U S PLASTIC LUMBER CORP, 10QSB/A, 1998-05-27

U S PLASTIC LUMBER CORP
10QSB/A, 1998-05-27
MISCELLANEOUS PLASTICS PRODUCTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.

FORM 10-QSB/A

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission file Number 000-23855

U.S. PLASTIC LUMBER CORPORATION
(Name of small business issuer in its charter)

---------------------

<TABLE>
<S> <C>
NEVADA 87-0404343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>

---------------------

2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
(561) 394-3511
(Address and telephone number of principal executive offices and place of
business)

Check here whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No [X]

The number of shares outstanding of the registrant's common stock as of
April 30, 1998 is 16,752,340.

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<PAGE> 2

U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES

FORM 10-QSB

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
2
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997.....................................
3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997................
4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997................
5
Notes to Condensed Consolidated Financial Statements........
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations.................................

PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 2. Changes in Securities....................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES............................................................. 21
EXHIBITS
</TABLE>
<PAGE> 3

EXPLANATORY NOTE: U.S. Plastic Lumber Corp. (the "Company") is filing this
quarterly report on Form 10-QSB/A for the quarterly period ended March 31, 1998
to correct certain errors in the Company's intercompany elimination effecting
consolidated balance sheet and consolidated statement of cash flow for quarter
ended March 31, 1998 (see Part I., Item 1. Financial Statements).

FORWARD LOOKING STATEMENTS

When used in this Form 10-QSB, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to economic conditions, changes in laws or
regulations, the Company's history of operating losses, demand for products and
services of the Company, newly developing technologies, loss of permits,
conflicts of interest in related party transactions, regulatory matters,
protection of technology, lack of industry standards, raw material commodity
pricing, the ability to receive bid awards, the effects of competition and the
ability of the Company to obtain additional financing. Such factors, which are
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to consolidated financial statements, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with undue reliance on any such forward-looking statements, which
speak only as of the date made. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

1
<PAGE> 4

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,096,911 $ 1,170,120
Trade receivables, net.................................... 6,452,550 6,940,288
Inventories............................................... 1,768,790 1,502,658
Prepaid expenses and other current assets................. 401,638 220,728
----------- -----------
Total current assets.............................. 9,719,889 9,833,794
PROPERTY AND EQUIPMENT, net................................. 7,649,571 5,775,424
ACQUIRED INTANGIBLES, net................................... 7,556,753 7,009,244
OTHER ASSETS................................................ 2,014,760 552,914
INVESTMENT IN JOINT VENTURE................................. 575,915 --
----------- -----------
Total assets...................................... $27,516,888 $23,171,376
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,745,951 $ 3,788,714
Accrued expenses.......................................... 1,220,937 1,737,518
Current portion of notes payable.......................... 2,484,458 2,404,607
Due to affiliates......................................... 1,006,810 1,956,810
Other liabilities......................................... 357,071 420,084
----------- -----------
Total current liabilities......................... 8,815,227 10,307,733
NOTES PAYABLE, net of current portion....................... 5,364,453 817,011
DEFERRED INCOME TAXES....................................... 633,656 580,433
MINORITY INTEREST........................................... 225,000 --
----------- -----------
Total liabilities................................. 15,038,336 11,705,177
----------- -----------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001;
authorized 5,000,000 shares; issued and outstanding
219,586 and 208,930, respectively (aggregate
liquidation preference of $4,391,720 and $4,184,140,
respectively).......................................... 221 209
Common stock par value $.0001, authorized 50,000,000
shares; issued and outstanding 15,892,011 and
15,621,599 shares, respectively........................ 1,590 1,562
Additional paid-in capital................................ 13,812,918 12,573,026
Accumulated deficit....................................... (1,336,177) (1,108,598)
----------- -----------
Total stockholders' equity........................ 12,478,552 11,466,199
----------- -----------
Total liabilities and stockholders' equity........ $27,516,888 $23,171,376
=========== ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

2
<PAGE> 5

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES................................................ $ 7,659,261 $ 2,003,496
COST OF GOODS SOLD.......................................... 6,058,821 1,564,658
----------- -----------
Gross profit...................................... 1,600,440 438,838
OPERATING EXPENSES.......................................... 1,584,796 885,093
----------- -----------
Operating income (loss)........................... 15,644 (446,255)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (145,332) (20,226)
Gain on sale of assets.................................... 105,588 10,472
----------- -----------
Total other income (expense)...................... (39,744) (9,754)
----------- -----------
Loss before income taxes.......................... (24,100) (456,009)
PROVISION (BENEFIT) FROM INCOME TAXES....................... (9,640) --
----------- -----------
Net loss.......................................... $ (14,460) $ (456,009)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (.00) $ (.04)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 15,737,443 12,500,268
=========== ===========
</TABLE>

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

3
<PAGE> 6

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (14,460) $ (456,009)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation........................................... 252,168 64,974
Amortization........................................... 103,589 46,864
Amortization of deferred financing costs............... 44,444 --
Gain on sale of assets................................. 105,588 --
Expense related to non-employee equity transactions.... 36,225 --
Compensation expense on earnout shares................. 3,718 1,264
Deferred income taxes.................................. -- 18,408
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. 763,317 1,221,435
Inventories.......................................... (141,377) (111,939)
Prepaid expenses and other current assets............ (180,910) (153,785)
Other assets......................................... -- (43,669)
Accounts payable..................................... (728,944) (854,340)
Other liabilities.................................... (65,144) (1,520)
Accrued expenses..................................... (609,069) (6,104)
----------- -----------
Total adjustments................................. (416,395) 181,588
----------- -----------
Net cash used in operating activities............. (430,855) (274,421)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,775,970) (208,842)
Cash paid for acquisitions, net of cash received.......... (515,500) (1,240,362)
Advances to Joint Venture................................. (707,812) --
----------- -----------
Net cash used in investing activities............. (2,999,282) (1,449,204)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock..................... -- 2,380,000
Proceeds from exercise of Series A warrants............... 172,870 --
Advances from affiliate................................... 1,250,000 --
Repayment of amounts due to affiliate..................... (2,400,000) --
Proceeds from notes payable............................... 5,067,508 718,000
Repayment of notes payable................................ (733,450) (530,815)
----------- -----------
Net cash provided by financing activities......... 3,356,928 2,567,185
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ (73,209) $ 843,560
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,170,120 854,290
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,096,911 $ 1,697,850
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest............................................... $ 98,931 $ 20,226
=========== ===========
Income taxes........................................... $ 114,226 $ --
=========== ===========
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

See Notes 2 and 3 for information regarding common and preferred shares
issued for acquisitions and noncompete agreements.

See Note 6 for information regarding stock options issued for securing a
discretionary line of credit.

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

4
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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

U.S. Plastic Lumber Corp. and its subsidiaries (the "Company") are engaged
in the manufacturing of recycled plastic lumber from post-consumer plastic waste
and the recycling of soils which have been exposed to hydrocarbons. The
Company's plastic lumber customers are located throughout the United States. The
Company's soil recycling customers are located primarily in the Northeastern
United States.

The Company's unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial reporting and the regulations of the Securities
and Exchange Commission for quarterly reporting. Accordingly, they do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company, the
statements include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
U.S. Plastic Lumber Corp. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

In July 1997, the Company and Interstate Industrial Corp. formed a 50/50
joint venture to operate a dredging company. The Company accounts for its
investment on the equity method. As of March 31, 1998, the carrying value of the
Company's investment in joint venture represented its contributed capital less
its share of the net losses of the joint venture, or $575,915. The net
obligation to the Joint Venture is included in other liabilities in the
accompanying December 31, 1997 consolidated balance sheet.

In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.

Loss Per Share

Basic loss per share is computed by dividing net loss by the
weighted-average number of shares actually outstanding. Diluted loss per share
further considers the impact of common stock equivalents to the extent that they
are dilutive. The Company's basic and diluted loss per share are equivalent for
the first quarter of 1998 and for the first quarter of 1997.

Impact of Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting of Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The adoption of SFAS No. 130
had no impact on the Company's disclosures. SFAS No. 131 will be adopted in
1998.

2. ACQUISITIONS

1996 Acquisition

Effective December 30, 1996, Clean Earth, Inc., together with its
subsidiaries, (collectively, "CEI") was acquired as a wholly-owned subsidiary of
U.S. Plastic Lumber Corp. ("USPLC"), through the exchange of

5
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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

77,143 shares of USPLC common stock for each outstanding share of common stock
of CEI, for a total of 5,400,000 shares (the "Merger"). For financial reporting
purposes, CEI is deemed to be the acquiring corporation and the transaction has
been accounted for as a reverse merger with the historical financial statements
prior to December 30, 1996 being those of CEI. The determination of CEI as the
acquirer for financial reporting purposes was based upon the following factors:
(i) former shareholders of CEI held the right to control a majority of board
seats immediately subsequent to the acquisition, (ii) the chief executive
officer and certain directors of the merged companies were individuals who were
holding such positions at CEI, (iii) the assets and revenues of CEI
substantially exceeded those of USPLC, and (iv) although the former shareholders
did not receive a majority share of USPLC common stock after the acquisition,
when taking into account the number of preferred shares and stock options held
by these individuals, if such preferred shares were converted and stock options
were exercised, a majority ownership position would be obtained. All references
in the condensed consolidated financial statements referring to shares, share
prices, per share amounts and stock prices have been retroactively adjusted to
reflect the capital structure of USPLC. The merger agreement provides for the
issuance of an additional 2,573,686 shares of common stock to the former
shareholders of CEI upon the ultimate resolution of the contingency related to
the issuance of shares to certain USPLC stockholders as discussed in Note 4.
Upon final resolution of this contingency, the additional shares issued, if any,
will be issued at their then current fair value as an additional cost of the
acquisition and recorded as acquired intangibles.

The value of the USPLC shares issued in connection with the reverse
acquisition was $2,538,000, or $0.47 per share. The purchase price exceeded the
fair value of the net assets acquired by approximately $2,810,000. Accordingly,
the excess has been recorded as a component of acquired intangibles and is being
amortized on a straight-line basis over a period of twenty years.

1997 Acquisitions

On January 27, 1997, the Company acquired Recycled Plastics Industries,
Inc. ("RPI"), a recycled plastic lumber manufacturer in exchange for $1,200,000
in cash and 1,000,000 shares of common stock. The total purchase price of
$1,675,000 exceeded the estimated fair value of the net assets of RPI by
approximately $1,410,000. The excess has been recorded as a component of
acquired intangibles and goodwill and is being amortized on a straight-line
basis over a period of twenty years.

On February 24, 1997, the Company acquired Advanced Remediation and
Disposal Technologies, Inc. ("ARDT"), an environmental consulting and
remediation company, in exchange for 300,000 shares of the Company's common
stock. The common stock was valued based on an independent appraisal at $159,000
which was less than the estimated fair value of the net assets of ARDT by
approximately $120,000. The difference was reflected as a reduction of
non-current assets. The purchase agreement also provides for the issuance of up
to an additional 150,000 shares of the Company's common stock if ARDT meets
certain profitability levels during the years ending December 31, 1997 and 1998.
In 1997, 12,500 of such shares were earned under the earnout provision and were
recorded as compensation expense at their current fair value of $28,125.

On March 28, 1997, the Company acquired Environmental Specialty Products,
Inc. ("ESP"), a sales and marketing company of recycled plastic lumber products
in exchange for $110,000 of cash and 25,150 shares of common stock. The total
purchase price of $123,581 exceeded the estimated fair value of the net assets
of ESP by approximately $29,000. The excess has been recorded as a component of
acquired intangibles and is being amortized on a straight-line basis over a
period of twenty years.

On March 31, 1997, the Company acquired Integrated Technical Services, Inc.
("ITS"), an environmental consulting and remediation company, in exchange for
$110,000 in cash and 185,000 shares of common stock. The total purchase price of
$209,900 exceeded the estimated fair value of the net assets of ITS by
approximately $390,000. The excess has been recorded as a component of acquired
intangibles and is being
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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortized on a straight-line basis over a period of twenty years. The purchase
agreement also provides for the issuance of up to an additional 24,000 shares of
the Company's common stock to certain former stockholders of ITS if ITS meets
certain profitability levels during the years ending December 31, 1997 and 1998.
In 1997, 16,000 of such shares were earned under the earnout provision and were
recorded as compensation expense at their current fair value of $34,965.
Additionally, the former shareholders of ITS were awarded 47,572 shares of
common stock as consideration for noncompete agreements. The Company is
amortizing the associated cost of $25,688 over the 60-month term of the related
agreements.

On June 30, 1997, the Company acquired EnviroPlastics Corporation ("EPC"),
a recycler of post consumer plastic, in exchange for 280,000 shares of the
Company's common stock. The total purchase price of $630,000 exceeded the
estimated fair value of the net assets of ITS by approximately $1,272,000. The
excess has been recorded as a component of acquired intangibles and is being
amortized on a straight-line basis over a period of twenty years. The purchase
agreement also provides for the issuance of up to 90,000 stock options for
shares of the Company's common stock, at an exercise price of $5.00 per share,
if EPC meets certain profitability levels during the years ending December 31,
1997, 1998 and 1999. In 1997, 30,000 options were granted under the terms of the
earnout provision. The exercise price of the stock options exceeded the fair
value of the underlying shares, accordingly, no compensation expense was
recorded at the date of grant. Additionally, the former shareholders of EPC were
awarded 25,000 shares of common stock as consideration for noncompete
agreements. The Company is amortizing the associated cost of $55,000 over the
60-month term of the related agreements.

On November 18, 1997, the Company acquired Waste Concepts, Inc. ("WCI"), an
environmental consulting and remediation company, in exchange for $175,000 in
cash and 400,000 shares of common stock. The total purchase price of $1,075,000
exceeded the estimated fair value of the net assets of WCI by approximately
$1,355,000. The excess has been recorded as goodwill and is being amortized on a
straight-line basis over a period of twenty years. The purchase agreement also
provides for the issuance of up to an additional 25,000 shares of the Company's
common stock if WCI meets certain profitability levels during the five-year
period ending December 31, 2002. No shares were granted in 1997 under the
provisions of the earnout.

A summary of the aggregate purchase price of the 1997 acquisitions and net
assets acquired is as follows:

<TABLE>
<S> <C>
Aggregate purchase price.................................... $ 3,872,481
-----------
Working capital (deficit)................................... (619,316)
Long-term assets............................................ 2,813,281
Long-term debt.............................................. (1,965,040)
Deferred taxes.............................................. (815,885)
-----------
Acquired intangibles........................................ $ 4,459,441
===========
</TABLE>

The acquisitions have been accounted for as purchases and, accordingly, the
results of operations of the acquired companies are included with those of the
Company for periods subsequent to the date of acquisition.

1998 Acquisitions

In January 1998, the Company acquired Green Horizon Environmental, Inc.,
("GHE") an environmental services company, in exchange for 50,000 shares of
common stock. The aggregate purchase price of $142,500 exceeded the estimated
fair value of the net assets of GHE by $102,000. The excess has been recorded as
a component of acquired intangibles and is being amortized on a straight-line
basis over a period of twenty years.

In February 1998, the Company acquired the majority interest of
Consolidated Technologies, Inc. ("CTI") in exchange for 36,500 shares of the
Company's common stock. CTI is an environmental recycling

7
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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services company located in Norristown, Pennsylvania. The Company had previously
owned a minority interest equal to 25% in CTI of which $500,000 of funding was
paid in cash during the first quarter of 1998. The aggregate purchase price of
$582,000 exceeded the estimated fair value of the net assets of CTI by $307,000.
The excess has been recorded as a component of acquired intangibles and is being
amortized on a straight-line basis over a period of twenty years.

In March 1998, the Company acquired substantially all of the assets of
Chesapeake Recycled Lumber, Inc. ("CRL") in exchange for $100,000 in cash, a
$100,000 note payable and 97,500 shares of the Company's common stock. The
aggregate purchase price of $420,000 exceeded the estimated fair value of the
net assets of CRL by $231,000. The excess has been recorded as a component of
acquired intangibles and is being amortized on a straight-line basis over a
period of twenty years.

The unaudited pro forma combined results of operations of the Company, RPI,
ARDT, ESP, ITS, EPC, WCI, GHE, CTI and CRL for 1998 and 1997, after giving
effect to certain pro forma adjustments are as follows:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales.............................................. $ 7,705,947 $ 6,564,277
=========== ===========
Loss before extraordinary items........................ $ (51,095) $ (287,978)
=========== ===========
Basic and diluted loss per share....................... $ (.00) $ (.02)
=========== ===========
Weighted average shares used in computation............ 15,817,854 13,240,488
=========== ===========
</TABLE>

The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill, depreciation on revalued property and equipment,
and to reflect income taxes at an effective statutory rate of 40%. They do not
purport to be indicative of the results of operations which actually would have
resulted had the acquisitions occurred at the beginning of the period presented,
or of future results of operations of the consolidated entities.

3. CAPITAL STOCK

Series A Convertible Preferred Stock

During the year ended December 31, 1996, the Company initiated an offering
of up to 250,000 shares of the Company's Series A Preferred Stock. The shares
are nonvoting and have a 10% cumulative stock dividend payable semiannually and
will be paid in Series A Preferred Stock. No cash dividends will be paid. Each
share is convertible into seven shares of the Company's common stock at the
option of the stockholder or mandatorily on the date a registration statement,
which would yield the Company $10 million in proceeds, is declared effective by
the Securities and Exchange Commission. In the event of any liquidation, after
payment of debts and other liabilities, the holders of Series A Preferred Stock
will be entitled to receive, before the holder of any of the Common stock, the
stated value of $20.00 per share. The Series A Preferred Stock can be redeemed
at any time at the sole option of the Company for $25.00 per share.

Stock Warrants

At March 31, 1998, the Company had outstanding 880,852 Series A and 950,000
Series B Warrants to purchase the Company common stock at $2.50 and $4.50 per
share, respectively. Such warrants are exercisable at any time prior to June 30,
1998 provided that a registration statement is in effect for the underlying
common shares. The Company undertook registration of the 950,000 Series A
warrants under the SB Provisions of the Securities Exchange Commission. The
registration was declared effective on February 13, 1998 and 69,148 Series A
warrants had been exercised through March 31, 1998.

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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The warrants are redeemable by the Company for $0.01 per warrant upon 30
days notice if the closing bid price for the Company's stock equals or exceeds
$4.00 and $6.00 per share for the Series A and Series B Warrants, respectively,
at any time for twenty consecutive trading days. As of May 15, 1998, the Company
had not registered the underlying common stock for the Series B Warrants.

Employee Stock Options

The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and is
generally tied to the market price of the Company's freely trading shares. The
term for exercising the stock options is generally ten years. Stock options
granted under the Company's stock option incentive plan vest ratably over a
period of three years. Employee stock option activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING
-------------- -----------
<S> <C> <C>
Outstanding, December 31, 1997.............................. $3.54 1,350,000
Granted................................................... 3.50 150,000
Exercised................................................. -- --
Canceled.................................................. -- --
----- ---------
Outstanding, March 31, 1998................................. $3.53 1,500,000
===== =========
Stock options exercisable at March 31, 1998................. $3.46 1,142,000
===== =========
</TABLE>

Nonemployee Stock Options

Magellan Finance Corporation ("Magellan"), a stockholder, holds an option
to purchase up to 235,789 shares of the Company's common stock at $1.77 per
share. The option expires as follows: 117,895 options on September 30, 1998; and
117,894 options on June 30, 1999. If Magellan does not exercise its option to
purchase the shares, then the Company is obligated to issue the shares to
certain USPLC stockholders, as defined, at no cost.

<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING
-------------- -----------
<S> <C> <C>
Outstanding, December 31, 1997.............................. $1.83 255,790
Granted................................................... 2.25 320,000
Exercised................................................. -- --
Canceled.................................................. -- --
Outstanding, March 31, 1998................................. $2.06 575,790
===== =======
Stock options exercisable as March 31, 1998................. $2.14 457,895
===== =======
</TABLE>

Stock Reservations

At March 31, 1998, common stock was reserved for the following:

9
<PAGE> 12
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<S> <C>
USPLC and CEI contingently issuable shares.................. 4,573,686
Exercise of Series A and Series B Warrants.................. 1,830,852
Conversion of Preferred Stock............................... 1,537,102
Nonemployee stock options................................... 575,790
Employee stock options...................................... 1,500,000
Shares and options contingently issuable under earnout
provisions................................................ 244,500
----------
10,261,930
==========
</TABLE>

4. COMMITMENT AND CONTINGENCIES

Earnout Agreement

The Company has an earnout agreement which provides for 2,000,000 shares of
the Company's common stock to be reserved for certain USPLC stockholders, as
defined, to be issued upon the Company meeting certain production or sales goals
for plastic lumber product prior to December 31, 2000. The additional shares, if
any, will be issued at their then current fair value as an additional cost of
the acquisition of Earth Care Global Holdings, Inc. by USPLC and allocated to
acquired intangibles.

Legal Proceedings

The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions, will not have
a material effect on the financial position or results of operations of the
Company.

At December 31, 1996, $113,415 of notes receivable are due from certain
partners of Earth Care Partners ("ECP"). ECP was a partnership controlled by an
officer/stockholder of USPLC. USPLC acquired ECP in February 1996. Shares issued
in connection with the acquisition were to be pledged as collateral and
subsequently sold when registered to repay the notes. As there were no plans to
register such shares, an allowance equal to the notes receivable was recorded.
In August 1997, a former partner of ECP alleged that the Company had wrongfully
issued shares to the other partners of ECP in connection with acquisition. The
Company, through an outside counsel, reviewed the transaction and concluded that
the stock issued to certain ECP partners was not properly authorized. The
affected ECP partners have disputed this conclusion. The Company and the
affected ECP partners are in negotiations to resolve these issues. The Company
believes that the ultimate outcome will not have a material effect on the
financial position or results of operations of the Company.

5. SEGMENT REPORTING

The Company's revenues generating operations are conducted through two
divisions, comprised of the plastic lumber division and the environmental
recycling division. The recycled plastic lumber division primarily includes the
operations of USPLC, RPI, ESP, EPC and CRL. The environmental recycling division
reflects the operating activities of CEI, ARDT, ITS, WCI, CBC, GHE and CTI.

10
<PAGE> 13
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The operating results of the respective segments are set forth below (in
thousands):

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Revenues:
Plastic lumber division................................... $2,805 $ 501
Environmental recycling division.......................... 4,854 1,502
------ ------
$7,659 $2,003
====== ======
Operating income (loss):
Plastic lumber division................................... $ (458) $ (256)
Environmental recycling division.......................... 776 109
Corporate................................................. (302) (299)
------ ------
$ 16 $ (446)
====== ======
Depreciation and amortization:
Plastic lumber division................................... $ 175 $ 34
Environmental recycling division.......................... 134 39
Corporate................................................. 47 39
------ ------
$ 356 $ 112
====== ======
</TABLE>

Information with respect to identifiable assets and capital expenditures of
the respective segments is set forth below (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Identifiable assets:
Plastic lumber division................................... $17,703 $15,113
Environmental recycling division.......................... 10,705 8,058
Corporate................................................. -- --
------- -------
$28,408 $23,171
======= =======
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
---------- -------------
<S> <C> <C>
Capital expenditures:
Plastic lumber division................................... $ 751 $ 152
Environmental recycling division.......................... 1,025 57
Corporate................................................. -- --
------- -------
$ 1,776 $ 209
======= =======
</TABLE>

6. LINE OF CREDIT

In January 1998, the Company obtained a revolving discretionary line of
credit with availability of $4,000,000 bearing interest at .50% under the bank's
prime rate. Advances under the line of credit are made at the sole discretion of
the lender. In connection with obtaining the line of credit, the Company granted
320,000 nonemployee stock options, exercisable at $2.25 per share. The value of
such options under the provisions of SFAS No. 123 of approximately $400,000 is
being amortized as interest over the term of the line of credit of 18 months.

11
<PAGE> 14
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. SUBSEQUENT EVENTS

In May 1998, the Company acquired Cycle-Masters, Inc., a manufacturer of
recycled plastic lumber, in exchange for $1,600,000 in cash, a $250,000
promissory note and 200,000 shares of the Company's common stock.

12
<PAGE> 15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for each of the three
month periods ended March 31, 1998 and 1997. This discussion should be read in
conjunction with consolidated financial statements and notes thereto of the
Company which are included elsewhere herein.

BUSINESS

U.S. Plastic Lumber Corp. has two distinct business lines. One operation,
the plastic lumber division, manufactures structural and non-structural plastic
lumber and a variety of accessory products such as park and site amenities, made
from 100% recycled high density polyethylene. The Company also manufactures
structural plastic lumber under certain licensing agreements protected by
patents.

The other operation is the environmental recycling division, which provides
environmental recycling services including fixed based plants providing thermal
desorption and bioremediation, environmental construction services, upland
disposal of dredge materials, beneficial re-use of industrial wastes, and
on-site recycling services.

BUSINESS COMBINATIONS

The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations.

ACQUISITIONS COMPLETED SUBSEQUENT TO MARCH 31, 1998

In May 1998, the Company acquired Cycle-Masters, Inc. ("CMI") which owns
and operates a plastic lumber manufacturing facility in Sweetser, Indiana. The
Company paid approximately $2.45 million in cash, notes and stock in this
transaction, which will be accounted for under the purchase method of
accounting. For additional information see the Form 8K filed by the Company with
the Securities and Exchange Commission and incorporated herein by reference.

ACQUISITIONS COMPLETED DURING THE THREE MONTHS ENDED MARCH 31, 1998

In January 1998, the Company acquired Green Horizon Environmental, Inc.
("GHE"), and environmental services company, in exchange for 50,000 shares of
Common Stock. (see Note 2 to the Financial Statements -- 1998 Acquisitions)

In February 1998, the Company acquired the majority interest of
Consolidated Technologies, Inc. ("CTI") in exchange for 36,500 shares of the
Company's Common Stock. CTI is an environmental recycling services company
located in Norristown, Pennsylvania. The Company had previously owned a minority
interest equal to 25% in CTI. (see Note 2 to the Financial Statements -- 1998
Acquisitions)

In March 1998, the Company acquired substantially all of the assets of
Chesapeake Recycled Lumber, Inc. in exchange for $100,000 in cash, a $100,000
note payable and 97,500 shares of the Company's Common Stock. (see Note 2 to the
Financial Statements -- 1998 Acquisitions).

BUSINESS SEGMENT INFORMATION

The following table sets forth revenue with percentages of total revenue,
and sets forth costs of operations, selling, general and administrative expenses
and operating income (loss) with percentages of the applicable segment revenue,
for each of the Company's various business segments for the periods indicated:

13
<PAGE> 16

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1998 % 1997 %
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE:
Plastic Lumber................................... $2,805 36.6 $ 501 25.0
Environmental Recycling.......................... 4,854 63.4 1,502 75.0
------ ----- ------ -----
Total revenue.......................... 7,659 100.0 2,003 100.0
OPERATING EXPENSES:
Cost of Sales:
Plastic Lumber................................. 2,428 86.6 525 104.8
Environmental Recycling........................ 3,378 69.6 975 64.9
Depreciation
Plastic Lumber................................. 140 5.0 22 4.4
Environmental Recycling........................ 108 2.2 39 2.6
Corporate...................................... 4 0.1 4 0.2
ADMINISTRATIVE EXPENSES:
Selling, General and Administrative
Plastic Lumber................................. 660 23.5 198 39.5
Environmental Recycling........................ 566 11.7 379 25.2
Corporate...................................... 255 3.3 260 13.0
Amortization Plastic Lumber...................... 35 1.2 12 2.4
Environmental Recycling........................ 26 0.5 -- 0.0
Corporate...................................... 43 0.6 35 1.8
------ ----- ------ -----
Total Operating Expenses............... 7,643 99.8 2,449 122.3
Total Operating Income (loss).......... 16 0.2 (446) (22.3)
</TABLE>

CONSOLIDATED RESULTS OF OPERATIONS

Comparison of the First Quarter Ended March 31, 1998 to the First Quarter
Ended March 31, 1997

The Company recognized increases in both sales and net income for the first
quarter ended March 31, 1998 compared to the first quarter ended March 31, 1997.
Sales increased $5,656,000 or 282% in the first quarter of 1998 to $7,659,000
from $2,003,000 in the same period in 1997 primarily due to contributions from
acquired companies in both business segments during 1997. Operating income
increased by $462,000 during the first quarter of 1998 to $16,000 from
($446,000) in the same period in 1997 due to acquired businesses and the
strength of the established environmental recycling division. The plastic lumber
division continued to internally consolidate and eliminate duplicate operating
and administrative functions during the first quarter of 1998 and continued to
invest in research and engineering in the railroad crosstie and structural
lumber business segments.

SALES

The Company's revenue increased 282% in the first quarter of 1998 over the
same period in 1997. More than 98% of the sales growth was attributed to
acquisitions completed during the fiscal year 1997 and the first quarter of
1998.

The plastic lumber division accounted for $2,805,000 or 36.6% of total
revenue in the first quarter of 1998 compared to $501,000 or 25.0% of total
revenue during the same period in 1997. Sales from the original plastic lumber
companies more than doubled in the first quarter of 1998 over the 1997
comparable period from $256,000 to $534,000 accounting for 12.1% of the
$2,304,000 increase in plastic lumber sales. This increase was due to the
addition of experienced sales and marketing personnel who joined the Company in
late 1997. The Tennessee plant also made its first commercial shipment of
railroad ties to the Chicago Transit Authority during the first quarter of 1998.
The remaining $2,026,000 increase in sales was primarily due to acquisitions of
Environmental Specialties Products (ESP), EnviroPlastics Corp. (EPC) and
Chesapeake Plastic Lumber

14
<PAGE> 17

(CPL) whose operations were acquired subsequent to the first quarter of 1997.
Recycled Plastics Industries (RPI) contributed two months of sales in the first
quarter of 1997.

Environmental recycling division sales during the first quarter of 1998
were $4,854,000 or 63.4% of total sales and increased $3,352,000 over the first
quarter of 1997. The base business at Clean Earth increased $351,000 or 30.6% in
the first quarter of 1998 due to increased sales efforts by newly acquired
companies and a milder winter season allowing easier access to soils requiring
treatment. In addition, there was a large contract with a utility in the
Northeast U.S. to haul contaminated soil to the Clean Earth facility that
contributed to the total sales increase. The remaining $3,001,000 increase was
due primarily to the acquisitions of Integrated Technical Services (ITS), Waste
Concepts, Inc. (WCI) and Green Horizons Environmental, Inc. (GHE) which the
Company did not acquire until after the first quarter of 1997. The Company has
nearly completed construction of the Carteret Biocycle Corp. (CBC) facility that
is scheduled to begin treating contaminated soils bio-organically during the
second quarter of 1998. This is expected to add additional revenue and earnings
to this division in the third quarter of 1998.

GROSS PROFIT

Consolidated gross profit increased $1,161,000 or 265% to $1,600,000 during
the first quarter of 1998 compared to $439,000 in the first quarter of 1997.
Acquired businesses from both business segments contributed to virtually all of
the increase in gross profit. Business units in both business segments continued
to eliminate and consolidate duplicate operating expenses during the first
quarter of 1998 however, these units continued to incur certain non-recurring
expenses associated with the unit combinations. The merger of the ITS and ARDT
businesses in the first quarter of 1998 as well as the integration and move of
the Tennessee and Michigan manufacturing facilities to a larger facility during
the fourth quarter of 1997 contributed to these additional operating costs.

In the plastic lumber division, acquisitions accounted for all of the
$286,000 increase in gross profit in the first quarter of 1998 compared to the
same period in 1997. The gross profits from these acquisitions accounted for
24.6% of the total increase in gross profit. While the manufacturing plants in
Wisconsin and Maryland are generating profits, the Company continues to invest
in the Tennessee flow mold factory to improve manufacturing efficiencies and
develop railroad ties, structural lumber and other flow molded products to
increase the plant's backlog to absorb the plant's fixed expenses. The Tennessee
plant incurred gross profit of ($210,000) including start up costs from the
relocation of old plants into the present location. Plant capacity in the
Wisconsin facility has tripled since the first quarter of 1997 to meet the
increased demand on the Company's decking products.

The environmental recycling division accounted for the remaining $875,000
or 75.4% increase in gross profit in the first quarter of 1998 over the first
quarter of 1997. On December 31, 1997, the ARDT subsidiary was merged into the
ITS subsidiary to take advantage of service synergy as well as eliminating
duplicated operating expenses. The anticipated opening of the CBC facility in
May 1998 is expected to contribute supplemental gross profit in the second
quarter 1998.

GENERAL AND ADMINISTRATIVE

Consolidated general and administrative expenses increased $700,000 or
79.0% during the first quarter ended March 31, 1998 compared to the same period
in 1997.

Acquisitions accounted for $584,000 or 83.4% of the increase with the
remaining increase due to the development of a national sales distribution
network for the plastic lumber operations. Corporate administrative expenses
remained stable having increased only $5,000 in the first quarter 1998 over the
same comparable quarter in 1997 despite the addition of several acquisitions.

In the plastic lumber division, administrative expenses increased $485,000
or 231% during the first quarter of 1998 compared to the first quarter of 1997
accounting for 69.3% of the total consolidated expense increase. Acquisitions
accounted for $167,000 or 36.1% of the increase. The company incurred an
estimated $150,000 in the first quarter of 1998 to develop a national sales
distribution network and a centralized

15
<PAGE> 18

customer service center for the plastic lumber operations. These expenses
included the Vice President of Sales, regional sales and product line managers
as well as personnel for customer service. Increases were also noted in
advertising, trade shows, travel and commissions in an effort to increase the
Company's sales coverage by region and product. The remaining increase was due
to increases in outside services, the addition of a President for the plastic
lumber operations, and increases in travel related to integrating existing
manufacturing operations as well as those acquired. The Company also incurred
research and engineering in order to commercialize the structural lumber and
railroad ties production lines.

In the environmental recycling division, general and administrative costs
increased $211,000 or 55.7% in the first quarter ended March 31, 1998 over the
comparable period in 1997 accounting for 30.1% of the total consolidated expense
increase primarily due to acquisitions offset by cost reductions implemented
during first quarter 1998.

INTEREST EXPENSE

Interest expense increased $125,000 or 625% during the first quarter ended
March 31, 1998 over the same quarter in 1997 primarily as a result of increased
borrowings from the bank line of credit, the financing of the Wisconsin plant
machinery and debt service assumed from businesses acquired during 1997 and
1998. In addition, the first quarter of 1998 included amortization of deferred
interest costs of $46,000 related to the $4,000,000 line of credit at PNC Bank.
Total debt (including amounts owed to affiliates) increased by $7,268,000 or
458% over the past year through credit lines and acquired debt and has
proportionately increased debt service.

DEPRECIATION AND AMORTIZATION

Depreciation expense increased $187,000 or 288% during the first quarter
ended March 31, 1998 compared to the same comparable quarter in 1997 reflecting
the increase in property, plant and equipment from both acquisitions and
continued capital investments. Amortization expense increased $57,000 during the
first quarter of 1998 over the first quarter of 1997 primarily due to goodwill
from acquisitions completed during 1997 and the first quarter of 1998.

LIQUIDITY AND CAPITAL RESOURCES

First Quarter Ended March 31, 1998

Total cash for the three month period ended March 31, 1998 decreased by
$73,000. Cash used in operating activities totaled $431,000 and consisted
primarily of payment of accrued expenses of $609,000 primarily relating to SB 2
registration costs that was paid in the first quarter of 1998. In addition there
were increases in accounts receivable and inventory totaling $269,000 as the
Company saw increasing sales coming out of the traditionally slower winter
period and increased inventory levels building up for anticipated stronger
spring and summer seasons. These items were offset by $546,000 in non-cash items
including depreciation and amortization of $356,000 and increases in trade
accounts payable of $162,000 due to seasonality.

Total cash used in investing activities totaled $2,999,000 and consisted
primarily of machinery and equipment purchases for additional capacity for the
Wisconsin manufacturing facility and the structural lumber and railroad tie
production lines in the Tennessee facility. The Company continued investment in
the Carteret Biocycle facility scheduled to commence operations in the second
quarter of 1998. In addition, the Company made $708,000 in advances to the
Interstate Industrial Corp. Joint Venture.

Total cash provided by financing activities was $3,357,000. These
activities consisted of $173,000 in proceeds from the exercise of A warrants
registered during the first quarter of 1998. Proceeds from borrowings made
primarily on a $4,000,000 line of credit secured from PNC Bank in January 1998,
the existing $1,500,000 credit line from PNC Bank and additional equipment
financing secured from PNC Leasing Corp to finance the additional plant capacity
at the Wisconsin site were also obtained. Total proceeds from borrowings totaled
$5,068,000 and were offset by repayments to affiliates (net of advances)
$1,250,000 and repayments of notes payable including some acquired debt totaling
$733,000.

16
<PAGE> 19

In January 1998, the Company secured a line of credit from PNC Bank of
$4,000,000 at prime rate less .5% with a term due on June 30, 1999. This line is
secured by certain assets of the Company and the personal guarantees of
individual members of Stout Partnership. In addition to the personal guarantees,
the individual members of the partnership pledged $2,000,000 in cash and
securities to PNC Bank on behalf of the Company. August C. Schultes, III, and
Gary J. Ziegler, both directors of the Company, are individual partners in Stout
Partnership. Mark S. Alsentzer, Chairman and President of the Company is also an
individual partner in Stout Partnership. As of March 31, 1998, the Company had
borrowed a total of $3,974,000 against the PNC $4,000,000 line of credit. The
proceeds were used primarily to repay amounts owed to affiliates as well as
continued investments in the Carteret Biocycle plant and general working
capital.

In March 1998, the Company secured additional financing from PNC Leasing
Corp. for six plastic extruder lines to increase plant capacity at the Wisconsin
manufacturing facility. The total amount of financing approved was $750,000 at
8% interest with payment due in 60 equal monthly installments. Payments will
commence upon complete funding of the project and is secured by the equipment at
the Wisconsin plant. As of March 31, 1998 the Company had financed a total of
$566,000 from PNC Leasing Corp.

The Company has under construction a bio-organic soil recycling facility in
Carteret, New Jersey as part of a start-up company named Carteret Biocycle Corp.
which is a wholly owned subsidiary of Clean Earth, Inc. This facility is
expected to commence operations in the second quarter of 1998 at an estimated
construction cost of $2.0 million. The Company will pursue additional financing
of this facility through a conventional bank.

The Company will require additional working capital to expand and upgrade
plant equipment in its Maryland and Tennessee plastic lumber facilities. In the
event that sales of the Company's railroad tie product expands beyond current
projections, it may be necessary for the Company to seek additional working
capital to construct and purchase equipment for a plant dedicated to railroad
ties.

The Company will also require working capital for the environmental
recycling operations, especially as it relates to the dredging opportunities
being pursued by the Company.

In April 1998, the Company has retained Pennsylvania Merchant Group as its
investment banker in connection with a proposed $25 million debt financing. If
secured, the Company would use the proceeds to refinance existing credit lines,
expand existing operations, increase working capital and finance new
acquisitions.

In May 1998, the Company has authorized a Series B Preferred Stock
Offering. The Company is seeking to raise $3,150,000 by offering up to 150,000
shares of Series B Preferred Stock at a price of $21.00 per share. The Series B
Preferred Stock has a cumulative 10% stock dividend and is convertible into
seven common shares for each preferred share.

The Company continues to seek acquisition candidates that can be vertically
integrated into either the recycled plastic lumber or environmental recycling
operations. In the recycled plastic lumber operation, targeted companies include
manufacturers and distributors of recycled plastic products as well as raw
material regrind operations. In the environmental recycling operation, targeted
companies include soil recycling companies including bio-organic methodologies
and construction companies involved in on-site clean-up and potential joint
ventures with dredging operations for remediation and disposal of contaminated
soils. The Company may require additional financing to support these
transactions.

To the extent the Company needs additional financing for the activities and
transactions set forth herein, the Company may avail itself of additional
private placements, additional debt financing, the registration of the Series B
warrants, and other sources of capital which may be available, including any
combination of these.

SEASONALITY

The Company does experience a seasonal slow down during the winter months
due to the fact that its environmental operations are located in the Northeast
United States, and therefore, adverse weather can

17
<PAGE> 20

impact the Company's performance. Additionally, the sale of plastic lumber
products, such as, but not limited to, the Company's Carefree Deck System slow
significantly in winter months.

YEAR 2000 ISSUE

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). The Company does not anticipate a material
financial impact as a result of the Year 2000 Issue.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, the Company is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

On or about January 2, 1998, the Company acquired Green Horizon
Environmental, Inc. (GHE), an environmental recycling services company
located in Norristown, PA. The stockholders of GHE received 50,000 shares
of common stock of the Company. These transactions were not registered
under the Securities Act of 1933 in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made was completed without any general or
public solicitation. In each case the offering was done to a very limited
number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge
and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the
investment.

On or about January 8, 1998, the Company issued 2,100 shares to its
Board of Directors as compensation for the last three board meetings
attended by the non-employee directors.

On or about January 20, 1998, the Company issued 7,000 shares as
compensation to an outside non-affiliate consultant for services rendered;
and again on or about February 5, 1998, the same consultant received an
additional 7,000 shares for meeting certain performance criteria of his
contract.

On or about February 5, 1998, the Company issued 1,166 shares to
certain employees of the Company as bonus compensation for past services
performed.

On or about February 6, 1998, the Company acquired an additional
twenty five percent interest in Consolidated Technologies, Inc. (CTI), an
environmental recycling services company located in Norristown, PA. The
stockholders of this interest received 35,000 shares of common stock of the
Company. These transactions were not registered under the Act in reliance
on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering made was
completed without any general or public solicitation. In each case the
offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and
few shareholders had strong knowledge and experience in business matters as
well as pre-existing business relationships with the Company. The knowledge
and experience of these individuals enabled them to evaluate the risks and
merits of the investment.

On or about February 27, 1998, the Company acquired substantially all
the assets of Chesapeake Recycled Lumber, Inc. (CRL), a plastic lumber
manufacturing company located in Denton, MD. The

18
<PAGE> 21

stockholders of CRL received cash at closing plus 97,500 shares of common
stock of the Company. These transactions were not registered under the Act
in reliance on the exemption from registration in Section 4(2) of the Act,
as transactions not involving any public offering. This offering made was
completed without any general or public solicitation. In each case the
offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and
primary shareholder had strong knowledge and experience in business matters
as well as pre-existing business relationships with the Company. The
knowledge and experience of these individuals enabled them to evaluate the
risks and merits of the investment.

On or about February 27, 1998, the Company acquired a five percent
interest in Consolidated Technologies, Inc. (CTI), an environmental
recycling services company located in Norristown, PA. The stockholder of
this interest received 1,500 shares of common stock of the Company. This
transaction was not registered under the Act in reliance on the exemption
from registration in Section 4(2) of the Act, as transactions not involving
any public offering. This offering made was completed without any general
or public solicitation. The offering was done to a shareholder of the
company being acquired. The shareholder had strong knowledge and experience
in business matters as well as pre-existing business relationship with the
Company. The knowledge and experience of this individual enabled him to
evaluate the risks and merits of the investment.

On or about March 31, 1998, the Company issued 69,148 shares to Series
A Warrant holders who exercised their warrants pursuant to a Notice of
Redemption issued by the Company to the Series A Warrant holders on March
6, 1998. Subsequent to March 31, 1998 the Company issued a total of 916,477
shares to Series A Warrantholders.

Securities issued in all of the foregoing transactions were issued as
restricted securities and the certificates were stamped with restrictive legends
to prevent any resale without registration under the Act or in compliance with
an exemption.

(d) As required by Rule 463 of Regulation SB, following the effective date
of the first registration statement filed under the Securities Act by the
Issuer, the Issuer shall report the use of proceeds resulting from the
registration offering as follows:

(1) The effective date of the SB-2 Registration Statement was February
13, 1998 at 5:00 p.m. The File No. was 333-22949.

(2) The offering was commenced immediately upon the declaration of the
effectiveness of the registration.

(3) (i) The offering has been closed as of April 6, 1998 as all
warrant holders exercised their rights to redeem the underlying common
shares or chose not to exercise by April 6, 1998 pursuant to a Notice of
Redemption letter sent to each warrant holder by the Company.

(ii) No managing underwriter was used as part of this offering.

(iii) Common Stock was registered.

(iv) Amount registered: 950,000 shares Aggregate Price of offering
amount registered: $2,375,000 Number of Shares Sold (Warrants
exercised): 916,477 Aggregate Offering Price Sold: $2,291,192

(v) Actual expenses incurred with offering:

<TABLE>
<S> <C>
Accounting $140,000
Legal $ 80,000
Printing 1,000
Mailing 1,000
SEC/Blue Sky fees 2,000
--------
TOTAL $224,000
========
</TABLE>

19
<PAGE> 22

(vi) The net offering proceeds to the issuer after deducting the
total expenses described above were approximately $2,000,000.

(vii) The funds raised by the Company from this offering will be
used for general working capital purposes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.1 Securities Purchase Agreement dated January 2, 1998 with Green
Horizon Environmental, Inc.*

10.2 Asset Purchase Agreement dated February 27, 1998 with Chesapeake
Recycling Inc.*

10.3 Stock Purchase and Sale Agreements with Timothy Fogerty, Al
Silkroski, and Michael Roscoe dated February 1998 purchasing a majority
interest of Consolidated Technologies Inc.*

10.4 Plan of Merger -- Cycle-Masters, Inc. (previously filed with Form
8-K)

10.5 1997 Non-Employee Director Stock Option Grant (filed as part of
the Company's Proxy Statement in connection with its Annual Meeting to be
held on June 3, 1998)

27.1 Financial Data Schedule for the three months ended March 31,
1998*

(b) Reports on Form 8-K

Form 8-K filed on March 2, 1998 reporting a change of auditors to Arthur
Andersen LLP.
- ---------------

* Previously filed.

20
<PAGE> 23

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

/s/ MARK S. ALSENTZER
--------------------------------------
Mark S. Alsentzer,
Chairman CEO and President

/s/ MICHAEL D. SCHMIDT
--------------------------------------
Michael D. Schmidt,
Chief Financial Officer