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EXHIBIT 99.1
CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants. 1
Combined Balance Sheets as of September 30, 1998 and 1997. 2
Combined Statements of Operations and Retained Earnings for the years
ended September 30, 1998 and 1997. 4
Combined Statements of Cash Flows for the years ended September 30,
1998 and 1997. 5
Notes to combined financial statements. 7
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[HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C. LETTERHEAD]
To the Board of Directors and
Stockholders of
Cornelius Nurseries, Inc. and
Turkey Creek Farms, Inc.
Houston, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying combined balance sheets of Cornelius Nurseries,
Inc. and Turkey Creek Farms, Inc. (Texas Corporations) as of September 30, 1998
and 1997, and the related statements of operations, retained earnings and cash
flows for the years then ended. The financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion of
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cornelius Nurseries, Inc. and
Turkey Creek Farms, Inc. as of September 30, 1998 and 1997 and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Certified Public Accountants
January 25, 1999
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
September 30,
-------------------------
1998 1997
----------- -----------
CURRENT ASSETS:
Cash (Note 1) $ 364,180 $ 527,627
Certificates of deposit (Notes B & I) 1,225,226 1,256,077
Accounts receivable - trade, net of allowance of
$160,279 for 1998 and $11,559 for 1997 1,377,651 1,420,049
Notes receivable - current portion 10,768 9,918
Inventories:
Purchased goods 2,500,779 2,655,866
Farm grown crops 4,550,125 4,969,039
Prepaid expenses 198,440 180,692
Deferred tax asset (Note E) 54,400 106,600
----------- -----------
TOTAL CURRENT ASSETS 10,281,569 11,125,868
PROPERTY AND EQUIPMENT: (Note B)
Land 2,228,804 2,228,804
Buildings and improvements 2,558,453 2,419,974
Automobiles and trucks 994,512 994,512
Machinery and equipment 1,532,114 1,314,055
Furniture and fixtures 87,891 87,891
----------- -----------
7,401,774 7,045,236
Less: accumulated depreciation 3,694,685 3,466,407
----------- -----------
3,707,089 3,578,829
OTHER ASSETS:
Notes receivable, net of current portion 8,900 5,368
Available for sale securities 44,498 43,772
Other assets 2,888 --
----------- -----------
56,286 49,140
----------- -----------
$14,044,944 $14,753,837
=========== ===========
See accompanying notes to combined financial statements.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
----------------------------
1998 1997
------------ ------------
CURRENT LIABILITIES:
Note Payable $ 60,385 $ 70,311
Current portion of long-term debt 816,119 405,756
Current portion of obligation under capital leases 60,640 27,316
Current portion of loans from stockholders 1,316 23,223
Accounts payable - trade 3,015,539 2,243,112
Accrued expenses 440,772 469,959
Income taxes payable -- 19,867
------------ ------------
TOTAL CURRENT LIABILITIES 4,394,771 3,259,544
Long-term debt, less current portion (Note B) 2,280,099 2,404,108
Obligation under capital leases, less current portion
(Note C)
164,167 18,425
Loans from stockholders, less current portion (Note D) 310,875 281,398
Deferred tax liability (Note E) 840,600 1,409,100
------------ ------------
TOTAL LIABILITIES 7,990,512 7,372,575
------------ ------------
Commitments and contingencies (Note G)
STOCKHOLDERS' EQUITY:
Common Stock (Note H) 4,800,000 4,800,000
Additional paid-in capital 98,756 98,756
Retained earnings 1,230,551 2,557,381
Less cost of treasury stock (74,875) (74,875)
------------ ------------
6,054,432 7,381,262
------------ ------------
$ 14,044,944 $ 14,753,837
============ ============
See accompanying notes to combined financial statements.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Year Ended September 30,
----------------------------
1998 1997
------------ ------------
Net Sales $ 21,638,452 $ 21,608,752
Cost of sales 17,216,539 14,882,919
------------ ------------
Gross profit 4,421,913 6,725,833
Selling, general and administrative expenses 5,846,216 5,481,045
Depreciation expenses 234,424 210,200
Interest expense 292,392 277,612
------------ ------------
Income (loss) from operations (1,951,119) 756,976
Other income:
Interest income 56,776 49,524
Miscellaneous income 30,536 10,921
Loss on sale of assets (854) --
Finance charges 26,431 13,580
------------ ------------
Income (loss) before income tax (1,838,230) 831,001
Income tax benefit (expense) (Note E) 511,400 (183,026)
------------ ------------
Net income (loss) (1,326,830) 647,975
Beginning retained earnings 2,557,381 1,909,406
------------ ------------
Ending retained earnings $ 1,230,551 $ 2,557,381
============ ============
See accompanying notes to combined financial statements.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Year Ended September 30,
--------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $(1,326,830) $ 647,975
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 234,424 210,200
Interest expense added to notes payable to
stockholders 29,477 26,664
Loss on disposal of assets 854 --
Allowance for bad debts 148,720 25,310
(Increase) decrease in:
Notes receivable 30,851 (51,094)
Accounts receivable (106,285) (293,866)
Notes receivable (4,382) 16,322
Inventories 574,000 (985,500)
Prepaid expenses and other assets (20,636) 17,210
Deferred tax asset 47,700 (500)
Increase (decrease) in:
Note payable (9,927) (7,767)
Accounts payable 772,427 1,004,755
Accrued expenses (29,187) (63,429)
Accrued pension cost -- (268,056)
Income taxes payable (19,867) (22,133)
Deferred tax liability (564,000) 139,000
----------- -----------
Net cash provided by (used in) operating activities (242,661) 395,091
Cash Flows from Investing Activities:
Purchases of property and equipment (141,494) (541,414)
Proceeds from sale of assets 3,500 --
Purchase of available for sale securities (726) (449)
----------- -----------
Net cash used in investing activities (138,720) (541,863)
See accompanying notes to combined financial statements.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Year Ended September 30,
------------------------
1998 1997
---------- ----------
Cash Flows from Financing Activities:
Principal payments on long term debt $ (229,807) $ (117,418)
Proceeds from long term debt 416,161 302,563
Net change in revolving line of credit 100,000 300,000
Loans (payments) from stockholders (21,907) 23,223
Payments on obligation under capital leases (46,513) (24,876)
---------- ----------
Net cash provided by financing activities 217,934 483,492
---------- ----------
Net increase (decrease) in cash (163,447) 336,720
Cash at beginning of year 527,627 190,907
---------- ----------
Cash at end of year $ 364,180 $ 527,627
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 261,598 $ 244,620
Taxes $ 69,366 $ 77,001
Non-cash transactions:
Capital leases for equipment $ 225,541 $ 34,570
See accompanying notes to combined financial statements.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
NOTE TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
A. Summary of Significant Accounting Policies
Nature of Business
Cornelius Nurseries, Inc. (CN) and Turkey Creek Farms, Inc. (TCF) (the
Companies) engage primarily in the business of growing and selling
trees, shrubs, plants and other landscaping materials at the wholesale
and retail trade levels. The Companies are under common ownership
and/or management. All significant inter-company transactions and
balances have been eliminated in combination. A summary of the
significant accounting policies utilized by the Companies in preparing
these combined financial statements follows:
Credit Risk
The Companies extend credit to their customers; most of them are in
central and southeastern Texas.
Inventories
Inventories are stated at lower of cost or market value, determined by
the first-in first-out method. Inventory costs include labor, materials
and supplies and related overhead cost incurred for farm grown
products.
Property and Equipment
Property and equipment are recorded at cost. Addition, renewals and
betterments which extend the useful lives of the related assets are
capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Depreciation of property and equipment is provided
using a combination of the straight-line and accelerated cost recovery
methods over the estimated useful lives of the assets. The useful lives
range from three to thirty-nine years.
Available for Sale Securities
Available for sale securities include common stock of certain
privately-held companies and are stated at market value which
approximates cost. The Companies intend to hold the securities for the
foreseeable future. Gains or losses realized on sale of stock
investments are determined using the specific identification method.
Income Taxes
Provision for federal income taxes is made by applying the estimated
annual effective tax rates to the individual Company's pre-tax income
adjusted for non-deductible expenses and non-taxable income. Deferred
taxes are recognized for differences between the bases of certain
assets and liabilities for financial and tax reporting. The deferred
taxes represent the future tax return consequences of those differences
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also
recognized for operating losses that are available to offset future
taxable income.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
NOTE TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
A. Summary of Significant Accounting Policies (Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. Notes Payable and Long-Term Debt
Long-term debt consists of the following:
September 30,
------------------------
1998 1997
----------- -----------
Revolving line of credit from a bank with maximum of $500,000,
interest payable quarterly at prime plus 0.5% (9% at December 31,
1998), matures on July 29, 1999 $ 400,000 $ 300,000
Real estate note payable to a bank, due in monthly installments of
$25,061 including interest at 9.5%, final payment due October 24,
2000. This note and the line of credit are collateralized by deed
of trust in certain real property, inventories and accounts
receivable, and are guaranteed by the major shareholders of the
Companies. 2,152,050 2,243,956
Note payable to a bank, due in monthly installments of $1,961
including interest at 8.75%, final payment due January 31, 2000,
secured by certain real estate and personally guaranteed by the
major shareholders of the Companies. 183,399 191,746
Note payable to a bank, due in monthly installments of $1,627
including interest at 9%, matures on May 17, 2002, secured by
several automobiles 60,769 74,162
Revolving note payable to a bank, maximum credit $300,000, matures on
February 24, 1999, collateralized by a $300,000 certificate of
deposit, interest due monthly at 6.75% 300,000 --
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3,096,218 2,809,864
Less current portion 816,119 405,756
----------- -----------
$ 2,280,099 $ 2,404,108
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
NOTE TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
B. Notes Payable and Long-Term Debt (Continued)
Aggregate annual principal payments subsequent to September 30, 1998,
according to the above described terms, are as follows:
Year Ending September 30,
-------------------------
1999 $ 816,119
2000 302,052
2001 1,966,631
2002 11,416
-----------
$ 3,096,218
===========
Total interest expense for all notes payable was $292,392 for 1998 and
$272,806 for 1997.
C. Lease Commitments
The Companies lease certain equipment under capital lease agreements.
The leases range from 24 to 60 months expiring February 2003 with
imputed interest rates at an average of 9%. Equipment of $324,570 has
been capitalized. Accumulated depreciation on the capitalized assets
was approximately $70,041 at September 30, 1998.
Maturities of the capitalized lease are as follows:
Year Ending September 30,
-------------------------
1999 $ 69,776
2000 69,320
2001 71,710
2002 51,422
2003 8,052
-----------
270,280
Less amount representing interest 45,473
-----------
224,807
Less current portion 60,640
-----------
$ 164,167
===========
D. Loans from Stockholders
During the years, the Companies periodically obtain loans from
stockholders to provide for working capital. The terms of the loans do
not stipulate periodic repayment. Interest is charged at the rate of
10%. The balance of the loans was $312,191 (current portion $1,316) and
$304,621 at September 30, 1998 and 1997, respectively. Interest expense
for the year was $29,477 for 1998 and $26,664 for 1997.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
NOTE TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
E. Income Taxes
The provision for federal income tax benefit (expense) consists of the
following components:
September 30,
--------------------------
1998 1997
----------- -----------
Current $ (4,900) $ (44,526)
Deferred 516,300 (138,500)
----------- -----------
$ 511,400 $ (183,026)
=========== ===========
The tax effects of the significant temporary differences which comprise
the deferred tax asset (liability) at September 30, 1998 and 1997 are
as follows:
1998 1997
----------- -----------
Deferred tax asset
Net operating loss carryforwards $ 788,000 $ 368,000
Contributions carryforwards 29,800 25,500
Deferred tax liability
Capitalized inventory costs (1,547,000) (1,689,000)
Bad debts (57,000) (7,000)
----------- -----------
Net deferred tax liability $ (786,200) $(1,302,500)
=========== ===========
Current portion of deferred tax asset 54,500 106,600
Non-current portion of deferred tax liability (840,600) (1,409,100)
----------- -----------
Net deferred tax liability $ (786,200) $(1,302,500)
=========== ===========
At September 30, 1998, the Companies had net operating loss
carryforwards of approximately $2,318,000 expiring in or before 2113.
F. Employee Retirement Plans
The Companies have a salary deferral plan (commonly known as a "401 k"
plan) which covers all full time employees. The employees become
eligible to participate in the plan after they have one year of service
and attained 21 years of age. The plan provided for deferred
contributions and the companies' discretionary matching contributions.
No matching contributions were made in the years ended September 30,
1998 and 1997.
G. Commitments and Contingencies
The Companies are in a voluntary support program for workers'
compensation. Under the program, the Companies are predominately
self-insured in regard to workers' compensation claims up to $150,000
per occurrence.
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CORNELIUS NURSERIES, INC. AND TURKEY CREEK FARMS, INC.
NOTE TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
H. Common Stock
The following is a summary of the common stock of the Companies at
September 30, 1998 and 1997, respectively.
Cornelius Nurseries, Inc.
$1 par value, 10,000,000 shares authorized; 3,000,000 shares
issued; 2,415,750 shares outstanding $ 3,000,000
Turkey Creek Farms, Inc.
$1 par value, 20,000,000 shares authorized; 1,800,000 shares
issued and outstanding 1,800,000
-----------
$ 4,800,000
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I. Concentration of Credit Risk
The Companies maintain unrestricted cash balances at several banks.
Cash accounts and certificates of deposits at each bank are insured by
the FDIC for up to $100,000. At September 30, 1998, the Companies had
uninsured balances totaling $872,380.
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