EX-99.1 3 margo8ka050505ex99-1.txt Exhibit 99.1 STATE LINE BARK AND MULCH, INC. FINANCIAL STATEMENTS YEARS ENDING DECEMBER 31, 2004 AND DECEMBER 31, 2003 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of STATE LINE BARK & MULCH, INC. We have audited the accompanying balance sheet of STATE LINE BARK.& MULCH INC (a Sub Chapter S corporation) as of December 31, 2004 and 2003 and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, with the exception of the matters described in the following paragraphs, the financial statements referred to above present fairly, in all material respects, the financial position of STATE LINE BARK & MULCH, INC as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note D- to the financial statements, generally accepted accounting principles require that assets and liabilities which are stated on the financial statements are in fact belonging to the corporation. Due to the impact of this item and the rents and charges that would have been accrued, management has not determined at this time how this would have affected the financial statements had generally accepted accounting principles been applied. Firm's signature /s/ Zennie E Shearous, CPA, PC ------------------------------ Zennie E Shearous, CPA, PC Savannah, GA May 3, 2005 State-Line Bark & Mulch, Inc. Balance Sheet Dec 31, 04 Dec 31, 03 ---------- ---------- ASSETS Current Assets Checking/Savings Cash in Hand- To Deposit 2,855 11,151 MAIN Southeastern Bank -22,320 23,492 OPERATING - Southeastern B 1,014 10,410 Petty Cash 200 1,543 --------- --------- Total Checking/Savings -18,251 46,597 Accounts Receivable Accounts Receivable 271,121 443,632 --------- --------- Total Accounts Receivable 271,121 443,632 Other Current Assets Inventory 304,077 120,000 Organization Costs 51 51 --------- --------- Total Other Current Assets 304,128 120,051 --------- --------- Total Current Assets 556,998 610,279 Fixed Assets Buildings 200,000 200,000 Furniture & Fixtures 3,355 3,355 Land 40,000 40,000 Machinery & Equipment 979,072 817,722 Vehicles 21,958 57,665 Accum Deprec - Buildings -33,546 -28,418 Accum Deprec - M & E -698,080 -613,750 Accum Deprec - Vehicles -17,595 -51,464 --------- --------- Total Fixed Assets 495,164 425,110 --------- --------- TOTAL ASSETS 1,052,162 1,035,390 ========= ========= LIABILITIES & EQUITY Liabilities Current Liabilities Accounts Payable Accounts Payable 89,928 433,901 --------- --------- Total Accounts Payable 89,928 433,901 Other Current Liabilities Line Of Credit-Bank Of Ame 193,388 193,508 Line of Credit-BB&T 55,868 LOC - Southeastern Bank 40,000 40,000 Notes Payable- Mulch Masters 2,062 Sales Tax Payable 581 722 --------- --------- Total Other Current Liabilities 233,969 292,160 --------- --------- See accompanying notes and accountant's report Page 1 State-Line Bark & Mulch, Inc. Balance Sheet Dec 31, 04 Dec 31, 03 ---------- ---------- Total Current Liabilities 323,897 726,061 Long Term Liabilities Lease Payable-Delange-Nissan 25,016 Mortgage Payable-Franklin 55,624 76,472 Note Payable-Southeastern Bank 25,641 Notes Payable-Associates Volvo 8,884 Notes Payable-BOA-Bagging Li 31,162 49,115 Notes Payable-Dye Machine 30,777 57,320 Notes Payable-Stockholder 30,000 Notes Payable - Northern - Mixe 19,454 NP-CIT-Volvo Loader 93,230 NP-Toyota Financial 16,733 --------- --------- Total Long Term Liabilities 301,996 217,434 --------- --------- Total Liabilities 625,893 943,494 Equity Common Stock 10,000 10,000 Distributions to Stockholders -36,500 -500 Retained Earnings 82,396 -3,774 Net Income 370,374 86,169 --------- --------- Total Equity 426,269 91,896 --------- --------- TOTAL LIABILITIES & EQUITY 1,052,162 1,035,390 ========= ========= See accompanying notes and accountant's report Page 2 STATE LINE BARK & MULCH, INC. STATEMENT OF RETAINED EARNINGS Beginning Retained Earnings Dec 31, 2004 Dec 31, 2003 ------------ ------------ Beginning Retained Earnings 81,895 -3,774 Net Income 370,374 86,169 ------- ------- Subtotal 452,269 82,395 Less Owner's Distributions 36,000 500 ------- ------- Total Retained Earnings 416,269 81,895 ======= ======= See accompanying notes and accountant's report Page 1 State-Line Bark & Mulch, Inc. Statement of Income Jan - Jan - Dec 04 Dec 03 --------- --------- Ordinary Income/Expense Income Bag Sales 2,232,467 1,733,304 Bulk Sales 1,008,569 1,421,443 Delivery Income 325 Nursery Sales 11,610 Over/Under Payments 2,039 420 Returned Checks -8,035 -1,418 Sales Discounts -2,366 -4,609 Unload Charge Income 212 --------- --------- Total Income 3,232,673 3,161,286 Cost of Goods Sold Delivery 216,779 203,665 Freight in 55,246 158,010 Purchase Discounts 1,758 221 Purchases 1,246,513 1,532,534 --------- --------- Total COGS 1,520,297 1,894,430 --------- --------- Gross Profit 1,712,376 1,266,856 Expense Advertising 1,332 2,597 Auto Expense 45 Bad Debts 2,413 1,992 Bank Charges 3,982 1,866 Commissions 18,095 38,134 Contract Labor-Staff Leasing 700,967 534,187 Depreciation 91,296 86,948 Dues And Subscriptions 2,704 9,171 Equipment Rental 2,257 1,170 Fuel Expense 87,447 70,309 Insurance - Liability 17,394 13,285 Insurance - Medical 175 11 Interest Expense 69,602 10,018 Interest Expense-Property 5,364 6,962 Janitorial 30 Leased Equipment 6,673 27,856 Leased Vehicles 8,569 8,610 Office Supplies Expense 4,288 3,772 Outside Services 300 Postage And Freight 3,335 3,421 Professional Fees 7,336 8,531 See accompanying notes and accountant's report Page 1 State-Line Bark & Mulch, Inc. Statement of Income Jan - Jan - Dec 04 Dec 03 --------- --------- Repairs And Maintenance 199,015 243,461 Storage Expense 4 Supplies 68,172 76,679 Taxes And Licenses 13,951 3,636 Telephone 10,845 13,274 Trade Show Expense 850 Utilities 16,046 14,476 --------- --------- Total Expense 1,342,113 1,180,742 --------- --------- Net Ordinary Income 370,263 86,114 Other Income/Expense Other Income Interest 110 55 --------- --------- Total Other Income 110 55 --------- --------- Net Other Income 110 55 --------- --------- Net Income 370,374 86,169 ========= ========= See accompanying notes and accountant's report Page 2 State-Line Bark & Mulch, Inc. Statement of Cash Flows Jan - Jan - Dec 04 Dec 03 -------- --------- OPERATING ACTIVITIES Net Income 370,374 86,169 Adjustments to reconcile Net Income to net cash provided by operations: Accounts Receivable 172,510 (165,066) Due From Mulch Masters 35,212 Inventory Asset (184,077) 100,000 Organization Cost (15) Accounts Payable (343,973) 91,445 Line Of Credit-Bank Of America (120) (5,375) Line of Credit-BB&T (55,868) (27,724) Line of Credit-Southeastern Bank 40,000 Notes Payable- Mulch Masters (2,062) 2,062 Sales Tax Payable (141) (4,469) -------- --------- Net cash provided by Operating Activities (43,357) 152,239 INVESTING ACTIVITIES Machinery & Equipment (161,350) (45,522) Vehicles 35,707 Accum Deprec - Building 5,128 5,128 Accum Deprec - M& E 84,330 77,800 Accum Deprec - Vehicles (33,869) 4,020 -------- --------- Net cash provided by Investing Activities (70,054) 41,426 FINANCING ACTIVITIES Lease Payable-Delange-Nissan 25,016 Mortgage Payable-Franklin (20,848) (19,250) Note Payable-Southeastern Bank (25,641) (22,469) Notes Payable-Associates Volvo (8,884) (21,096) Notes Payable-BOA-Bagging Line (17,954) (57,355) Notes Payable-Dye Machine (26,544) (23,361) Notes Payable-Stockholder 30,000 0 Notes Payable Norther Mixer 19,454 NP-CIT-Volvo Loader 93,230 0 NP-Toyota Financial 16,733 0 -------- --------- Distributions to Stockholders (36,000) (500) -------- --------- Net cash provided by Financing Activities 48,562 (144,031) -------- --------- Net cash, increase for period (64,849) 49,634 Cash at beginning of period 46,597 (3,037) -------- --------- Cash at end of period (18,252) 46,597 ======== ========= See accompanying notes and accountant's report Page 1 of 1 STATE LINE BARK & MULCH, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 and 2003 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of State Line Bark & Mulch, Inc. is presented to assist in the understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to U.S. generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Industry and Nature of Operations State Line Bark and Mulch, Inc. is a manufacturing and distribution company for premium cypress and pine mulch and chips, and composted and potting soil. SLB&M was incorporated on January 1, 2001. The Company is controlled and owned by Mr. Richard Stewart and Mrs. Dana Lisa Stewart and is located in Folkston, Georgia. The Company is established on 34.71 acres and is located in the middle of a forest of cypress and pine trees. Contiguous to the Company land area are 66.06 acres owned by the Stewarts. The Company consists of one (1) manufacturing premise and one (1) administrative office. The distribution center is located in the mill. Industry: The Company is primarily in the business of manufacture and sale of cypress and pine mulch and chips, and composted and potting soil. The operation is conducted from Folkston, Georgia. The Company's principal suppliers are established around the mill. It markets to Puerto Rico and USA. The land has approximately 9 acres of contamination. This piece of land is demarcated. Management: The Stewarts are the principal officers of the Company and responsible for dealing with major suppliers, brokers and customers. There is an Operations Manager in charge of the daily operation of the Plant. Revenue Transactions: Customers are located in the USA and Puerto Rico. The terms of sales are 30 days, net, principally. The Company recognizes sales upon shipment of merchandise to the customer. The Company uses the accrual accounting method for recording the sales. Purchase Transactions: The Company's major suppliers are the Timber Companies and related producers of logs. Payment terms fluctuate from 5 days to 30 days, net. Payroll Transactions: The employee count for the Company is thirty (30). The employees are leased from an external company (Paycheck) as follows: one (1) General Manager; three (3) administrative clerks; two (2) Plant supervisors; two (2) mechanics; and, twenty-two (22) labor workers. This personnel is not considered Company's employees but instead, leased employees. STATE LINE BARK & MULCH, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 and 2003 Inventory: The inventory is composed of: 1. Logs 2. Cypress & Pine Mulch 3. Bark 4. Composted 5. Potting Soil Inventories of material are stated at cost. The inventory cost does not include an allocation of direct labor and overhead costs. The inventory's physical count is performed as of year end. Property Plant & Equipment: Property and Equipment are carried at cost. Depreciation of property and equipment is provided using 200% double declining method for financial reporting purposes rates based on the following estimated useful lives. Years ----- Machinery & Equipment 7 Vehicles 5 Income Taxes: All tax effects of the Sub Chapter S Corporation's income or loss are passed to the stockholders individually; thus, this statement includes no income tax expenses or benefit for the corporation. Liabilities & Long Term Debt: Current Liabilities include: A line of credit with Bank of America which originated October 25, 2000. Interest is rate expensed variable 1% above prime with a total credit line available of $200,000. A line of credit with BB&T Bank which originated December 2001. Interest rate expense variable 1% above prime with a total credit line available of $150,000. A line of credit with Southeastern Bank which originated May 2003. Interest rate expense variable at prime with a total credit line available of $ 50,000. Long-term Debt consists of: Note payable to Delange Nissian Forklift, secured by forklift (lease purchase) original terms are, principal. $14,315.50, payable in 60 payments of $368.45 beginning February 25, 2004. STATE LINE BARK & MULCH, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 and 2003 Note payable to Bank of America, secured by bagging line equipment. Original terms are principal of $ 177,705, 60 payments of $ 3,850.37, interest rate 10.75%. Notes payable to Citi Capital secured by dye machine Original terms are principal of $83,812, 36 payments of $2,564.71, interest rate of 6.3% beginning December 2002. Notes payable to Toyota Financial, secured by forklift. Original terms are principal of $15,542 payable in 48 payments of $323.80 beginning July 2001. Due From Mulch Masters, Inc. is an aggregate of due to and due from Mulch Masters, Inc. in the normal operations of business. Common Stock: The Company has authorized and issued 10,000 shares of $1 par value common, stock. All, stock is solely owned by the Stewarts. NOTE B- RELATED PARTY TRANSACTIONS The stockholders, the Richard K and Dana Lisa Stewart, (the Stewarts) own a 100% interest in Mulch Masters Inc. that is a customer of State Line Bark and Mulch, Inc. Mulch Masters Inc. provided 16.81% of total revenues in the year 2004 and 18.55% of total revenues in the year 2003. State Line Bark & Mulch Inc. has its base of operations utilizing land and building which are the legal assets of Mulch Masters, Inc. which is 100% owned by the stockholders of State Line Bark & Mulch, Inc., Richard & Lisa Stewart. The Stockholders, Richard & Lisa Stewart loaned State Line Bark & Mulch, Inc. $30,000 December 30, 2004 and were repaid the debt as consequence of the sale of assets to Margo State Line, Inc. No interest was accrued for the year 2004. Departure from GAAP: The building at a adjusted cost basis of $200,000 and land at adjusted cost basis of $40,000 and the related Notes payable --Franklin balance as of December 31, 2004 of $55,624 and December 31, 2003 of $76,472 are assets and liabilities of Mulch Masters Inc. Management has elected to carry these on the State Line Bark & Mulch, Inc financial statements for their own convenience. Because the revenues have serviced the debt and the corporation has benefited from the use of the assets. Originally State Line Bark & Mulch was a company operating under Mulch Masters Inc. and then incorporated separately in the year 2001. Interest has been expensed relating to the debt in the amount of $ $5,364 for the year 2004 and $6,962 for the year 2003. Depreciation Expense related to the Building is $5,128 for the year 2004 and $5,128 for the year 2003. Likewise State Line Bark & Mulch Inc. have not expensed or been charged rent for the use of the building or land. To include assets and liabilities with related expenses which legally belong to another company are a departure from U.S. generally accepted accounting principles. STATE LINE BARK & MULCH, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 and 2003 NOTE C- SUBSEQUENT EVENTS: On February 16, 2005, Margo State Line, Inc., a Florida Corporation, acquired substantially all the assets and assumed certain liabilities of State-Line Bark & Mulch, Inc., pursuant to asset purchase agreement. Margo State Line, Inc. is a wholly-owned subsidiary of Margo Caribe, Inc., a Puerto Rico Corporation. As of this purchase Sate Line Bark & Mulch., Inc. has discontinuing operations. Other Information pertaining to Sale of assets: The aggregate purchase price, which includes the land and building referred to in Note D was $2,600,000 plus the liabilities assumed of $690,186. Out of the total, purchase price, Margo State Line, inc. has deposited $100,000 in an escrow account to cover any contingencies (specifically relating to the land and building referred to above) and expenses which pertain to the purchase agreements. Additionally, and up to the resolution of any contingency (specifically relating to the land and building), $640,000 of the total purchase price has not been paid to State Line Bark & Mulch Inc., the Stewarts and or Mulch Masters, Inc. NOTE D- DEPARTURE FROM GAAP See Note B- Related Party Transactions: Departure from GAAP.