Exhibit 99.2
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
AND AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
TABLE OF CONTENTS
Independent Auditor’s Report | ||
Consolidated Balance Sheets | Exhibit A | |
Consolidated Statements of Operations | Exhibit B | |
Consolidated Statements of Shareholder’s Equity (Deficit) | Exhibit C | |
Consolidated Statements of Cash Flows | Exhibit D | |
Notes to Consolidated Financial Statements |
INDEPENDENT AUDITOR’S REPORT
To the Shareholders
Florida Recycling Services, Inc. of Illinois
Chicago, Illinois
We have audited the accompanying consolidated balance sheets ofFlorida Recycling Services, Inc. of Illinois and Subsidiaryas of December 31, 2003, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholder’s equity (deficit) for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Florida Recycling Services, Inc. of Illinois and Subsidiary as of December 31, 2003, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Shepard Schwartz & Harris LLP
February 11, 2004
EXHIBIT A
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Three Months Ended March 31, | Years Ended December 31, | |||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 955,374 | $ | 183,943 | $ | 669,735 | $ | 69,192 | $ | 897,341 | ||||||||||
Receivables | ||||||||||||||||||||
Trade | 11,582,265 | 12,996,103 | 16,156,222 | 10,691,735 | 12,256,134 | |||||||||||||||
Other | 532 | 8,426 | 2,506 | 11,424 | 45,347 | |||||||||||||||
Prepaid expenses | 1,035,687 | 831,337 | 1,643,739 | 492,026 | 370,707 | |||||||||||||||
Advances to related parties | 875,000 | 510,000 | 855,000 | 510,000 | — | |||||||||||||||
Supplies and materials | 950,632 | 682,803 | 963,480 | 487,520 | 432,939 | |||||||||||||||
Total current assets | 15,399,490 | 15,212,612 | 20,290,682 | 12,261,897 | 14,002,468 | |||||||||||||||
PROPERTY AND EQUIPMENT | ||||||||||||||||||||
Building | 607,636 | 583,628 | 607,636 | 699,721 | 1,451,221 | |||||||||||||||
Machinery and equipment | 62,924,505 | 53,080,935 | 57,645,604 | 50,661,524 | 45,253,426 | |||||||||||||||
63,532,141 | 53,664,563 | 58,253,240 | 51,361,245 | 46,704,647 | ||||||||||||||||
Less - accumulated depreciation | 40,206,036 | 36,223,605 | 40,312,888 | 33,828,548 | 24,966,942 | |||||||||||||||
23,326,105 | 17,440,958 | 17,940,352 | 17,532,697 | 21,737,705 | ||||||||||||||||
Land | 98,197 | 98,197 | 98,197 | 413,198 | 476,226 | |||||||||||||||
23,424,302 | 17,539,155 | 18,038,549 | 17,945,895 | 22,213,931 | ||||||||||||||||
OTHER ASSETS | ||||||||||||||||||||
Deposits | 17,962 | 18,435 | 17,962 | 18,435 | 2,878 | |||||||||||||||
Contract acquisition rights (net of accumulated amortization of $97,721 in 2003 and $21,667 in 2002) | 434,670 | 387,968 | 453,601 | 363,566 | — | |||||||||||||||
Goodwill (net of accumulated amortization of $68,611 in 2001) | 174,489 | 174,489 | 174,489 | 174,489 | 581,389 | |||||||||||||||
Deferred income taxes | 584,100 | 617,000 | 601,100 | 636,000 | 636,000 | |||||||||||||||
1,211,221 | 1,197,892 | 1,247,152 | 1,192,490 | 1,220,267 | ||||||||||||||||
$ | 40,035,013 | $ | 33,949,659 | $ | 39,576,383 | $ | 31,400,282 | $ | 37,436,666 | |||||||||||
LIABILITIES AND SHAREHOLDER’S DEFICIT | ||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||
Checks issued in excess of bank balance | $ | — | $ | — | $ | — | $ | — | $ | 2,170,476 | ||||||||||
Note payable - bank | 9,610,000 | 5,700,000 | 10,000,000 | 4,500,000 | — | |||||||||||||||
Current maturities of long-term debt | 27,162,569 | 8,344,231 | 12,928,121 | 8,198,916 | 10,687,496 | |||||||||||||||
Accounts payable | 4,710,541 | 5,876,187 | 6,555,149 | 5,369,645 | 3,775,630 | |||||||||||||||
Accrued expenses | 2,794,266 | 2,248,798 | 2,655,732 | 2,697,802 | 4,168,021 | |||||||||||||||
Total current liabilities | 44,277,376 | 22,169,216 | 32,139,002 | 20,766,363 | 20,801,623 | |||||||||||||||
LONG-TERM DEBT - net of current maturities | — | 15,850,553 | 12,060,243 | 15,051,757 | 25,457,100 | |||||||||||||||
SHAREHOLDER’S DEFICIT | ||||||||||||||||||||
Common stock - $1,000 par value, 1,000 shares authorized, 100 shares issued and outstanding | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | |||||||||||||||
Additional paid-in capital | 11,670,550 | 11,670,550 | 11,670,550 | 11,670,550 | 6,716,512 | |||||||||||||||
Accumulated deficit | (16,012,913 | ) | (15,840,660 | ) | (16,393,412 | ) | (16,188,388 | ) | (15,638,569 | ) | ||||||||||
Total shareholder’s deficit | (4,242,363 | ) | (4,070,110 | ) | (4,622,862 | ) | (4,417,838 | ) | (8,822,057 | ) | ||||||||||
$ | 40,035,013 | $ | 33,949,659 | $ | 39,576,383 | $ | 31,400,282 | $ | 37,436,666 | |||||||||||
The accompanying notes are an integral part of these statements.
EXHIBIT B
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, | Years Ended December 31, | |||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Sales | $ | 22,987,134 | $ | 22,177,116 | $ | 90,519,364 | $ | 84,783,830 | $ | 81,722,405 | ||||||||||
Cost of sales | ||||||||||||||||||||
Direct labor | 5,750,775 | 5,160,218 | 23,844,185 | 22,268,603 | 23,188,341 | |||||||||||||||
Dumping and hauling | 7,500,418 | 7,178,248 | 30,349,486 | 28,516,654 | 30,123,083 | |||||||||||||||
Depreciation and amortization | 1,693,779 | 2,137,251 | 8,632,711 | 9,172,228 | 10,645,485 | |||||||||||||||
Amortization of contract rights | 18,931 | 18,931 | 75,727 | 43,334 | — | |||||||||||||||
Other | 3,419,767 | 2,880,815 | 10,051,118 | 9,561,909 | 9,938,131 | |||||||||||||||
18,383,670 | 17,375,463 | 72,953,227 | 69,562,728 | 73,895,040 | ||||||||||||||||
Gross profit | 4,603,464 | 4,801,653 | 17,566,137 | 15,221,102 | 7,827,365 | |||||||||||||||
Operating expenses | 3,710,422 | 3,741,739 | 14,910,255 | 13,666,493 | 12,497,884 | |||||||||||||||
Operating income (loss) | 893,042 | 1,059,914 | 2,655,882 | 1,554,609 | (4,670,519 | ) | ||||||||||||||
Other (income) expense | ||||||||||||||||||||
(Gain) loss on sale of assets | — | — | (40,947 | ) | 11,466 | 38,470 | ||||||||||||||
Interest expense | 495,543 | 540,252 | 1,931,303 | 2,092,962 | 2,626,756 | |||||||||||||||
495,543 | 540,252 | 1,890,356 | 2,104,428 | 2,665,226 | ||||||||||||||||
Income (loss) before income tax expense (benefit) | 397,499 | 519,662 | 765,526 | (549,819 | ) | (7,335,745 | ) | |||||||||||||
Income tax expense (benefit) - deferred | 17,000 | 19,000 | 34,900 | — | (150,000 | ) | ||||||||||||||
Net income (loss) | $ | 380,499 | $ | 500,662 | $ | 730,626 | $ | (549,819 | ) | $ | (7,185,745 | ) | ||||||||
Earnings per share | $ | 3,804.99 | $ | 5,006.62 | $ | 7,306.26 | $ | (5,498.19 | ) | $ | (71,857.45 | ) | ||||||||
The accompanying notes are an integral part of these statements.
EXHIBIT C
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY (DEFICIT)
Additional | ||||||||||||||||||||
Shares | Par | Paid-in | Accumulated | |||||||||||||||||
Issued | Value | Capital | Deficit | Total | ||||||||||||||||
Balance - January 1, 2001 | 100 | $ | 100,000 | $ | 6,687,112 | $ | (8,452,824 | ) | $ | (1,665,712 | ) | |||||||||
Net loss | — | 0 | 0 | (7,185,745 | ) | (7,185,745 | ) | |||||||||||||
Shareholder’s contribution | — | 0 | 29,400 | 0 | 29,400 | |||||||||||||||
Balance - December 31, 2001 | 100 | 100,000 | 6,716,512 | (15,638,569 | ) | (8,822,057 | ) | |||||||||||||
Net loss | — | 0 | 0 | (549,819 | ) | (549,819 | ) | |||||||||||||
Shareholder’s contribution | — | 0 | 4,954,038 | 0 | 4,954,038 | |||||||||||||||
Balance - December 31, 2002 | 100 | 100,000 | 11,670,550 | (16,188,388 | ) | (4,417,838 | ) | |||||||||||||
Net income | — | 0 | 0 | 730,626 | 730,626 | |||||||||||||||
Shareholder’s distribution | — | 0 | 0 | (935,650 | ) | (935,650 | ) | |||||||||||||
Balance - December 31, 2003 | 100 | 100,000 | 11,670,550 | (16,393,412 | ) | (4,622,862 | ) | |||||||||||||
Net income (unaudited) | — | — | — | 380,499 | 380,499 | |||||||||||||||
Balance - March 31, 2004 (unaudited) | 100 | $ | 100,000 | $ | 11,670,550 | $ | (16,012,913 | ) | $ | (4,242,363 | ) | |||||||||
The accompanying notes are an integral part of these statements.
EXHIBIT D
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | Years Ended December 31, | |||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||
Cash received from customers | $ | 27,561,089 | $ | 19,872,747 | $ | 85,054,877 | $ | 86,348,229 | $ | 81,572,652 | ||||||||||
Cash paid for goods and operating expenses | (21,539,330 | ) | (19,226,334 | ) | (79,728,995 | ) | (76,284,274 | ) | (78,757,105 | ) | ||||||||||
Interest paid | (420,793 | ) | (491,272 | ) | (1,832,673 | ) | (2,011,004 | ) | (2,450,343 | ) | ||||||||||
Net cash provided by operating activities | 5,600,966 | 155,141 | 3,493,209 | 8,052,951 | 365,204 | |||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Advances to related parties | (20,000 | ) | — | (345,000 | ) | (510,000 | ) | — | ||||||||||||
Deposits paid (returned) | — | — | 472 | (15,557 | ) | 443,019 | ||||||||||||||
Cash received from sale of property and equipment | (7,079,532 | ) | (1,988,317 | ) | 73,718 | 117,221 | 1,578,756 | |||||||||||||
Purchase of property and equipment | — | — | (9,185,157 | ) | (5,821,311 | ) | (5,670,297 | ) | ||||||||||||
Payment for contract acquisition rights | — | (43,333 | ) | (165,762 | ) | — | — | |||||||||||||
Net cash used for investing activities | (7,099,532 | ) | (2,031,650 | ) | (9,621,729 | ) | (6,229,647 | ) | (3,648,522 | ) | ||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Proceeds from note payable - bank | — | 1,200,000 | 5,500,000 | 1,300,000 | — | |||||||||||||||
Proceeds of long-term debt | 4,256,644 | 3,000,000 | 10,699,978 | 1,590,216 | 11,282,538 | |||||||||||||||
Payments of long-term debt | (2,472,439 | ) | (2,055,896 | ) | (8,962,288 | ) | (7,641,669 | ) | (7,955,236 | ) | ||||||||||
Contribution from shareholder | — | — | — | 2,100,000 | — | |||||||||||||||
Distributions to shareholder | — | (152,844 | ) | (508,627 | ) | — | — | |||||||||||||
Net cash provided by (used for) financing activities | 1,784,205 | 1,991,260 | 6,729,063 | (2,651,453 | ) | 3,327,302 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 285,639 | 114,751 | 600,543 | (828,149 | ) | 43,984 | ||||||||||||||
Cash and cash equivalents - beginning | 669,735 | 69,192 | 69,192 | 897,341 | 853,357 | |||||||||||||||
Cash and cash equivalents - ending | $ | 955,374 | $ | 183,943 | $ | 669,735 | $ | 69,192 | $ | 897,341 | ||||||||||
Reconciliation of net income (loss) to net cash provided by operating activities | ||||||||||||||||||||
Net income (loss) | $ | 380,499 | $ | 500,662 | $ | 730,626 | $ | (549,819 | ) | $ | (7,185,745 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities | ||||||||||||||||||||
Depreciation and amortization | 1,712,710 | 2,156,182 | 8,708,438 | 9,215,562 | 10,645,485 | |||||||||||||||
(Gain) loss on sale of property and equipment | — | — | (40,947 | ) | 11,466 | 38,470 | ||||||||||||||
(Increase) decrease in | ||||||||||||||||||||
Receivables - trade | 4,573,955 | (2,304,369 | ) | (5,464,487 | ) | 1,564,399 | (149,753 | ) | ||||||||||||
Other receivables | 1,974 | 3,088 | 8,918 | 33,923 | (6,735 | ) | ||||||||||||||
Supplies and materials | 12,848 | (195,283 | ) | (475,961 | ) | (54,580 | ) | (118,929 | ) | |||||||||||
Prepaid expenses | 608,052 | (339,311 | ) | (1,151,712 | ) | (121,320 | ) | (4,052 | ) | |||||||||||
Deferred income taxes | 17,000 | 19,000 | 34,900 | — | (150,000 | ) | ||||||||||||||
Increase (decrease) in | ||||||||||||||||||||
Checks issued in excess of bank balance | — | — | — | (2,170,476 | ) | 623,321 | ||||||||||||||
Accounts payable | (1,844,606 | ) | 506,542 | 1,185,504 | 1,594,015 | (3,681,907 | ) | |||||||||||||
Accrued expenses | 138,534 | (191,370 | ) | (42,070 | ) | (1,470,219 | ) | 355,049 | ||||||||||||
5,220,467 | (345,521 | ) | 2,762,583 | 8,602,770 | 7,550,949 | |||||||||||||||
Net cash provided by operating activities | $ | 5,600,966 | $ | 155,141 | $ | 3,493,209 | $ | 8,052,951 | $ | 365,204 | ||||||||||
The accompanying notes are an integral part of these statements.
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Nature of Operations
Florida Recycling Services, Inc. of Illinois (FRS of Illinois) and its subsidiary Florida Recycling Services, Inc. of Delaware (FRS of Delaware) operate waste disposal and recycling services in central Florida.
Note B - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of FRS of Illinois and its subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company at March 31, 2004 and 2003 and the consolidated results of operations and cash flows for the three months ended March 31, 2004 and 2003.
Financial statement disclosures required by generally accepted accounting principles have not been included for the unaudited interim consolidated financial information where those disclosures are not significantly different than disclosures presented with the audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
Trade receivables are uncollateralized customer obligations due 30 days from the invoice date.
Trade receivables are stated at the amount billed to the customer. The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s estimate of the amounts that will not be collected. Management reviews individual receivable balances and the Company’s average write offs to estimate the allowance for doubtful accounts. At December 31, 2003, 2002 and 2001, an allowance of $260,179, $379,120 and $363,332, respectively was considered necessary.
Property and Equipment
Property and equipment is stated at cost. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Expenditures for improvements, replacements and major renewals are capitalized.
Depreciation is provided principally by accelerated methods over estimated useful lives of 5 to 39 years.
In January 2003, the Company outsourced the refurbishing of its containers to a related party. Costs associated with the betterments totaling $1,000,000 have been capitalized
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to machinery and equipment. In prior years, the repair and refurbishing was done internally. No amounts were capitalized in previous years since there was no objective basis to measure the betterments.
Note B - Summary of Significant Accounting Policies (Cont’d)
Goodwill and Other Intangible Assets
Goodwill, representing the aggregate excess cost of companies acquired over the fair value of their net assets at dates of acquisition, was being amortized by the straight-line method over a period of 15 years for the year ended December 31, 2001.
In June 2001, Statement of Financial Accounting Standards (SFAS) No. 142 was issued to address the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. The Company adopted SFAS No. 142 as of January 1, 2002. Upon adoption of SFAS 142, the Company assigned approximately $407,000 of previously reported goodwill to contract acquisition costs.
Contract acquisition costs are being amortized over their estimated remaining useful lives of approximately 8 years. Estimated amortization expense for each year is $84,014 through December 31, 2007 and $59,151 for 2008.
On January 1, 2002, goodwill amounting to $174,489 was not subject to further amortization as a result of SFAS No. 142. The Company conducted its initial impairment test in 2002, with no reduction of recorded goodwill resulting from the test. A reconciliation adjusting comparative net earnings and earnings per share for the year ended December 31, 2001, to show the effect of amortizing the contract acquisition costs and no longer amortizing goodwill, follows:
2001 | ||||
Reported net loss | $ | (7,185,745 | ) | |
Adjustments: | ||||
Goodwill amortization | 43,334 | |||
Contract acquisition costs amortization | (30,334 | ) | ||
Adjusted net loss | $ | (7,172,745 | ) | |
Basic earnings per share: | ||||
Reported net earnings | $ | (71,857.45 | ) | |
Effect of amortization changes | 130.00 | |||
Adjusted net loss per share | $ | (71,727.45 | ) | |
Note B - Summary of Significant Accounting Policies (Cont’d)
Impairment of Long-Lived Assets
In accordance with SFAS No. 144Accounting for the Impairment or Disposal of Long-Lived Assets, property and equipment and amortizable intangibles are reviewed for
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable from estimated future undiscounted cash flows, excluding interest charges. Impairment losses are measured as the amount by which the carrying amount of the assets exceed their fair value.
Fair Value of Financial Instruments
SFAS No. 107 requires disclosures about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 2003, 2002 and 2001. Accordingly, the estimates presented in these statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.
Management estimates the fair value of (i) receivables, advances to related parties, accounts payable, accrued expenses and notes payable to approximate carrying value due to short maturity of these instruments; and (ii) borrowings under the long-term debt approximates carrying value because the most significant portion of these borrowings accrues interest at a floating interest rate based on the market.
The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than customary with historical cost accounting.
Per Share Data
Net earnings per share (EPS) are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Weighted average shares outstanding amounted to 100 shares in the years ended December 31, 2003, 2002 and 2001.
Income Taxes
FRS of Illinois, with the consent of its shareholder, has elected to be taxed as an S corporation for Federal and state income tax purposes. The shareholder of an S corporation includes his share of the company’s income or loss on his individual income tax returns. Therefore, no provision or liability for federal or state income taxes has been made in the 2003, 2002 and 2001 financial statements for FRS of Illinois net income / (loss) of approximately $673,000, $(480,000) and $(6,966,000), respectively.
FRS of Delaware provides for federal and state taxes currently due plus deferred taxes, if any, arising from temporary differences between income for financial reporting and income tax purposes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Note B - Summary of Significant Accounting Policies (Cont’d)
Advertising
Advertising costs are expensed when incurred. Advertising expense for the years ended December 31, 2003, 2002 and 2001 was $79,000, $73,300 and $65,046, respectively.
Estimates and Assumptions
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note C - Note Payable - Bank
The Company has a $12,000,000 commitment of which $9,610,000 (unaudited), $10,000,000, $5,700,000 (unaudited), and $4,500,000 is drawn at March 31, 2004, December 31, 2003, March 31, 2003, and December 31, 2002, respectively. The note, which is due June 2004, bears interest at the banks prime rate (effective rate of 4% in 2004 (unaudited), 3.8% in 2003 and 5% in 2002). Interest is payable monthly. The note is collateralized by a personal guarantee of the Company’s shareholder.
Note D - Long-Term Debt
Long-term debt consists of the following:
March 31, (unaudited) | December 31, | |||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||||||||
The Company has a $3,000,000 commitment that bears interest at the bank’s prime rate (effective rate of 4% in 2004 and 2003). The note is payable in monthly installments of $50,000 plus interest through January 2009 and is collateralized by a personal guarantee of the Company’s shareholder. | $ | 2,950,000 | $ | 3,000,000 | $ | 3,000,000 | $ | — | $ | — | ||||||||||
Property note - payable in monthly installments of $5,065 including interest at 8%, due February 2015. Collateralized by land and building with a cost of $835,000. | — | — | — | — | 490,280 | |||||||||||||||
Equipment notes - payable in monthly installments aggregating $869,000 and $795,000 as of March 31,2004 and 2003 (unaudited), respectively, and $869,540, $777,591 and $803,579 as of December 31 2003, 2002 and 2001, respectively, including interest at rates ranging LIBOR plus 2% to 9.78% (effective rate of 5.9% and 5.7% for the three months ended March 31, 2004 and 2003 (unaudited), respectively, and 5.68%, 6.7% and 7.62% in 2003, 2002 and 2001, respectively) due at various dates through 2008. Collateralized by equipment with a cost of approximately $38,000,000 and $35,000,000 as of March 31, 2004 and 2003 (unaudited), respectively, and $37,719,523, $34,723,265 and $28,695,553 as of December 31, 2003, 2002 and 2001, respectively and personal guarantees of the Company’s shareholder. | 17,555,925 | 19,794,784 | 19,588,364 | 21,850,673 | 27,891,166 |
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, (unaudited) | December 31, | |||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||||||||
Equipment note - due March 2004. Interest is payable monthly at 4%. The note is collateralized by a personal guarantee of the Company’s shareholder. The Company is presently negotiating the extension of this loan. | 1,000,000 | — | 1,000,000 | — | — | |||||||||||||||
Unsecured note payable to shareholder, interest payable monthly at 8%. | — | — | — | — | 3,163,150 | |||||||||||||||
Note payable - interest payable monthly at 8.0%, due April 2004. The note is collateralized by a personal guarantee of the Company’s shareholder. | 4,256,644 | — | 1,400,000 | 1,400,000 | 1,400,000 | |||||||||||||||
Note payable - interest payable monthly at 5.75%, due on demand. The note is collateralized by a personal guarantee of the Company’s shareholder. | 1,400,000 | 1,400,000 | — | — | 3,200,000 | |||||||||||||||
27,162,569 | 24,194,784 | 24,988,364 | 23,250,673 | 36,144,596 | ||||||||||||||||
Less - current maturities | 27,162,569 | 8,344,231 | 12,928,121 | 8,198,916 | 10,687,496 | |||||||||||||||
$ | — | $ | 15,850,553 | $ | 12,060,243 | $ | 15,051,757 | $ | 25,457,100 | |||||||||||
Maturities of long-term debt in the five years subsequent to 2003 are:
Year | Amount | |||
2004 | $ | 12,928,121 | ||
2005 | 6,192,013 | |||
2006 | 3,239,708 | |||
2007 | 1,472,491 | |||
2008 | 1,106,031 | |||
Thereafter | 50,000 | |||
$ | 24,988,364 | |||
Note E - Retirement Plan
The Company has a qualified cash or deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees who meet minimum eligibility requirements may elect to defer portions of their salary, subject to Internal Revenue
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service limits. Employer contributions are discretionary. There was no profit sharing expense during 2003, 2002 and 2001.
Note F - Leases
FRS of Illinois leases a recycling facility and warehouses under the terms of operating leases. The leases, which expire in September 2006 provide for minimum monthly rentals aggregating approximately $7,420 plus operating expenses. In addition, the Company rents office space for approximately $7,800 per month under a month-to-month lease. Minimum future rents under these leases are:
Year | Amount | |||
2004 | $ | 89,040 | ||
2005 | 89,040 | |||
2006 | 80,560 | |||
Total | $ | 258,640 | ||
Rent expense for the years ended December 31, 2003, 2002 and 2001 was $169,543, $268,108 and $311,422, respectively.
Note G - Income Taxes
Income tax expense (benefit) is comprised of the following:
Years Ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Current federal income tax | $ | — | $ | — | $ | — | ||||||
Deferred federal income tax | 34,900 | — | (150,000 | ) | ||||||||
Income tax expense (benefit) | $ | 34,900 | $ | — | $ | (150,000 | ) | |||||
Income tax expense (benefit), as a percentage of pretax earnings, is as follows:
As a Percent of Pretax Earnings | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Combined statutory federal income tax rate | 39.0 | % | 39.0 | % | 39.0 | % | ||||||
At December 31, 2003, FRS of Delaware has available net operating loss carryforwards that may be used to reduce future taxable income amounting to $1,580,000. The carryforwards expire in the years 2013 - 2017. A deferred tax asset, amounting to $601,100, $636,000 and $636,000 at December 31 2003, 2002 and 2001, respectively, was recorded relating to the future tax benefit of the net operating loss carryforwards. The Company has determined that it is more likely than not that the future tax benefit will be fully utilized; therefore no valuation allowance has been established related to the deferred tax asset.
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Related Party Transactions
The Company has transactions with related parties as follows:
2003 | 2002 | 2001 | ||||||||||
Management fee expense | $ | 3,062,000 | $ | 2,720,000 | $ | 2,972,500 | ||||||
Insurance expense | 852,000 | 2,233,600 | 2,041,000 | |||||||||
Capitalized container refurbishing | 1,000,000 | — | — | |||||||||
Container repair expense | 323,000 | — | — | |||||||||
Truck and truck parts | 980,600 | 1,064,400 | 505,000 |
Balances due to and from related parties at December 31, were as follows:
2003 | 2002 | 2001 | ||||||||||
Accounts payable and accrued expenses | $ | 1,911,600 | $ | 556,000 | $ | 949,500 | ||||||
Other receivables | 38,800 | 241,700 | — |
Note I - Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers.
Note J - Cash Flow Information
Non-cash investing and financing activities:
During 2003, the Company distributed land and building to the Company’s shareholders with a book value of $427,023.
During 2002, the Company distributed land and building subject to the related debt to its sole shareholder as partial payment on the note payable to the shareholder. The Company’s shareholder contributed the remaining balance on the note payable to additional paid-in capital. No additional shares were issued to the shareholder for the capital contribution. The additional paid-in capital contributed by the shareholder is as follows:
Loan payable to shareholder | $ | 3,163,150 | ||||||
Less - property distributions | ||||||||
Net building | $ | 704,932 | ||||||
Land | 83,500 | |||||||
Debt assumed | (479,320 | ) | (309,112 | ) | ||||
Loan contributed to additional paid-in capital | 2,854,038 | |||||||
Cash contributions | 2,100,000 | |||||||
Total | $ | 4,954,038 | ||||||
FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2001, the shareholder contributed equipment (containers) valued at $29,400 to additional paid-in capital.
Note K - Subsequent Event (unaudited)
In April 2004, the Company signed and closed a stock sale purchase agreement under which all of the Company’s outstanding shares were sold. The agreement provides that the Company’s outstanding debt is paid by the sales proceeds. The Company will become a wholly owned subsidiary of the purchaser.