EX-99.3 5 g96165exv99w3.htm CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements
 

Exhibit 99.3

Quarter Report
Florida Recycling Services, Inc.

As of March 31, 2004 and December 31, 2003 and for the three months ended
March 31, 2004 and 2003

 

 

Florida Recycling Services, Inc.
Table of Contents
As of March 31, 2004 and December 31, 2003 and
for the three months ended March 31, 2004 and 2003

 
         
    Page
Consolidated Financial Statements
        
 
        
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003
    1  
 
        
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (Unaudited)
    2  
 
        
Consolidated Statements of Changes in Shareholders’ Deficit for the three
months ended March 31, 2004 (Unaudited)
    3  
 
        
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited)
    4  
 
        
Notes to Consolidated Financial Statements (Unaudited)
    5-11  

 

 

Florida Recycling Services, Inc.
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003 (amounts in thousands)

 
                 
    March 31,     December 31,  
    2004     2003  
    (Restated – See Note 1)  
Assets
                
Current assets
                
Cash and cash equivalents
   $ 191     $ 337  
Trade accounts receivable, net of allowance for doubtful accounts
     6,903       8,054  
Due from affiliates
     995       2,726  
Supplies and materials
     506       520  
Prepaid expenses and other current assets
     569       1,173  
 
            
Total current assets
     9,164       12,810  
 
            
 
                
Property and equipment, net of accumulated depreciation
     15,820       15,521  
 
            
 
                
Other non-current assets
                
Deposits
     17       17  
Note receivable
     258       —  
Customer relationships, net of accumulated amortization of $92 at March 31, 2004
and $81 at December 31, 2003
     315       326  
Goodwill
     174       174  
 
            
Total non-current assets
     764       517  
 
            
 
                
Total assets
   $ 25,748     $ 28,848  
 
            
 
                
Liabilities and Shareholders’ Deficit
                
 
                
Current liabilities
                
Accounts payable
   $ 4,913     $ 5,969  
Accrued expenses
     7,321       7,069  
Due to affiliates
     1,954       3,478  
Note payable-bank
     9,610       10,000  
Shareholder loan
     2,950       3,000  
Current maturities of long-term debt
     19,620       12,316  
 
            
Total current liabilities
     46,368       41,832  
 
            
 
                
Long-term debt
     —       9,849  
 
            
 
                
Total liabilities
     46,368       51,681  
 
            
 
                
Commitments and contingencies (Note 8)
                
 
                
Shareholders’ deficit
                
Common stock, $1,000 par value, 1,000 shares authorized, 100 shares issued and outstanding
     100       100  
Additional paid-in capital
     9,986       5,729  
Accumulated deficit
     (30,706 )     (28,662 )
 
            
Total shareholders’ deficit
     (20,620 )     (22,833 )
 
            
Total liabilities and shareholders’ deficit
   $ 25,748     $ 28,848  
 
            

 
The accompanying notes are an integral part of these consolidated financial statements.

1

 

Florida Recycling Services, Inc.
Consolidated Statements of Operations (Unaudited)
For the three months ended March 31, 2004 and 2003 (amounts in thousands)

 
                 
    2004     2003  
    (Restated - See Note 1)  
Revenue
   $ 20,038     $ 21,143  
 
            
 
                
Cost of operations:
                
Disposal costs
     6,543       8,092  
Direct labor
     5,793       5,266  
Other operating costs
     4,279       3,416  
Selling, general and administrative expenses
     3,595       4,092  
Depreciation and amortization
     1,445       1,977  
Gain on distribution and disposal of property and equipment
     —       (3,704 )
 
            
Total cost of operations
     21,655       19,139  
 
            
 
                
Operating income (loss)
     (1,617 )     2,004  
 
                
Interest expense, net
     427       566  
 
            
 
                
Net income (loss)
   $ (2,044 )   $ 1,438  
 
            

 
The accompanying notes are an integral part of these consolidated financial statements.

2

 

Florida Recycling Services, Inc.
Consolidated Statements of Changes in Shareholders’ Deficit (Unaudited)
For the three months ended March 31, 2004 (amounts in thousands)

 
                                 
            Additional             Total  
    Common     Paid-In     Accumulated     Shareholders'  
    Stock     Capital     Deficit     Deficit  
            (Restated - See Note 1)          
Balances as restated, December 31, 2003
   $ 100     $ 5,729     $ (28,662 )   $ (22,833 )
Net loss as restated
     —       —       (2,044 )     (2,044 )
Shareholder contribution as restated
     —       4,257       —       4,257  
 
                        
Balances as restated, March 31, 2004
   $ 100     $ 9,986     $ (30,706 )   $ (20,620 )
 
                        

 
The accompanying notes are an integral part of these consolidated financial statements.

3

 

Florida Recycling Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2004 and 2003 (amounts in thousands)

 
                 
    2004     2003  
    (Restated - See Note 1)  
Cash flows from operating activities
                
Net income (loss)
   $ (2,044 )   $ 1,438  
Depreciation and amortization
     1,445       1,977  
Gain on distribution and disposal of property and equipment
     —       (3,704 )
Changes in operating assets and liabilities:
                
Trade accounts receivable
     893       40  
Supplies and materials
     14       (17 )
Prepaid expenses and deposits
     604       (85 )
Accounts payable
     (1,056 )     (446 )
Accrued expenses
     252       171  
Net changes in due to/(from) affiliate
     207       545  
 
            
Net cash provided by (used in) operating activities
     315       (81 )
 
            
 
                
Cash flows from investing activities
                
Purchase of property and equipment
     (1,733 )     (1,741 )
Proceeds from sale of property and equipment
     —       72  
 
            
Net cash used in investing activities
     (1,733 )     (1,669 )
 
            
 
                
Cash flows from financing activities
                
Checks issued in excess of bank balance
     —       (380 )
Proceeds from shareholder loan
     —       3,000  
Payments on shareholder loan
     (50 )     —  
Proceeds from note payable-bank
     —       1,200  
Payments on note payable-bank
     (390 )     —  
Payments on long-term debt, net
     (2,545 )     (2,061 )
Contribution from shareholder
     4,257       —  
Distributions to shareholder
     —       (9 )
 
            
Net cash provided by financing activities
     1,272       1,750  
 
            
 
                
Decrease in cash and cash equivalents
     (146 )     —  
 
                
Cash and cash equivalents
                
Beginning of period
     337       —  
 
            
 
                
End of period
   $ 191     $ —  
 
            
 
                
Supplemental cash flow disclosures
                
Cash paid for interest expense
   $ 352     $ 491  
 
            

 
The accompanying notes are an integral part of these consolidated financial statements.

4

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 1 Organization of Business and Basis of Presentation

Florida Recycling Services, Inc. (FRS of Illinois, a subchapter S corporation) and its subsidiary Florida Recycling Services, Inc. of Delaware (FRS of Delaware) (collectively “FRS”, “Florida Recycling” or “the Company”) operate waste disposal and recycling services throughout central Florida.

The accompanying consolidated financial statements include the accounts of FRS and its subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information related to the organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accounting policies followed in the preparation of these interim consolidated financial statements are consistent with those followed in the Company’s annual consolidated financial statements for the year ended December 31, 2003 (as restated). In the opinion of management, these unaudited consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows for the periods presented.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, intangible assets, goodwill and liabilities for potential litigation.

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 March 31, 2004 and December 31, 2003, an allowance of $1,842 and $2,230 was considered necessary, respectively.

On April 30, 2004, Waste Services, Inc. (“Waste”) completed the acquisition of all of the issued and outstanding shares of Florida Recycling. Following the acquisition, the results of operations of FRS were below Waste’s expectations and Waste conducted a review of FRS’s business in an effort to identify the factors contributing to the lower than expected level of performance. Based on the results of this review, it appeared that the 2003 financial statements of FRS, provided by the sellers, contained misstatements and could not be relied upon. As such, FRS completed a restatement of its historical consolidated financial statements as of March 31, 2004 and 2003 and for the quarters then ended.

These restatement adjustments primarily related to:

     (a) Adjustments for revenue recognition;

     (b) Adjustments for accruals of disposal costs;

     (c) Adjustments for changes in provisions for doubtful accounts;

     (d) Adjustments related to capitalization of certain assets and period costs; and

     (e) Adjustments to reclassify amounts due to/from affiliates.

The following tables set forth the net effect of the restatements and reclassifications on specific amounts presented in the Company’s consolidated balance sheets, consolidated statements of operations and condensed consolidated statements of cash flows:

 

5

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 1 Organization of Business and Basis of Presentation, Continued

Consolidated Balance Sheet-March 31, 2004 (Unaudited)
and December 31, 2003

                                                 
    March 31, 2004     December 31, 2003  
    Previously                     Previously              
    Reported     Adjustments     Restated     Reported     Adjustments     Restated  
Assets
                                                
 
                                                
Current assets
                                                
Cash and cash equivalents
   $ 955     $ (764 )   $ 191     $ 670     $ (333 )   $ 337  
Trade accounts receivable, net of allowance for doubtful accounts
     11,582       (4,679 )     6,903       16,156       (8,102 )     8,054  
Due from affiliates
     875       120       995       855       1,871       2,726  
Supplies and materials
     950       (444 )     506       963       (443 )     520  
Prepaid expenses and other current assets
     1,037       (468 )     569       1,646       (473 )     1,173  
 
                                    
 
     15,399       (6,235 )     9,164       20,290       (7,480 )     12,810  
 
                                    
 
                                                
Property and equipment, net of accumulated depreciation
     23,425       (7,605 )     15,820       18,039       (2,518 )     15,521  
 
                                    
 
                                                
Other non-current assets
                                                
Deposits
     18       (1 )     17       18       (1 )     17  
Note receivable
     —       258       258       —       —       —  
Customer relationships, net of accumulated amortization
     435       (120 )     315       454       (128 )     326  
Goodwill
     174       —       174       174       —       174  
Deferred income tax asset
     584       (584 )     —       601       (601 )     —  
 
                                    
 
     1,211       (447 )     764       1,247       (730 )     517  
 
                                    
 
                                                
 
   $ 40,035     $ (14,287 )   $ 25,748     $ 39,576     $ (10,728 )   $ 28,848  
 
                                    

 

6

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 1 Organization of Business and Basis of Presentation, Continued

Consolidated Balance Sheets-March 31, 2004 (Unaudited)
and December 31, 2003, Continued

                                                 
    March 31, 2004     December 31, 2003  
    Previously                     Previously              
    Reported     Adjustments     Restated     Reported     Adjustments     Restated  
Liabilities and Shareholders’ Equity
                                                
 
                                                
Current liabilities
                                                
 
                                                
Accounts payable
   $ 4,710     $ 203     $ 4,913     $ 6,555     $ (586 )   $ 5,969  
Accrued expenses
     2,794       4,527       7,321       2,656       4,413       7,069  
Due to affiliates
     —       1,954       1,954       —       3,478       3,478  
Note payable-bank
     9,610       —       9,610       10,000       —       10,000  
Shareholder loan
     —       2,950       2,950       —       3,000       3,000  
Current maturities of long-term debt
     27,163       (7,543 )     19,620       12,928       (612 )     12,316  
 
                                    
 
     44,277       2,091       46,368       32,139       9,693       41,832  
 
                                    
 
                                                
Long-term debt
     —       —       —       12,060       (2,211 )     9,849  
 
                                    
 
                                                
Shareholders’ deficit
                                                
Common stock
     100       —       100       100       —       100  
Additional paid-in capital
     11,670       (1,684 )     9,986       11,670       (5,941 )     5,729  
Accumulated deficit
     (16,012 )     (14,694 )     (30,706 )     (16,393 )     (12,269 )     (28,662 )
 
                                    
 
     (4,242 )     (16,378 )     (20,620 )     (4,623 )     (18,210 )     (22,833 )
 
                                    
 
                                                
 
   $ 40,035     $ (14,287 )   $ 25,748     $ 39,576     $ (10,728 )   $ 28,848  
 
                                    

 

7

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 1 Organization of Business and Basis of Presentation, Continued

Consolidated Statements of
Operations (Unaudited)

                                                 
    March 31, 2004     March 31, 2003  
    Previously                     Previously              
    Reported     Adjustments     Restated     Reported     Adjustments     Restated  
Revenue
   $ 22,987     $ (2,949 )   $ 20,038     $ 22,177     $ (1,034 )   $ 21,143  
 
                                    
Cost of operations:
                                                
Disposal costs
     7,500       (957 )     6,543       7,178       914       8,092  
Direct labor
     5,751       42       5,793       5,160       106       5,266  
Other operating costs
     3,420       859       4,279       2,881       535       3,416  
Selling, general and administrative expenses
     3,710       (115 )     3,595       3,742       350       4,092  
Depreciation and amortization
     1,713       (268 )     1,445       2,156       (179 )     1,977  
Gain on distributions and disposal of property and equipment
     —       —       —       —       (3,704 )     (3,704 )
 
                                    
Total cost of operations
     22,094       (439 )     21,655       21,117       (1,978 )     19,139  
 
                                    
Operating income (loss)
     893       (2,510 )     (1,617 )     1,060       944       2,004  
Interest expense, net
     496       (69 )     427       540       26       566  
 
                                    
Income (loss) before income taxes
     397       (2,441 )     (2,044 )     520       918       1,438  
Income tax expense
     17       (17 )     —       19       (19 )     —  
 
                                    
Net income (loss)
   $ 380     $ (2,424 )   $ (2,044 )   $ 501     $ 937     $ 1,438  
 
                                    

Condensed Consolidated
Statements of Cash Flows (Unaudited)

                                                 
    March 31, 2004     March 31, 2003  
    Previously                     Previously              
    Reported     Adjustments     Restated     Reported     Adjustments     Restated  
Cash flows from operating activities
   $ 5,601     $ (5,286 )   $ 315     $ 155     $ (236 )   $ (81 )
Cash flows from investing activities
     (7,100 )     5,367       (1,733 )     (2,032 )     363       (1,669 )
Cash flows from financing activities
     1,784     (512 )      1,272       1,991       (241 )     1,750  

 

8

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 2 Note Payable — Bank

The Company has a $12,000 revolving line of credit facility of which $9,610 is drawn at March 31, 2004. The note, which is due on demand, bears interest at a rate of 25 basis points below the bank’s prime rate (approximate effective rate of 3.8% in 2004 and 2003). Interest is payable monthly. The note is collateralized by waste containers and vehicles, and is personally guaranteed by the Company’s shareholder. This note was subsequently repaid on April 30, 2004.

Note 3 Long-Term Debt

Long-term debt at March 31, 2004 and December 31, 2003 consists of:

                 
    2004     2003  
    (Unaudited)          
Notes payable — Principal and interest payments are payable monthly (aggregating approximately $374 per month) at interest rates ranging from LIBOR plus 2% to 8.16% with final maturity dates through July 2009. Notes are collateralized by equipment and the personal guarantee of the Company’s shareholder.
   $ 9,238     $ 10,747  
 
                
Notes payable — Principal and interest payments are payable monthly (aggregating approximately $374 per month) at interest rates ranging from 2.9% to 9.25%, with final maturity dates through October 2009. Notes are collateralized by trucks, vehicles, and the personal guarantee of the Company’s shareholder.
     5,465       6,001  
 
                
Notes payable — Principal and interest payments are payable monthly (aggregating approximately $96 per month) at rates ranging from 8.1% to 9.5% interest, with final maturity dates through November 2006. Notes are collateralized by vehicles, and other equipment and the personal guarantee of the Company’s shareholder.
     2,476       2,791  
 
                
Note payable — Principal and interest payments are payable monthly (approximately $63 per month) at 7.15% interest with a final maturity date of May 2005. Note is collateralized by waste containers and the personal guarantee of the Company’s shareholder.
     1,041       1,226  
 
                
Note payable — Interest is 8.5% and is payable upon maturity in April 2004, along with the principal. The note is uncollateralized.
     1,400       1,400  
 
            
 
     19,620       22,165  
Less current maturities
     19,620       12,316  
 
            
 
                
Long-term debt
   $ —     $ 9,849  
 
            

As indicated in Note 1, the Company was purchased by Waste in April 2004, and all of the outstanding debt was repaid. Due to change of control provisions in the debt arrangements, all of the outstanding amounts have been classified as current.

Note 4 Shareholder loan

On January 24, 2003, the Company’s shareholder borrowed $3,000 from a bank. The note was executed between FRS, the shareholder and the shareholder’s wife (collectively the “borrowers”) and the bank. The note is secured by the shareholder’s personal residence with interest payable monthly at the Wall Street Journal Prime Rate or the bank’s reference prime rate (4.0% at March 31, 2004). On January 22, 2004, the note was extended to mature January 22, 2009 with principal payments of $50 to be made monthly. The proceeds from this note were used for working capital purposes and the note was subsequently repaid on April 30, 2004.

 

9

 

Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Note 5 Related-Party Transactions

     The Company had transactions with related parties for the three months ended March 31 as follows (unaudited):

                 
    2004     2003  
Management fee expense
   $ 1,233     $ 674  
Waste disposal costs
     1,856       2,337  
Insurance expense
     49       786  
Capitalized container refurbishing
     1,032       —  
Container repair expense
     —       66  
Truck and truck parts
     574       211  
 
            
 
   $ 4,744     $ 4,074  
 
            

Note 6 Surety Bonds and Letters of Credit

Municipal solid waste services contracts require permits and licenses to operate transfer stations, and landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of March 31, 2004, the Company provided customers and various regulatory authorities with letters of credit approximating $2.0 million, and performance or surety bonds of approximately $22.5 million to collateralize its performance obligations on an individual contract basis. Should the Company fail to perform its obligation under certain contracts, there would be a potential obligation of the Company for the portion of the contract that is secured by the Company’s letter of credit (i.e. $2.0 million). The Company incurred no such non-performance claims for the periods ended March 31, 2004 and 2003, respectively.

Note 7 Cash Flow Information

Additional information regarding non-cash investing and financing activities for the three month period ended March 31 include:

During 2003, the Company distributed land and building with a net book value of $427 (and fair market value of approximately $4,080) to a shareholder. This distribution, which is reflected at fair market value within the Company’s financial statements, combined with the cash distribution of $9 resulted in total shareholder distributions of $4,089 in 2003. APB No. 29, “Accounting for Nonmonetary Transactions”, requires that non-reciprocal transfers to owners be recorded at the fair value of the asset distributed. As such, the Company recognized a gain on the property distribution approximating $3.6 million.

During 2004, the Company converted $258 in trade receivables to a long-term customer note.

During 2003, the Company entered into capital leases for certain waste hauling vehicles with a cost of approximately $320.

Note 8 Commitments and Contingencies

Environmental Risks

The Company is subject to liability for environmental damage that its truck storage facilities may cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, including damage resulting from conditions existing prior to the Company’s acquisition of such facilities. Pollutants or hazardous substances whose transportation was arranged by Florida Recycling, may also subject the Company to liability for any off-site environmental contamination caused by these pollutants or hazardous substances.

Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on FRS’s financial condition, results of operations or cash flows. As of the date of these consolidated financial statements, the Company estimates the range of reasonably possible losses related to environmental matters to be insignificant and is not aware of any such environmental liabilities that would be material to its operations or financial condition.

 

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Florida Recycling Services, Inc.
Notes to the Financial Statements (Unaudited)

 

Legal Proceedings

     In the normal course of business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or revoke or deny renewal of an operating permit or license held by the Company. From time to time, the Company may also be subject to actions brought by citizens’ groups, adjacent landowners or residents in connection with the permitting and licensing of hauling operations or allegations related to environmental damage or violations of the permits and licenses pursuant to which the Company operates.

 

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