itract, Margo shareholders
will own, on a fully diluted basis, 13.2% of the outstanding common stock of
iTract, Inc. Prior to the consummation of the proposed merger, Margo will have
sold substantially all of its assets pursuant to the stock purchase agreement
with Empresas Margo, Inc.
Upon consummation of the proposed merger, Margo will be merged with and into
iTract, Inc., with iTract, Inc. being the surviving corporation of the merger.
All holders of Margo common stock will become holders, on a share- for-share
basis, of shares of common stock of iTract, Inc. having the same rights with
respect to iTract, Inc. as their shares of Margo common stock now have with
respect to Margo. iTract, Inc. will succeed to all rights, assets, liabilities
and obligations of Margo. The closing of this merger would occur immediately
prior to the closing of the merger of a subsidiary of iTract, Inc. with itract.
Purpose
The reason for the reincorporation of Margo as a Delaware corporation is that
it allows the merger with itract, as discussed below, to qualify as a tax-free
exchange for most of the members of itract for federal income tax purposes.
Also, Delaware is one of the preferred jurisdictions for public companies
because of its established body of corporate law. Thus, Margo and itract believe
that being a Delaware corporation will help iTract, Inc.'s ability to obtain
debt and equity financing in the future.
Conversion of Shares
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Chapter Four -- The Merger with the New Delaware Holding Company
Pursuant to the terms and conditions of the merger agreement, each share of
Margo common stock, $0.001 par value, which is outstanding immediately prior to
the merger will be converted into one share of common stock, $0.001 par value,
of iTract, Inc. having the same rights, powers, qualifications, limitations and
restrictions with respect to iTract, Inc. as the Margo common stock presently
has with regard to Margo.
It will not be necessary for shareholders to surrender their certificates.
Certificates representing Margo common stock will be deemed to be certificates
for an equal number of shares of iTract, Inc. common stock. After the merger,
certificates that previously represented Margo common stock will be replaced by
certificates representing iTract, Inc. common stock when submitted to the
transfer agent with a request that they be so replaced or when presented for
transfer. If any certificate is to be reissued in a name other than that in
which the certificate surrendered is registered, the person requesting the
exchange shall pay any transfer or other taxes incident thereto.
Conditions of Merger
Consummation of the merger with iTract, Inc. is subject to fulfillment, on or
before the effective time of the merger, of the following conditions:
o approval by the holders of a majority of the outstanding shares of Margo
common stock, and
o receipt of a ruling from the Puerto Rico Treasury Department to the effect
that the merger constitutes a tax-free reorganization under the Puerto
Rico Internal Revenue Code of 1994, as amended.
Termination
At any time prior to the consummation of the merger, the merger agreement may
be terminated and the merger abandoned by the board of directors of Margo. The
board of directors would abandon the merger if the conditions set forth above
are not satisfied.
Stock Options
All options to purchase Margo common stock outstanding as of the effective
time of the merger shall, by virtue of the merger and without any further action
on the part of Margo or the holders of the options, be converted into the
options to acquire the same number of shares of iTract, Inc. common stock and
for the same exercise price.
Dissenters' Rights of Appraisal
Pursuant to Section 10.12 of the Puerto Rico General Corporations Law of 1995
("PRGCL"), the holder of record of any shares of Margo common stock who does not
vote the holder's shares in favor of adoption and approval of the merger
agreement with iTract, Inc. may assert appraisal rights and elect to have the
"fair value" of the holder's shares of Margo common stock determined and paid to
it, provided that the holder complies with the requirements of Section 10.12 of
the PRGCL, summarized below. All references to and summaries of the rights of
Margo dissenting shareholders are qualified in their entirety by reference to
the text of Section 10.12 of the PRGCL which is attached to this proxy
statement/prospectus as Appendix F.
Any shareholder entitled to vote on the merger of Margo with iTract, Inc. who
desires that Margo purchase the shares of Margo common stock held by it (the
"dissenting shares") must not vote in favor of adoption and approval of the
merger. Shares of Margo common stock voted in favor of adoption and approval of
the merger will be disqualified as dissenting shares.
Shareholders whose shares are not voted in favor of adoption and approval of
the merger and who, in all other respects, follow the procedures specified in
Section 10.12 of the PRGCL, will be entitled to have their Margo common stock
appraised by the Puerto Rico Court of First Instance (the "Court") and to
receive payment of the "fair value" of these shares, exclusive of any element of
value arising from the accomplishment or expectation of the merger, as
determined by the Court. The procedures set forth in Section 10.12 of the PRGCL
must be strictly complied with. Failure to follow those procedures will result
in a termination or waiver of the shareholders' appraisal rights under Section
10.12 of the PRGCL.
Under Section 10.12 of the PRGCL, a holder of Margo common stock electing to
exercise appraisal rights must:
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Chapter Four -- The Merger with the New Delaware Holding Company
1. Deliver to Margo, before taking of the vote on the merger, a written
demand for appraisal of the holder's Margo common stock which reasonably
informs Margo of the identity of the shareholder of record and that the
record shareholder intends to demand appraisal of the holder's shares. The
written demand is in addition to and separate from any consent or vote
with respect to the merger. Neither a vote against, nor abstention from
voting with respect to the merger, nor a failure to consent to the merger,
will satisfy the requirement that a written demand for appraisal be
delivered to Margo before the vote on the merger. The written demand for
appraisal should be delivered either in person to the Secretary of Margo,
or by mail to Road 690, Kilometer 5.8, Vega Alta, Puerto Rico 00692,
Attention: Secretary of Margo, prior to _______, 2000; and
2. Not vote in favor of, or consent in writing to, the merger. A failure to
vote against the merger, or not respond to a request for written consent,
will not constitute a waiver of appraisal rights.
The written demand for appraisal must be made by or for the holder of record
of shares of Margo common stock. Accordingly, the demand must be executed by or
for the shareholder of record, fully and correctly, as the shareholder's name
appears on the stock certificates representing the shares. If the applicable
shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the applicable shares are owned of record by more than one person, as in
a joint tenancy or tenancy in common, the demand should be executed by or for
all joint owners. An authorized agent, including one of two or more joint
owners, may execute the demand for appraisal for a shareholder of record.
However, the agent must identify the record owner(s) and expressly disclose the
fact that, in executing the demand, the agent is acting as agent for the record
owner(s).
A record owner, such as a broker, who holds shares as nominee for other
persons may exercise appraisal rights with respect to the shares held for all or
less than all of these other persons. In this case, the written demand should
set forth the number of shares covered by it. Where no number of shares is
expressly mentioned, the demand will be presumed to cover all of the shares
outstanding in the name of the record owner.
Within 10 days after the effective time of the merger, Margo is required to,
and will, notify each shareholder who has satisfied the foregoing conditions of
the date on which the effective time occurred and that appraisal rights are
available with respect to shares for which a demand has been submitted. Within
120 days after the effective time, Margo, or any shareholder who has satisfied
the foregoing conditions and otherwise is entitled to appraisal rights under
Section 10.12 of the PRGCL, may file a petition in the Court demanding a
determination of the value of the shares held by all shareholders entitled to
appraisal rights. If no petition is filed, appraisal rights will be lost for all
shareholders who previously had demanded appraisal of their shares. Shareholders
of Margo seeking to exercise appraisal rights should not assume that Margo will
file a petition with respect to the appraisal of the value of their shares or
that Margo will initiate any negotiations with respect to the "fair value" of
these shares. Accordingly, these shareholders should regard it as their
obligation to take all steps necessary to perfect their appraisal rights in the
manner prescribed in Section 10.12 of the PRGCL.
Within 120 days after the date of the effective time, any shareholder who has
complied with the applicable provisions of Section 10.12 of the PRGCL will be
entitled, upon written request, to receive from Margo a statement setting forth
the aggregate number of shares not voted in favor of the merger and with respect
to which demands for appraisal were received by Margo, and the number of holders
of these shares. The statement must be mailed within 10 days after the written
request therefor has been received by Margo or within 10 days after expiration
of the period for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on the
petition the Court will determine the shareholders of Margo entitled to
appraisal rights. After determining the shareholders entitled to an appraisal,
the Court will appraise the value of the shares of Margo common stock owned by
these shareholders, determining the "fair value" of these shares exclusive of
any element of value arising from the accomplishment or expectation of the
merger with iTract, Inc. and the transactions described in this proxy
statement/prospectus.
The Court will direct payment by Margo of the fair value of these shares
together with a fair rate of interest, if any, on the fair value to shareholders
entitled to it upon surrender to Margo of stock certificates. The costs of the
proceeding may be determined by the Court and taxed upon the parties as the
Court deems equitable in the circumstances. Upon application of a shareholder,
the Court may, in its discretion, order that all or a portion of the expenses
incurred by any shareholder in connection with an appraisal proceeding,
including, without limitation,
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Chapter Four -- The Merger with the New Delaware Holding Company
reasonable attorneys' fees and fees and expenses of experts, be charged pro rata
against the value of all the shares entitled to appraisal.
Although Margo believes that the merger is fair, no representation is made as
to the outcome of the appraisal of fair value as determined by the Court, and
shareholders should recognize that the appraisal could result in a determination
of a value higher or lower than, or the same as, the consideration to be
received in the merger. Moreover, Margo does not presently anticipate offering
cash consideration in excess of the fair market value of the merger
consideration calculated as of the completion of the merger to any shareholder
exercising appraisal rights, and reserves the right to assert, in any appraisal
proceeding, that, for purposes of Section 10.12 of the PRGCL the "fair value" of
a share of Margo common stock is less than the fair market value of the merger
consideration calculated as of the completion of the merger that would otherwise
be received by this shareholder. In determining the "fair value" of shares of
Margo common stock, the Court is required to take into account all relevant
factors. Therefore, the determination could be based upon considerations other
than, or in addition to, the price paid for shares and the asset value of shares
of Margo common stock, including, without limitation, the market value of shares
and the asset values and earning capacity of Margo. Section 10.12 of the PRGCL
provides that "fair value" is to be "exclusive of any element of value arising
from the accomplishment or expectation of the merger."
Any holder of shares of Margo common stock who has demanded an appraisal in
compliance with Section 10.12 of the PRGCL will not, after the effective time of
the merger, be entitled to vote the holder's shares for any purpose nor be
entitled to the payment of dividends or other distributions on those shares
other than those payable to shareholders of record as of a date prior to the
effective time of the merger.
If no petition for an appraisal is filed within 120 days after the date of
the effective time, or if a holder of shares delivers to Margo a written
withdrawal of the holder's demand for an appraisal and an acceptance of the
merger either within 60 days after the effective time or with the written
approval of Margo after that period, then the right of that shareholder to an
appraisal will cease and the shareholder will receive the merger consideration
for the Margo shares and become a shareholder of iTract, Inc. Margo reserves the
right to give or withhold its written approval after the 60-day period in its
sole discretion. No appraisal proceeding in the Court will be dismissed as to
any shareholder without the approval of the Court, which approval may be
conditioned on those terms as the Court deems just.
Pursuant to an amendment to the merger agreement, any payments required to be
made to Margo stockholders dissenting to the itract merger will be itract's
obligation following the consummation of the itract merger. However, if
stockholders holding in excess of ten percent of Margo's common stock exercise
their appraisal rights, itract may terminate the merger agreement without any
liability or further obligation.
Federal and Puerto Rico Income and Other Tax Consequences of the Merger with the
New Delaware Holding Company
The following discussion summarizes the material Federal and Puerto Rico tax
aspects of the proposed merger of Margo with iTract, Inc. This discussion is
based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), the Puerto Rico Internal Revenue Code of 1994, as amended (the "PR
Code") and the Puerto Rico Municipal Property Tax Act of 1991, as amended (the
"MPTA"), all as in effect on the date of this proxy statement.
Some portions of the discussion are based on the assumption that:
1. at the time of the merger the fair market value of iTract, Inc. common
stock would be approximately equal to the fair market value of Margo
common stock surrendered pursuant thereto;
2. at the time of the merger there is no plan or intention by the
shareholders of Margo to sell, exchange, or otherwise dispose of any
shares of iTract, Inc. received in the merger that would reduce the Margo
shareholders' ownership of iTract, Inc. common stock to a number of shares
having a value, as of the date of the merger, of less than 50% of the
value of all of the formerly outstanding common stock of Margo, including
Margo shares held by dissenters and Margo shares redeemed prior to the
merger, as of the date of the merger;
3. there is no plan or intention to have iTract, Inc. reacquire any of its
common stock issued in the merger;
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Chapter Four -- The Merger with the New Delaware Holding Company
4. the liabilities of Margo assumed by iTract, Inc., plus the liabilities, if
any, to which the assets are subject, were incurred by Margo in the
ordinary course of its business;
5. the fair market value of the assets of Margo transferred to iTract, Inc.
will equal or exceed the sum of the liabilities assumed by iTract, Inc.,
plus the amount of liabilities, if any, to which-the transferred assets
are subject;
6. following the merger, iTract, Inc. would continue to conduct a business;
and
7. Margo, its shareholders and iTract, Inc. would pay their respective
expenses, if any, incurred in connection with the merger.
This discussion does not address all aspects of Federal and Puerto Rico
taxation that may be relevant to a holder of Margo or iTract, Inc. common stock
in light of that shareholder's particular circumstances or to a shareholder
subject to special rules such as:
o an individual shareholder that is not a citizen of the United States;
o a financial institution or insurance company;
o a tax-exempt organization;
o a dealer or broker in securities; or
o a shareholder that holds Margo or iTract, Inc. common stock or that
acquired Margo or iTract, Inc. common stock pursuant to the exercise of
options or otherwise as compensation.
Margo strongly urges each holder of Margo common stock to consult his or her
tax advisor to determine the Federal and Puerto Rico tax consequences of the
merger that may be applicable to the particular shareholder.
Federal Income Tax Consequences
Margo
For purposes of the Code, the merger would be treated as a taxable sale by
Margo of each of its appreciated tangible and intangible assets to iTract, Inc.
in exchange for iTract, Inc. common stock and a distribution by Margo to its
shareholders of iTract, Inc.'s common stock.
Since at the effective time of the merger Margo will be considered a foreign
corporation that is not engaged in a United States trade or business under the
Code, Margo will not be subject to Federal income tax on this gain.
iTract, Inc.
iTract, Inc. would not be required to recognize any gain or loss on the
receipt of Margo's tangible and intangible assets in exchange for iTract, Inc.
common stock.
The Shareholders
The merger would be treated as a taxable exchange for federal income tax
purposes by a shareholder of Margo common stock for iTract, Inc.'s common stock.
Thus, Margo shareholders would generally be required to recognize a gain or loss
on the exchange of the Margo common stock for iTract, Inc.'s common stock under
the Code measured by the difference as of the effective time of the merger
between the fair market value of iTract, Inc.'s common stock received and the
holder's tax basis in the Margo common stock.
Holders of Margo common stock that are corporations organized under the laws
of the Commonwealth of Puerto Rico, would be subject to federal income tax on
gains derived from the exchange of Margo common stock for iTract, Inc.'s common
stock only if the gain is effectively connected to a U.S. trade or business
carried on by the corporation.
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Chapter Four -- The Merger with the New Delaware Holding Company
Gains, if any, from exchange of Margo's common stock for iTract, Inc.'s
common stock by individuals who are bona fide residents of Puerto Rico during
the entire taxable year generally are treated as Puerto Rico source income and
therefore excluded from U.S. Federal income taxation if the Puerto Rico resident
pays a Puerto Rico income tax at an effective rate of at least 10% on the gain.
Because this gain is subject to tax in Puerto Rico at progressive rates that
generally exceed 10%, in many cases it will be excluded from U.S. taxation under
this rule. However, a resident of Puerto Rico who is not subject to a 10% tax on
gain from the sale of the holder's Margo common stock nevertheless may treat the
gain as Puerto Rico source income not subject to U.S. Federal income tax if the
requirements of Notice 89-40 are met. The Code provisions governing the source
of the gain authorizes the Secretary of the Treasury to issue regulations making
the 10% tax requirement inapplicable to bona fide residents of Puerto Rico. In
Notice 89-40, the IRS announced that regulations would be issued that would
provide that gain from the sale of stock individuals who had been bona fide
residents of Puerto Rico for the entire taxable year would be Puerto Rico
source, and therefore excluded from U.S. Federal income taxation, whether or not
the individual paid a 10% on the gain to Puerto Rico. Unless contrary authority
is issued, an individual resident of Puerto Rico who meets the conditions
described in the notice may treat a gain from the exchange of the Margo common
stock for iTract, Inc.'s common stock as Puerto Rico source income.
Dividends Paid by iTract, Inc.
Dividends paid by iTract, Inc. out of its earnings and profits to its
shareholders would constitute ordinary gross income for purposes of the Code.
Sale or Exchange of iTract, Inc.'s common stock
Holders of iTract, Inc.'s common stock would be required to recognize a gain
or loss on the sale, exchange or other disposition of iTract, Inc.'s common
stock for federal income tax purposes under the Code.
Corporations organized under the laws of the Commonwealth of Puerto Rico
would be subject to U.S. Federal income tax on gains derived from the sale,
exchange or other disposition of iTract, Inc.'s common stock only if the gain is
effectively connected to a U.S. trade or business carried on by the corporation.
Gains, if any, from the sale, exchange or other disposition of the iTract,
Inc.'s common stock by individuals who are bona fide residents of Puerto Rico
during the entire taxable year generally are treated as Puerto Rico source
income and, therefore, excluded from U.S. taxation if the Puerto Rico resident
pays a Puerto Rico income tax at an effective rate of at least 10% on the gain.
Because the gain is subject to tax in Puerto Rico at progressive rates that
generally exceed 10%, in many cases it will be excluded from U.S. taxation under
this rule. However, a resident of Puerto Rico who is not subject to a 10% tax on
gain from the sale of the holder's common stock of iTract, Inc. nevertheless may
treat the gain as Puerto Rico source income not subject to federal income tax if
the requirements of Notice 89-40 are met. The Code provisions governing the
source of the gain authorize the Secretary of the Treasury to issue regulations
making the 10% tax requirement inapplicable to bona fide residents of Puerto
Rico. In Notice 89-40, the IRS announced that regulations would be issued that
would provide that gain from the sale of stock by individuals who had been bona
fide residents of Puerto Rico for the entire taxable year would be Puerto Rico
source income, and therefore excluded from U.S. Federal income taxation, whether
or not the individual paid a 10% on the gain to Puerto Rico. Unless contrary
authority is issued, an individual resident of Puerto Rico who meets the
conditions described in the notice may treat a gain from the sale, exchange or
other disposition of the iTract, Inc.'s common stock as Puerto Rico source
income under the Code.
United States Estate and Gift Taxes
The transfer by death or gift of iTract, Inc.'s common stock is generally
subject to federal estate and gift taxes under the Code.
Puerto Rico Tax Consequences
Income Tax
Margo, iTract, Inc. and the Shareholders
IV-13
Chapter Four -- The Merger with the New Delaware Holding Company
Margo understands that the merger would constitute a tax-free reorganization
for purposes of the PR Code. Under these circumstances:
1. no gain or loss would be recognized by Margo upon the transfer of its
tangible and intangible assets to iTract, Inc. in exchange for iTract,
Inc.'s common stock;
2. no gain or loss would be recognized by Margo upon the distribution to its
shareholders of iTract, Inc.'s common stock;
3. no gain or loss would be recognized by iTract, Inc. upon receiving Margo's
tangible and intangible assets in exchange for iTract, Inc.'s common
stock; and
4. Margo's shareholders would not recognize gain or loss upon the deemed
exchange of Margo common stock for iTract, Inc.'s common stock.
Furthermore, a shareholder's basis in iTract, Inc.'s common stock received in
the merger would be the same basis as the shareholder had in shares of Margo
common stock and the holding period of iTract, Inc.'s common stock received by
each shareholder would include the holding period of the common stock of Margo
held by the shareholder immediately prior to the merger.
Margo has requested a ruling from the Puerto Rico Department of Treasury to
the effect that the merger constitutes a tax-free reorganization under the PR
Code. The administrative practice of the Puerto Rico Department of Treasury is
to require as a condition of issuing this ruling that Margo be deemed to
distribute a dividend of its current and accumulated earnings and profits to its
shareholders. To this date, the Puerto Rico Department of the Treasury has not
issued this ruling and no assurance can be given that the ruling will in fact be
issued. The receipt of the ruling confirming the tax-free reorganization
treatment of the merger of Margo into iTract, Inc. is a condition to the closing
of the itract merger.
A gain realized by a dissenting shareholder on account of surrendering Margo
stock pursuant to the exercise of dissenter rights will generally be subject to
Puerto Rico income taxes.
In the case of a gain realized by a dissenting shareholder not described in
the preceding paragraph, the gain will be subject to Puerto Rico income tax, and
in some circumstances a tax to be withheld at source of up to 25% of the
consideration received will be imposed, only if (1) in the case of an individual
citizen of the United States, the gain is treated as income derived from sources
within Puerto Rico, or (2) in the case of a foreign corporation or partnership
or non-resident alien individual, the gain is income from sources within Puerto
Rico or is effectively connected with a trade or business in Puerto Rico. To the
extent the gain is subject to Puerto Rico income tax, a dissenting shareholder
that is also subject to Federal income tax on the gain may not be able to claim
the Puerto Rico income tax imposed thereon against the applicable Federal income
tax.
Dividends Paid by iTract, Inc.
The shareholders of iTract, Inc. that are individuals and residents of Puerto
Rico and corporations or partnerships organized pursuant to the laws of the
Commonwealth of Puerto Rico will be subject to a Puerto Rico income tax as
ordinary income on the total amount of dividends distributed by iTract, Inc.
from its earnings and profits.
Sale or Exchange of iTract, Inc.'s common stock
Any gain realized by a shareholder of iTract, Inc. from the sale, exchange or
redemption of iTract, Inc.'s common stock will not be subject to the Puerto Rico
income tax under the PR Code if the gain is income from sources outside of
Puerto Rico and the shareholder is:
1. an individual citizen of the United States and not a resident of Puerto
Rico;
2. an individual not a citizen of the United States and not engaged in a
trade or business in Puerto Rico; or
IV-14
Chapter Four -- The Merger with the New Delaware Holding Company
3. a corporation or partnership organized under the laws of a country other
than Puerto Rico and not engaged in a trade or business in Puerto Rico.
Any gain to be recognized by a shareholder of iTract, Inc. from the sale or
exchange of iTract, Inc.'s common stock will constitute income from sources
within Puerto Rico if title to and beneficial ownership of the stock is
transferred in Puerto Rico. Any gain realized by a iTract, Inc. shareholder on
account of a redemption of iTract, Inc.'s common stock will constitute income
from sources within Puerto Rico.
Property Tax Consequences Under the MPTA
Under the MPTA, iTract, Inc.'s common stock would not be subject to personal
property taxes.
Puerto Rico Estate and Gift Taxes
The transfer by death or gift of iTract, Inc.'s common stock by an individual
resident of Puerto Rico would be subject to Puerto Rico estate or gift taxes
under the PR Code.
Terms of the Merger Agreement with itract
This section of the proxy statement/prospectus describes material provisions
of the merger agreement with itract. The description of the merger agreement
contained in this proxy statement/prospectus does not purport to be complete.
For a complete understanding of the terms and conditions of the merger
agreement, you are urged to read the merger agreement, attached as Appendix B to
this proxy statement/prospectus carefully and in its entirety.
Under Delaware law, shareholder approval is not required for the merger of a
subsidiary of iTract, Inc. with itract. Thus, approval of the merger with itract
is not being submitted for approval to Margo shareholders.
Closing; Effective Time
Unless otherwise agreed to by the parties, the closing of the merger will
take place at the offices of Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of
the Americas, New York, New York, on the fifth business day after satisfaction
or waiver of all of the conditions set forth in the merger agreement. Subject to
the provisions of the merger agreement, on the closing date, iTract, Inc. and
itract will file a certificate of merger or other appropriate documents with the
Secretary of State of Delaware in accordance with the relevant provisions of the
Delaware corporations statutes, as a result of which iTract Acquisition Company,
LLC ("iTract Acquisition Sub"), a wholly owned subsidiary of iTract, Inc., will
merge with and into itract and itract will become a wholly owned subsidiary of
iTract, Inc.. The merger will become effective at the time the certificate of
merger is duly filed with the Secretary of State of Delaware.
The Merger Consideration
At the effective time of the merger, members of itract will receive a number
of shares of common stock of iTract, Inc. that will, on a fully diluted basis
assuming exercise of all outstanding options and warrants, represent 86.8% of
the outstanding iTract, Inc. common stock immediately after the merger. Each
member of itract will be entitled to receive a pro rata share of the merger
consideration, rounded to the nearest whole number, based on the proportion that
the itract units held by that member immediately prior to the merger bears to
the total number of issued and outstanding itract units at the time of the
merger. As of the date of this proxy statement/prospectus, there are no
membership units subject to outstanding options or warrants of itract and
127,500 shares subject to outstanding options of Margo. There are no outstanding
warrants or other convertible securities of Margo.
Margo anticipates exchanging 13,216,102 shares of iTract, Inc. common stock
for the itract membership units exchanged in the merger, assuming no Margo
shareholder dissents to the merger of Margo with iTract, Inc.
Cancellation of itract Units; Fractional Shares
At the effective time of the itract merger, all outstanding itract membership
units will automatically be cancelled and holders of these units will be
entitled to receive, as soon as is practicable, certificates representing shares
of
IV-15
Chapter Four -- The Merger with the New Delaware Holding Company
iTract, Inc.'s common stock. No certificates representing fractional shares
of iTract, Inc.'s common stock will be issued upon the surrender of the itract
membership units.
Representations and Warranties
Each of itract, iTract, Inc., iTract Acquisition Sub and Margo have made
customary representations and warranties in the merger agreement relating to,
among other things:
o its organization and the organization of its subsidiaries, when
applicable;
o its capital structure;
o the authorization, execution, delivery and enforceability of the merger
agreement and related matters;
o the absence of conflicts under its charter, bylaws and material
agreements;
o material contracts;
o litigation;
o taxes and tax returns;
o employee benefit plans;
o compliance with applicable laws;
o title to assets and properties;
o the accuracy of information supplied by it contained in this proxy
statement/prospectus;
o its business activities;
o its financial statements and the accuracy of the information contained in
them;
o the absence of material changes and events;
o the accuracy of books, records, accounts and internal accounting controls;
o broker's and finder's fees;
o insurance;
o labor matters and relations;
o employees;
o intellectual property and software; and
o business locations.
The merger agreement also contains representations and warranties of Margo
relating to:
o registration of its securities and filing of documents with the SEC; and
o listing of its securities on the Nasdaq SmallCap Market.
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Chapter Four -- The Merger with the New Delaware Holding Company
Certain Covenants
Margo's, iTract, Inc.'s and iTract Acquisition Sub's Conduct of Business
Prior to the Merger. Margo and iTract, Inc. have agreed that, until the earlier
of the termination of the itract merger agreement or the effective time of the
itract merger, they will conduct their business in the ordinary course. Each of
Margo, iTract, Inc. and iTract Acquisition Sub have also agreed not to:
o amend its articles or certificate of incorporation or bylaws, except to
include some indemnification provisions;
o organize any subsidiary or acquire any capital stock or other equity
securities of any person or any equity or ownership interest in any
business;
o incur any debt or liabilities of any kind other than in the ordinary
course of business or in furtherance of the merger with itract and the
transactions contemplated thereby;
o grant or extend any power of attorney other than in the ordinary course of
business which does not affect a material part of Margo's business;
o fail to keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it;
o split, combine or reclassify its outstanding capital stock or declare, set
aside or pay any dividend or distribution payable in cash, stock, property
or otherwise;
o spin-off any assets or businesses, sell any assets or businesses or effect
any extraordinary corporate transaction, other than the sale of
substantially all of Margo's assets to Empresas Margo, Inc., in which
Margo or iTract, Inc., as the case may be, retains all of the proceeds
from the sale;
o engage in any transaction for the purpose of effecting a recapitalization;
o engage in any transaction or series of related transactions which has a
similar effect to any of the foregoing;
o sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of,
any additional shares of, or any options, warrants or rights of any kind
to acquire any shares of its capital stock of any class, or any debt or
equity securities convertible into or exchangeable for its capital stock
or amend or modify the terms and conditions of any of the foregoing,
provided, however, that Margo may issue shares upon exercise of
outstanding options;
o redeem, purchase, acquire or offer to purchase or acquire any shares of
its capital stock, other than as required by the governing terms of those
securities;
o take any action which would jeopardize the treatment of the itract merger
as a tax-free exchange within the meaning of Section 351 of the Internal
Revenue Code;
o make any acquisition of any assets or businesses, other than purchases of
assets in the ordinary course of business;
o fail to promptly advise itract in writing of any material adverse effect
with respect to Margo, iTract, Inc. or any of their subsidiaries; or
o agree or otherwise commit, whether in writing or otherwise, to do, or take
any action or omit to take any action that would result in, a breach or
violation of any of the foregoing.
itract's Conduct of Business Prior to the Merger. itract has agreed that,
until the earlier of the termination of the merger agreement or the effective
time of the itract merger, it will conduct its business in the ordinary course
and in the manner currently conducted and proposed to be conducted. In addition,
itract has agreed not to:
IV-17
Chapter Four -- The Merger with the New Delaware Holding Company
o amend its certificate of formation in an adverse manner;
o organize any subsidiary or acquire any capital stock or other equity
securities of any person or any equity or ownership interest in any
business;
o incur any debt or liabilities of any kind other than in the ordinary
course of business or in furtherance of the proposed merger and the
transactions contemplated thereby;
o grant or extend any power of attorney other than in the ordinary course of
business which does not affect the material part of its business;
o fail to keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it;
o split, combine or reclassify its outstanding membership interests or
declare, certify or pay any dividend or distribution payable in cash,
stock, property or otherwise, spin off any assets or business, sell any
assets or business, effect any extraordinary corporate transaction in
which it retains all the proceeds from the sale, engage in any transaction
for the purpose of effecting any recapitalization or engage in any
transaction or series of related transactions which have a similar effect
on any of the foregoing;
o sell, pledge, dispose of or agree to issue, sell or dispose of any
additional interests or any options, warrants or rights of any kind, to
acquire any interest in other securities, or any debt or securities
convertible into or exchangeable for those membership interests or modify
or amend the terms and conditions of any of the foregoing, provided,
however, that itract may issue interests upon exercise of outstanding
options, and provided further itract may issue additional options and
additional units if those options and units shall be converted into
options or common stock of iTract, Inc. at the effective time of the
merger;
o redeem, purchase, acquire or offer to purchase or acquire any interests
other than as required by certain agreements,
o make any acquisition of any assets or businesses other than purchases of
assets in the ordinary course of business;
o fail to promptly advise Margo and iTract, Inc. in writing of any material
adverse effect with respect to itract;
o take any action which would jeopardize the treatment of the merger as a
tax-free exchange within the meaning of Section 351 of the Internal
Revenue Code; or
o agree or otherwise commit, whether in writing or otherwise, to do, or take
any action or omit to take any action that would result in, a breach or
violation of any of the foregoing.
No Solicitation
Each of Margo, iTract, Inc., itract and iTract Acquisition Sub has agreed
that, prior to the earlier of the termination or effective time of the itract
merger, it will not solicit, initiate or encourage any inquiries, proposals or
offers from any person relating to any business combination with respect to
itract, Margo or iTract, Inc. or any sale of a material portion of its assets
and/or capital stock, other than with respect to the sale of Margo's nursery and
other subsidiaries.
Conditions to the Consummation of the Merger
Except as may be waived by Margo, iTract, Inc. and iTract Acquisition Sub,
their obligation to consummate the merger is subject to the satisfaction of
several conditions, including:
o the shareholders of Margo shall have approved and adopted the merger
agreement with iTract, Inc. and the sale of substantially all of Margo's
assets;
IV-18
Chapter Four -- The Merger with the New Delaware Holding Company
o Margo shall have received the fairness opinion of Schwartz, Heslin Group,
Inc. that the merger with itract is fair, from a financial point of view,
to Margo's shareholders;
o Margo shall have received the fairness opinion of San Juan iTract, Inc.,
Inc. that the sale of substantially all of Margo's assets is fair, from a
financial point of view, to Margo's shareholders;
o the Registration Statement on Form S-4 of which this proxy
statement/prospectus is a part, shall have become effective and no stop
order suspending the effectiveness shall be in effect;
o no injunction, order or decree of any federal or state court or
administrative or governmental body which prevents consummation of the
merger shall be in effect;
o the shares of iTract, Inc. shall be listed on the Nasdaq SmallCap Market;
o Margo shall have received a ruling from the Puerto Rico Treasury
Department confirming that the merger of Margo into iTract, Inc. qualifies
as a tax-free reorganization under the Puerto Rico Internal Revenue Code
of 1994;
o evidence that the loans made by Michael J. Spector and J. Morton Davis to
ICES in the aggregate principal amount of $2,000,000 shall be repaid, with
interest thereon, immediately following the merger;
o each member of itract receiving shares in iTract, Inc. and each holder of
options in itract shall have executed lock-up agreements pursuant to which
each agrees not to dispose of their shares until eight months after the
effective time of the merger;
o the delivery of an indemnification agreement by ICES with respect to the
ownership by itract of certain intellectual property free of any
encumbrances.
Except as may be waived by itract, the obligation of itract to consummate the
merger is subject to satisfaction of several conditions, including:
o the representations and warranties of Margo, iTract, Inc. and iTract
Acquisition Sub contained in the merger agreement shall be true and
correct in all material respects as of the closing date of the merger, and
Margo, iTract, Inc. and iTract Acquisition Sub shall have performed in all
material respects their obligations under the merger agreement as of the
closing date;
o Margo shall have merged with and into iTract, Inc.;
o the sale of substantially all of Margo's assets shall have been
consummated;
o at the effective time of the merger, iTract, Inc. shall have a cash and
cash equivalents of not less than $5,000,000 and not be subject to
liabilities exceeding $10,000 in the aggregate, excluding any liabilities
for amounts required to be paid to dissenting Margo shareholders
exercising appraisal rights and liabilities for legal and accounting fees
incurred by Margo after July 1, 2000 up to $250,000;
o the iTract, Inc. common stock shall be listed on the Nasdaq SmallCap
Market;
o each director, officer and employee of iTract, Inc. and iTract Acquisition
Sub shall resign effective as of the effective time of the merger and the
resigning directors of iTract, Inc. shall have appointed as their
successors the persons designated by itract;
o each holder of 5% or more of iTract, Inc.'s common stock immediately
prior to the merger shall have executed a lock-up agreement pursuant to
which it agrees not to dispose of these shares until four months after
the consummation of the merger, subject to some exceptions set forth in
the merger agreement;
o receipt of opinions of counsel that the merger with itract qualifies as a
tax-free exchange under Section 351 of the Internal Revenue Code and is
not subject to taxation in Puerto Rico
IV-19
Chapter Four -- The Merger with the New Delaware Holding Company
o receipt of a ruling from the Puerto Rico Treasury Department and an
opinion of counsel that the merger of Margo into iTract, Inc. qualifies as
a tax-free reorganization under the Puerto Rico Internal Revenue Code;
o receipt of a release from Michael J. Spector, Margaret D. Spector and
Margo Nursery Farms Inc. whereby said persons release Margo, iTract, Inc.,
itract and ICES from all liability relating to the occupancy by Margo and
its subsidiaries of the nursery farm leased from Mr. and Mrs. Spector; and
o receipt of an indemnification agreement from Michael J. Spector and Margo
Nursery Farms, Inc. pursuant to which said persons agree to indemnify
iTract, Inc., itract and ICES for a breach of the environmental
representations made in the merger agreement.
Based on Margo's current stock price, after the merger of Margo with the new
Delaware holding company, the new Delaware holding company will not meet
Nasdaq's requirements for initial listing on the SmallCap Market. Thus, if the
parties do not waive the condition to closing that the shares of the new
Delaware holding company be listed on the Nasdaq SmallCap Market, the merger
will not be consummated.
Indemnification and Insurance
After the effective time of the itract merger, iTract, Inc. will indemnify
and hold harmless each present and former officer and director of Margo, iTract,
Inc., iTract Acquisition Sub and the other subsidiaries of Margo against any
claims, liabilities, costs or expenses pertaining to any matter existing or
occurring before or after the effective time of the merger to the fullest extent
permitted by the certificate of incorporation and by-laws of Margo immediately
prior to the consummation of the merger with iTract, Inc.
Termination
The merger agreement may be terminated prior to the completion of the itract
merger only as follows:
o by written agreement of all the parties at any time;
o unilaterally by Margo or iTract, Inc. if satisfaction of any of the
conditions to their obligations becomes impossible and is not waived or
the merger has not occurred by December 31, 2000 (subject to a 60 day
extension if this proxy statement/prospectus has not been declared
effective by the SEC), in either case other than as a result of a material
breach or default by Margo, iTract, Inc. or Michael J. Spector;
o unilaterally by itract if satisfaction of any of the conditions to its
obligations becomes impossible and is not waived or the merger has not
occurred by December 31, 2000 (subject to a 60 day extension if this proxy
statement/prospectus has not been declared effective by the SEC), in
either case other than as a result of a material breach or default by
itract;
o unilaterally by Margo or iTract, Inc. if itract has breached the agreement
in any material respect and the breach has not been cured within ten days
after notice thereof; and
o unilaterally by itract if Margo or iTract, Inc. has breached the agreement
in any material respect and the breach has not been cured within ten days
after notice thereof.
Expenses
In the event the merger agreement is terminated as set forth above, there is
no further liability or obligation of any party, except that:
o if the agreement is terminated by Margo or iTract, Inc. as a result of a
material breach by itract, itract and ICES shall be obligated to reimburse
Margo and iTract, Inc. for all out-of-pocket expenses incurred by them in
connection with the agreement and the transactions contemplated thereby up
to a maximum of $100,000; and
IV-20
Chapter Four -- The Merger with the New Delaware Holding Company
o if the agreement is terminated by itract as a result of a material breach
by Margo or iTract, Inc., Margo and iTract, Inc. shall be obligated to
reimburse itract for all out-of-pocket expenses incurred by it in
connection with the agreement and the transactions contemplated thereby up
to a maximum of $100,000.
Material Federal Income Tax Consequences
The following discussions summarize the material Federal income tax
consequences of
o the merger of the wholly-owned subsidiary of the new Delaware holding
company into itract,
o dispositions of shares of common stock of the new Delaware holding company
following the mergers, and
o distributions by the new Delaware holding company to its stockholders
following the mergers.
These discussions are based on the Internal Revenue Code, applicable U.S.
Treasury Regulations, judicial authority, and administrative rulings and
practice, all as of the date of this proxy statement/prospectus, and all of
which are subject to change, including changes with retroactive effect. The
discussions below do not address any state, local or foreign tax consequences of
the merger, or estate or gift tax considerations. Each itract member's tax
treatment may vary depending upon his or her particular situation.
Effect of the itract Merger on The New Delaware Holding Company and its
Stockholders
For purposes of the Internal Revenue Code, the itract merger will be treated
as a nontaxable transfer to a controlled corporation by itract members of their
membership interests, or by itract of its assets followed by a liquidation of
itract. The new Delaware holding company will not be subject to Federal income
tax on the receipt of those interests. After the itract merger, itract will be a
"disregarded entity" that is not treated as separate from the new Delaware
holding company for Federal income tax purposes. The new Delaware holding
company's basis in itract's assets will be equal to the sum of the bases of the
interests itract members transferred to the new Delaware holding company in the
itract merger or, if the transaction is treated as a transfer by itract of its
assets followed by a liquidation of itract, equal to itract's basis in the
assets.
Persons who were stockholders of the new Delaware holding company prior to
the itract merger (i.e., Margo's former stockholders) will not transfer or
receive any property in the itract merger. Accordingly, these persons will not
have any Federal income tax liability as a result of the itract merger.
Effect of the itract Merger on itract Members
The following discussion does not address all aspects of Federal income
taxation that may be relevant to an itract member in light of that member's
particular circumstances or to a member subject to special rules such as:
o a financial institution or insurance company;
o a tax-exempt organization;
o an S corporation;
o a taxpayer subject to alternative minimum tax;
o a dealer or broker in securities; or
o a person that is not a U.S. holder.
For these purposes, the term "U.S. holder" means a person that is a citizen
or resident of the United States, a corporation, partnership, or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States Federal income tax purposes regardless of source,
or a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust or one or more U.S. persons have the authority to
control all substantial
IV-21
Chapter Four -- The Merger with the New Delaware Holding Company
decisions of the trust. Each itract member is urged to consult his or her tax
advisor to determine the Federal tax consequences of the itract merger that may
be applicable to his or her situation.
The conclusions presented below with respect to the receipt of common stock
of the new Delaware holding company by members of itract in the merger are based
on the following assumptions being correct as of the date of this proxy
statement/prospectus and on the date of the itract merger:
o itract has not issued additional membership units after March 31, 2000,
including membership units issued pursuant to warrants or options;
o at the time of the itract merger, the adjusted tax basis of each member's
interest in itract will equal or exceed that member's share of itract's
liabilities, and the aggregate adjusted tax basis of itract's assets will
equal or exceed itract's liabilities;
o the fair market value of the shares of the new Delaware holding company
common stock received by itract members in the itract merger in exchange
for membership interests acquired by them before December 1999 will be no
greater than the value of those interests;
o no holder of an option or warrant to acquire membership units of itract or
common stock of the new Delaware holding company has a plan to exercise
the option or warrant other than a general plan to realize the value of
the option or warrant at some indefinite time in the future before it
expires;
o the number of shares of common stock of the new Delaware holding company
to be received in exchange for all of the itract membership interests was
determined by arm's-length negotiations among itract members and the
managements of itract, Margo and the new Delaware holding company;
o in connection with the itract merger, no itract member will receive,
directly or indirectly, any consideration other than shares of common
stock of the new Delaware holding company;
o none of the shares of common stock of the new Delaware holding company
received in the itract merger by an itract member will be separate
consideration for, or allocable to, any employment, consulting, or similar
agreement with respect to services;
o the itract merger agreement and the documents described in the itract
merger agreement and this proxy statement/prospectus represent the entire
understanding between the parties to those agreements and their respective
stockholders and members, and there are no written or oral agreements
regarding the itract merger other than those expressly referred to in the
itract merger agreement and this proxy statement/prospectus;
o no member of itract has any plan or intention to dispose of the shares of
common stock of the new Delaware holding company to be received in the
itract merger;
o on each date on which itract issued membership units, the value of itract
was equal to or greater than the value of itract on the previous date on
which membership units were issued;
o neither Margo nor the new Delaware holding company has issued any options
to purchase common stock of Margo or the new Delaware holding company
after March 31, 2000;
o the itract members each hold their membership interests, and will hold
their shares of common stock of the new Delaware holding company, as
"capital assets" within the meaning of the Internal Revenue Code; and
o at the time of the itract merger, the assets of itract will not include
any "investment company property" other than cash in an amount no greater
than $100,000, and the assets of the new Delaware holding company,
including the assets of its wholly-owned subsidiaries, will not include
any "investment company property" other than cash in an amount no greater
than $6,000,000.
"Investment company property" includes the following types of property:
IV-22
Chapter Four -- The Merger with the New Delaware Holding Company
o money;
o stocks and other equity interests in a corporation other than wholly-owned
subsidiary corporations, evidences of indebtedness, options, forward or
futures contracts, notional principal contracts and derivatives;
o any foreign currency;
o any interest in a real estate investment trust, a common trust fund, a
regulated investment company, a "publicly-traded partnership" as defined
in the Internal Revenue Code or any other equity interest, other than in a
corporation, that is readily convertible into, or exchangeable for, any
asset described in (a) to (e);
o certain interests in precious metals;
o interests in any entity if substantially all of the assets of the entity
consist of assets described in (a) to (e); and
o any interest in any entity not described in (f) to the extent the value of
the interest is attributable to assets listed in (a) to (e).
The conclusions presented below are not binding on the IRS or the courts.
Neither Margo, the new Delaware holding company, nor itract has sought or will
seek any ruling from the IRS with respect to these conclusions, and there can be
no assurance that the IRS will not take a different position concerning the tax
consequences of the itract merger or ownership or disposition of the shares of
common stock issued in the itract merger or that any contrary position taken by
the IRS would not be sustained.
Receipt of Shares of Common Stock of the new Delaware Holding Company in the
itract Merger
To the extent that itract members receive shares of common stock of the new
Delaware holding company in exchange for their itract membership interests, they
will be treated as having received their stock in a nontaxable transfer to a
controlled corporation. These itract members will not be subject to Federal
income tax liability on the gain realized on the transfer, and their respective
bases in the common stock of the new Delaware holding company will equal their
respective bases in the membership interests exchanged in the itract merger.
However, each member of itract has a capital account associated with his or
her interest in itract in addition to the membership units owned by him or her.
If, as assumed above, itract increased in value over time, the capital accounts
associated with earlier-issued membership units may be greater than the capital
accounts associated with subsequently issued membership units. Because the
shares of common stock of the new Delaware holding company will be issued in the
itract merger in proportion to the number of membership units held by each
member and not necessarily in proportion to members' capital accounts, the IRS
may take the position that the holders of earlier-issued membership units may
be deemed to have received additional shares of common stock of the new Delaware
holding company and then transferred those shares to the holders of later-issued
membership units. The IRS could then take the position that the value of the
shares deemed transferred should be treated as income to the holders of the
later-issued membership units. The holders of earlier-issued membership units in
any event should not recognize gain on this deemed transfer because they
received nothing in exchange for the transfer of these shares.
Any persons that are treated as having received common stock of the new
Delaware holding company in exchange for services, rather than for a membership
interest in itract, will not be treated as having received the stock in a
nontaxable transaction, and will be subject to Federal income tax on the receipt
of compensation.
Distributions by the New Delaware Holding Company
A distribution on shares of common stock of the new Delaware holding company
will be taxable to the holder as ordinary dividend income to the extent that the
amount of the distribution does not exceed the new Delaware holding company's
current or accumulated earnings and profits allocable to the distribution as
determined for Federal income tax purposes. To the extent that the amount of the
distribution exceeds the new Delaware holding company's current or accumulated
earnings and profits allocable to the distribution, the distribution will be
treated as a return of capital, thus reducing the holder's adjusted tax basis in
the shares of the new Delaware holding
IV-23
Chapter Four -- The Merger with the New Delaware Holding Company
company common stock with respect to which the distribution was made. The amount
of any excess distribution that exceeds the holder's adjusted tax basis in the
shares of common stock of the new Delaware holding company will be taxed as
capital gain and will be long-term capital gain if the holder's holding period
for the shares of common stock exceeds one year. If the holder received his or
her shares of common stock in exchange for his or her itract membership
interest, the holding period for that holder's shares of common stock will
include the period for which the holder held his or her itract membership
interest. If the holder received his or her shares of common stock in exchange
for services, his or her holding period will commence on the day following the
day on which he or she received the shares of common stock. There can be no
assurance that the new Delaware holding company will have sufficient earnings
and profits to cause distributions on the shares of the new Delaware holding
company common stock to be treated as dividends for Federal income tax purposes.
For purposes of the remainder of this discussion, the term "dividend" refers
to a distribution paid out of current or accumulated earnings and profits,
unless the context indicates otherwise. Dividends received by corporate holders
will generally be eligible for the 70% dividends-received deduction under the
Internal Revenue Code. There are, however, many exceptions and restrictions
relating to the availability of the dividends-received deduction, such as
restrictions relating to
o the holding period of the stock on which the dividends are received,
o debt-financed portfolio stock,
o dividends treated as "extraordinary dividends," and
o taxpayers that pay alternative minimum tax.
Corporate holders should consult their own tax advisors regarding the
extent, if any, to which exceptions and restrictions may apply to their
particular factual situations. The Internal Revenue Code requires a corporate
holder to satisfy a separate 46-day (91-day, in the case of certain preferred
stock dividends) holding period requirement with respect to each dividend in
order to be eligible for the dividends-received deduction with respect that
dividend.
Sale or Exchange of Common Stock of the New Delaware Holding Company
Holders of shares of common stock of the new Delaware holding company will be
required to recognize a gain or loss on the sale, exchange or other disposition
of these shares for Federal income tax purposes under the Internal Revenue Code.
In determining their holding period, holders who received their stock in
exchange for their itract membership interests will include the period for which
they held their interests prior to the itract merger.
Directors and Principal Officers of iTract, Inc. after the Merger
In accordance with the merger agreement, all of the then current members of
the board of iTract, Inc. will resign immediately prior to the effective time of
the itract merger and will designate as their successors persons designated by
itract. In addition, all of iTract, Inc.'s executive officers and employees will
resign as of the effective time, to be replaced by the executive officers
appointed by the board of directors of iTract, Inc. following the itract merger.
Listed below is biographical information for each person who is expected to
be a director or executive officer of iTract, Inc. upon completion of the itract
merger. itract is engaged in an active search for, and intends to name, a
permanent chief executive officer, a permanent chief financial officer and other
executive officers following the itract merger.
[Enlarge/Download Table]
Name Age Position
------------------------ --- ------- -- ------------------------------------------
Henry Kauftheil 39 Chairman of the Board
Kevin Kerzner 38 Director, Executive Vice President and Interim Chief
Executive Officer
Joseph C. Sienkiewicz 44 Director and Interim Chief Financial Officer
Anthony Peluso 36 Vice President-Marketing
Eli Ofek 38 Director
Robert Goodman 36 Director
IV-24
Chapter Four -- The Merger with the New Delaware Holding Company
[Download Table]
Name Age Position
------------------------ --- ------- -- ------------------------------------------
David Rothstein 45 Director
Henry Kauftheil has been the sole manager of itract since its inception in
May 1999. Since 1995, Mr. Kauftheil has been the Chairman of ICES, a privately
held company that primarily develops, invests in and operates Internet
technology related companies. Through one of its subsidiaries, ICES acted as
founder of itract. Mr. Kauftheil also serves as an officer, director or manager
of each of the subsidiaries of ICES. Mr. Kauftheil is also a director of
YouNetwork Corporation, a developer of e-commerce software tools, which files
quarterly and annual reports with the SEC.
Kevin Kerzner was a founder of, and is the current Executive Vice President
of itract. Following the itract merger, he will also serve as the Interim Chief
Executive Officer of iTract, Inc.. From January 1998 until he joined itract in
May 1999, Mr. Kerzner was the Executive Vice President of ICES Enterprises,
Inc., the predecessor to The TechDepartment.com, Inc., itract's majority member.
From September 1996 to December 1997, Mr. Kerzner was a director of sales for
eMarketplaces, Inc., a subsidiary of ICES. From July 1995 to August 1996, with
the exception of four months during which he worked as National Sales Director
at IDT Corporation, a telecommunications company, Mr. Kerzner was the principal
of Rtech, a consulting company which he founded.
Joseph C. Sienkiewicz, a certified public accountant, has been ICES's Chief
Financial Officer since November 1999, and will serve on an interim basis as the
Chief Financial Officer of iTract, Inc. following the itract merger. Prior to
joining ICES, from February 1997 to September 1999, Mr. Sienkiewicz served as
Chief Financial Officer at Atwood Richards Inc., a $500 million international
multilateral trading company. From February 1996 to January 1997, Mr.
Sienkiewicz served as Chief Financial Officer of Ogden Aviation Services, an
airline services company and prior to that, from December 1992 to December 1995,
he served as the Chief Financial Officer of the Revlon Retail Group. Mr.
Sienkiewicz has also served in management accounting positions at KPMG, The
Great A&P Tea Company and Simon & Schuster. Mr. Sienkiewicz has an MS in Federal
Taxation from Pace University and a BS in Accounting from Seton Hall University.
Mr. Sienkiewicz is also a director of YouNetwork Corporation.
Anthony Peluso joined itract in January 2000 as its Vice President of
Marketing. Prior to joining itract, Mr. Peluso was employed as Account Director
at Toolbox Communications, an integrated marketing communications company, from
June 1999 to December 1999. From July 1997 to November 1999, Mr. Peluso worked
for WHS, a division of Arnold Advertising in Boston, MA. as an Account
Supervisor. Mr. Peluso also served as Advertising and Promotions Manager for
1-800-FLOWERS from 1995-1997. Mr. Peluso's experience also includes management
positions at Avis Rent-A-Car and Young & Rubicam Advertising. Mr. Peluso has a
BS in Marketing from St. John's University.
Dr. Eli Ofek has been an Associate Professor of Finance at New York
University's Stern School of Business since 1991. Dr. Ofek has a Ph.D. in
Finance from the University of Chicago's Graduate School of Business and has a
B.A. in Accounting and Economics from Tel Aviv University. Dr. Ofek also serves
as a director of ICES.
Robert Goodman is currently employed by the Federal Reserve Bank of New York
as a Senior Technical Specialist, where he has been since 1988 in various
positions of increasing responsibilities. His current role includes designing
Internet e-commerce solutions for U.S. Treasury Auctions. Mr. Goodman has a B.S.
in Business Management and Finance and an M.A. in Management Information Systems
from Brooklyn College. Mr. Goodman also serves as director of ICES.
David Rothstein is the president of Dalow Industries, a privately-held
jewelry business located in Brooklyn, New York, which supplies mid-range,
general category jewelry to the nationwide wholesale market and to large
regional retailers. Mr. Rothstein has managed the business of Dalow Industries
in various capacities for the past 18 years. He is also the Chairman of the
Board of Directors and President of Yeshiva Ohr Shraga, a private school located
in Brooklyn, New York. He received his Jurist Doctorate from Brooklyn Law School
in 1983 and his Bachelors of Arts from Brooklyn College in 1978.
Interests of Certain Persons in the Merger
You should be aware that, as described below, some executive officers and
directors of Margo have interests in the merger that are different from, or in
addition to, your interests and that may create potential conflicts of interest.
IV-25
Chapter Four -- The Merger with the New Delaware Holding Company
Except as described below, Margo is not aware of any material interest in the
merger of its executive officers and directors, other than those as shareholders
of Margo generally.
In connection with the execution of the letter of intent between Margo and
itract, Michael J. Spector and J. Morton Davis, who beneficially own 65.7% and
9.8%, respectively, of Margo's outstanding common stock, made loans of
$1,715,000 and $285,000, respectively, to ICES, the indirect parent company of
itract. The entire principal balance plus accrued interest on these loans is
payable immediately following the effective time of the merger with itract.
However, Mr. Davis has agreed in principle to defer the repayment of his loan
until the first anniversary of the closing of the merger. If the itract merger
is not consummated by December 31, 2000 (subject to a 60-day extension), these
loans will be converted into common stock of ICES.
From November 2000 through January 2001, Rosalind Davidowitz, Mr. Davis'
wife, together with another affiliate of Mr. Davis, loaned itract $350,000.
$250,000 of the principal amount of these loans are repayable upon the earlier
to occur of the first anniversary of the closing of the merger and May 15, 2002.
The remaining $100,000 in principal amount of these loans is currently due on
the earlier to occur of the closing of the itract merger and May 15, 2001.
However, the parties to these loans and ICES have agreed in principle to modify
these loans so that all of these loans will be due upon the earlier to occur of
the first anniversary of the closing of the merger and May 15, 2002. The parties
have also agreed that the obligor on these loans will be ICES and itract will be
relieved of all obligations under these loans. In connection with these loans,
Ms. Davidowitz was issued warrants to purchase 75,000 shares of common stock of
ICES.
In addition, all options to purchase shares of Margo common stock held by
Margo's officers and directors will be converted into options to purchase the
same number of shares of iTract, Inc.'s common stock and these options will
become immediately exercisable upon consummation of the merger of Margo with
iTract, Inc.
Executive officers and directors of Margo own options to purchase shares of
Margo common stock, as more fully described in footnote 1 to the table appearing
on page VIII-7.
For his role in introducing itract to Margo, itract compensated Alan Stahler
by issuing an aggregate of 200,000 itract membership units to designated family
members of Mr. Stahler. Mr. Stahler did not receive, nor is he entitled to
receive, any compensation from Margo for his role in facilitating this
transaction. Mr. Stahler is the son-in-law of J. Morton Davis, who beneficially
owns 9.8% of Margo's outstanding common stock. Mr. Davis is also a beneficial
shareholder of ICES.
Indemnification and Insurance
Pursuant to the merger agreement with itract, iTract, Inc. has agreed to
indemnify each present and former director and officer of Margo, iTract, Inc.,
iTract Acquisition Sub and Margo's subsidiaries against claims, liabilities,
costs and expenses incurred in connection with claims arising out of or
pertaining to matters existing or occurring at or prior to the effective time of
the merger.
See "Terms of the Merger Agreement with itract-Indemnification and
Insurance."
Accounting Treatment
The itract merger will be accounted for as a reverse merger. As a result,
itract will be considered to be the acquiring entity and iTract, Inc. the
acquired entity for accounting purposes, even though iTract, Inc. is the
acquirer for legal purposes. The historical financial information of itract will
become the historical financial information of iTract, Inc. and historical
stockholders' equity and earnings per share prior to the merger will be
retroactively restated for the equivalent number of shares to be received in the
merger.
Restriction on Resales by Affiliates
The shares of iTract, Inc.'s common stock to be issued to Margo shareholders
and members of itract in the mergers are being registered under the Securities
Act, subject to the lock-up agreements mentioned below. These shares may be
traded freely and without restriction by those shareholders who are not deemed
to be "affiliates" of iTract, Inc. or itract, as that term is defined under the
Securities Act.
IV-26
Chapter Four -- The Merger with the New Delaware Holding Company
An affiliate of iTract, Inc. or itract is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, iTract, Inc. or itract, as the case may be. Any
subsequent transfer by an affiliate of iTract, Inc. or itract must be permitted
by the resale provisions of Rule 145 under the Securities Act or Rule 144 under
the Securities Act, in the case of persons who become affiliates of iTract, Inc.
after the merger, or must otherwise be permitted under the Securities Act, and
not be subject to any lock-up agreement. These restrictions are expected to
apply to the directors, executive officers and principal stockholders of iTract,
Inc.
Some officers, directors, shareholders, managers and members of Margo and
itract will enter into lock-up agreements. Under the itract merger agreement,
each member of itract receiving shares of iTract, Inc.'s common stock in the
itract merger will enter into an agreement whereby the member agrees, for a
period of eight months following the effective time of the merger, not to sell,
assign or transfer any securities of iTract, Inc. held by the member or acquired
by the member. In addition, each holder of more than 5% of Margo's common stock
will enter into an agreement whereby the holder will agree, for a period of four
months following the effective time of the merger, not to sell, assign or
transfer any securities of iTract, Inc. held by the shareholder or acquired by
the shareholder. However, Michael J. Spector and Margaret D. Spector will be
able to pledge their shares of iTract, Inc. common stock to an unaffiliated
lender as collateral for purposes of financing the purchase of Margo's nursery
operations and other businesses without the lender being subject to the lock-up
provisions, and Margaret D. Spector will be able to sell up to 30,000 shares of
iTract, Inc.'s common stock during this four months period.
IV-27
Chapter Five -- Selected Financial Data
CHAPTER FIVE
SELECTED FINANCIAL DATA
Selected Financial Data of Margo
The following table sets forth selected consolidated audited financial data
for Margo on a historical basis, for each of the five years ended December 31,
1999 and the unaudited nine months ended September 30, 2000 and 1999. The
selected financial data should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Margo, and Margo's consolidated financial statements for the year ended December
31, 1999, which are included in this proxy statement/prospectus.
[Enlarge/Download Table]
Nine Months Ended
September 30, Years Ended December 31,
(unaudited)
------------------ -----------------------------------------------
Earnings Statement Data: 2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Discontinued Operations:
Income (loss) from discontinued
operations and net $(1,386,6$1) $ 265,228 $ (127,867)$(1,112,837) $ (750,534)$ (577,214)$4) (396,334)
Net income (loss) per common
share - basic and $iluted $(0.74) $.14 $(0$07) $(0.59) $(0$40) $(0.30) $(0.21)
Weighted average of number of
common shares outs 1,882,322 1,875,322 1,875,322 1,878,655 1,895,322 1,895,322 1,895,322
Balance Sheet Data:
Cash and equivalents $ 728,878 $ 809,478 $1,082,592 $ 747,390 $ 1,230,250$ $946,490 $ 785,490
Net assets of discontinued
operations $4,146,122 $5,825,393 5,159,184 5,622,253 6,299,730 7,324,860 8,062,912
Total assets $4,875,000 $6,634,871 $6,241,776 $ 6,369,643 $,7,529,980 $ 8,271,350 $38,848,402
Shareholders' equity $4,875,000 $6,634,871 $6,241,776 $6,369,643 $,7,529,980 $ 8,271,350 $38,848,402
V-1
Chapter Five -- Selected Financial Data
Selected Financial Data of itract
The following table sets forth selected financial data of itract for the three
month period ended September 30, 2000, for the period from May 12, 1999
(inception) through September 30, 2000, for the audited year ended June 30, 2000
and for the period from May 12, 1999 (inception) through June 30, 1999. The
selected financial data should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
itract and itract's financial statements for the period from May 12, 1999
(inception) through September 30, 2000, which are included in this proxy
statement/prospectus.
[Enlarge/Download Table]
Period from
Three Months May 12, 1999 Period from
Ended (inception) through May 12, 1999
September 30, 20September 30, 200 Year Ended (inception) through
(Unaudited) (Unaudited) June 30, 2000 June 30, 1999
------------- -------------- ------------- -------------
Statement of Operations Data:
Revenues $ 1,197 $ 1,197 $ - $ -
Web Site Development Costs (117,186) (458,957) (172,275) (169,495)
Selling General and
Administrative Expense (435,003) (2,176,685) (1,680,077) (61,605)
Net Loss (550,992) (2,634,445) (1,852,352) (231,100)
Balance Sheet Data:
Cash $ 833 $ 833 $ 96 $ -
Total Assets 1,066,176 1,066,176 1,108,150 64,250
Total Liabilities 3,154,096 3,154,096 2,645,077 295,350
Member's Deficit 2,087,920 (2,087,920) (1,536,927) (231,100)
Pro Forma Financial Statements
Introduction to Pro Forma Financial Statements (Unaudited)
The accompanying unaudited pro forma balance sheet presents the financial
position of Margo and itract as of September 30, 2000, assuming the merger of
Margo with the new Delaware holding company, the merger of a subsidiary of the
holding company with itract and the sale of substantially all of Margo's assets
have been completed as of the balance sheet date. The pro forma statements of
operations for the year ended June 30, 2000 and for the three months ended
September 30, 2000 for Margo and itract, respectively, reflect the merger of
Margo with the new Delaware holding company, the merger of a subsidiary of the
holding company with itract, and the sale of substantially all of Margo's
assets, as if the transactions had occurred on the first day of the fiscal year
presented and carried forward to the interim period presented.
The itract merger will be accounted for as a reverse merger. As a result,
itract will be considered to be the acquiring entity and iTract, Inc., the new
Delaware holding company, the acquired entity for accounting purposes, even
though iTract, Inc.'s subsidiary is the legal acquirer. The historical financial
information of itract will become the historical financial information of
iTract, Inc. and historical stockholders' equity and earnings per share prior to
the merger have been retroactively restated for the equivalent number of shares
to be received in the merger. The pro forma financial statements subsequent to
the merger of a subsidiary of the holding company with itract include: (1) the
pro forma balance sheet as of September 30, 2000, with the net assets of itract
at historical costs; (2) the pro forma results of operations for the three-month
period ended September 30, 2000 and for the year ended June 30, 2000. Separate
balance sheets have been presented assuming that no Margo shareholder dissents
to the merger or that ten percent of Margo shareholders dissent to the merger
and exercise appraisal rights. If more than ten percent of Margo shareholders
exercise their appraisal rights, itract can terminate the merger agreement.
V-2
Chapter Five -- Selected Financial Data
The pro forma financial information does not purport to be indicative of the
results which would have actually been obtained had the transactions been
completed as of the assumed dates and for the periods presented or which may be
obtained in the future.
[Enlarge/Download Table]
UNAUDITED PRO FORMA BALANCE SHEET
As of September 30, 2000
(No Dissenting Shares)
---------------------------------------------------------------------------------
(a)(b)(e) iTract, Inc. (f)(g)(h)(j)
Pro Forma (formerly Reverse
Margo Adjustments Margo) After Acquisition
Before Delaware Delaware and Pro (j)
Delaware Merger and Merger and Forma Pro Forma
Merger Sale of Assets Sale of Assets itract Adjustments iTract, Inc.
ASSETS
Cash and equivalents $ 728,878 $ 4,271,122 $ 5,000,000 $ 833 $(2,606,338) $ 2,394,495
Net assets of discontinued
operations 4,146,122 (4,146,122) - -
Accounts receivable, net 622 622
Prepaid expenses and other
current assets 30,855 30,855
Property and equipment, net 62,739 62,739
Other assets 971,127 971,127
---------- ----------- ----------- ---------- ----------- ------------
Total assets $4,875,000 $ 125,000 $ 5,000,000 $1,066,176 $(2,606,338) $ 3,459,838
========== =========== =========== ========== =========== ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and
accrued expenses $ - $ 250,000 $ 250,000 $ 273,070 $ (250,000) $ 273,070
Due to affiliates 2,881,026 (2,034,430) 846,596
---------- ----------- ----------- ---------- ----------- ------------
Total current liabilities $ - $ 250,000 $ 250,000 $3,154,096 $(2,284,430) $ 1,119,666
---------- ----------- ----------- ---------- ----------- ------------
Commitments and contingencies
Shareholders' Equity:
Common stock 1,922 1,922 13,216 15,138
Additional paid-in capital 4,657,544 4,657,544 558,606 5,216,150
Retained earnings (deficit) 311,822 (125,000) 186,822 (2,087,920) (893,730) (2,794,828)
Treasury stock (96,288) (96,288) (96,288)
---------- ----------- ----------- ---------- ----------- ------------
Total shareholders' 4,875,000 (125,000) 4,750,000 (2,087,920) $ (321,908) 2,340,172
---------- ----------- ----------- ---------- ----------- ------------
Total liabilities and
shareholders' equity $ 4,875,00 $ 125,000 $ 5,000,000 $1,066,176 $(2,606,338) $ 3,459,838
========== =========== =========== ========== =========== ============
V-3
Chapter Five -- Selected Financial Data
[Enlarge/Download Table]
UNAUDITED PRO FORMA BALANCE SHEET
As of September 30, 2000
(10% Dissenting Shares)
---------------------------------------------------------------------------------
(a)(b)(e) iTract, Inc. (f)(g)(i)(j)
Pro Forma (formerly Reverse
Margo Adjustments Margo) After Acquisition
Before Delaware Delaware and Pro (j)
Delaware Merger and Merger and Forma Pro Forma
Merger Sale of Assets Sale of Assets itract Adjustments iTract, Inc.
ASSETS
Cash and equivalents $ 728,878 $ 4,271,122 $ 5,000,000 $ 833 $(2,608,338) $ 2,394,495
Net assets of discontinued
operations 4,146,122 (4,146,122) - - - -
Accounts receivable, net - - - 622 - 622
Prepaid expenses and other
current assets - - - 30,855 - 30,855
Property and equipment, net - - - 62,739 - 62,739
Other assets - - - 971,127 - 971,127
---------- ----------- ----------- ---------- ----------- ------------
Total assets $4,875,000 $ 125,000 $ 5,000,000 $1,066,176 $(2,606,338) $ 3,459,838
========== =========== =========== ========== =========== ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and
accrued expenses $ - $ 250,000 $ 250,000 $ 273,070 $ 292,109 $ 815,179
Due to affiliates - - - 2,881,026 (2,034,430) 846,596
---------- ----------- ----------- ---------- ----------- ------------
Total current liabilities $ - $ 250,000 $ 250,000 $3,154,096 $(1,742,321) $ 1,661,775
---------- ----------- ----------- ---------- ----------- ------------
Commitments and contingencies
Shareholders' Equity:
Common stock 1,922 1,922 13,216 15,138
Additional paid-in capital 4,657,544 4,657,544 558,606 5,216,150
Retained earnings (deficit) 311,822 (125,000) 186,822 (2,087,920) (893,730) (2,794,828)
Treasury stock (96,288) (96,288) (542,109) (638,397)
---------- ----------- ----------- ---------- ----------- ------------
Total shareholders' equity 4,875,000 (125,000) 4,750,000 (2,087,920) $ (157,109) 1,798,063
---------- ----------- ----------- ---------- ----------- ------------
Total liabilities and
shareholders' equity $ 4,875,00 $ 125,000 $ 5,000,000 $1,066,176 $(2,606,338) $ 3,459,838
========== =========== =========== ========== =========== ============
V-4
Chapter Five -- Selected Financial Data
[Enlarge/Download Table]
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended June 30, 2000
---------------------------------------------------------------------------------------
iTract, Inc.
(c)(d) Pro Forma (formerly Reverse
Margo Adjustments Margo) After Acquisition
Before Delaware Delaware and Pro
Delaware Merger and Merger and (d) Forma Pro Forma
Merger Sale of Assets Sale of Assets itract Adjustments iTract, Inc.
Income from continuing operations:
Web site development costs $ - $ - $ - $ (172,275) $ - $ (172,275)
Selling, general and
administrative expenses - - - (1,680,077) - (1,680,077)
----------- ------------ ------------ ----------- ---------- -----------
Loss from operations (1,852,352) (1,852,352)
Discontinued operations:
Income (loss) from discontinued
operations (249,743) 249,743 - - - -
Loss on disposition of discontinued
operations, including provision
of $125,000 for operating losses
during the period through the
date of disposal (1,314,658) 1,314,658 - - - -
----------- ------------ ------------ ----------- ---------- -----------
Net income (loss) $(1,564,401) $ 1,564,401 $ - $(1,852,352) $ _ $(1,852,352)
=========== ============ ============ =========== ========== ===========
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UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2000
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iTract, Inc.
(c) Pro Forma (formerly Reverse
Margo Adjustments Margo) After Acquisition
Before Delaware Delaware and Pro
Delaware Merger and Merger and Forma Pro Forma
Merger Sale of Assets Sale of Assets itract Adjustments iTract, Inc.
Income from continuing operations:
Revenues $ - $ - $ - $ 1,197 $ - $ 1,197
Web site development costs (117,186) (117,186)
Selling, general and
administrative expenses - - - (435,003) - (435,003)
----------- ------------ ------------ ----------- ---------- -----------
Net loss and loss from operations $ - $ - $ - $ (550,992) $ - $ (550,992)
=========== ============ ============ =========== ========== ===========
V-5
Chapter Five -- Selected Financial Data
Unaudited Pro Forma Per Share Data
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Three Months Ended Year Ended Three Months Ended Year Ended
September 30, 2000 June 30, 2000(1) September 30, 2000 June 30, 2000(1)
(No Dissenting Shares) (No Dissenting Shares) (10% Dissenting (10% Dissenting
Shares) Shares)
---------------------- ---------------------- ------------------ ------------------
Net loss per weighted average
common share
(basic and diluted) ($0.04) ($0.12) ($0.04) ($0.12)
Weighted average common
shares outstanding 15,098,424 15,098,424 14,910,192 14,910,424
Dividends declared per share -- -- -- --
Book value per share at
end of period $0.20 N/A $0.17 N/A
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(1) This period refers to Margo's period from July 1, 1999 to June 30, 2000, and
covers for itract the fiscal year ended June 30, 2000.
Notes to Unaudited Pro Forma Financial Statements
(a) Represents the expected sale of Margo's subsidiaries (Margo Nursery
Farms, Inc., Margo Garden Products, Inc., Margo Landscaping and Designs, Inc.,
Rain Forest Products Group, Inc., Margo Development Corporation and Margo Flora,
Inc.) for an assumed price of $5,000,000 in cash, plus the assumption of debt of
approximately $966,500, pursuant to the terms of the stock purchase agreement
with Empresas Margo. See (f) below.
(b) Margo, a Puerto Rico corporation, will merge with and into a
wholly-owned subsidiary, iTract, Inc., a Delaware corporation. As a result of
this merger, each shareholder of Margo will receive one share of iTract, Inc.
for every Margo share that the shareholder owns.
(c) No income from continuing operations is shown for Margo as a result of
the expected sale of substantially all of Margo's assets.
(d) Information for itract, which operates on a June 30 fiscal year, was
derived from the audited financial statements for the year ended June 30, 2000.
Information for Margo, which operates on a December 31 fiscal year, was derived
from quarterly reports on form 10-Q and the annual report on form 10-K.
(e) Takes into account the provision of the merger agreement with itract
under which itract will assume all legal and accounting fees incurred by Margo
after July 1, 2000 in connection with the merger up to $250,000. As a result,
this amount is reflected as an account payable to the service providers at the
time of the merger. If Margo pays any of these expenses, the requirement that
Margo have at least $5 million in cash and cash equivalents at the effective
time of the merger will be reduced by the amount of the payments.
(f) Elimination of Margo's retained earnings of $186,822 with a
corresponding increase in additional paid-in-capital.
(g) Assumes iTract, Inc. will issue 13,216,102 new shares of its common
stock to itract members in exchange for all of the outstanding units of itract.
This transaction will increase common stock and decrease additional paid-in
capital by $13,216.
(h) Assumes no Margo shareholder dissents to the merger with iTract, Inc.
and exercises appraisal rights.
V-6
Chapter Five -- Selected Financial Data
(i) Reflects 10% of the shares of Margo common stock are not converted
into shares of iTract, Inc. common stock due to dissenting votes. Accordingly,
it is assumed that these Margo stockholders will receive payment at a per share
price of $2.88 instead of shares of iTract, Inc., based on the highest closing
price of Margo's shares of common stock during the fourth quarter of 1999. The
number of shares converted represents the maximum number of shares of Margo
common stock that may dissent to the merger of Margo with iTract, Inc. without
itract having the ability to terminate the merger agreement.
(j) itract has indicated that cash available upon completion of the merger
is expected to be reduced by approximately $2.6 million, which funds will be
used to (1) repay a portion of the amounts advanced to or on behalf of itract by
ICES and its affiliates, (2) pay legal and accounting fees incurred in
connection with the merger, and (3) pay other obligations of itract.
Approximately $385,000 of the amounts due to ICES and affiliates at the time of
the merger will be discharged and converted into capital contributions to
itract. These pro forma balance sheets as of September 30, 2000, assume that (1)
$385,000 in amounts due to affiliates are discharged and converted into capital,
(2) amounts then due to affiliates are paid off, except for approximately
$847,000, and (3) merger-related legal and accounting fees in the amount of
$250,000 are paid off. It also assumes that amounts owed to dissenting
shareholders would not be paid immediately upon completion of the merger. Note
that liabilities will be incurred by itract subsequent to September 30, 2000, a
portion of which will be paid upon completion of the merger, and others will be
paid off in the future.
V-7
Chapter Six -- Information About the New Delaware Holding Company
CHAPTER SIX
INFORMATION ABOUT THE NEW DELAWARE
HOLDING COMPANY
General
iTract, Inc. is the new Delaware holding company into which Margo is
proposing to merge. It was formed by Margo on April 5, 2000 as a wholly-owned
subsidiary for the sole purpose of effecting the merger with itract. It has no
assets other than a wholly-owned subsidiary, which also has no assets, that will
merge with and into itract. Following these transactions, it will be a holding
company whose sole assets will be its 100% membership interest in itract and the
$5,000,000 to be received by Margo from the sale of its assets. Immediately
after these transactions, this cash amount will be reduced by approximately
$3,200,000. In addition, iTract, Inc. will be required to pay dissenting Margo
shareholders exercising appraisal rights the amount determined by a Puerto Rico
court to be the fair value of their Margo shares. After the consummation of
these transactions, the current shareholders of Margo and members of itract will
be shareholders of iTract, Inc.
Directors and Officers
The current directors of iTract, Inc. are the same as Margo's directors.
Michael J. Spector also serves as President and Chief Executive Officer of
iTract, Inc. Upon the consummation of the merger with itract, all of these
directors and officers will resign and are expected to be replaced with the
persons listed under "Directors and Principal Officers after the Merger."
Description of Securities
As of the date of this proxy statement/prospectus, the authorized capital
stock of iTract, Inc. consists of 100,000,000 shares of common stock, par value
$.001 per share, and 5,000,000 shares of "blank check" preferred stock, par
value $.001 per share. No other classes of capital stock are authorized under
its certificate of incorporation.
Common Stock. iTract, Inc. issued 1,000 shares of common stock to Margo.
Approximately 2 million shares of common stock will be issued in connection with
the merger of Margo into iTract, Inc. and approximately 12.8 million shares of
common stock will be issued to itract members in connection with the itract
merger. At the effective time of the merger of Margo with iTract, Inc. and the
itract merger, the issued and outstanding shares of iTract, Inc. common stock
will be duly authorized, validly issued and nonassessable. Holders of iTract,
Inc. common stock will have no preemptive, redemption, conversion, subscription
or sinking fund rights. These holders will be entitled to receive dividends when
and as declared by the board of directors out of funds legally available for
payment. Upon liquidation, dissolution or winding up of iTract, Inc., the
holders of the common stock may share ratably in the assets, subject to the
rights and preferences of any outstanding preferred stock.
Each holder of common stock is entitled to one vote per share of common
stock held of record by the holder. Common shareholders do not have any right to
cumulate votes for the election of directors.
Preferred Stock. The board of directors of iTract, Inc. has the power,
without further vote of the shareholders, to authorize the issuance of up to
5,000,000 shares of preferred stock and to fix the terms, limitations, rights,
privileges and preferences of any of these shares of preferred stock. This power
includes the ability to establish voting, dividend, redemption, conversion,
liquidation and other rights and preferences for any of these shares. There are
presently no shares of preferred stock outstanding.
VI-1
Chapter Six -- Information About the New Delaware Holding Company
Long Term Incentive Plan
In ________, 2001 the board of directors of iTract, Inc. adopted, and
Margo, as the sole stockholder, approved, the 2001 Long Term Incentive Plan (the
"Plan"), which provides for the grant by iTract, Inc. of awards of restricted
stock and options to purchase common stock. The maximum number of shares of
common stock which may be issued and sold under the Plan is ___________. The
Plan, which expires in ________, 2011, will be administered by the board of
directors or a committee of the board of directors of iTract, Inc. The purposes
of the Plan are to ensure the retention of existing executive personnel, key
employees, directors, consultants and advisors who are expected to contribute to
the future growth and success of iTract, Inc. and to provide additional
incentive by permitting these individuals to participate in the ownership of
iTract, Inc.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of iTract, Inc.'s common stock on the
date of the grant, except that the term of an incentive option granted under the
Plan to a stockholder owning more than 10% of the outstanding voting power may
not exceed five years and its exercise price may not be less than 110% of the
fair market value of the common stock on the date of the grant. To the extent
that the aggregate fair market value, as of the date of grant, of the shares for
which incentive options become exercisable for the first time by an optionee
during the calendar year exceeds $100,000, the portion of the option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of
iTract, Inc. may be exercised only while the optionee is employed or retained by
the company or within 90 days of the date of termination of the employment
relationship or directorship. However, where termination is by reason of death
or permanent disability of the optionee, options which are exercisable at that
time may be exercised within 12 months of the date of termination of the
employment relationship or directorship. Upon the exercise of an option, payment
may be made by cash or by any other means that the board of directors or the
committee determines. No option may be granted under the Plan after _______,
2011.
In addition to providing for the granting of options, the Plan provides
for awards of "restricted stock." The restricted stock will be subject to
restrictions on transfer and subject to forfeiture upon termination of
employment, for those periods as shall be specified by board of directors or the
committee on the granting of each award of restricted stock.
Options or restricted stock may be granted only to those employees,
officers and directors of, and consultants and advisors to, iTract, Inc. or any
subsidiary as the board of directors or the committee shall select from time to
time in its sole discretion, provided that only employees of iTract, Inc. or a
subsidiary shall be eligible to receive incentive options.
The board of directors may amend or terminate the Plan except that
stockholder approval is required to effect a change so as to increase the
aggregate number of shares that may be issued under the Plan to modify the
requirements as to eligibility to receive options, to increase materially the
benefits accruing to participants or as otherwise may be required by Rule 16b-3
or Section 422 of the Code. However, an adjustment of the number of shares that
may be issued under the Plan to reflect changes as a result of a stock dividend,
stock split, recapitalization, merger or consolidation does not require
stockholder approval. No action taken by the board may materially and adversely
affect any outstanding option grant without the consent of the optionee.
Under current tax law, there are no Federal income tax consequences to
either the employee or iTract, Inc. on the grant of non-qualified options if
granted under the terms set forth in the Plan. Upon exercise of a non- qualified
option, the excess of the fair market value of the shares subject to the option
over the option price (the "spread") at the date of exercise is taxable as
ordinary income to the optionee in the year it is exercised and is deductible by
iTract, Inc. as compensation for Federal income tax purposes, provided it
complies with applicable withholding and/or reporting rules. The optionee's
basis in the shares will be equal to the fair market value on the date taxation
is imposed and the holding period commences on this date.
VI-2
Chapter Six -- Information About the New Delaware Holding Company
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of the option, assuming that the optionee was
an employee of iTract, Inc. from the date the option was granted until 90 days
before the exercise. However, upon exercise, the spread must be added to regular
Federal taxable income in computing the optionee's "alternative minimum tax"
liability. An optionee's basis in the shares received on exercise of an
incentive stock option will be the option price of these shares for regular
income tax purposes. No deduction is allowable to iTract, Inc. for Federal
income tax purposes in connection with the grant or exercise of these options.
Transfer Agent
ChaseMellon Shareholder Services, L.L.C., New York, New York, will serve
as transfer agent for the shares of common stock of iTract, Inc.
VI-3
Chapter Seven -- Information About itract
CHAPTER SEVEN
INFORMATION ABOUT ITRACT
Business Overview
itract was formed as a Delaware limited liability company in May 1999.
itract is an Internet-based development stage company that was established to
address the needs of small to medium sized businesses that desire a more
efficient and cost-effective means to market, promote and advertise their
products and services directly to prospective businesses and consumers. These
promotional activities are commonly referred to as "direct marketing campaigns."
itract's services, which are provided online through its Web site, are intended
to allow these businesses to analyze, assemble and launch their direct marketing
campaigns in a simple, low-cost and effective manner. By accessing itract's Web
site from their own desktop computers, and without downloading or purchasing any
additional software, itract customers are able to develop and launch
comprehensive direct marketing campaigns delivering advertising materials via
email, fax and traditional postal mail to a targeted audience of both on-line
and off-line prospective customers. Itract completed successful testing of a
"beta" version of its software and launched a basic "version 1.0" of its system
from its Web site (www.itract.com) on June 30, 2000. To date, itract has had
limited funds with which to operate its business and has generated minimal
revenues of $1,197 to September 30, 2000. itract believes that the funds
available to it upon the consummation of the mergers will permit it to increase
the promotion of its services and upgrade its Web site to include additional
features, which in turn is intended to generate increased revenues.
Industry Overview
DIRECT MARKETING
Direct marketing has traditionally been conducted by mailing marketing
information directly to consumers. More recently, with the growth of the
Internet and advances in telecommunications technology, direct marketers have
begun to utilize email and fax machines to deliver their marketing messages to
prospective customers. According to the Direct Marketing Association, overall
media spending for direct marketing initiatives reached $176.5 billion in 1999,
up 7.2% over 1998's expenditures. Direct marketing advertising expenditures
represented 57.1% of total U.S. advertising expenditures in 1999. Direct
marketing expenditures for business-to-business, at $90 billion, accounted for
51% of total 1999 direct marketing expenditures. According to the Direct
Marketing Association, in 1999 a total of $42.2 billion was spent on direct mail
campaigns, up from $39.3 billion spent in 1998. In addition, the Direct
Marketing Association also predicts that direct mailing expenditures will grow
at a rate of 6.2% annually through 2004. Total U.S. direct marketing sales
business-to-business grew by 10.4% from $626.4 billion in 1998 to $691.6 billion
in 1999, and are expected to grow at an annual rate of 7.4% to $1.17 trillion in
2004.
The Internet and Email
The Internet has emerged as a significant tool for global communications,
commerce and media. The growth of the Internet is the result of a number of
factors, including the extensive and growing installed base of advanced personal
computers in the home and workplace, increasingly faster and cheaper access to
the Internet, improvements in network infrastructure and bandwidth, development
of Internet-based applications and increasingly useful content available online.
Email is one of the most popular applications associated with the Internet.
Increased use of the Internet has resulted in the widespread adoption of email
as a regular and dependable communications medium.
The ability to inexpensively communicate at any time and from any location
with Internet access has resulted in the rapid increase in email use in recent
years. Continued growth in the use of email is being driven by its convenience,
speed, low cost and the ability to send increasingly large and complex files and
attachments,
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Chapter Seven -- Information About itract
including documents, spreadsheets and multimedia presentations. Today, email is
becoming increasingly critical to business- to-consumer and business-to-business
communications.
Email Marketing
Consumer marketing has traditionally been conducted through a variety of
media, including direct mail and telephone. The widespread adoption of the
Internet and email has enabled companies to create new direct marketing and
communications strategies to target and acquire new customers, as well as
enhance existing customer relationships. The Direct Marketing Association has
estimated that approximately $1.3 billion was spent on direct marketing through
the Internet in 1999 and predicts that this number will grow to $8.6 billion by
2004. Email marketing and communications strategies are gaining acceptance among
a wide variety of businesses. In a 2000 Forrester Research study, e-commerce
marketers reported that email marketing was their most effective tool in
retaining customers and increasing sales. The marketers interviewed by Forrester
planned on tripling their spending on email marketing by 2004. Forrester
Research also predicts that 200 billion commercial emails will be sent by
marketers in 2004. itract believes that email marketing is more cost effective
than traditional direct marketing methods and enables significantly faster
communication with a larger audience.
Fax Marketing
Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. The proliferation of fax machines and their ease of operation has
caused fax usage to increase significantly as a principal means of
business-to-business communications. Declining telephony costs and improved
transmission technologies have made the transmission of documents by fax a
cost-effective and preferred alternative to mail, courier and telex services. In
addition, there recently has been a substantial increase in the installed base
of fax-capable personal computers.
Itract's Business
itract's Internet-based system, comprised of proprietary and licensed
software linked to a network of Web, email and fax servers, has been designed
and is intended to be further enhanced to assist small businesses in analyzing,
assembling and delivering targeted direct marketing campaigns without the high
cost, long lead times and production difficulties associated with traditional
direct marketing. itract expects that the ease of use and functionality of the
itract system will allow customers to increase sales, improve effective
communication and reduce marketing costs.
itract has developed, and is further refining an all-inclusive
Internet-based direct marketing system that empowers itract's small business
customers with the ability to develop and launch a direct marketing campaign
from a single computer, using bulk email, "blast" fax mail and/or traditional
postal mail. To utilize the itract system, the user accesses itract's Web site
and uploads its authored document, which may be a marketing announcement,
catalog or any other type of business message, together with a mailing list. The
mailing list, if it is the user's own list, may consist of a combination of
email addresses, fax telephone numbers and traditional postal addresses. In
addition, with version 1.0 of the itract system, users are able to purchase
permission-based email mailing lists directly from itract's Web site. Subsequent
upgraded versions of the itract system are intended to provide customers with
the ability to purchase mailing lists that include demographic information
concerning a business, such as the identity of key executives, SIC (Standard
Industrial Classification) code, number of employees and reported sales, as well
as the ability to purchase permission-based fax numbers and/or postal addresses.
Once an authored document and mailing list are provided to itract through
its Web site, itract transmits the authored document to each prospect on the
mailing list, through email, fax or traditional postal mail. Email is
transmitted by itract though its network of email servers. Faxes are transmitted
by a third-party service provider whose fax servers are linked to itract's
network of servers. Postal mail is packaged and deposited in the mails by a
third-party vendor compensated by itract based on each piece of mail sent.
Because users' mailing lists may contain email, fax and postal addresses for a
single prospect, itract users can direct the particular delivery method to be
used
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Chapter Seven -- Information About itract
or, by the click of a button, the user can utilize itract's 'smart send' system
which determines the most cost-effective way to reach that prospect, be it by
email, fax or postal mail. Itract's management believes that an important
feature of the itract system is its ability to simultaneously reach both the
on-line and off-line marketplace.
itract uses its best efforts to adhere to all federal and state laws and
regulations relating to the transmission of spam (unsolicited email) and faxes.
In addition to taking steps to ensure that the itract system is not used to
transmit unsolicited email or fax, itract provides every recipient of
information transmitted through the itract system with the ability to contact
itract at no cost to "opt-out" of receiving future solicitations through itract.
Finally, while not available on version 1.0, itract expects that future
upgrades of its system will incorporate a rewards/incentives program and include
reporting tools, both of which will enable itract customers to increase the
effectiveness of their direct marketing campaigns.
LIST RENTAL/PURCHASE
An integral feature of itract's system is its ability to provide users,
for a fee, with mailing lists (initially consisting of email addresses) which
may be purchased directly from itract on its Web site. Subsequent versions of
the itract system are intended to allow users to purchase fax numbers and postal
addresses from a choice of list companies available through itract's Web site.
To date, itract has entered into a three-year agreement with one list provider
of permission-based email addresses. Under this agreement, itract, at no initial
cost, has been granted the nonexclusive right to resell mailing lists to its
customers, and pays the list provider royalties upon sales to itract customers.
itract is in negotiations with other list providers and may enter into
agreements with these and other list provider companies in the future, any of
which may require itract to pay initial licensing fees.
In addition to providing users with targeted mailing lists, itract's Web
site is intended to allow customers to construct mailing lists tailored to their
demographic, geographic, product and/or service specifications, and manage,
analyze, search and manipulate the data contained in their contact lists,
whether or not purchased from itract. itract anticipates that these features
will not be available until after the consummation of the mergers.
REWARDS PROGRAM
To generate increased use and loyalty, the itract system is intended to be
upgraded to incorporate a rewards and loyalty points program. Rewards points
will be used in three ways. To generate increased response rates, itract
customers will be able to provide prospects that respond to its direct marketing
efforts with rewards points. itract customers will also earn rewards points for
utilizing the itract system. In addition, anyone who registers for itract's
permission-based registry will be eligible to instantly receive reward points.
Reward points are intended to be redeemable at participating online and offline
retailers, as well as for itract services. itract previously entered into an
agreement with a rewards points provider that ceased operations in November
2000. itract is currently in negotiations with alternative rewards points
providers and will seek to enter into an agreement with an appropriate provider.
itract believes that with the funds that will be available to it upon the
consummation of the mergers, it will be able to complete necessary modifications
to its software and hardware to implement a rewards points program.
SPAM PRECAUTIONS, ANTI-SPAM REGISTRY
All email lists provided by itract are intended to be designed, to the
greatest extent practicable, to include only prospects that have specifically
requested to receive information of interest or have been given the option to
opt out from receiving information but have not done so. All fax mailing lists
provided by itract will be purchased from third party list providers which
certify that these lists only include prospects that have specifically requested
to receive information of interest. In addition, all recipients of information
email or faxes through the itract system are given the option, by accessing
itract's Web site, to "opt out" from receiving future unsolicited information of
the nature received, and/or opting in to receiving future solicitations in
specific categories of interest. To encourage individuals to provide itract with
specific opt in information, as well as basic personal information such as name,
address, phone and fax numbers and email address, itract intends to award reward
points, if and when established, to individuals providing itract with this
information. In this manner, itract will build an "Anti-Spam registry"
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Chapter Seven -- Information About itract
containing the names of individuals who have requested not to receive
information, and have the ability to compile a proprietary permission-based
database consisting of those individuals who have "opted in."
The Anti-Spam registry will be used by itract customers, whether using
their own or purchased mailing lists, to ensure that individuals in the registry
who have so requested do not receive unsolicited information. Moreover,
customers using the itract system with their own mailing lists are required to
acknowledge an "anti-spam" disclaimer that appears on screen before continuing.
Accordingly, the itract system attempts to minimize the legal and ethical issues
related to the transmission of spam (unsolicited mass email or fax).
Revenue Sources
itract intends to generate revenue from multiple sources. Itract expects
to derive most of its revenue from transmission fees charged for each email, fax
and piece of postal mail delivered by itract. itract users will also be charged
an annual subscription fee (currently anticipated to be $49.95), although itract
is currently offering free lifetime "membership" to users that enroll to use
itract's services. In addition, itract expects to earn commissions on mailing
lists purchased by itract users through itract's Web site from third party list
companies. To a lesser degree, itract expects to generate additional revenues by
selling reward points to itract users for use in their direct marketing
campaigns.
ITRACT PRIVATE LABEL PROGRAM
itract intends to generate revenues from its private label program,
pursuant to which itract will enter into agreements with strategic partners to
provide them with "private label" versions of the itract system which will be
accessible from the Web site of these third parties. In addition to maintenance
and development fees that these parties will be required to pay to itract for
itract's development and management of these private label Web sites, revenues
generated from the itract system through strategic partners' Web sites will be
shared with itract according to contracted for rates. In this manner, itract's
private label program will enable it to gain access to customers that may not
otherwise have utilized the itract solution from itract's own Web site.
Itract Sales and Marketing
SALES
itract's sales program uses the following three methods:
1. Web site Sales
itract's Web site (www.itract.com) has been designed to function as one of
itract's primary sales methods. A major marketing goal is to drive traffic to
the itract Web site. The "front end" of the Web site is designed to sell itract
services and is the portal to the user site. The member site is designed for
functional ease-of-use and generation of renewal income.
The front end of the itract Web site is designed to grab the customer's
attention in the first few seconds. itract believes it succinctly articulates
the benefits of the itract system and encourages customers to purchase its
online services. A prospect is able to visit the itract Web site for the first
time, purchase credits and mount a direct marketing campaign all on the same
day. On every page of the itract Web site, the user has the opportunity to
purchase itract's services. A specially created navigation bar provides users
with immediate access to the information they require. itract's sales
promotion/service description, pricing, ordering, help desk and contact
information are all specially designed to be user friendly.
An integral part of the itract Web site is the member site, which itract
believes is highly sophisticated yet easy-to-use. The member site is designed
from the user's point of view. A step-by-step process walks the customer through
importing and building its mailing lists, attaching documents, and transmitting
the data to targets on the mailing lists.
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Chapter Seven -- Information About itract
The member site is designed to generate renewal revenue. It includes an
automated function which notifies the customer when it has fallen below a
predetermined number of credits in its account. This message prompts the
customer to purchase more credits at that time and rewards the customer with
bonus email credits for doing so. There is also a hyper-link directly into the
"Purchase More Credits" function of the member site, where the customer is able
to purchase more credits.
2. Private Label Program
The itract private label program is being designed to facilitate the
creation of relationships with companies that private label itract's services.
The private label program will allow these companies to market itract's services
from their own Web site and under their own name to their existing customer
base. This is intended to permit increased sales of itract's services while
keeping direct sales costs low. By partnering with companies that target
particular industry segments, itract believes it will gain access to a relevant
customer base, which in turn will increase itract's online sales. Because these
partnerships will be performance-based, itract will compensate its strategic
partners only when a purchase is made, making this channel highly
cost-effective.
itract will initially leverage its existing relationship with
eMarketplaces, Inc., an indirect majority owned subsidiary of ICES.
eMarketplaces is an e-commerce provider that utilizes proprietary technology to
create community-oriented, business-to-business electronic marketplaces for
specific industries. Under an agreement entered into between itract and
eMarketplaces, itract will provide eMarketplaces with a "private label" version
of the itract system so that existing customers of eMarketplaces will be able to
purchase itract's services. itract has entered into similar agreements with
other strategic partners. itract does not expect to make these private label
versions of its services available to any strategic partner until the itract
system has been upgraded to provide additional features. itract anticipates that
these additional features will not be available until after the consummation of
the mergers.
3. Direct Sales
itract's in-house sales force currently consists of a Vice President of
Marketing and one additional account executive, and itract intends to hire
additional account executives consistent with its growth needs as required. The
in-house sales force focuses on strategic selling. itract's initial target
market will consist of the following:
Affiliate Programs - itract will seek to enter into one or more agreements
that will provide it access to an "affiliate network" of companies doing
business on the Internet. These agreements will provide itract with the ability
to engage network affiliates to provide links on their Web sites to itract's Web
site. itract would pay to these network affiliates a fee based on revenues
generated through their Web sites, customers referred through their Web sites or
other similar criteria. In this manner, if itract is able to successfully engage
affiliates, itract will be able to reach prospective customers that may not
otherwise have been aware of itract's services.
On-line and Off-Line Businesses and Services - itract has, and will
continue to use its own itract system to bulk email and fax promotional
information regarding the itract system's capabilities to on-line and off-line
businesses.
Special Offers - itract is currently offering free lifetime "charter
membership" and discounted transmission rates to users that enroll to use
itract's services. itract may offer similar special promotional offers in the
future.
MARKETING
To familiarize the public with the itract system and its capabilities and
build brand awareness, itract has entered into agreements with both an
advertising agency and a public relations agency.
In addition, itract has entered into an agreement with InfoSpace.com, Inc.
InfoSpace maintains an Internet content, commerce and community Web site.
Pursuant to the agreement, InfoSpace will post itract promotional placements,
including textual and graphic links to itract's Web site on various locations of
its Web site. InfoSpace
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has committed to providing itract a specified number of "impressions" over the
two year term of the agreement. An "impression" is defined as a user's viewing
an InfoSpace Web site page that has an itract promotional placement and
connecting to itract's Web site through that link. itract's sole remedy for
InfoSpace's failure to meet this commitment is the ability of itract to extend
the term of the agreement up to a maximum of 12 additional months until this
commitment is met. As consideration for these services, InfoSpace will be
compensated based on the number of impressions it generates, up to a maximum of
$83,333 for any month.
itract does not intend to commence full-scale marketing efforts until the
itract system has been upgraded to provide additional features. itract
anticipates that these features will not be available until after the
consummation of the mergers.
Customer Relationship Management Tools
itract expects that electronic customer relationship management (eCRM)
tools it utilizes will play an important role in generating sales, marketing
itract's services and providing customer support services.
Using off-the-shelf software it has purchased, itract is maintaining a
database that records interactions between itract and its customers and
prospective customers. This software will allow itract to provide automated,
customized responses to prospects and customers that visit itract's Web site or
otherwise inquire about itract's services. Prospects that have set up accounts
with itract are automatically followed-up with several email messages designed
to stimulate usage, in addition to one telephone call from an itract Customer
Service Representative. Other prospects, depending on the level of interest
shown by them in itract's services, are pursued aggressively through a series of
messages that offer incentives and special promotions or are pursued less
aggressively with an initial message sent to solicit the prospect's consent to
be included on itract's mailing list, with follow-up monthly communications from
itract designed to showcase itract's services and announce enhancements. By
integrating itract's Web site with these eCRM tools, other than an initial
personal call from a Customer Service Representative, itract's services are
marketed in an automated, cost-effective fashion without human intervention.
The database will also allow itract to gauge the relative effectiveness of
the various methods by which itract interacts with and markets its services to
prospective customers. In particular, itract will be able to obtain statistical
feedback on the effects of various forms of marketing, live interactions with
prospects, email and direct mailings sent to prospects, as well as the results
of business generated from random traffic to itract's Web site.
itract also employs Customer Service Representatives who are able to
respond to customers' inquiries in one of four ways selected by the customer:
34. live chat,
35. call-me-back buttons,
36. email and
37. inbound telephone.
The "live chat" feature available from itract's Web site allows real-time
typed communications between persons accessing itract's Web site and itract's
Customer Service Representatives. In addition, clicking on a "call-me-back"
button on itract's Web site will result in a phone call from an itract Customer
Service Representative to the person requesting a response. itract Customer
Service Representatives also respond to email and telephone inquiries. It is
itract's policy to respond immediately to "call-me-back" inquiries and within 24
hours to email inquiries. itract currently employs two Customer Service
Representatives and will have to hire additional Customer Service
Representatives as its business grows.
Technology
itract's proprietary software is able to interactively determine the
proper delivery methods available to a client based on the information contained
in their uploaded or purchased contact lists. It incorporates list counting and
de-duplicating functionality that was originally developed for itract by an
outside programming contractor and
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has been further refined by itract's own personnel with the assistance of
independent consultants engaged for this purpose. The system was developed using
the leading industry standard tools and languages available in the Internet
industry. These include but are not limited to Microsoft SQL database, Cold
Fusion, Java and GTT. Their selection was based on their interoperability with
TCP/IP, the Internet standard communications protocol, and their widespread use
within the communications industry.
The system consists of itract's proprietary software which incorporates
licensed software for the transmission of faxes and email messages, linked to a
network of web servers, fax servers, and email servers redundantly connected to
deliver these messages. All systems environments are managed by a staff of
trained technicians. Back-up systems were designed for high availability and
scalability in a mission critical "24x7" scenario.
If and when itract introduces new services and expanded functionality, the
modular design of itract's software, which allows easy integration with core
systems for added features, will be expanded. Current plans involve the addition
of reward points, remote accessibility, voice broadcast capabilities, and
greater options within each sending method such as job scheduling, fine mode fax
transmission, and overnight, 2nd day, 1st class or bulk mail postal delivery
options. List rental options are intended to be expanded to allow for the
purchase of a greater variety of opt-in email prospect telemarketing lists,
response and compiled direct mail lists, and other media selections appropriate
to itract's business strategy.
In addition to relying on third parties for the software that enables the
itract system to send faxes through the Internet, itract is dependent on support
services provided by third parties for the integration of this software with
itract's hardware and proprietary software. Prior to the launch of version 1.0
of the itract system, itract anticipated licensing fax transmission software and
obtaining support services from a particular entity, which subsequently ceased
operations. As a result, itract was forced to delay the launch of version 1.0 of
its Web site and incur additional costs.
Utilizing the itract system accessible from itract's Web site, clients are
currently able to upload or purchase contact lists in electronic format, and
then transmit a message using a simple, intuitive online interface that accepts
immediate online input or attachment of a document the client has previously
authored. itract handles the delivery of the rendered documents to the client's
list of selected contacts. Future upgrades of the itract system are intended to
allow users to compile contact lists based on historical responses and
demographic profiles.
itract has developed a detailed set of system specifications to be
incorporated into the current system and is working with a third-party
programming group to develop version 2.0 of its Web site, which is currently
expected to be released in the first calendar quarter of 2001.
itract has contracted with an outside data facility provider to provide
itract with a data facility, located in New York, New York, where itract
maintains its Web servers, fax servers and email servers. As both an ISP
(Internet Service Provider) and CLEC (Competitive Local Exchange Carrier), this
provider provides itract with both Internet connectivity for its email services
and telephony services for fax transmission.
Acquisitions
From time to time, itract examines various acquisition opportunities. Any
decision to make an acquisition would be based upon a variety of factors,
including the purchase price and other financial terms of the transaction, the
business prospects and competitive position of services provided by the
acquisition candidate, and the extent to which any acquisition would enhance
itract's prospects. To date, no agreement or agreement in principle has been
reached for any acquisition.
Competition
itract competes both with traditional providers of direct marketing
services and new entrants to the market that provide email and fax direct
marketing services. In addition, the majority of businesses today use their
internal
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email systems to provide solutions to manage and deliver outbound email
campaigns. Many of itract's current and potential competitors have greater name
recognition, longer operating histories, larger customer bases, and
significantly greater financial, technological, marketing, public relations,
sale, distribution and other resources.
The direct marketing industry in general, and the email marketing industry
in particular, is intensely competitive. The market is highly fragmented, with
the largest companies accounting for only a small portion of the market. There
are few barriers to entry, as evidenced by the many new entrants to the market,
and it is expected that established and new entities will continue to enter the
market. While itract's management believes that it may be one of the first
companies to provide a fully-integrated communications system that through
email, fax and postal mail simultaneously reaches the on-line and off-line
marketplace, there can be no assurance that itract will be able to compete
effectively with current or future competitors.
For companies seeking outsourced solutions, itract competes with email
outsourcing companies that offer services similar to those provided by itract,
including email distribution, list management and reporting. itract competes
with Boomerang.com, which provides direct marketers with Internet-based
transmission of email and fax, but not postal mail. Cynet, Inc. and Mail.com
also provide fax and email transmission services. Other key competitors include
24/7 Media, yesmail.com, Click Action, Digital Impact and MessageMedia, which
provide email marketing solutions, efax.com, which provides fax transmission
services only, and E-Letter, Inc., an online direct mail service company whose
services are limited to postal mail.
Companies in the Internet based direct marketing industry compete mainly
on quality and range of services, and price. itract believes that by providing
customers who access its Web site with the ability to simultaneously reach
online and offline targets directly from the user's desktop computer, itract
provides its customers with a service not currently provided by its competitors.
However, itract realizes that it will not be able to successfully compete unless
and until it introduces new features, such as analytical tools, rewards points
and the availability of additional mailing lists. itract believes that the funds
that will be available to it upon the consummation of the mergers will allow it
to complete development of and introduce these features.
itract's ability to compete will also depend on the success of its sales
and marketing efforts, and on itract's ability to offer:
o technical expertise;
o consistent and reliable service;
o features and functionality;
o full service solutions; and
o direct marketing expertise.
Intellectual Property Rights
itract's success and ability to compete are substantially dependent upon
its technology and intellectual property. While itract relies on copyright,
trade secret and trademark law to protect its technology and intellectual
property, itract believes that factors such as the technological and creative
skills of its personnel, new product and service developments, frequent product
and service enhancements and reliable product and service maintenance are more
essential to establishing and maintaining an intellectual property leadership
position. itract has one service mark application pending for the mark "itract"
and has no patents or patent applications pending. Others may develop products
and services that are similar or superior to those provided by itract.
itract has entered into confidentiality agreements with its employees,
consultants and corporate partners and intends to control access to, and
distribution of its products, documentation and other proprietary information.
Despite itract's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain
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and use its products, services or technology. Policing unauthorized use of
proprietary information is difficult, and the steps itract has taken might not
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect its proprietary rights as fully as do the laws of
the United States.
Substantial litigation regarding intellectual property rights exists in
the technology industry. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to itract. itract may
increasingly be subject to infringement claims as the number of competitors in
its industry segments grows and the functionality of products in different
industry segments overlaps. In addition, many of itract's competitors may have
filed or intend to file patent applications covering aspects of their technology
that they may claim itract's intellectual property infringes. Although itract
has not been party to any litigation asserting claims that allege infringement
of intellectual property rights, there can be no assurance that itract will not
be a party to litigation in the future. Any third party claims, with or without
merit, could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product introduction delays or
require itract to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
itract, if at all. A successful claim of product infringement against itract
could harm itract's business.
Government Regulation
There is a growing body of laws and regulations applicable to access to or
commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is likely that a growing number of laws and regulations will be
adopted at the international, federal, state and local level with respect to the
Internet or direct marketing services covering issues such as user privacy,
pricing, content, copyrights, distribution, and characteristics and quality of
products and services. Further, the growth and development of the market for
email direct marketing may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may impair the growth
of the Internet or email direct marketing, which could, in turn, decrease the
demand for itract's products and services and increase itract's cost of doing
business, or otherwise harm its business. Moreover, the applicability to the
Internet of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any new legislation or regulation of
this type, the application of laws and regulations from jurisdictions whose laws
do not currently apply to itract's business or the application of existing laws
and regulations to the Internet could harm itract's business.
Legislation has recently been enacted in several states relating to the
sending of unsolicited email, a practice commonly referred to as "spamming." The
federal government and several states, including New York, are considering, or
have considered, similar legislation. In addition, due to the convergence of
email and fax technology, federal law relating to the transmission of
unsolicited faxes, as discussed below, may be applicable to the transmission of
spam. Although the provisions of these current and contemplated laws vary, they
generally limit or prohibit both the transmission of unsolicited email and the
use of familiar spamming techniques such as the use of forged or fraudulent
routing and header information. Some states, including California, require that
unsolicited email include opt-out instructions and that senders of unsolicited
email honor any opt-out requests, a requirement that is consistent with itract's
own permission email policies. itract believe that its permission-based email
system will not be affected by spam-related legislation because it does not send
unsolicited messages and because its current practices are intended to comply
with current and proposed legislation. However, if itract is unable to prevent
the transmission of unsolicited email, it may be subject to claims for
violations by its customers of federal or state civil or criminal law. In
addition, there can be no assurance that legislation will not also affect
permission-based email marketing in a way that could force itract to change its
business practices, particularly in light of the rapidly evolving state of the
law in this area. In this event, itract's business could suffer.
In addition to the laws regulating the Internet and the transmission of
email, Federal law makes it unlawful to use a computer or other device to send
an unsolicited advertisement to a telephone facsimile machine, and provides a
private right of action to recover $500 for each violation of this law. To the
extent itract sells fax numbers to its customers, itract intends that all of
these numbers will belong to individuals that have explicitly agreed to receive
advertisements transmitted to their fax machines. In addition, itract requires
its customers that use
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Chapter Seven -- Information About itract
their own fax mailing lists to certify that these lists consist only of
individuals that have agreed to receive the information being transmitted.
However, despite itract's efforts, there can be no assurance that itract will be
able to comply with the law, and itract may also be held responsible for
violations of its customers. If itract is found to have violated this federal
law, itract may have to pay significant damages, its reputation will be harmed
and its business will suffer.
Employees and Facilities
itract employs nine full-time employees, who are located at itract's
principal executive offices at 18 West 18th Street, 10th Floor, New York, New
York 10011. itract occupies these facilities pursuant to an occupancy agreement
with its indirect majority owner, ICES. Under this agreement, itract pays ICES a
monthly amount based on the number of itract employees located at these
facilities. ICES has a lease for these premises that terminates in January 2010.
itract's telephone number is (212) 647-8483. itract's home page is located at
www.itract.com. Information contained on itract's Web site shall not be deemed a
part of this prospectus/proxy statement.
Legal Proceedings
itract is not currently a party to any material legal proceedings.
Certain Relationships and Related Transactions
ICES, through its subsidiary The TechDepartment.com Inc., currently owns
approximately 91.7% of itract's outstanding membership units. Upon the
consummation of the mergers, TechDepartment.com Inc. will own approximately 80%
of the outstanding common stock of the new Delaware holding company. ICES
develops, invests in, and operates Internet technology related companies.
Henry Kauftheil is currently the sole manager of itract and, at the
effective time of the mergers, will become the Chairman of the Board of the new
Delaware holding company. Mr. Kauftheil is also the Chairman and sole director
of The TechDepartment.com and the Chairman and a controlling stockholder of
ICES.
itract currently occupies space leased by ICES, for which it is obligated
to pay ICES a monthly amount based on the number of itract employees located at
these facilities. This amount was $5,000 for the month of September 2000, and
may increase as itract employs additional personnel. See "Employees and
Facilities."
Pursuant to a written agreement dated as of May 12, 1999, itract pays ICES
a monthly fee of $10,000 in consideration of various services provided by ICES
to itract, including investment banking, legal and accounting services.
itract also is a party to an agreement with CoreActive ACG, LLC, another
majority-owned subsidiary of ICES, pursuant to which itract pays CoreActive $850
per month for each itract employee that utilizes computer hardware, software and
network services provided by CoreActive.
itract is also obligated to CoreActive ACG, LLC in the amount of $485,000
in connection with the development of components of the itract system by
employees of CoreActive and some of its affiliates. CoreActive and these
affiliates have executed an Assignment of Intellectual Property pursuant to
which CoreActive and those affiliates conveyed all of their rights in the itract
system to itract.
To date, itract has not made any actual cash payments to ICES or its
affiliates in connection with the agreements and obligations described above.
However, at September 30, 2000 itract owed ICES and its affiliates the amount of
$2,881,026. This amount includes approximately $1,076,000 of debt owed to third
party vendors that was assumed by ICES, of which $956,991 remained unpaid at
December 31, 2000. In the event ICES does not satisfy these obligations, itract
will remain obligated to repay these vendors. Pursuant to the Agreement and Plan
of Merger, ICES has agreed that prior to the effective time of the itract
merger, approximately $385,000 of the
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Chapter Seven -- Information About itract
amounts owed by itract to ICES and its affiliates will be discharged and
converted into capital contributions to itract.
Executive Compensation
Summary Compensation Table
The following table sets forth for the fiscal years ended June 30, 1999
and 2000 the compensation for services in all capacities of itract's Manager and
the persons who were at June 30, 2000 executive officers of itract who received
salary and bonus in excess of $100,000 per annum.
Annual Compensation
------------------------------------------
Fiscal Other Annual
Name and Principal Position Year Salary $ Bonus $ Compensation
---- -------- ------- ------------
Henry Kauftheil, 2000 0 0 0(1)
Manager 1999 0 0 0(1)
Kevin Kerzner, 2000 $120,000(2) 0 0
Executive Vice President 1999 0 0 0
----------------------
(1) No executive compensation was paid to itract's Manager during the fiscal
years ended June 30, 1999 or June 30, 2000. Some entities controlled by
Henry Kauftheil, the Manager of itract, received fees from itract for the
years ended June 30, 1999 and June 30, 2000, as set forth under "Certain
Relationships and Related Transactions." Upon the consummation of the
mergers, the limited liability company agreement of itract will be amended
to provide, among other things, that the business and affairs of itract be
managed and controlled by its sole member, the new Delaware holding
company, eliminating the position of "Manager." Accordingly, after the
merger, Mr. Kauftheil will cease to be the Manager of itract, although it
is anticipated that Mr. Kauftheil will serve as the Chairman of the Board
of the new Delaware holding company following the merger.
(2) Represents annual base salary under an employment contract entered into as
of January 1, 2000; actual salary paid to Mr. Kerzner by itract during the
fiscal year ended June 30, 2000 was $59,230. Mr. Kerzner was compensated
by an affiliate of itract from July 1, 1999 to December 31, 1999 in the
amount of $45,000.
Employment Agreements
Kevin Kerzner. Pursuant to an employment agreement dated as of January 1,
2000, Kevin Kerzner is employed as the Executive Vice President of itract. The
agreement is for an initial term of three years, and will extend automatically
unless written notice is given by either party at least 90 days prior to the end
of the initial term. If the agreement is automatically renewed, it will continue
to be extended annually until terminated by either party pursuant to the
agreement. Mr. Kerzner will receive an annual base salary of $120,000 in the
first year of his employment period, increasing to $150,000 and $200,000
respectively in the second and third years of his employment with itract. Mr.
Kerzner will also be eligible to receive a bonus based on the performance of
itract. The agreement also entitles Mr. Kerzner to other benefits, including
medical insurance and participation in benefit plans that are or may be
available to employees of itract. Under the terms of the agreement, Mr. Kerzner
is prohibited from competing with itract for a period of one year following his
employment with itract. The agreement may be terminated by itract at any time
for "cause" as specified in the agreement.
Anthony Peluso. Pursuant to an employment agreement dated as of January
15, 2000, Anthony Peluso is employed as the Vice President -- Marketing of
itract. The agreement is for an initial term of three years, and will extend
automatically unless written notice is given by either party at least 90 days
prior to the end of the initial term. If the agreement is automatically renewed,
it will continue to be extended annually until terminated by either party
pursuant to the agreement. Notwithstanding the foregoing, the agreement may be
terminated by itract at any time upon three months' notice and the payment of
severance pay equal to three months of base salary. Mr. Peluso receives an
annual base salary of $100,000, subject to increase in the discretion of itract,
and will be eligible to
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Chapter Seven -- Information About itract
receive a bonus based on the performance of itract. The agreement also entitles
Mr. Peluso to other benefits, including medical insurance and participation in
benefit plans that are or may be available to employees of itract. Under the
terms of the agreement, Mr. Peluso is prohibited from competing with itract for
a period of two years following his employment with itract. The agreement may be
terminated by itract at any time for "cause" as specified in the agreement.
Financial Statements
The audited balance sheets of itract as of June 30, 1999 and June 30, 2000
and the related statements of operations and members' deficit and statements of
cash flows for the period from May 12, 1999 (inception) to June 30, 1999, for
the fiscal year ended June 30, 2000 and the period from May 12, 1999 (inception)
to June 30, 2000 are included in this proxy statement/prospectus. The unaudited
balance sheet of itract as of September 30, 2000 and the related statements of
operations, members' deficit and cash flows for the three month period ended
September 30, 2000 and for the period from May 12, 1999 (inception) to September
30, 2000 are also included in this proxy statement/prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ITRACT
The matters discussed in this section contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended, that involve
risks and uncertainties. All statements other than statements of historical
information provided below may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "may", "will", "should", "could",
"intends", "thinks", "estimates", "believes", "anticipates", "plans", "expects",
or the negative of those terms, and similar expressions are intended to identify
forward-looking statements. Factors that could cause actual results to differ
materially from those reflected in the forward-looking statements include, but
are not limited to, those discussed in this section and elsewhere in this
filing, including those discussed under "Risks Associated With itract's
Business." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect itract management's analysis,
judgement, belief or expectation only as of the date of this filing. itract
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after this date.
Overview
itract was formed as a Delaware limited liability company and commenced
operations in May 1999. itract is a development stage company and a member of an
affiliated group of companies under common control of its indirect parent, ICES.
itract has a fiscal year ending June 30. To date, itract has had limited funds
with which to operate its business and has generated minimal revenues.
itract launched a basic "version 1.0" of its system from its Web site
(www.itract.com) on June 30, 2000. The Web site is currently operational and
allows users to launch direct marketing campaigns delivering e-mail, fax and
traditional postal mail to an audience of both on-line and off-line prospective
customers. In addition, users are able to purchase permission-based email
mailing lists directly from itract's Web site.
itract intends to utilize the services of third-party consultants to
upgrade its Web site and proprietary software. These upgrades will provide
itract's users with additional features and enhancements not currently available
from itract's Web site. itract expects to use a portion of the funds that will
be available upon the consummation of the mergers to compensate these
consultants. Accordingly, these upgrades will not be available until after that
time.
itract intends to generate revenues from multiple sources. itract users
will be charged an annual subscription fee (currently anticipated at $49.95 per
annum) for unlimited access to itract's system, although itract is currently
offering free lifetime "membership" to users that enroll to use itract's
services. A transmission fee is
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Chapter Seven -- Information About itract
charged for each email, fax and piece of postal mail delivered by itract.
Subscription fee revenues will be recognized ratably over the term of the
subscription period, and transmission fee revenues are recognized as services
are performed. In addition, itract charges its customers and earns commissions
on mailing lists purchased by itract's users through its Web site from third
party list companies. itract also intends to charge its customers who purchase
reward points (which are not currently available) for use in their direct
marketing campaigns. Revenues from the sale of customer lists are recognized
when the list is provided. Reward points revenues will be recognized when the
points are issued. itract expects its e-commerce transactions to generate
substantially all of its revenues in the future. However, to the extent that the
number of subscribed users of itract's system is less than anticipated or that
users do not engage in the anticipated volume of transactions, revenues
generated by itract will be less than projected.
itract also anticipates deriving additional revenue from its private label
program pursuant to which itract will enter into agreements with strategic
partners to provide them with "private label" versions of the itract system
which will be accessible from the Web sites of these third parties. In this
manner, itract's private label program will enable it to gain access to
customers that may not otherwise have utilized the itract system from itract's
own Web site.
itract believes that the continued expansion of its operations and
marketing efforts is essential to achieving its financial goals. itract
therefore intends to continue to increase expenditures in all areas of its
operations, resulting in continued increases in cost of revenues and selling,
general and administrative expenses.
Historical Results of Operations
Historical results for itract's fiscal year ended June 30, 2000 and the
three months ended September 30, 2000.
Revenue
itract has generated revenues of $1,197 from inception to September 30,
2000. All of these revenues were generated by sales of itract's services from
its Web site subsequent to itract's launch of version 1.0 on June 30, 2000.
itract anticipates that it will not generate significant revenue unless and
until it increases its marketing efforts and introduces new features and
services accessible from its Web site. itract will not have sufficient funds to
finance these activities unless it consummates the merger with Margo or obtains
financing from alternative sources.
Selling, General and Administrative Expenses
Selling and marketing expenses consist of salaries, travel expenses for
sales staff, marketing expenses for itract's system, marketing materials and
promotions. Sales and marketing expenses amounted to $357,397, for itract's
fiscal year ended June 30, 2000, and $186,924 for the three months ended
September 30, 2000. The increased rate of expenditures is consistent with
itract's plan to build an infrastructure and to market its system, in order to
increase the number of strategic alliances, value added services, and
ultimately, the number of users. As itract continues to expand sales and launch
new services, itract expects to incur significant promotional expenses as well
as expenses related to the hiring of additional sales and marketing personnel,
increased advertising, public relations campaigns and marketing events. itract
anticipates that these costs will substantially increase in future periods
following the merger.
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including executive, finance,
administration, facilities and fees for professional services. General and
administrative expenses amounted to $1,322,680 for itract's fiscal year ended
June 30, 2000, and $248,079, for the three months ended September 30, 2000.
Included in itract's fiscal year ended June 30, 2000 are non-cash compensation
charges of $546,525 as a result of the issuance of 728,700 membership units to
the parent company, employees, employees of affiliates and consultants. These
membership units were issued as payment for services rendered, which include
technical and administrative support and finders fees in connection with the
proposed
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Chapter Seven -- Information About itract
merger with Margo. itract anticipates that its general and administrative
expenses will increase significantly as itract expands its infrastructure and
administrative staff.
Provision for Income Taxes
No provision is required to be made by itract for Federal and State income
taxes. Under the Internal Revenue Code and similar state regulations, itract has
elected to be treated as a partnership; accordingly, the income of itract is
taxed to its members.
Liquidity and Capital Resources
At September 30, 2000, itract had cash and cash equivalents of $833 and
total liabilities of $3,154,096. Since inception, itract has funded its
operations, working capital needs and capital expenditures through loans and
advances from its indirect parent, ICES, and affiliates of ICES. On February 24,
2000, in conjunction with the proposed merger with Margo, ICES issued $2,000,000
in convertible notes, in the amounts of $1,715,000 and $285,000, respectively,
to Michael J. Spector and J. Morton Davis, who are beneficial owners of Margo.
Mr. Davis is also a beneficial shareholder of ICES. The proceeds from the
issuance of these notes were advanced by ICES to itract to fund the operations
of itract until the effective time of the itract merger.
To date, the $2,000,000 advanced by ICES has been exhausted and itract has
required additional loans and advances to fund its operating and working capital
requirements. To fund these capital requirements, from November 2000 through
January 2001, Rosalind Davidowitz, Mr. Davis' wife, together with another
affiliate of Mr. Davis, loaned itract $350,000. $250,000 of the principal amount
of these loans are repayable upon the earlier to occur of the first anniversary
of the closing of the itract merger and May 15, 2002. The remaining $100,000 in
principal amount of these loans is currently due on the earlier to occur of the
closing of the itract merger and May 15, 2001. However, the parties to these
loans and ICES have agreed in principle to modify these loans so that all of
these loans will be due upon the earlier to occur of the first anniversary of
the closing of the merger and May 15, 2002. The parties have also agreed that
the obligor on these loans will be ICES and itract will be relieved of all
obligations under these loans. In connection with these loans, Ms. Davidowitz
was issued warrants to purchase 75,000 shares of common stock of ICES.
If the itract merger is not consummated, cash generated from itract's
operations will be insufficient to meet itract's capital requirements, and
unless itract obtains alternative financing, itract will be required to cease
operations.
itract's outstanding liabilities are principally comprised of loans and
advances due to ICES and affiliates of ICES. A portion of these liabilities
include approximately $1,076,000 of debt owed to third party vendors that was
assumed by ICES, of which $956,991 remained unpaid at December 31, 2000. In the
event ICES does not satisfy these obligations, itract will remain obligated to
repay these vendors. Pursuant to the Agreement and Plan of Merger, itract has
agreed that prior to the effective time of the itract merger, all amounts owed
by itract to ICES and its affiliates at February 29, 2000 will be discharged and
converted into capital contributions to itract, except for $525,000 (plus
interest) representing principally the amount incurred by itract for the
development of its Web site. The amount to be discharged pursuant to the merger
agreement is approximately $385,000. The $525,000 that will not be so discharged
is payable on demand to CoreActive ACG, LLC, an affiliate of ICES. CoreActive
originally developed itract's proprietary software, which has been subsequently
modified and upgraded by itract's consultants.
Upon completion of the itract merger, the new Delaware holding company, of
which itract will be a wholly-owned subsidiary, will have approximately
$5,000,000 in cash. This amount will be immediately reduced by approximately
$2,600,000, which funds will be used to repay amounts advanced to itract by
ICES, legal and accounting fees incurred in connection with the itract merger,
and other obligations of itract. In addition, the new Delaware holding company
will be required to pay dissenting Margo shareholders exercising appraisal
rights the amount determined by a Puerto Rico court to be the fair value of
their Margo shares.
VII-14
Chapter Seven -- Information About itract
It is anticipated that cash balances on hand immediately following the
itract merger, together with the anticipated cash flows from operations, will be
sufficient to fund working capital and capital expenditures for the 12 months
following the itract merger. However, itract's capital requirements are subject
to numerous contingencies associated with development stage companies, itract
may be subject to unanticipated expenses, and itract may be unable to realize
anticipated revenues. To the extent that the number of subscribed users of the
itract system is less than anticipated or that these users do not engage in the
anticipated volume of e-commerce transactions, cash flows generated by itract
will be less than projected. Accordingly, if itract does not execute its
business plan as anticipated, itract may be required to seek additional
financing within the 12 month period following the merger. itract may also
require additional financing in the future to expand its service offerings and
to make strategic acquisitions.
There can be no assurance that required or desired financing will be
available to itract, or that, if available, the financing will be available on
terms favorable to itract. Financing may be effected through the issuance of
equity securities, which may result in dilution to shareholders. Further, if
financing is raised by the issuance of debt, limitations may be placed on
itract's operations. Failure to obtain financing may impact itract's ability to
respond to competitive pressures or to take advantage of strategic opportunities
and may cause itract to cease operations.
Web site Development Costs
Costs incurred to develop itract's Web site have been capitalized or
expensed based upon guidelines issued by the Emerging Issues Task Force
Consensus Issue No. 00-2. All costs associated with the planning stage, totaling
$458,957 (including amortization costs of $87,199) through September 30, 2000,
have been expensed as incurred. Costs incurred in the Web site application and
infrastructure, graphics and content development stages, totaling $1,058,326
through September 30, 2000, have been capitalized.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including some derivative instruments imbedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS 133 requires the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and the measurement of those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. As itract does not engage or
plan to engage in derivative or hedging activities, there will be no impact to
itract's results of operations, financial position or cash flows upon the
adoption of this standard.
itract implemented the provisions of Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities," effective May 1999. SOP 98-5,
issued by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants, requires that the costs of all start-up
activities, as defined in the SOP, be expensed as incurred. The adoption of the
provisions of this SOP did not materially impact the results of operations or
the financial position of itract.
In October 1999, the Chief Accountant of the SEC requested that the
Financial Accounting Standards Board Emerging Issues Task Force address a number
of accounting and financial reporting issues that the SEC believes has developed
with respect to Internet businesses. The SEC identified twenty issues for which
they believed some form of standard setting or guidance may be appropriate
either because (i) there appeared to be diversity in practice or (ii) the issues
are not specifically addressed in current accounting literature or (iii) the SEC
Staff is concerned that developing practice may be inappropriate under generally
accepted accounting principles. Many of the issues identified by the SEC,
including those that address barter and revenue recognition, are potentially
applicable to itract. Although the Task Force has begun to deliberate these
issues, formal guidance has not been issued to date for the majority of them. In
addition, in December 1999, the SEC Staff issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements", which is required to be
implemented in the quarter ended March 31, 2000. Although itract believes its
historical accounting policies and practices
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Chapter Seven -- Information About itract
conform with generally accepted accounting principles, there can be no assurance
that the final consensus reached by the Task Force on the Internet issues
referred to above, or other actions by standard setting bodies will not result
in changes to itract's historical accounting policies and practices or to the
manner in which some transactions are presented and disclosed in itract's
consolidated financial statements. Although the SEC Staff issued SAB No. 101B in
June 2000 to defer the effective date of implementation of SAB No. 101 until the
fourth quarter of 2000, itract adopted SAB No. 101 for its quarter ended March
31, 2000 with no material impact on its financial position or its results of
operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of the
Accounting Principals Board, or APB, Opinion No. 25. This Interpretation
clarifies the application of APB Opinion 25 including:
o the definition of employee for purposes of applying APB Opinion 25;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications to the terms of
a previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a
business combination
itract has adopted Interpretation No. 44 with no material effect on its
financial position or its results of operations.
VII-16
Chapter Eight -- Information About Margo
CHAPTER EIGHT
INFORMATION ABOUT MARGO
Business
The principal business of Margo and its subsidiaries 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.
Margo is also engaged in seeking sites for the development of residential
housing projects.
Principal Operations
During 1999 and 1998, Margo conducted operations in the Commonwealth of
Puerto Rico . During 1997, Margo also conducted operations in South Florida.
Puerto Rico Operations
Margo's operations in Puerto Rico are conducted at a 117 acre nursery farm
in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a 13
acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre farm
is leased from Michael J. Spector and Margaret D. Spector, who are directors,
officers and principal shareholders of Margo. See "Certain Relationships and
Related Transactions -- Lease and Option to Purchase Main Nursery Farm" in this
proxy statement/prospectus. The 13 acre facility in the Municipality of
Barranquitas is leased from Cali Orchids, Inc., an unrelated third party.
Margo 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, Margo produces
various types of palms, flowering and ornamental plants, trees, shrubs, bedding
plants and ground covers. In Barranquitas, Margo produces orchids, bromelias,
anthuriums, spathiphylum and poincettias. Its customers include wholesalers,
retailers, chain stores and landscapers primarily located in Puerto Rico and the
Caribbean. Margo enjoys a 90% tax exemption under Puerto Rico law from income
derived from its nursery business in Puerto Rico.
Margo is a supplier of plants and lawn and garden products for The Home
Depot Puerto Rico, the largest mainland retailer of lawn and garden products
according to Nursery Retailer magazine. During the third quarter of 1999, Margo
became the largest supplier of live goods (plant material) to WalMart Stores,
which presently has nine stores throughout Puerto Rico.
Margo provides landscaping services to customers in Puerto Rico and the
Caribbean, including commercial as well as residential landscape design and
landscaping.
Margo is engaged in sales of lawn and garden products, including plastic
and terracotta pottery, planting media, such as soil and peat moss, and mulch.
Among the various lawn and garden product lines it distributes, Margo 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.
Margo is also engaged in the manufacturing of potting soils, mulch,
professional growing mixes, river rock and gravels.
South Florida Operation
On August 15, 1997, after a review of Margo's South Florida operation and
in view of the strong competition in that market, Margo's board of directors
made the determination to close its operation in South
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Chapter Eight -- Information About Margo
Florida effective September 30, 1997, and dispose of all related assets. On
September 29 and November 28, 1997, Margo sold the two nursery farms which
comprised Margo's facilities in South Florida.
Production
Margo's plants are propagated by using cuttings, plugs, liners, air
layers, seeds and tissue cultures. Cuttings are obtained from Margo's own stock
plants and from other nurseries for growout at Margo'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.
Margo'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. Margo produces
both field and container grown material, as well as flowering, bedding plants
and hanging baskets.
Marketing
Margo's marketing efforts have been primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of Margo are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean.
Margo targets construction and government projects which require extensive
landscaping. In addition, landscaping enables Margo to provide design,
installation and maintenance services which complement the sales function. For
large retailers in Puerto Rico (such as The Home Depot, WalMart Stores, Kmart,
and Masso Expo), Margo develops promotional programs which include deliveries to
customer outlets and special pricing based on volume.
For the nine months ended September 30, 2000 and the year ended December
31, 1999, Margo's two largest customers accounted for approximately 29% and 26%,
respectively, of Margo's net sales. The Home Depot accounted for approximately
16% and 14% and WalMart Stores accounted for approximately 13% and 12% of
Margo's net sales for the nine months ended September 30, 2000 and the year
ended December 31, 1999, respectively.
During 1998 and 1997, Margo's single largest customer, Masso Expo
(formerly Builders Square) accounted for approximately 13% and 24%,
respectively, of Margo's net sales.
Margo does not have any significant delivery contracts extending over a
one year period with customers, including landscaping contracts.
Financial Information Relating to Principal Operations
The following table sets forth information regarding operations at each of
Margo's operating locations for the nine month periods ended September 30, 2000
and 1999 and for each of the years ended December 31, 1999, 1998 and 1997. The
information is provided after the elimination of intercompany transactions.
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Chapter Eight -- Information About Margo
[Enlarge/Download Table]
Nine months ended
September 30, Year ended December 31
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2000 1999 1999 1998 1997
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(Dollars in thousands)
Sales by Location:
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Puerto Rico:
