EX-99.1 3 whitewing_exh99-1.txt EXHIBIT 99.1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Total Recycling Services, Inc. and Subsidiaries (formerly Total Filter Recycling, Inc.) We have audited the accompanying consolidated balance sheet of Total Recycling Services, Inc. and Subsidiaries (name changed from Total Filter Recycling, Inc. on June 10, 2002) as of December 31, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2000 and 2001. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Total Recycling Services, Inc. and Subsidiaries (formerly Total Filter Recycling, Inc.) as of December 31, 2001, and the results of their operations and their cash flows for the years ended December 31, 2000 and 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ M.R. Weiser & Co., LLP New York, N. Y. July 2, 2002 TOTAL RECYCLING SERVICES, INC. AND SUBSIDIARIES (FORMERLY TOTAL FILTER RECYCLING, INC.) CONSOLIDATED BALANCE SHEETS December 31, March 31, ASSETS 2001 2002 ----------- ----------- (Unaudited) Current assets: Cash $ 12,657 $ 60,073 Accounts receivable, net of allowance for doubtful accounts of $39,000 and $57,000 at December 31, 2001 and March 31, 2002, respectively 439,088 579,958 Inventory 215,704 203,527 Due from affiliate 60,808 95,294 Prepaid expenses 56,948 79,799 Other current assets 21,301 36,135 ----------- ----------- Total current assets 806,506 1,054,786 ----------- ----------- Property and equipment, net 1,169,431 1,187,610 ----------- ----------- Other assets: Intangible assets: Goodwill, net 85,390 85,390 Other intangible assets, net 265,898 454,402 ----------- ----------- Total intangible assets 351,288 539,792 Investment in affiliate - at equity 115,353 122,182 Other assets 126,491 59,578 ----------- ----------- Total other assets 593,132 721,552 ----------- ----------- Total assets $2,569,069 $2,963,948 =========== =========== (CONTINUED) TOTAL RECYCLING SERVICES, INC. AND SUBSIDIARIES (FORMERLY TOTAL FILTER RECYCLING, INC.)

TOTAL RECYCLING SERVICES, INC. AND SUBSIDIARIES (FORMERLY TOTAL FILTER RECYCLING, INC.)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

TOTAL RECYCLING SERVICES, INC. AND SUBSIDIARIES (FORMERLY TOTAL FILTER RECYCLING, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS

TOTAL RECYCLING SERVICES, INC. AND SUBSIDIARIES (FORMERLY TOTAL FILTER RECYCLING, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 2002 AND SUBSEQUENT THERETO AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2002 IS UNAUDITED) 1. BACKGROUND: Organization: Total Recycling Services, Inc. ("TRS") was incorporated on July 24, 1992 under the laws of the state of New Jersey. The consolidated entity, collectively referred to as the "Company", includes four wholly-owned subsidiaries: EMP, Inc. ("EMP"), Total Recycling Services of Connecticut, Inc. d/b/a Total Recycling Services ("TRS of CT"), Etters Realty, Inc. and ARS Properties, Inc. All significant intercompany balances and transactions have been eliminated. Effective April 24, 2002, TRS increased the number of shares of authorized common stock from 1,000,000 to 1,400,000. On June 10, 2002, TRS changed its name from Total Filter Recycling, Inc. to Total Recycling Services, Inc. Nature of Business: The Company services and sells products to the motor vehicle repair industry. Services include the collection of recyclable materials. Products include antifreeze and industrial absorbents. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Revenue Recognition: Revenue from the sale of products is recognized when delivered. Revenue from services is recognized over the period services are rendered. Property and Equipment: Property and equipment are carried at cost and are being depreciated under either the straight line or double declining balance methods over the estimated useful lives of the related assets, ranging from three to forty years. Expenditures for maintenance, repairs and betterments that do not substantially prolong the useful life of an asset are charged to operations as incurred. Additions and betterments that substantially extend the useful life of an asset are capitalized. Investment in Affiliate - Equity Method: The investment in an affiliate consists of a 50% interest in Advanced Recovery Solutions, Inc. d/b/a Complete Spill Solutions ("ARS"), and is accounted for under the equity method. Income Taxes: The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets and liabilities are determined based on differences between the financial reporting and the income tax bases of the assets and liabilities measured using enacted income tax rates and laws that are expected to be in effect when the differences reverse. Use of Estimates: 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Inventory: Inventory is recorded at cost, determined by the first-in, first-out method. Stock Based Compensation: As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," the Company applies Accounting Principles Board Opinion No. 25 and related interpretations for expense recognition for stock based compensation arrangements for employees. -2- Advertising: The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2000 and 2001 and the three months ended March 31, 2001 and 2002 was $11,705, $12,233, $2,540 and $3,685, respectively. Recent Accounting Pronouncements: As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. As of March 31, 2002, the Company had unamortized goodwill and intangible assets of approximately $540,000, subject to the provisions of SFAS No. 142. The Company has not yet performed its transitional impairment test in conjunction with the adoption of SFAS No. 142. As noted above, the Company ceased amortizing goodwill effective January 1, 2002. The following are pro forma results assuming goodwill had not been amortized prior to January 1, 2002:

-3- In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The Company adopted SFAS No. 144 as of January 1, 2002. No provision for the impairment or disposal of long-lived assets was recorded as a result of this adoption. 3. UNAUDITED INFORMATION: The unaudited consolidated financial statements at March 31, 2002 and for the three months ended March 31, 2001 and 2002 reflect adjustments, all of which are of a normal recurring nature, which are, in the opinion of management, necessary to a fair presentation. The results for the interim periods presented are not necessarily indicative of full year results. 4. PROPERTY AND EQUIPMENT: Major classifications of property and equipment and their respective useful lives are as follows:

-4- At December 31, 2001 and March 31, 2002, property under capital leases amounted to $346,663 and $518,760, net of accumulated depreciation of $158,637 and $175,040, respectively. 5. INTANGIBLE ASSETS: The major classifications of intangible assets and their respective useful lives are as follows:

-5- 6. BANK LOAN: The Company has a $278,500 interest-only loan payable with The Trust Company of New Jersey, which was due on January 15, 2002. The Company has received an extension of the due date until July 31, 2002. The loan is collateralized substantially by all corporate assets. The loan carries a floating interest rate of prime. At December 31, 2001 and March 31, 2002, the rate was 4.75%. Interest is payable monthly. 7. LINE OF CREDIT: The Company has a $674,000 revolving line of credit agreement with The Trust Company of New Jersey, which expires on July 31, 2002. The line is collateralized by substantially all corporate assets. The line carries a floating interest rate of prime. Interest is payable monthly. At December 31, 2001 and March 31, 2002, the outstanding balance was $500,000 and $674,000, respectively. 8. LOANS PAYABLE:

The majority stockholder has personally guaranteed certain loans payable, capital lease and operating lease obligations. Certain minority stockholders have personally guaranteed certain notes due to The Trust Company of New Jersey. Principal payments on the above notes are as follows as of December 31, 2001 (substantially the same at March 31, 2002): Year Ending December 31, ------------ 2002 $ 73,441 2003 16,420 --------- $ 89,861 ========= -7- 9. LOANS PAYABLE - RELATED PARTIES:

10. CAPITAL LEASES: Future minimum lease payments required under several capital equipment leases are as follows:

-8- 11. CONVERTIBLE LOANS PAYABLE: At December 31, 2001 and March 31, 2002, the Company had three loans payable totaling $425,000, which mature between October 2003 and April 2004. On May 3, 2002, the loans were converted into 85,000 shares of common stock at $5.00 per share. 12. INCOME TAXES: At December 31, 2001, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $209,000, which will expire in 2021. The tax effects of items comprising the Company's deferred tax assets and liabilities are as follows: December 31, March 31, 2001 2002 ---------- ---------- (Unaudited) Deferred tax assets: Net operating loss carryforwards $ 87,684 $ 188,484 Accounts receivable 16,386 23,736 Goodwill and other intangibles 12,521 9,160 ---------- ---------- 116,591 221,380 Deferred tax liabilities: Property and equipment (52,261) (64,096) ---------- ---------- 64,330 157,284 Valuation allowance (64,330) (157,284) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ========== The Company has recorded a full valuation allowance on its net deferred tax assets. The valuation allowance increased during the years ended December 31, 2000 and 2001 and the three months ended March 31, 2001 and 2002 by approximately $66,000, $78,000, $29,000 and $93,000, respectively. 13. COMMON STOCK TO BE ISSUED: In June 1998, the Company converted a $15,000 loan payable into 25,000 shares of the Company's Common Stock. The shares were not issued until July 2000; prior thereto they were recorded as Common Stock to be issued. -9- 14. ISSUANCE OF COMMON STOCK: In January 2002, the Company issued 10,000 shares of Common Stock to an employee for services. Compensation expense of $6,563 was recorded. The expense was measured by the estimated fair value of the Common Stock ($.656 per share). 15. STOCK OPTIONS: On October 1, 2001, the Company granted an option to purchase 225,000 shares of Common Stock at an exercise price of $.01 in consideration for investment services. The option will expire one year from the date of grant. A minimum of $1,000,000 in an investment transaction must be completed in order for the option to be exercised, and the option must be exercised prior to the closing of the transaction. In accordance with SFAS No. 123, the Company will value this option under the fair value method. Since the option is unvested, no accounting recognition will be recorded until the investment transaction is completed. On April 23, 2002, the investment transaction occurred and the option was exercised. See Note 20 "Acquisition and Private Placement" for further information relating to the acquisition emanating from such investment services. 16. RELATED PARTY TRANSACTIONS: In 1999, the majority stockholder issued a note for $45,000; the stockholder has not received any payments for principal or interest on this note. The unpaid interest has not been accrued because the Company and the stockholder have mutually agreed to forgo these payments until April 1, 2002. See Note 9 for the terms of this note. At December 31, 2001 and March 31, 2002, the Company was indebted to the majority stockholder in the amount of $29,161 and $39,161, respectively. There is no stated maturity date or interest rate on this debt. No payments are required until April 2003. On January 1, 2002, the Company purchased intellectual property consisting of various formulas, equipment designs, mechanical device adaptations and other intellectual property for $194,505 from a stockholder of ARS, a 50% owned company. The Company paid $50,000 cash and the other $144,505 was in the form of a note. During the year ended December 31, 2001 and the three months ended March 31, 2002, the Company purchased $4,736 and $13,865 of goods for resale from ARS and had accounts payable to ARS at December 31, 2001 and March 31, 2002 of $3,986 and $7,108, respectively. As of December 31, 2001 and March 31, 2002, $60,808 and $95,294, respectively, was due from ARS. This is non-interest bearing and due on demand. -10- The ARS shareholder agreement, dated September 19, 2001, contains a provision whereby two ARS stockholders have the right to request the Company to purchase their shares at any time following the 18-month period from the date of the agreement. The repurchase of shares of one of the stockholders of ARS is required to be completed by September 30, 2004. The Company may purchase the stock or have ARS redeem the shares. The repurchase price per share is determined by applying a multiple of 4 times EBITDA divided by the number of shares outstanding on the valuation date. At December 31, 2001 and March 31, 2002, the Company recorded a liability for this put option obligation amounting to $93,310 and $100,674, respectively. 17. CONCENTRATIONS AND SIGNIFICANT CUSTOMER: The Company has one customer that represented 35.4%, 30.16%, 32.5% and 25.7% of revenues for the years ended December 31, 2000 and 2001 and for the three months ended March 31, 2001 and 2002, respectively. This customer also accounted for 21.8% and 19.2% of accounts receivable at December 31, 2001 and March 31, 2002, respectively. A change in this relationship could have an adverse affect on the Company's continued operations. 18. COMMITMENTS AND CONTINGENCIES: Operating Leases: The Company leases commercial space, vehicles and equipment under noncancelable operating leases that expire on various dates. Rent expense under these leases for the years ended December 31, 2000 and 2001 and the three months ended March 31, 2001 and 2002 was $258,059, $310,385, $67,800 and $39,862, respectively. In May 2002, the Company entered into a five-year lease for commercial space that expires on April 30, 2007. As of December 31, 2001, the future aggregate minimum lease payments under these operating leases, including the May 2002 lease, are as follows (substantially the same at March 31, 2002): Years Ending December 31, ------------ 2002 $ 374,000 2003 336,000 2004 139,000 2005 114,000 2006 80,000 Thereafter 27,000 ------------ $ 1,070,000 ============ -11- Service Lease: The Company has a noncancelable agreement with Mobil Lubrication Services Co., Inc. for the right to service accounts of Mobil Lube. The agreement calls for a monthly payment of $2,100, and expires on January 31, 2003. The expense for the years ended December 31, 2000 and 2001 and the three months ended March 31, 2001 and 2002 was $25,200, $25,200, $6,300 and $6,300, respectively. The commitment for the years ending December 31, 2002 and 2003 is $25,200 and $2,100, respectively. Rental Income: The Company leased certain property to an unrelated party, Burlington Motor Carriers, Inc. The lease is due in monthly installments of $7,500 through November 2005 with a final payment of $50,000 due at the end of the lease term. At December 31, 2001, the carrying amount of the leased property was approximately $320,000. During March 2002, Burlington Motor Carriers, Inc. vacated the leased premises as a result of bankruptcy and ceased paying rent. On June 17, 2002, the Company entered into an agreement to sell the previous leased land and building, for $485,000, which is recorded at a net book value of approximately $320,000 and $318,000 at December 31, 2001 and March 31, 2002, respectively. 19. 401(K) PROFIT-SHARING PLAN: The Company has a 401(k) plan that is available to all eligible employees. The plan is an employee deferral plan only; no contributions are required or currently permitted by the employer. -12- 20. ACQUISITION AND PRIVATE PLACEMENT: Whitewing Acquisition: On January 31, 2002, the Company entered into a Letter of Intent ("LOI") with Whitewing Labs, Inc. ("Whitewing"). On March 7, 2002, the terms of the LOI were announced to the public. On May 3, 2002, the Company signed a Stock for Stock Exchange Agreement (the "Agreement") with Whitewing Labs, Inc. The stockholders of the Company acquired 28,000,000 shares of Whitewing's common stock in exchange for all of the issued and outstanding shares of the Company (1,400,000 shares). In the transaction, the principal stockholders of the Company became the directors and officers of Whitewing. The 28,000,000 shares represents 80 percent of Whitewing's common stock outstanding. This transaction will be accounted for as a reverse acquisition with the Company being the accounting acquirer, under SFAS No. 141, "Business Combinations". Whitewing, which was engaged in the vitamin supplement business, is a public company that transacts no business, following its December 2001 sale of substantially all if its operating assets. On May 14, 2002, Whitewing changed its name to Whitewing Environmental Corp. Private Placement: On May 3, 2002, the Company completed a private placement of 160,000 shares of its common stock. The shares were offered to accredited investors in units of 5,000 shares each at a price of $5.00 per share for an aggregate gross proceeds of $800,000. Each investor who purchased units in the Private Placement agreed that upon the closing of the Private Placement, each share of common stock that the investor subscribed for will be exchanged for 20 shares of Whitewing common stock. 21. SUBSEQUENT EVENTS: Asset Purchase Agreement: On August 30, 2001, the Company signed a Letter of Intent to purchase net assets of Connecticut Waste Oil, Inc. ("CWO") including trucks and equipment, inventory, leases, customer lists and other intangibles for a purchase price of $350,000. Effective January 1, 2002, the Company entered into an Equipment Lease and Operating Agreement with CWO in order to assume business operations before the closing of the asset purchase agreement. Under the agreement, revenue from servicing CWO's customers is retained by the Company, which is obligated to pay related operating expenses. The agreement will expire the earlier of the closing of the purchase agreement or December 28, 2002. -13- In January 2002, the son of the principal stockholder of CWO joined the Company's management as director of TRS of CT. On April 24, 2002, in consideration for his future services, he received 50,000 shares of the Company's common stock at a fair value of $5.00 per share. The shares will be held in escrow and distributed in equal quarterly installments over a 3 year period. The voting rights of all shares in escrow shall be given by proxy to the majority stockholder of the Company. If employment is terminated as a result of breach of contract or resignation, unreleased shares shall be cancelled and returned to the Company. If the Company terminates employment without cause, the remaining shares shall be released in quarterly installments to the end of the term in the same manner as if he remained employed. -14-

WHITEWING ENVIRONMENTAL CORP 8-K/A