Exhibit 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Textilease Corporation and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Textilease
Corporation and Subsidiaries (the "Company") at December 31, 2002, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the Financial Accounting Standards Board Statement No. 142, "Intangible
Assets and Goodwill," effective January 1, 2002.
As discussed in Note 3 to the consolidated financial statements, the Company has
restated its consolidated financial statements as of and for the year ended
December 31, 2002.
/s/ PricewaterhouseCoopers LLP
March 28, 2003, except for Notes 3 and 14, as
to which the dates are November 14, 2003 and
September 2, 2003, respectively
Baltimore, Maryland
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(Restated - see Note 3)
- --------------------------------------------------------------------------------
<Table>
Cash $ 930,040
Marketable securities 40,963
Accounts receivable - trade, net of allowance for doubtful
accounts of $300,000 8,094,712
Inventories 23,655,158
Prepaid expenses and other current assets 1,509,382
-----------
Total current assets 34,230,255
-----------
Property, plant and equipment, net of accumulated depreciation
of $26,413,042 18,734,332
-----------
Other assets
Cash surrender value - officers' life insurance, net of policy
loans of $3,044,857 1,118,804
Goodwill 10,178,718
Intangible assets 1,228,067
Receivable from insurance trusts 1,897,396
Deposits and other assets 1,641,267
-----------
Total other assets 16,064,252
-----------
Total assets $69,028,839
===========
</Table>
The accompanying notes are an integral part of these financial statements.
1
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(Restated - see Note 3)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 4,878,992
Accrued expenses 3,420,373
Deferred income taxes, current 3,461,267
ESOP contribution payable and deferred compensation 969,321
Notes payable 8,329,149
Current maturities of long-term debt 2,383,690
------------
Total current liabilities 23,442,792
------------
Long-term liabilities
Deferred income taxes 865,848
Deferred compensation, net of current portion 3,736,852
Long-term debt, net of current maturities 9,932,626
------------
Total long-term liabilities 14,535,326
------------
Total liabilities 37,978,118
------------
Contingencies and commitments
Stockholders' equity
Common Stock Class A, voting, $0.50 par value per share,
1,500,000 shares authorized, 1,026,088 shares issued
and outstanding 513,044
Common Stock Class B, non-voting, $0.50 par value per share,
1,100,000 shares authorized, 1,075,840 shares issued and
outstanding 537,920
Common Stock Class C, non-voting, $0.50 par value per share,
100,000 shares authorized, issued and outstanding 50,000
ESOP, voting, $0.50 par value per share, 1,000,000 shares
authorized, 412,533 shares issued and outstanding 206,267
Additional paid-in capital 11,867,795
Retained earnings 18,647,089
Stockholders notes receivable (243,600)
Accumulated other comprehensive income (527,794)
------------
Total stockholders' equity 31,050,721
------------
Total liabilities and stockholders' equity $ 69,028,839
============
</Table>
The accompanying notes are an integral part of these financial statements.
2
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2002
(Restated - see Note 3)
- --------------------------------------------------------------------------------
<Table>
Revenue
Rental and service income $75,784,354
Product sales 19,550,837
----------
Total revenue 95,335,191
Cost of rentals and service (exclusive of depreciation) 41,539,515
Cost of products sold (exclusive of depreciation) 11,343,294
----------
Total cost of rentals, services and products sold 52,882,809
----------
OPERATING EXPENSES
Selling and delivery expenses 25,717,443
General and administrative expenses 12,444,590
ESOP contribution 1,136,710
Net periodic pension expense (benefit) 72,603
----------
Total operating expenses 39,371,346
----------
Income from operations 3,081,036
----------
OTHER INCOME (EXPENSE)
Interest and dividend income 9,850
Miscellaneous income 112,375
Interest expense (1,927,886)
----------
Total other expense (1,805,661)
----------
Income before income taxes 1,275,375
Provision for income taxes 536,322
----------
Net income $ 739,053
==========
</Table>
The accompanying notes are an integral part of these financial statements.
3
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002
(Restated - see Note 3)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL SHAREHOLDERS OTHER
--------------------------- PAID-IN RETAINED NOTES COMPREHENSIVE
CLASS A CLASS B CLASS C ESOP CAPITAL EARNINGS RECEIVABLE INCOME TOTAL
-------- -------- ------- -------- ----------- ----------- ------------- ------------- -----------
BALANCES AS OF
DECEMBER 31, 2001 $513,044 $507,920 $50,000 $161,069 $10,623,692 $18,420,287 $ -- $(100,844) $30,175,168
Issued 60,000 shares of
Class B stock -- 30,000 -- -- 213,600 -- -- -- 243,600
Issued 100,225 shares of
ESOP stock -- -- -- 50,113 1,142,580 -- -- -- 1,192,693
Redeemed 9,831 shares of
ESOP stock -- -- -- (4,915) (112,077) -- -- -- (116,992)
Shareholders notes
receivable -- -- -- -- -- -- (243,600) -- (243,600)
Comprehensive income
Net income -- -- -- -- -- 739,053 -- -- 739,053
Other comprehensive
income - minimum
pension liability, net
of tax of $268,409 -- -- -- -- -- -- -- (426,950) (426,950)
-----------
Comprehensive income -- -- -- -- -- -- -- -- 312,103
===========
Dividends to shareholders -- -- -- -- -- (512,251) -- -- (512,251)
-------- -------- ------- -------- ----------- ----------- ------------- ------------- -----------
BALANCES AS OF
DECEMBER 31, 2002 $513,044 $537,920 $50,000 $206,267 $11,867,795 $18,647,089 $(243,600) $(527,794) $31,050,721
======== ======== ======= ======== =========== =========== ============= ============= ===========
</Table>
The accompanying notes are an integral part of these financial statements.
4
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(Restated - See Note 3)
- --------------------------------------------------------------------------------
<Table>
<Caption>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 739,053
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 3,158,726
Bad debt expense 424,561
Deferred income taxes 387,309
ESOP expense 1,136,710
Loss on disposal of property and equipment 108,699
Other (4,598)
Changes in assets and liabilities
Accounts receivable - trade 719,123
Inventories 1,438,662
Prepaid expenses 985,164
Cash surrender value - officers' life insurance (135,466)
Deposits (204,722)
Other assets 173,525
Accounts payable - trade 1,079,688
Accrued expenses (161,753)
Deferred compensation (55,954)
-----------
Total adjustments 9,049,674
-----------
Net cash provided by operating activities 9,788,727
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 18,550
Purchases of property and equipment (1,190,261)
Purchases of investments (540)
Payments to insurance trusts (288,248)
-----------
Net cash used in investing activities (1,460,499)
-----------
</Table>
The accompanying notes are an integral part of these financial statements.
5
TEXTILEASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(Restated - see Note 3
- --------------------------------------------------------------------------------
<Table>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans against cash surrender value of
officers' life insurance $ 102,654
Repayment of short-term debt (5,741,697)
Repayment of long-term debt (2,265,000)
Repayment of obligations under capital lease (186,199)
Dividends paid to stockholders (512,251)
ESOP stock redemptions (116,992)
-----------
Net cash used in financing activities (8,719,485)
-----------
Net decrease in cash (391,257)
CASH
Beginning of year 1,321,297
-----------
End of year $ 930,040
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,649,744
Income taxes (refunds received), net (397,435)
Non-cash tax effect on additional minimum pension liability 268,409
NON-CASH INVESTING ACTIVITY
Assets purchased under capital lease 578,811
NON-CASH FINANCING ACTIVITY
Issuance of ESOP stock 1,192,693
</Table>
The accompanying notes are an integral part of these financial statements.
6
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. ORGANIZATION
Textilease Corporation (the "Company") was formed in November 1947 for the
primary purpose of leasing uniforms to businesses in the Mid-Atlantic
Region. The Company has expanded to encompass leasing and direct sale of
workplace products that enhance the appearance of the workplace, and
enhance the appearance, health and well-being of employees. Textile
products, including garments, high quality restaurant linen, mats, shop
towels, mops and other products have a target market of the Southeastern
United States, as do workplace first aid and safety products that are
personally delivered by van-based sales representatives. Direct shipment
of first aid and safety products at the retail and wholesale distribution
level takes place nationally through two wholly owned subsidiaries.
In addition, a subsidiary garment manufacturing plant in Puerto Rico
supplies products to Textilease Corporation and other purchasers.
Textilease Corporation grants credit to a wide variety of businesses in
diverse industries throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the year ended December 31, 2002
include the accounts of Textilease Corporation and its wholly-owned
subsidiaries, Quick-Aid, Inc., Textilease Medique, Inc., Stempler
Enterprises, Inc., and Pride America Garments, Inc. jointly referred to as
the "Company." All significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
All short-term investments that have original maturities of three months
or less are considered to be cash equivalents. Cash equivalents consist of
overnight investments stated at cost, which approximates fair value.
MARKETABLE SECURITIES
Marketable securities are stated at cost which approximates market value.
REVENUE RECOGNITION
Revenues on rental and service income are recorded over the term of the
lease and when such services are performed. Revenues on product sales to
customers are recorded upon the shipment of products, in accordance with
the terms of the invoice.
SHIPPING AND HANDLING COSTS
Shipping and handling fees billed to customers are recognized as a
component of the related underlying revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for losses arising from uncollectible customer accounts
receivable is based on historical bad debt experience and an evaluation of
accounts receivable balances at year end.
7
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Changes in the allowance for doubtful accounts for the year ended December 31,
2002 was as follows:
<Table>
Balance, beginning of period $ 350,000
Write-offs (582,253)
Recoveries of accounts previously written off 107,692
Provision for bad debts 424,561
------------
Balance, end of period $ 300,000
============
</Table>
INVENTORIES
Inventories consist of new goods and supplies, and rental merchandise in
service. New goods and supplies are valued at the lower of average cost or
market using the First-in, First-out (FIFO) method. Rental merchandise in
service is stated at cost less amortization, which is not in excess of market,
and is amortized over service lives ranging from 6 to 36 months and is included
as a component of cost of rentals and service.
The components of inventories as of December 31, 2002 are as follows:
<Table>
New goods and supplies $ 9,775,645
Rental merchandise in service 13,879,513
------------
Total $ 23,655,158
============
</Table>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major additions and
betterments are charged to the asset accounts while maintenance and repairs,
which do not improve or extend the lives of the assets, are expensed currently.
Upon disposal of property, plant and equipment, the cost of the asset and the
related accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in other income. Property, plant and
equipment as of December 31, 2002 is as follows:
<Table>
Land $ 693,334
Buildings and improvements 15,166,725
Machinery and equipment 22,987,899
Office furniture and equipment 5,548,362
Automobiles and trucks 751,054
------------
45,147,374
Less: accumulated depreciation (26,413,042)
------------
Property, plant and equipment, net $ 18,734,332
============
</Table>
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, as follows: 5-10 years for machinery, furniture,
equipment, and automobiles; and 20-40 for buildings and improvements.
Depreciation expense for the year ended December 31, 2002 was $3,109,270.
Equipment held under capital leases amortized using the straight-line method
over the life of the asset pursuant to Statement of Financial Standard ("SFAS")
No. 13, "Accounting for Leases ("SFAS 13"). As of December 31, 2002, Property,
plant and equipment includes gross assets acquired under capital leases of
$1,428,304 and related amounts included in accumulated depreciation were
$164,890.
8
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
PROPERTY, PLANT AND EQUIPMENT
The Company assesses impairment of its property and equipment based on
whether it is probable that undiscounted estimated future cash flows of
its property and equipment will be less than its net book value. If the
property and equipment is impaired, its basis is adjusted to its fair
market value.
DEFERRED COMPENSATION
The Company has deferred compensation plans with certain key employees.
There are a variety of plans, but generally compensation is earned over a
30 year period with a minimum period of 10 years of service needed before
contract rights vest. Benefits would be paid at retirement age, disability
or death, over a period of 10 years.
The present value of benefits payable at retirement is being accrued as
deferred compensation expense over the period from the date of the
contract through the first date the employees are eligible to receive full
benefits. Present value is determined using discount rates determined at
inception of the contract.
INCOME TAXES
Provisions for federal, state and local income taxes are calculated on
reported financial statement pre-tax income based on current tax law.
Income taxes include deferred taxes resulting from temporary differences
in income for financial statement and tax purposes. These temporary
differences result primarily from differences in the carrying value of
assets and liabilities.
INTANGIBLE ASSETS AND GOODWILL
Effective January 1, 2002, the Company adopted the full provisions of SFAS
No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other
Intangible Assets." In connection with its adoption of SFAS 141 and 142,
the Company evaluated its intangible assets, other than goodwill, and
determined that its intangible assets are comprised of trademarks to be
indefinite lived. SFAS 142 requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized, but instead be tested
for impairment at least annually. SFAS 142 prescribes a two-phase process
for impairment testing of goodwill. The first phase screens for
impairment; while the second phase (if necessary), measures the
impairment. The Company has completed the transitional impairment test,
which did not result in the impairment of recorded goodwill or its
indefinite lived intangibles.
RECEIVABLE FROM INSURANCE TRUSTS
The Company established six split-dollar life insurance policies in 1991
as an estate tax funding plan for the benefit of an officer/shareholder.
Under the agreement, the Company is paying a portion of the premiums on
the six policies for a period of ten to twelve years. Upon the death of
the officer/shareholder, the Company's interest in these policies will be
purchased by trusts set up under the agreement through a combination of
cash and Textilease stock. These receivables are recorded at
9
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
the net present value of the cumulative premiums paid by the Company,
discounted over the life expectancy of the officer/shareholder.
SALES COMMISSIONS
Sales commissions are expensed over the life of the sales contracts for
which commissions are earned.
ADVERTISING
Advertising costs are charged to operations when incurred. Advertising
expense for the year ended December 31, 2002 was $916,563.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in
the United States of America. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses. Actual
results could vary from the estimates that were used.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable, and obligations under capital leases approximate fair value, due
to the relatively short maturity of these instruments. The carrying amount
of variable-rate and fixed-rate long-term debt approximates fair value.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivative instruments and hedging activities in
accordance with Statement of Financial Accounting Standards No. 133 ("FAS
133"), Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
financial instruments, including certain derivative financial instruments
embedded in other contracts and for hedging activity. FAS 133 requires the
Company to recognize all derivatives as either assets or liabilities in
its financial statements and record these instruments at their fair
values. In order to achieve hedge accounting treatment, hedging activities
must be appropriately designated, documented and proven to be effective as
a hedge of a balance sheet item pursuant to provisions of FAS 133 (see
Note 4).
GUARANTEES AND INDEMNIFICATIONS
In the ordinary course of business, the Company may enter into agreements
for the supply of goods or services to customers that provide warranties
to the customer on one or more of the following: (i) the quality of the
goods and services supplied by the Company; (ii) the performance of the
goods supplied by the Company; and (iii) the Company's compliance with
certain specifications and applicable laws and regulations in supplying
the goods and services. Liability under such warranties often is limited
to a maximum amount, by the extent of the liability, or by the time period
within which a claim must be asserted. The Company's warranty obligations
under such supply agreements were immaterial.
10
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Additionally, the Company may enter into service agreements with service
providers in which it agrees to indemnify the service provider against
certain losses and liabilities arising from the service provider's
performance under the agreement. Generally, such indemnification
obligations do not apply in situations in which the service provider is
grossly negligent, engages in willful misconduct, or acts in bad faith.
The Company's liability under such service agreements was immaterial.
3. RESTATEMENT
During 2003, the Company determined that it had not accounted for a
deferred compensation obligation with one of its key executives. The 2002
financial statements and the December 31, 2001 retained earnings balance
have been restated to reflect the correction of this error. The effect of
this correction on the December 31, 2002 Consolidated Balance Sheet was to
increase accrued deferred compensation by $1,001,000 and to decrease
deferred tax liabilities by $386,000 and retained earnings by $615,000.
The effect of this correction on retained earnings as of December 31, 2001
was a decrease of $559,000. The effect of this correction on the 2002
Consolidated Statement of Income was to increase general and
administrative costs, decrease income from operations by $91,000, decrease
the provision for income taxes by $35,000 and to decrease Net Income by
$56,000.
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses an interest rate swap agreement (the "Agreement"),
entered into in May 2000, with a large commercial bank to hedge the
interest rate on its unsecured senior notes bearing interest at a fixed
rate of 9% (see Note 5). The Company does not hold or issue derivative
financial instruments for trading purposes.
The Agreement matures in June 2003 and entitles the Company to receive (at
9.0%) and pay (at 8.5%), on a monthly basis, the difference between these
fixed interest rates, unless monthly U.S. LIBOR is equal to or greater
than 7.5%. If monthly U.S. LIBOR is equal to or greater than 7.5%, then
the amount paid by the Company is based on a variable rate (thirty-day
LIBOR plus 1.25%). The monthly difference received or paid is calculated
by reference to an agreed notional principal amount. The notional balance
of the swap converts a portion of the outstanding principal balance on the
unsecured senior note at various amounts over the life of the Agreement.
The notional principal balance was $6,750,000 at December 31, 2002. The
fixed rate paid at December 31, 2002 was 8.5%. The fixed rate received
under this agreement is 9%.
The Company has elected, as permitted by FAS 133, not to prove the hedge
effectiveness of its interest rate swap due to the administrative burden
of complying with FAS 133. As a result, changes in the fair value of the
interest rate swap are recorded through current income rather than through
other comprehensive income.
For the year ended December 31, 2002, the Company recognized a net loss of
$35,198, reported in interest expense in the Statement of Income, which
represented the change in fair value of the derivative during the year. As
of December 31, 2002, the fair value of the interest rate swap was $13,305
and is included in other assets.
5. NOTES PAYABLE
On October 31, 2002, the Company renewed a $16.0 million unsecured Credit
Agreement, which expires on October 31, 2003, with a financial institution
for working capital and other general corporate needs. The amount
available is subject to borrowing base limits of 80% of eligible accounts
receivable, 50% of eligible merchandise in service up to $7.5 million, and
20% of eligible new goods and supplies inventory up to $2.5 million. At
December 31, 2002, $8,329,149 was outstanding while $7,670,851 of
additional borrowings were available under the Credit Agreement. A
commitment fee of .375% per annum on the amount of remaining availability
less the amount of outstanding letters of credit is payable quarterly.
During the year ended December 31, 2002, the Company recognized $12,204
for commitment fees. The Credit Agreement accrues interest at the thirty
day LIBOR (London InterBank Offered Rate) rate plus an applicable margin
of 2.25%. The applicable margin can be adjusted quarterly by .25% to a
minimum of 1.45% based on the
11
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- -------------------------------------------------------------------------------
Company's achievement of certain leverage ratios. Interest is payable
monthly in arrears on the first business day. At December 31, 2002, the
interest rate was 3.19%.
The Company can obtain letters of credit up to the lesser of the
outstanding debt or $2 million. A commitment fee of 1% per annum on the
outstanding letter of credit is payable prior to the issuance of such
letter of credit and on each renewal date. At December 31, 2002, $860,750
of the available letters of credit has been reserved for a specific
purpose, but, was not utilized as of year-end.
Under the Credit Agreement, the Company is required to comply with
non-financial covenants as well as certain minimum ratios including
leverage, debt coverage, and net worth ratios. At December 31, 2002, the
Company was in compliance with these covenants.
6. LONG-TERM DEBT
Long-term debt as of December 31, 2002 consists of the following:
Unsecured senior notes due May 15, 2005. Interest
is payable semi-annually at 8.87%. Principal
payments of $1,000,000 are payable each May 15
beginning in 1998 and thereafter through 2004. $ 2,000,000
Unsecured senior notes due May 16, 2006. Interest
is payable semi-annually at 9%. Principal payments
of $1,000,000 are payable in 2000 through 2003,
$1,500,000 in 2004, $3,000,000 in 2005, and
$3,500,000 in 2006. 9,000,000
Non-compete note payable. Payable in three
annual installments of $60,0000. 120,000
Capital leases, bearing interest rates ranging from
5.9% - 11.5%, payable in various monthly
installments through December 2007. 1,196,316
------------
12,316,316
Less current maturities (2,383,690)
------------
$ 9,932,626
============
12
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Annual maturities of long-term debt and capital lease obligations for each of
the years ended December 31 are as follows:
<Table>
<Caption>
CAPITAL
DEBT LEASES TOTAL
2003 $ 2,060,000 $ 344,300 $ 2,404,300
2004 2,560,000 344,935 2,904,935
2005 3,000,000 278,885 3,278,885
2006 3,500,000 235,580 3,735,580
2007 -- 191,707 191,707
Thereafter -- 2,168 2,168
----------- ---------- -----------
11,120,000 1,397,575 12,517,575
Less: amounts representing
interest on leases -- (201,259) (201,259)
----------- ---------- -----------
$11,120,000 $1,196,316 $12,316,316
=========== ========== ===========
</Table>
At December 31, 2002, the Company was in compliance with all covenants related
to its long term debt.
7. RELATED PARTY TRANSACTIONS
In June 2000, the Company entered into a note receivable with a shareholder for
$225,000. The terms of the note call for interest payments at 5% for 36
consecutive months, beginning August 15, 2000. Thereafter, the principal plus
interest is payable in 60 equal monthly installments of $4,246, beginning
September 15, 2003. The notes receivable has been classified in other assets on
the balance sheet.
In July 2002, the Company entered into a Stock Purchase Agreement with two
executives of the Company. The Company issued 30,000 shares of Class B common
stock to each executive at a share price of $4.06, in exchange for a
promissory note of $121,800. The notes bear interest at 4.25% per annum,
payable semi-annually commencing January 1, 2003. The principal balance of
$243,600 shall become due and payable in full on December 31, 2005.
8. EMPLOYEE BENEFIT PLANS
TEXTILEASE CORPORATION PENSION PLAN
Textilease has a non-contributory defined benefit pension plan covering many of
its employees. The benefits are based on years of credited service and on the
employee's compensation. The company's funding policy is to make contributions
sufficient to fund the benefits provided by the Plan and maintain the Plan in a
sound actuarial condition. Plan assets principally consist of fixed income
securities and equity securities. Entry into the Plan has been frozen since
1996.
13
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
The funded status of the Company's pension plan at December 31, 2002 is as
follows.
Projected benefit obligation $(2,694,299)
Plan assets at fair value 1,876,486
-----------
Funded status $ (817,813)
===========
For the year ended December 31, 2002, the pension obligation was
calculated utilizing a discount rate of 6.875%, and an assumed rate of
return on assets of 8%. Benefit payments were $242,148 for the year ended
December 31, 2002.
DEFINED CONTRIBUTION - RETIREMENT SAVINGS AND EMPLOYEE STOCK OWNERSHIP
PLAN (ESOP)
Textilease has a defined contribution retirement savings plan in which
voluntary employee contributions are matched by the Company. The Company
matches employee contributions with company stock on up to 4% of statutory
earnings. The employees may make additional unmatched contributions
subject to certain limitations. Prior to January 2001, participation was
available to all employees with one year of service. As of January 2001,
the eligibility requirement changed to six months of service. An
additional annual stock distribution may be made to all employees eligible
for the plan at the discretion of the Board of Directors.
In 2002, the Board of Directors authorized the issuance of Company stock
to the Employee Stock Ownership Plan to satisfy the accrued liability as
of December 31, 2001 of $785,537 and a discretionary contribution of
$407,154 for the year then ended, which was declared by the Board of
Directors in May 2002. The number of shares issued was based on the fair
market value per share of common stock of $11.90 at September 30, 2001.
Accordingly, 100,225 shares were issued to the plan for the 2001
contribution and 2002 discretionary contribution.
The Company has issued put options to participants who received a
distribution of Company stock from the ESOP. These put options provide
participants the right to sell their Textilease stock back to the Company
within specified time periods at its then fair market value. The Company's
repurchase obligation in connection with the put options would be
approximately $4,909,143 were the participants to exercise their put
options at December 31, 2002 based on the fair market value per share of
$11.90 at September 30, 2002.
The Company had an accrued ESOP liability of $710,240 as of December 31,
2002 and ESOP expense for the year then ended of $1,136,710.
HEALTH AND WELFARE PLAN
The Company has an employee benefit plan that provides health and death
benefits to substantially all employees with over 90 days of service.
Participants are required to make pre-determined contributions. Additional
amounts needed to fund the plan are provided by Textilease. Additionally,
this health and welfare plan covers certain individuals after retirement
who have met certain age and years of service requirements.
14
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
The funded status of the Company's health and welfare plan at December 31,
2002 is as follows:
<Table>
Fair value of plan assets $ 1,479,215
Projected benefit obligation (1,274,558)
------------
Funded status $ 204,657
============
Benefit plan expenses $ 2,825,165
============
</Table>
The weighted average assumptions used to calculate the projected benefit
obligation for the year ended December 31, 2002 were as follows: discount
rate of 6.875%; and health care cost trend rates of 5.0%. The health care
cost trend rates for the Company are expected to remain at the same level as
in the current year. Assumed health care cost trend rates have a significant
effect on the amounts reported for post retirement medical plans. Included in
plan assets are short term investments, including overnight investing
accounts and a general checking account.
9. LEASE COMMITMENTS
OPERATING LEASES
The Company is obligated under operating leases expiring at various dates
through 2008. These leases are for computer and office equipment, buildings
and vehicles.
Future minimum lease payments for operating leases for each of the year
ending December 31, 2002 are as follows:
<Table>
2003 $ 1,909,270
2004 1,576,060
2005 1,187,277
2006 511,506
2007 120,108
Thereafter 3,596
-----------
Total $ 5,307,817
===========
</Table>
Total rent expense was $4,083,490 in 2002.
In connection with several of the above equipment leases, the Company
incurred additional costs to construct the equipment and to cover finance
costs for funds advanced by the lessor during construction. The total costs
were deferred until the leases were executed and are being amortized over the
term of the leases. These costs are included in fixed assets. Amortization
expense attributable to the lease costs was $166,508 for the year ended
December 31, 2002.
10. COMMITMENTS AND CONTINGENCIES
WORKERS COMPENSATION INSURANCE
For the year ended December 31, 2002, the Company partially self-insured
workers compensation claims. The company is responsible for up to $100,000
per incident for the year ended December 31, 2002 and up to $700,000 in the
aggregate for a policy year. Amounts above these
15
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
limits are covered by insurance. As of the end of the policy year, the
Company has reserved $259,857 for 2002 for possible losses on outstanding
claims.
LEGAL MATTERS
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of business. The Company, after consultation with legal
counsel, believes that the disposition of these matters will not have a
material adverse effect on the financial condition, results of operation
or liquidity of the Company.
11. INCOME TAXES (RESTATED)
The components of the income tax provision for the year ended December 31, 2002
consisted of:
<Table>
CURRENT TAX PROVISION
Federal $123,681
State 25,332
--------
Total current provision 149,013
--------
DEFERRED TAX PROVISION
Federal 321,466
State 65,843
--------
Total deferred tax provision 387,309
--------
Provision for income taxes $536,322
========
</Table>
A reconciliation of the difference between the Company's effective income tax
rate and the statutory federal income tax rate is as follows:
<Table>
<Caption>
% OF
U.S. statutory regular tax rate 34.0%
State income tax, net of U.S. federal
income tax benefit 4.7%
Permanent differences 3.1%
--------
Provision for income taxes 41.8%
========
</Table>
Deferred income taxes result from temporary differences in the financial basis
of assets and liabilities. The types of differences that give rise to deferred
income tax liabilities or assets as of December 31, 2002 are as follows:
<Table>
DEFERRED TAX ASSETS
Accounts receivable reserves $ 208,080
Employee benefits 2,058,369
Contribution carryforward 115,860
-----------
Deferred tax assets 2,382,309
-----------
DEFERRED TAX LIABILITIES
Fixed assets (1,684,338)
Inventory (4,800,550)
Other (224,536)
-----------
Deferred tax liabilities (6,709,424)
-----------
Net deferred tax liabilities $(4,327,115)
===========
</Table>
As of December 31, 2002, the Company had a contribution deduction carryforward
of $538,789 which begins to expire in 2006.
16
12. COMMON STOCK
In 2002, a dividend of $1 per share was declared and paid on Class C
common stock and ESOP common stock totaling $512,251. There were no
dividends declared but unpaid as of December 31, 2002.
13. CONCENTRATION OF CREDIT RISK
The Company has cash at a financial institution, which is in excess of
Federal Deposit Insurance Corporation ("FDIC") limits of $100,000. At
December 31, 2002, the Company's uninsured cash balance totaled
$1,162,983.
14. SUBSEQUENT EVENT
On September 2, 2003, the Company completed its sale of the business and
assets of the Company to UniFirst Corporation pursuant to the terms and
conditions of a Stock Purchase Agreement, dated as of July 17, 2003, by
and among UniFirst Corporation and all of the stockholders of the Company.
17
TEXTILEASE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In Thousands)
DECEMBER 31, 2002
JUNE 30, 2003 (RESTATED)
Assets
Current Assets:
Cash $ 1,790 $ 930
Marketable securities 41 41
Accounts receivable, trade (net) 8,287 8,095
Inventories 23,035 23,656
Prepaid expenses 1,467 1,509
-------- --------
Total current assets 34,620 34,231
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 19,232 18,734
OTHER ASSETS
Cash surrender value - officer's life
insurance, net of loans 1,018 1,119
Goodwill 10,179 10,179
Intangible assets, net 1,228 1,228
Receivable from insurance trusts 1,897 1,897
Deposits 160 540
Other assets 1,901 1,101
-------- --------
Total other assets 16,383 16,064
-------- --------
Total assets $ 70,235 $ 69,029
======== ========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable, trade $ 3,323 $ 4,879
Accrued expenses 2,980 3,421
Payroll and sales taxes payable 438 --
Income taxes payable 327 --
Deferred taxes, current 3,554 3,461
ESOP contribution payable and deferred compensation 1,647 969
Notes payable 9,872 8,329
Current maturity of long-term debt 3,265 2,384
-------- --------
Total current liabilities 25,406 23,443
-------- --------
LONG-TERM LIABILITIES
Deferred income taxes, net of current 889 866
Deferred compensation, net of current 3,852 3,737
Long-term debt, net of current 7,874 9,933
-------- --------
Total long-term liabilities 12,615 14,536
-------- --------
Total liabilities 38,021 37,979
-------- --------
STOCKHOLDERS' EQUITY
Common stock, class A 513 513
Common stock, class B 538 538
Common stock, class C 50 50
ESOP stock 206 206
Additional paid-in capital 11,868 11,868
Retained earnings 19,811 18,647
Stockholders notes receivable (244) (244)
Other comprehensive income (528) (528)
-------- --------
Total stockholders' equity 32,214 31,050
-------- --------
Total liabilities and stockholders' equity $ 70,235 $ 69,029
======== ========
TEXTILEASE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
June 30, 2003 June 30, 2002
---------------- ----------------
Revenues $ 47,263 $ 47,597
Costs and expenses:
Operating costs 25,868 26,264
Selling and administrative expenses 16,610 18,620
Depreciation expense 1,273 1,421
Amortization expense 201 201
-------- --------
Total Costs and Expenses 43,952 46,506
-------- --------
Income from Operations 3,311 1,091
-------- --------
Other Income (Expense)
Interest Income 38 4
Interest Expense (664) (867)
Other (12) (212)
-------- --------
Total Other Expense (638) (1,075)
-------- --------
Income before income taxes 2,673 16
-------- --------
INCOME TAXES
Provision for income taxes, current 1,340 410
Deferred income taxes (271) (403)
-------- --------
Total income taxes 1,069 7
-------- --------
Net Income $ 1,604 $ 9
======== ========
TEXTILEASE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In Thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
June 30, 2003 June 30, 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,604 $ 9
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 1,273 1,421
Amortization 201 201
Bad debt expense 141 159
Deferred income taxes (271) (403)
ESOP expense 625 631
Gain on disposal of property and equipment 6 (1)
Changes in assets and liabilities
Accounts receivable - trade (333) 784
Inventories 620 1,274
Due from taxing authorities 344 410
Miscellaneous receivables 216 327
Prepaid expenses (191) (703)
Cash surrender value - officers' life insurance 100 103
Deposits 380 201
Other assets (812) 160
Accounts payable - trade (1,556) (1,017)
Accrued expenses, payroll & sales tax liabilities (2) (100)
Deferred compensation 115 (20)
------- -------
Total adjustments 856 3,427
------- -------
Net cash provided by operating activities 2,460 3,436
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,966) (830)
Payments to insurance trusts 0 (18)
------- -------
Net cash used in investing activities (1,966) (848)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term debt 1,543 (885)
Net payments on long-term debt (1,690) (2,000)
Repayment of capital lease obligations (155) (76)
Borrowings on capital lease 668 322
------- -------
Net cash used in financing activities 366 (2,639)
------- -------
Net decrease in cash 860 (51)
------- -------
Cash, Beginning of period 930 1,321
------- -------
Cash, End of period $ 1,790 $ 1,270
======= =======
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 3003
- -------------------------------------------------------------------------------
1. ORGANIZATION
Textilease Corporation (the "Company") was formed in November 1947 for the
primary purpose of leasing uniforms to businesses in the Mid-Atlantic
Region. The Company has expanded to encompass leasing and direct sale of
workplace products that enhance the appearance of the workplace, and
enhance the appearance, health and well-being of employees. Textile
products, including garments, high quality restaurant linen, mats, shop
towels, mops and other products have a target market of the Southeastern
United States, as do workplace first aid and safety products that are
personally delivered by van-based sales representatives. Direct shipment
of first aid and safety products at the retail and wholesale distribution
level takes place nationally through two wholly owned subsidiaries.
In addition, a subsidiary garment manufacturing plant in Puerto Rico
supplies products to Textilease Corporation and other purchasers.
Textilease Corporation grants credit to a wide variety of businesses in
diverse industries throughout the United States.
2. INTERIM FINANCIAL INFORMATION
These condensed consolidated financial statements have been prepared by
the Company without audit. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that
the information furnished reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary to a fair statement of results for the interim period. Results
for an interim period are not indicative of any future interim periods or
for an entire fiscal year.
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 3003
- -------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories consist of new goods and supplies, and rental merchandise in
service. New goods and supplies are valued at the lower of average cost or
market. Rental merchandise in service is stated at cost less amortization,
which is not in excess of market, and is amortized over service lives
ranging from 6 to 36 months.
The components of inventories as of June 30, 2003 and December 31, 2002,
respectively, are as follows:
June 30, 2003 December 31, 2002
New goods and supplies $ 9,831,845 $ 9,775,645
Rental merchandise in service 13,202,863 13,879,513
------------- --------------
$ 23,034,708 $ 23,655,158
============= ==============
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 3003
- -------------------------------------------------------------------------------
DEFERRED COMPENSATION
The Company has deferred compensation plans with certain key employees.
There are a variety of plans, but generally compensation is earned over a
30 year period with a minimum period of 10 years of service needed before
contract rights vest. Benefits would be paid at retirement age, disability
or death, over a period of 10 years.
The present value of benefits payable at retirement is being accrued as
deferred compensation expense over the period from the date of the
contract through the first date the employees are eligible to receive full
benefits. Present value is determined using discount rates determined at
inception of the contract.
TEXTILEASE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 3003
- -------------------------------------------------------------------------------
GUARANTEES AND INDEMNIFICATIONS
In the ordinary course of business, the Company may enter into agreements
for the supply of goods or services to customers that provide warranties
to the customer on one or more of the following: (i) the quality of the
goods and services supplied by the Company; (ii) the performance of the
goods supplied by the Company; and (iii) the Company's compliance with
certain specifications and applicable laws and regulations in supplying
the goods and services. Liability under such warranties often is limited
to a maximum amount, by the extent of the liability, or by the time period
within which a claim must be asserted. The Company's warranty obligations
under such supply agreements were immaterial. Additionally, the Company
may enter into service agreements with service providers in which it
agrees to indemnify the service provider against certain losses and
liabilities arising from the service provider's performance under the
agreement. Generally, such indemnification obligations do not apply in
situations in which the service provider is grossly negligent, engages in
willful misconduct, or acts in bad faith. The Company's liability under
such service agreements was immaterial.
4. RESTATEMENT
During 2003, the Company determined that it had not accounted for a
deferred compensation obligation with one of its key executives. The 2002
financial statements and the December 31, 2001 retained earnings balance
have been restated to reflect the correction of this error. The effect of
this correction on the December 31, 2002 Consolidated Balance Sheet was to
increase accrued deferred compensation by $1,001,000 and to decrease
deferred tax liabilities by $386,000 and retained earnings by $615,000.
The effect of this correction on retained earnings as of December 31, 2001
was a decrease of $559,000. The effect of this correction on the 2002
Consolidated Statement of Income was to increase general and
administrative costs, decrease income from operations by $91,000, decrease
the provision for income taxes by $35,000 and to decrease Net Income by
$56,000.