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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. )
U.S. PLASTIC LUMBER CORP.
(Name of small business issuer in its charter)
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Nevada 3080 87-0404343
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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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)
Bruce C. Rosetto
2300 W. Glades Road, Suite 440 W, Boca Raton, Florida 33431
(561) 394-3511
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
- --------------------------- ----------------------- ------------------------- ------------------------ ------------------------
Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities To Be To Be Offering Price Aggregate Offering Registration Fee
Registered Registered Per Unit Price(1)
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Common Stock 950,000 $4.50 $4,275,000 $1,295.45
(underlying Series
B Warrants)
Common Stock 2,205,789 Varying Exercise $7,197,947 $2,181.96
(underlying Stock Prices
Options)
Common Stock 1,477,140 $3.00 $4,431,420 $1,342.85
(underlying Series
B Preferred Stock)
- --------------------------- ----------------------- ------------------------- ------------------------ ------------------------
Total $4,820.26
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
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U.S. PLASTIC LUMBER CORP.
950,000 SHARES OF COMMON STOCK
UNDERLYING SERIES B COMMON STOCK PURCHASE WARRANTS;
2,205,789 SHARES OF COMMON STOCK
UNDERLYING STOCK OPTION GRANTS;
1,477,140 SHARES OF COMMON STOCK
UNDERLYING SERIES B PREFERRED STOCK;
U.S. Plastic Lumber Corp. (the "Company"), is offering, for sale to the
holders of outstanding Series B Common Stock Purchase Warrants (the "Series B
Warrants"), up to 950,000 shares; and up to 2,205,789 shares to existing holders
of stock options (hereinafter individually or collectively the "Shares") of its
$.0001 par value Common Stock, (the "Common Stock"). The Company also seeks to
register 1,477,140 shares of its Common Stock underlying its issued and
outstanding Series B Preferred Stock.
The Common stock is issuable upon exercise of the Series B Warrants, at
a price of $4.50 per share. Each Series B Warrant entitles the holder to
purchase one share of Common Stock of the Company. The Series B Warrants were
distributed as a dividend with respect to the Common Stock of the Company to
shareholders of record as of March 18, 1996. By their terms, the Series B
Warrants were not exercisable and did not constitute an offer by the Company to
sell the Shares prior to the effective date of the registration statement, of
which this prospectus is part, which registers the Shares issuable upon such
exercise. The Series B Warrants are exercisable 45 days after the registration
statement is declared effective by the Securities and Exchange Commission. The
Series B Warrants are callable and can be redeemed by the Company for $.01 per
Series B Warrant on 30 days notice at any time after the effective date of this
Prospectus if the closing bid price of the Common Stock equals or exceeds $6.00
for 20 consecutive trading days. The Company's Common Stock is quoted on the
NASDAQ Small Cap Market under the Symbol "USPL". The conditions for redemption
of the Series B Warrants have already been accomplished; therefore management
intends to call for redemption of the Series B Warrants as soon as practicable
after the effective date of this Registration Statement. In the event the
Company calls for redemption of the Series B Warrants, they will mail a notice
to all Series B Warrant holders as of the date hereof. Series B Warrant holders
would then have 30 days to exercise the Series B Warrants, after which they
would be compelled to accept the nominal redemption price for all unexercised
Series B Warrants. The Company will not retain any market professionals to
assist in the redemption process. The exercise and redemption prices of the
Series B Warrants were arbitrarily determined by the Company and bear no
relationship to assets, shareholders equity or any other recognized criteria of
value. Prior to this offering, there has been only a limited public market for
the Common Stock and there is no assurance that such market will continue in the
future.
The Company is also offering for sale to existing holders of stock
options 2,205,789 shares of Common Stock at exercise prices ranging from $1.77
per share to $7.22 per share. The stock options were granted to either employees
as part of their employment or to directors and former directors who received
options in exchange for prior loans made to the Company. If all options were to
be exercised at their existing exercise prices, a total sum of $7,197,947 could
be raised.
Finally, the Company is seeking to register 1,477,140 shares of its
Common Stock underlying the Series B Preferred Stock. The Company has just
completed the Series B Preferred Stock Private Placement. As part of the terms
and conditions of the Private Placement the Company has agreed to register the
underlying Common Stock. The Preferred Stock has been sold at $21.00 per share
and each share converts to seven shares of Common Stock. The Preferred Stock
also carries a 10% cumulative stock dividend paid semi-annually.
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THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL AND IMMEDIATE
DILUTION AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD TO RISK THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Commissions & Proceeds to the
Public(1) Discounts(1)(2) Company (2)
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Per Share (Series B Warrants).......... $4.50 $0.00 $4.50
Total Maximum (Series B Warrants) $4,275,000 $0.00 $4,275,000
Per Share (Stock Options).............. varying $0.00 $7,197,947
Per Share (Series B Preferred)......... $3.00 $0.00 $3.00
Total Maximum (Series B Preferred)..... $4,431,420 $0.00 $4,431,420
---------- ------------- -------------
Total Maximum (Series B Warrants
+ Stock Options + Series B Preferred).. - $15,904,367
========================================== ====================== ======================== =========================
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(1) The Shares are being offered by the Company only to the holders of
outstanding Series B Warrants, Series B Preferred Stock or holders of
existing stock option grants. The Shares will be sold by the Company
without any discounts or other commissions. The offering price is
payable in cash upon exercise of the Series B Warrants, Series B
Preferred Stock or stock options as the case may be. No minimum number
of Series B Warrants or stock options must be exercised, and no
assurance exists that any Series B Warrants, Series B Preferred Stock
or stock options will be exercised or Series B Preferred Stock sold.
The Company will retain any proceeds from Series B Warrant, stock
option exercises or Series B Preferred Stock, regardless of the number
exercised. See "Plan of Distribution."
(2) Proceeds to the Company are shown before deducting offering expenses
payable by the Company estimated at $25,000. See "Use of Proceeds".
The date of this Prospectus is , 1998.
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AVAILABLE INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2, under the
Securities Act of 1933, as amended (the "Securities Act), with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information contained in
the Registration Statement. For further information regarding both the Company
and the Securities offered hereby, reference is made to the Registration
Statement, including all exhibits and schedules thereto, which may be inspected
without charge at the public reference facilities of the Commission's
Washington, D.C. office, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
may be obtained from the Washington, D.C. office upon request and payment of the
prescribed fee.
The Company became subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (The "Exchange Act") on February 13,
1998 and, in accordance therewith, will file reports and other information with
the Commission. Reports and other information filed by the Company with the
Commission pursuant to the informational requirements of the Exchange Act will
be available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, 75 Park Place, New York, New York 10007; Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material may be obtained from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding issuers that file such
reports electronically with the Commission. Such site is accessible by the
public through any Internet access service provider and is located at
http://www.sec.gov.
Copies of the Company's Annual, Quarterly and other Reports which will
be filed by the Company electronically with the Commission commencing with the
Annual Report for the year ended 1997 which was filed by the Company on April
30, 1998 will also be available upon request, without charge, by writing U.S.
Plastic Lumber Corp., 2300 W. Glades Road, Suite 440 W, Boca Raton, Florida
33431, (561)-394-3511. The Company will provide without charge to any person who
receives a prospectus, upon written or oral request, a copy of any of the
information that was incorporated by reference in the prospectus by contacting
Bruce C. Rosetto, Vice President and General Counsel/Secretary of the Company at
the address and telephone number listed herein.
UNTIL SEPTEMBER 30, 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY STATE SECURITIES
COMMISSION OR OTHER STATE REGULATORY AUTHORITY, AND NO SUCH REGULATORY AUTHORITY
HAS PASSED UPON THE TERMS OF THIS OFFERING OR APPROVED THE MERITS THEREOF.
INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF
THIS OFFERING IN EVALUATING THE MERITS AND RISKS OF THE OFFERING AND MAKING AN
INVESTMENT DECISION.
THIS PROSPECTUS SHOULD BE READ IN ITS ENTIRETY BY ANY PROSPECTIVE INVESTOR PRIOR
TO HIS OR HER INVESTMENT.
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PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THE PROSPECTUS.
THE COMPANY
U.S. Plastic Lumber Corporation (the "Company") is a manufacturer and
marketer of recycled plastic lumber products and a provider of environmental
recycling services. The Company was incorporated under the laws of the State of
Utah on July 26, 1983, under the name of Front Street Energy, Inc., and
completed an initial public offering of its securities in 1983. The Company
changed its corporate domicile to the State of Nevada in June 1992 and changed
its name to Front Street, Inc. In 1994, the Company changed its name to
Educational Storybooks International, Inc. when it acquired all the outstanding
stock of Educational Storybooks, Inc. The Company subsequently divested itself
of Educational Storybooks, Inc. and another subsidiary, and had no significant
assets or business until March, 1996, when the Company acquired Earth Care
Global Holdings, Inc. ("Earth Care") as a wholly owned subsidiary, through the
acquisition of all the issued and outstanding stock of Earth Care in a stock for
stock exchange (the "Acquisition") and changed its name to U.S. Plastic Lumber
Corporation. The mailing address of the Company's principal executive offices is
2300 W. Glades Road, Suite 440 W, Boca Raton, Florida 33431. The Company's
telephone number is (561) 394-3511.
The Company has two distinct business lines. One operation, U.S.
Plastic Lumber Ltd., manufactures structural and non-structural plastic lumber
and fabricates a variety of accessory products, such as park and site amenities,
made from 100% recycled high density polyetheylene. The other operation, Clean
Earth, Inc. 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. The Company owns and operates
nine manufacturing, processing and fabrication facilities in the U.S. The
primary product produced in four of these plants is plastic lumber profiles made
from recycled plastic waste. Recycled plastic lumber is manufactured in a
variety of colors, profiles and shapes including standard lumber dimensions and
many custom engineered profiles and shapes. The fifth and sixth plants are
fabrication facilities which manufacture value-added products made from the
Company's recycled plastic lumber. The seventh plant is a recycled plastic
processing facility which includes washing, grinding and pelletizing of post
consumer and post industrial plastic waste. Some of this material is used to
supply the raw material needs of the Company's lumber manufacturing facilities.
Plastic lumber's principal intended use is as an environmentally friendly and
non-toxic alternative to pressure treated lumber or rain forest hardwoods, which
is suitable for and provides high quality performance in most outdoor
applications. The Company's plastic lumber product can be used in structural and
non-structural applications. The Company's eighth plant operates a process for
treating and recycling soil that has been contaminated with petroleum
hydrocarbons and similar compounds through a process known as
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thermal desorption. The Company opened a ninth plant to open during the
last week of June 1998 which will be utilized for treating and recycling soil
through a process which is bio-organic in nature. See "Business."
THE OFFERING
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Securities offered ............ 950,000 Shares of Common Stock, $.0001 par value ("Common Stock")
issuable upon exercise of outstanding Series B Warrants.
2,205,789 Shares of Common Stock issuable upon exercise of stock
options previously granted. 1,477,140 Shares of Common Stock
issuable upon conversion of Series B Preferred Stock. See "Description
of Securities."
Plan of Distribution........... The Shares are being offered and will be sold by the Company, without
any discounts or other commissions, to the holders of the Series B
Warrants, Series B Preferred Stock and stock options upon the exercise
thereof and from time to time through the OTC Electronic Bulletin Board,
in private transactions or otherwise. See "Plan of Distribution."
Offering Price................. $4.50 per share for the Series B Warrants.
$1.77-$7.22 per share for the stock options.
Use of Proceeds................ Any proceeds will be used to provide working capital and general
corporate purposes, including possible acquisitions. See "Use of
Proceeds."
Securities Outstanding......... The Company is authorized to issue up to 50,000,000 shares of Common
Stock and as of June 30, 1998 has 17,122,314 shares of Common Stock
issued and outstanding. The Company has reserved from its authorized
capital 950,000 shares of Common Stock for issuance upon exercise of the
Series B Warrants and 1,477,140 shares of Common Stock for issuance upon
conversion of the Series B Preferred Stock. In addition, the Company
also has other warrants, options or earn out shares outstanding which
give the holders thereof the right, subject to certain conditions, to
acquire up to an additional 7,148,975 shares of Common Stock. The
Company is also authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series with such rights and
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preferences as the Board of Directors may designate. The Board of Directors
has designated one series of Preferred Stock (Series A) of which there
are 218,588 shares as of June 30, 1998 issued and outstanding, which are convertible
into 1,530,116 shares of Common Stock of the Company. The Board of
Directors of the Company has approved a Series B Preferred Stock
offering of up to 211,020 shares of Preferred Stock, Series B, which are
convertible into 1,477,140 shares of Common Stock of the Company. See
"Description of Securities."
Series B Warrants.............. Each Series B Warrant entitles the holder thereof to purchase one share
of Common Stock at any time during the period commencing on the date of
this Prospectus and ending 45 days after the registration statement is
declared effective by the Securities and Exchange Commission. The
Series B Warrants are callable and can be redeemed by the Company for
$.01 per Series B Warrant on 30 days notice at any time after the date
of this Prospectus if the closing bid price of the Common Stock equals
or exceeds $6.00 for 20 consecutive trading days.
In the event management calls for redemption of the Series B Warrants
at any time in the future, Series B Warrant holders would then have 30
days in which to decide whether to exercise their warrants, after which
time they would be compelled to accept the nominal redemption price.
The exercise price is $4.50 per share for the Series B Warrants,
subject to adjustment in certain events. See "Description of Securities
- Series B Warrants."
Series B Preferred............. Each share of Series B Preferred Stock entitles the holder to convert
time after the holder's purchase. Conversion can be mandated by the
Company in the event the Company completes a public offering with gross
proceeds of $10 million or more. The Series B Preferred Stock also
entitles the holder to a 10% cumulative stock dividend payable
semi-annually. See "Description of Securities - Series B Preferred
Stock."
Risk Factors................... An investment in the Company is highly speculative. Investors will
suffer substantial dilution in the book value per share of the Common
Stock compared to the purchase price. The Company incurred an operating
loss during 1997 of $321,304 and has an accumulated deficit of
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$1,108,598 as of December 31, 1997. For the first quarter of 1998
ending March 31, 1998, the Company incurred an operating profit of
$15,644 and has an accumulated deficit of $1,336,177. If substantial
funds are not received from exercise of the Series B Warrants or stock
options, of which there is no assurance, the Company may require
additional funding for which it has no commitments. No person should
invest in the Company who cannot afford to risk loss of the entire
investment. See "Risk Factors."
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FORWARD LOOKING STATEMENTS
When used in this Prospectus, 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 "Risk Factors," "Business" and "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 "Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK FACTORS
The securities being offered hereby involve a high degree of risk.
Prospective investors should carefully consider the following risk factors
before investing in the Company.
OPERATING LOSSES. The Company incurred an operating loss of $ 321,000
for the year ended December 31, 1997 and an operating loss of $291,000 for the
year ended December 31, 1996. For the first quarter of 1998 ending March 31,
1998, the Company incurred an operating profit of $15,644 and has an accumulated
deficit of $1,336,177. The success of operations in the future will be largely
dependent upon the Company's ability to substantially increase its sales revenue
and improve its operating margins, as to which there is no assurance.
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ACQUISITIONS AND RAPID GROWTH. Acquisitions have been an important
source of Company growth and increased profitability. The Company intends to
continue to pursue and aggressive growth strategy through acquisitions. There
can be no assurance that the Company will be able to identify any suitable
acquisition candidates, achieve any acquisitions in the future or that if does
accomplish acquisitions that it will have a beneficial impact upon the Company's
business, its results of operations, or its financial condition. There can be no
assurance that the Company will successfully integrate the operations of any
acquired companies. In addition, the Company expects that, as a result of
further infrastructure investments it plans to make during fiscal 1998,
principally in order to integrate the operations of its new and acquired
operations, it may experience reduced operating margins in the near term.
The Company's growth will also depend on its ability to acquire
additional operations, manage expansion, control costs of its operations and
consolidate acquisitions into existing operations. In connection with such
acquisitions, the Company will be required to review the operations of the
acquired company, including its management infrastructure and systems and
financial controls, and make operating adjustments or complete reorganizations
as appropriate. Unforeseen capital and operating expenses, or other difficulties
and delays frequently encountered in connection with the expansion and
integration of acquired operations, could have an adverse effect upon the
Company's financial results. Significant acquisitions require the integration of
administrative, finance, sales, purchasing and marketing organizations, as well
as the coordination of common sales and marketing efforts and the implementation
of appropriate operational, financial and management systems and controls. This
will require substantial attention from the Company's senior management team,
who have limited acquisition experience to date. The diversion of management
attention required by the acquisition and integration of acquired companies, as
well as any other difficulties that may be encountered in the transition and
integration process, could have an adverse effect on the results of operations
of the Company. There can be no assurance that the Company will identify
suitable acquisition candidates, that acquisitions will be consummated on
acceptable terms or that the Company will be able to successfully integrate the
operations of any acquired company. The Company's ability to continue to grow
through the acquisition of additional stores will also be dependent upon the
availability of suitable candidates, the Company's ability to attract and retain
competent management and the availability of capital to complete the
acquisitions. The Company currently intends to finance acquisitions through a
combination of cash resources, borrowings and, in appropriate circumstances, the
issuance of equity and/or debt securities. The acquisition of additional
operations has in the past and is expected in the future to have a significant
effect on the Company's quarterly and yearly operating results. Future
acquisitions by the Company involving residual income could result in
significant charges to net income from accelerated amortization.
ACCESS TO CAPITAL. The Company has limited access to capital. The
Company's acquisition strategy and growth plans are expected to continue in the
future. The Company has, and intends to, continue to pay for acquisitions with a
combination of cash, Common Stock and debt. There can be no assurances that the
Company will have necessary and appropriate levels of capital to maintain its
acquisition strategy and growth plans. The Company will require additional
capital in connection with the manufacture, marketing and
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sale of its products. In order to develop new products, manufacture, market,
and sell its new and existing product line, and otherwise implement its
plan of operations, the Company will be required, among other things,
to raise additional capital. While the Company has existing lines of credit,
there can be no assurance that such debt financing will be available to the
Company in the future or that such debt financing will be available in the
amounts required by the Company or on terms acceptable to the Company. The
failure of the Company to obtain financing in adequate amounts and on
acceptable terms could have an adverse effect on the Company's business,
financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE. Of the 17,122,314 shares of the
Company's Common Stock outstanding as of June 30, 1998 prior to the exercise of
any Series B Warrants or stock options, 4,307,887 shares are freely tradable or
are eligible to be sold in the public market, and the 950,000 shares of Common
Stock underlying the Series B Warrants and the 2,205,789 shares of stock
options, subject to vesting requirements of each individual option grant, will
also be freely tradable immediately upon issuance. In addition, the 1,477,140
shares of Common Stock underlying the Series B Preferred Stock will be freely
tradable immediately upon conversion into Common Stock. The 369,500 shares of
Earn Out shares will be issued by the Company over time depending on certain
acquired companies meeting defined goals. All the remaining shares of Common
Stock presently outstanding may be sold into any public market that may exist
for the Common Stock, pursuant to Rule 144 promulgated pursuant to the
Securities Act of 1933, as amended (the "Securities Act") or individual Stock
Sale Restriction Agreements. The vast majority of the Stock Sale Restriction
Agreements expire on December 31, 1998. Future sales by current shareholders of
substantial amounts of Common Stock into the public market could depress the
market prices of the Common Stock in any such market.
OUTSTANDING WARRANTS, OPTIONS AND OTHER RIGHTS. In addition to the
950,000 Series B Warrants and the 2,205,789 stock options, the Company has
outstanding other earn-out shares, options and earn out agreements to purchase
up to 7,078,975 shares. The Company may also have other options granted in the
future in connection with an employee stock option program. The holders of such
options, warrants or rights are given an opportunity during the term of such
rights to profit from a rise in the market price of the Company's Common Stock,
with a resultant dilution of the interests of all other shareholders. The
holders thereof are likely to exercise them only if the then prevailing market
price exceeds such exercise prices, which would be at a time when, in all
likelihood, the Company would otherwise be able to obtain funds from the sale of
its securities on terms more favorable than those provided by the options and
warrants. Accordingly, the Company may find it more difficult to raise
additional capital while the options and warrants are outstanding.
NEWLY DEVELOPING INDUSTRY/PRODUCT ACCEPTANCE. The reclamation and
recycling of plastic waste and the manufacture of plastic lumber for use in
construction, and other composite materials containing recycled waste plastics,
are relatively new industries. There is a general reluctance in the construction
industry to use new materials before they have been extensively tested,
particularly in certain segments which have exacting performance standards for
component materials. In the case of the Company's recycled plastic lumber and
composite materials in particular, such testing may be extensive for each
prospective customer and may
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require substantial additional time and resources. In addition, the Company may
experience resistance from prospective customers who are accustomed to more
conventional, non-artificial wood materials. Moreover, the Company may not have
sufficient financial and other resources to undertake extensive marketing and
advertising activities or to afford the cost of the necessary marketing and
sales personnel at such time as it becomes appropriate to broaden its marketing
efforts.
AVAILABILITY OF RAW MATERIALS. The availability of low-cost raw
materials, namely consumer and industrial plastic waste products, is a material
factor in the Company's costs of operations. The Company generally maintains raw
material inventories of approximately one half million pounds, which is adequate
for approximately two months of production. The Company believes that its
current sources of raw materials will continue to be available on commercially
reasonably terms. However, unavailability, scarcity or increased cost of such
raw materials would have a material adverse effect upon the Company's business.
The Company purchases most of its raw materials through distributors. Disruption
of these supply sources could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
rely on contractual arrangements with its raw materials suppliers and has no
long-term supply contracts. See "Business - Plastic Lumber Operation Raw
Material Supply".
COMPETITION. The Company's recycled plastic lumber business faces
extensive competition from other producers of recycled plastic lumber as well as
producers of vinyl and aluminum decking, and traditional wood, especially
pressure treated wood. The Company competes against other makers of recycled
plastic lumber principally on the basis of price and quality as well as the
immediate availability of its product, and competes against other products such
as pressure treated lumber by emphasizing the suitability characteristics of
recycled plastic lumber for certain applications, as well as appealing to the
environmental consciousness of consumers. There are, literally, thousands of
suppliers of competitive products with entrenched national distribution networks
in place, the impact of which could make it very difficult for the Company to
compete effectively. The Company's environmental recycling operation has several
large competitors which provide similar services throughout the Northeast and
Mid Atlantic states. The resources of the competition, financial and otherwise,
may be such that it can be very difficult for the Company to effectively
compete. In some instances, the competitors of the Company have more revenues,
market share, better name recognition and capital available which can make it
difficult for the Company to compete. There can be no assurances that the
Company will be able to effectively compete in any of its markets. See
"Competition," "Plastic Lumber Operation" and "Environmental Recycling
Operation."
NEWLY DEVELOPING TECHNOLOGIES. The Company's products and services
involve newly developing technologies, and there is no assurance the Company
will be able to compete effectively in developing and marketing such products
and services or in developing or maintaining the know how, technology, and
patents to compete effectively. There is a general lack of public awareness of
these newly developing products and services generally, or as alternatives to
more traditional and well established products. To compete effectively, the
Company must increase public knowledge and acceptance of its products and
services and
9
<PAGE> 13
develop and maintain certain levels of know how and technical expertise, of
which there is no assurance.
INDUSTRY STANDARDS. ASTM (American Society for Testing and Materials)
and certain industry trade organizations have established general standards and
methods for measuring the characteristics of specific building materials. Users
of building materials (and frequently, issuers of building codes) generally
specify that the building materials comply with such standards relative to the
proposed applications. Since uniform, recognized standards or methods have only
recently been established for measuring the characteristics of plastic lumber,
potential users may not know of this, to judge whether or not plastic lumber may
be suitable for their particular requirements, without being informed of such
standards by the plastic lumber supplier or otherwise becoming aware of them.
The fact that such standards are not well known for plastic lumber may limit the
market potential of the Company's building materials and make potential
purchasers of such building materials reluctant to use them. The Plastic Lumber
Trade Association, of which the Company is a member, is pursuing increased
public awareness of such standards, but no assurance can be given that public
awareness will successfully be increased or that increased awareness will
increase the market for the Company's products.
REGULATORY MATTERS. The Company's businesses are subject to laws and
regulations designed to protect the environment from toxic wastes and hazardous
substances or emissions and to provide a safe workplace for its employees. Under
current federal regulations, Resource Conservation & Recovery Act, ("RCRA") &
Comprehensive Environmental Responsibility, Compensation & Liability Act,
("CERCLA"), the generator of toxic or hazardous waste is financially and legally
responsible for that waste forever, and strictly liable for the clean up and
disposal costs. In particular, the business of treating or otherwise handling
toxic or hazardous waste materials is fraught with potential liability to such
handlers if the handling and tracking of such wastes is not properly done. The
Company believes it is either in material compliance with all currently
applicable laws and regulations or is operating in accordance with appropriate
variances or similar arrangements, but there is no assurance that it will always
be deemed in compliance, nor any assurance that compliance with current or
future laws and regulations will not require significant capital expenditures
that could have a material adverse effect on its operations. Such laws and
regulations are always subject to change and could become more stringent in the
future. Although state and federal legislation currently provide for certain
procurement preferences for recycled materials, such preferences for materials
containing waste plastics are dependent upon the eventual promulgation of
product or performance standard guidelines by state or federal regulatory
agencies. Such guidelines for recycled plastic building materials may not be
released or, if released, the product performance standards required by such
guidelines may be incompatible with the Company's manufacturing capabilities. It
may be necessary to expend considerable time, effort and money to keep the
Company's existing or acquired facilities in compliance with applicable
environmental, zoning, health and safety regulations and as to which there may
not be adequate insurance coverage. In addition, due to the possibility of
unanticipated factual or regulatory developments, the amounts and timing of
future environmental expenditures and compliance could vary substantially from
those currently anticipated. See "Plastic Lumber
10
<PAGE> 14
Operation - Governmental Regulation and Environmental Matters" and
"Environmental Recycling Operation - Regulations."
LOSS OF PERMITS. The Company's business, especially the environmental
recycling operation, is dependent upon certain permits and licenses from many
different federal, state, and local agencies. There can be no assurances that
the Company will be able to maintain its permits and licenses in the future or
modify its permits and licenses to be able to compete effectively. See "Plastic
Lumber Operation - Governmental Regulation and Environmental Matters" and
"Environmental Recycling Operation - Regulations."
PROTECTION OF TECHNOLOGY (NO PATENT PROTECTION). The Company's business
involves many proprietary trade secrets, as well as certain methods, processes
and equipment designs for which the Company has not sought patent protection.
Although the Company has taken measures to safeguard its trade secrets by
limiting access to manufacturing and processing facilities and requiring
confidentiality and nondisclosure agreements with third parties, there is no
assurance that its trade secrets will not be disclosed or that others will not
independently develop comparable or superior technology. Rather than rely on
patent protection, the Company has generally chosen to rely on the proprietary
nature of its processes. The Company has obtained exclusive worldwide licensing
rights with respect to patent pending technology related to railroad crossties
and the process to manufacture them, but there is no assurance the Company will
be able to maintain such rights for any specific length of time. See "Plastic
Lumber Operation - Research and Development" and "Proprietary Technology."
BIDDING. The environmental recycling operation consists of certain
subsidiaries which are highly reliant upon contract bidding as a significant
source of revenues. There can be no assurance that the Company will be
successful in obtaining bid work in the future or that if it does obtain bid
work that it will be at suitable profitable margins.
DEPENDENCE ON MANAGEMENT. The development of the Company's business and
operations is dependent upon the efforts and talents of its executive officers,
in particular, Mark Alsentzer, Chief Executive Officer. The loss of the services
of this officer or other executive officers could have a material adverse effect
on the Company's business. See "Management."
EXPERTISE. The business of the Company requires much expertise in a
wide variety of functions. There can be no assurance that the Company will be
able to maintain employees with the requisite levels of expertise or that the
Company will be able to attract and retain such employees in the future.
NO ASSURANCE OF A LIQUID PUBLIC MARKET FOR SECURITIES. Although the
Company's shares of Common Stock are eligible for quotation on the Electronic
Bulletin Board, there can be no assurance that a regular and established market
will continue for the securities upon completion of this offering. There can
also be no assurance as to the depth or liquidity of any market for Common Stock
or the prices at which holders may be able to sell the Shares. As a result, an
investment in the Shares may be totally illiquid and investors may not be able
to liquidate their investment readily or at all when they need or desire to
sell.
11
<PAGE> 15
VOLATILITY OF STOCK PRICES. In the event that an established public
market does develop for the Common Stock, market prices will be influenced by
many factors, and will be subject to significant fluctuation in response to
variations in operating results of the Company and other factors such as
investor perceptions of the Company, supply and demand, interest rates, general
economic conditions and those specific to the industry, international political
conditions, developments with regard to the Company's activities, future
financial condition and management. See "Plan of Distribution."
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS. The
Common Stock of the Company may be considered a low priced security under rules
promulgated under the Exchange Act. Under these rules, broker-dealers
participating in transactions in low priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker-dealer's duties, the customer's rights and remedies, and certain market
and other information, and make a suitability determination approving the
customer for low priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing and provide monthly account statements to
the customer, and obtain specific written consent of the customer. With these
restrictions, the likely effect of designation as a low priced stock is to
decrease the willingness of broker-dealers to make a market for the stock, to
decrease the liquidity of the stock and increase the transaction cost of sales
and purchases of such stocks compared to other securities.
CONFLICTS OF INTEREST INHERENT IN MATERIAL RELATED PARTY TRANSACTIONS.
The Company has recently entered into several significant acquisitions and other
affiliated transactions, the terms of which were, in some instances, determined
without the benefit of arms length bargaining or negotiation and necessarily
involve conflicts between the interests of the related parties and the Company.
These include the recent acquisitions, as wholly owned subsidiaries of the
Company, of Earth Care Global Holdings and Earth Care Partners, Duratech
Industries, Clean Earth, Inc., Recycled Plastics Industries, Inc., Cycle
Masters, Inc., Integrated Technical Services, Inc., Environmental Specialty
Plastics, Inc., EnviroPlastics Corp., Advanced Remediation and Disposal
Technologies, Inc., Waste Concepts, Inc., Green Horizon Environmental, Inc.,
Consolidated Technologies, Inc. and GeoCore, Inc. as well as the granting or
issuance of various stock, options and other rights to members of management,
principal shareholders, and other affiliates. See "Certain Transactions."
LIMITED LIABILITY OF MANAGEMENT. The Company has adopted provisions to
its Articles of Incorporation and Bylaws which limit the liability of officers
and directors and provides for indemnification by the Company of officers and
directors to the full extent permitted by Nevada law, which provides that
officers and directors shall have no personal liability to a Company or its
shareholders for monetary damages for breach of fiduciary duties as directors,
except for a breach of their duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law,
unlawful payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derives an improper personal benefit. Such
provisions substantially limit the shareholders' ability to hold
12
<PAGE> 16
officers and directors liable for breaches of fiduciary duty, and may require
the Company to indemnify its officers and directors. See "Certain Transactions."
NO CASH DIVIDENDS. The Company does not currently intend to pay cash
dividends on its Common Stock and does not anticipate paying such dividends at
any time in the foreseeable future. At present, the Company will follow a policy
of retaining all of its earnings, if any, to finance development and expansion
of its business. The Company does intend to pay dividends in stock on its
outstanding Series A Preferred Stock and its Series B Preferred Stock. See
"Dividend Policy."
NO ASSURANCE OF WARRANT EXERCISE AND NO ESCROW OF FUNDS. There is no
assurance that any proceeds will be received from this offering and therefore
there may be insufficient proceeds to defray offering expenses. Any proceeds
received will immediately be retained by the Company to be used in its business.
The amount of capital currently available to the Company is limited. In the
event that any proceeds from this offering and the Company's existing capital
are not sufficient to enable the Company to develop and expand its business and
generate a profit, the Company may need to seek additional financing from
commercial lenders or other sources, for which it presently has no commitments
or arrangements. This creates an increased risk to persons who do exercise their
Series B Warrants, because there is no assurance that additional Series B
Warrants will be exercised or that the Company will receive any further funding.
RISKS OF EXERCISE. Although the market price of the Common Stock
currently exceeds the exercise price of the Series B Warrants and options, there
is no assurance that exercising Series B Warrant and options holders will be
able to sell their Common Stock in the future at a price which equals or exceeds
such exercise price.
CURRENT PROSPECTUS AND REGISTRATION REQUIRED FOR EXERCISE. Holders of
the Series B Warrants and stock options will only be able to exercise such
securities to acquire the underlying Common Stock if a current prospectus
relating to the Common Stock is then in effect and such exercise is qualified or
exempt from qualification under applicable securities laws of the states in
which such holders of the Series B Warrants and stock options reside. Although
the Company intends to use its best efforts to update this prospectus as
necessary to maintain a current prospectus and federal and state
registration/qualification for such exercise, there is no assurance that the
Company will be able to do so at such time as such persons may wish to exercise
such securities. The value of the Series B Warrants may be greatly diminished if
the ability to exercise such securities is not maintained. If a current
prospectus is in effect, the Series B Warrants are redeemable for nominal
consideration at any time after the date hereof upon 30 days notice, if the bid
price of the Common Stock equals or exceeds $6.00 for 20 consecutive trading
days. If redeemed, warrant holders would have 30 days to exercise the Series B
Warrants, after which they would be compelled to accept the nominal redemption
price.
DILUTION. Series B Warrant holders who exercise their Series B Warrants
to purchase the underlying shares of Common Stock will suffer substantial
dilution in the purchase price of the shares compared to the net tangible book
value per share immediately after the purchase.
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<PAGE> 17
The exact amount of dilution will vary depending upon the total number of Series
B Warrants exercised, and will be greater if less than all the Series B Warrants
are exercised. The fewer Series B Warrants exercised, the greater dilution will
be with respect to the Series B Warrants that are exercised. See "Dilution."
POTENTIAL ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK. The
Company is authorized to issue up to 50,000,000 shares of Common Stock. To the
extent of such authorization, the Board of Directors of the Company will have
the ability, without seeking shareholder approval, to issue additional shares of
Common Stock in the future for such consideration as the Board of Directors may
consider sufficient. The issuance of additional Common Stock in the future will
reduce the proportionate ownership and voting power of the Common Stock offered
hereby. The Company is also authorized to issue up to 5,000,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by the Board of Directors. To the extent of such authorization, such
designations may be made without shareholder approval. The Board of Directors
has designated one series of Preferred Stock (Series A) and issued 218,588
shares of Series A Preferred Stock. The Board of Directors has also approved the
issuance of 211,020 shares of Series B Preferred Stock. The designation and
issuance of series of preferred stock creates additional securities which have
dividend and liquidation preferences over the Common Stock offered hereby. See
"Description of Securities."
POTENTIAL ANTI-TAKEOVER MEASURES. Certain provisions in the articles of
incorporation or bylaws of the Company, such as staggered terms for the Board of
Directors and authorization to issue additional common or preferred stock and
designate the rights and preferences of the preferred stock without further
approval of shareholders, could be used as anti-takeover measures. Provisions
such as these could result in the Company being less attractive to anyone who
might consider a takeover attempt, and result in shareholders receiving less
than they otherwise might in the event of a takeover attempt.
CONTINUATION OF MANAGEMENT CONTROL. Upon completion of this offering,
the current management of the Company will own 49.3% of the total outstanding
securities and will have absolute control of the Company. Investors in this
offering as a group will have no ability to remove, control or direct such
management. Only one third of the outstanding shares is required to constitute a
quorum at any shareholders' meeting, and action may be taken by a majority of
the voting power present at a meeting, or may be taken without a meeting by
written consent of shareholders holding a majority of the total voting power.
See "Principal Stockholders" and "Description of Securities."
ARBITRARY DETERMINATION OF OFFERING PRICE. The exercise price of the
Series B Warrants and the stock options was arbitrarily determined by management
of the Company. The price bears no relationship to the Company's assets, book
value, net worth or other economic or recognized criteria of value. In no event
should the exercise prices be regarded as an indicator of any future market
price for the Company's securities.
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares of Common
Stock underlying the Series B Warrants at the exercise price of $4.50 per Share
for Series B Warrants and the exercise of the stock options will vary depending
upon the total number of Series B Warrants and stock options exercised. If all
Series B Warrants and all stock options were to be exercised (of which there is
absolutely no assurance, nor any assurance that any will be exercised), the
Company would receive gross proceeds of $11,472,947. Upon the Closing of the
Series B Preferred Stock Private Placement, the Company has received additional
gross proceeds of $4,431,420 having sold 211,020 shares of Series B Preferred
Stock. Regardless of the number of Series B Warrants or stock options exercised,
the Company expects to incur offering expenses estimated at $27,000 for legal,
accounting, printing and other costs in connection with the offering. Inasmuch
as there is no assurance that all Series B Warrants or stock options will be
exercised nor any requirement that any minimum amount of the Series B Warrants
or stock options be exercised, there are no escrow provisions and any proceeds
that are received will be immediately available to the Company to provide
additional working capital to be used for general corporate purposes. The exact
uses of any other proceeds will depend on the amounts received and the timing of
receipt. While the Company may consider additional acquisitions in the future as
a method to further develop and expand its business, there are presently no
specific plans, proposals, arrangements, understandings or contracts with
respect to future acquisitions or other methods to the further development and
expansion of the Company's business.
MARKET INFORMATION & DIVIDEND POLICY
The Common Stock of the Company has traded in the over-the-counter
market on a limited and sporadic basis, and is quoted on the NASDAQ Small Cap
Market under the symbol USPL. The following table sets forth the high and low
bid price quotations for each calendar quarter during the last two fiscal years
and subsequent interim period. The Company reverse split its Common Stock on a 1
for 16 basis in March, 1996. Quotations for periods prior to such split and
information regarding the number of shares have been restated here and elsewhere
throughout the prospectus to reflect post split amounts throughout.
Quarter Ended High Bid Low Bid
- ------------- -------- -------
March 31, 1996 $ 3.50 $ 2.88
June 30, 1996 $ 4.75 $ 4.13
September 30, 1996 $ 5.13 $ 4.63
December 31, 1996 $ 4.75 $ 3.00
March 31, 1997 $ 6.50 $ 6.00
June 30, 1997 $ 6.13 $ 5.75
September 30, 1997 $ 6.50 $ 5.50
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<PAGE> 19
December 31, 1997 $ 4.4375 $ 4.875
March 31, 1998 $ 7.4375 $ 7.0625
June 30, 1998 $ 6.9375 $ 6.0625
The above prices represent interdealer quotations, without retail
markup, markdown or commissions, and may not represent actual transactions. As
of June 30, 1998, there were approximately 394 record holders of the Company's
Common Stock, not including those listed with CEDE & Co.
CAPITALIZATION
Primary Shares:
- ---------------
Common Stock (4,307,887) shares 17,122,314
are freely tradable)
Fully Diluted:
- --------------
Series A Preferred Shares (convert @ 7:1
common) 1,530,116
Series B Warrants 950,000
Series B Preferred Shares (convert @ 7:1
common) 1,477,140
Other Warrants and Options 2,205,789
Earn Out shares and Options 369,500
Historical Shareholder earn out 4,573,686
----------
Subtotal 11,105,231
----------
Fully Diluted Equity 28,228,545
DIVIDEND POLICY
The Company has not previously paid any cash dividends on its Common
Stock and does not anticipate or contemplate paying dividends on Common Stock in
the foreseeable future. It is the present intention of management of the Company
to utilize all available funds for the development of the Company's business.
The Company does intend to pay stock dividends on its outstanding Series A
Preferred Stock and Series B Preferred Stock in accordance with the terms
thereof.
16
<PAGE> 20
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.
In June 1998, the Company acquired GeoCore, Inc. ("GCI") which operates
an environmental services company in New Jersey. The Company paid 30,000 shares
in the form of unregistered Common Stock of the Company in this transaction.
In June of 1998, the Company acquired the assets of Trimax of Long
Island, Inc. and Polymerix, Inc. Trimax was a manufacturer of structural plastic
lumber made from recycled plastic and operated in Ronkokoma, Long Island.
Polymerix owned two patents relative to the structural lumber manufacturing
process. These assets were purchased by the Company with the approval of the
U.S. Bankruptcy Court for the Eastern District of New York as Trimax and
Polymerix had filed a bankruptcy petition in January 1998. The Company paid
$950,000 in cash plus $650,000 in the form of common stock of the Company in
this transaction.
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<PAGE> 21
In June of 1998, the Company acquired the remaining interests of
Consolidated Technologies, Inc. ("CTI") so that the Company now owns 100% of
CTI. The remaining 45% interest was purchased by the Company for the sum of
$25,000 in cash plus 30,000 shares of common stock of the Company plus earn-out
shares and royalty compensation.
ACQUISITIONS COMPLETED DURING THE THREE MONTHS ENDED MARCH 31, 1998
In January 1998, the Company acquired Green Horizon Environmental, Inc.
("GHE"), an 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, but owned 55% after this acquisition. (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:
COMPARISON OF THE FIRST QUARTER ENDED MARCH 31, 1998 TO THE FIRST QUARTER
ENDED MARCH 31, 1997
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:
<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
----- ---- ----- ----
</TABLE>
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<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 OPERATIONS
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.
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<PAGE> 23
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 (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
20
<PAGE> 24
plant's backlog to absorb the plant's fixed expenses. The Tennessee plant
incurred gross profit of ($211,020) 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 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
21
<PAGE> 25
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.
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<PAGE> 26
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 June of 1998 at an estimated
construction cost of $2.0 million. The Company will pursue additional financing
of this facility through a conventional bank.
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 has raised $4,431,420 by offering 211,020 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. This Offering has been closed by the Company.
The Company will require working capital for the environmental
recycling operations, especially as it relates to the dredging opportunities
being pursued by the Company. Although, there are no material commitments in
place currently for capital expenditures, the Company also anticipates requiring
additional working capital to expand and upgrade its plastic lumber
manufacturing facilities as sales levels increase and as the structural lumber
and railroad tie product begins to take hold within its market. The Company also
anticipates using working capital relative to research and development costs
with respect to its new products.
The Company continues to seek acquisition candidates that can be
vertically integrated
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<PAGE> 27
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.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DEC. 31
-------------------------------------------
1997 % 1996 %
-------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
REVENUE:
Plastic Lumber $8,130 32.9 $ -- 0.0
Environmental Recycling 16,609 67.1 6,412 100.0
------ ----- ----- -----
Total revenue 24,739 100.0 6,412 100.0
OPERATING EXPENSES:
Cost of Sales:
Plastic Lumber 7,110 87.5 -- --
Environmental Recycling 12,161 73.2 4,762 74.3
Depreciation
Plastic Lumber 288 1.7 -- --
Environmental Recycling 220 1.3 630 9.8
Corporate 12 0.0 -- --
ADMINISTRATIVE EXPENSES:
Selling, General and Administrative
Plastic Lumber 1,661 20.4 -- --
Environmental Recycling 1,899 11.4 1,311 20.5
Corporate 1,440 5.8 -- --
Amortization
Plastic Lumber 104 1.3 -- --
Environmental Recycling 17 0.0 -- --
Corporate 148 0.1 -- --
----- ----- ----- -----
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Operating Expenses 25,060 101.3 6,703 104.5
Total Operating Income (loss) (321) 1.3 (291) (4.5)
</TABLE>
Year to Year Comparisons: Due to the reverse merger of Clean Earth,
Inc. on December 31, 1996 into U.S. Plastic Lumber Corporation, and as a result
of the twelve companies acquired during the 1997 fiscal year, year to year
comparisons with respect to margin analysis, trend analysis, profitability
analysis, or analysis of sales or costs of goods sold are not meaningful.
CONSOLIDATED RESULTS OF OPERATIONS
The Company experienced a 286% increase in net sales for the
year ended December 31, 1997 compared to the same period in 1996. This increase
was due primarily to increased sales from acquired businesses in both the
recycled plastic lumber segment as well as the environmental recycling business
segment during 1997. Net loss from operations of $321,000 for the year ended
December 31, 1997 increased by $30,000 as compared to the same period in 1996.
This was due to certain one-time charges incurred in 1997, which the Company
estimates to be $516,000, for consolidating the operations of our Tennessee and
Michigan manufacturing facilities and other general and administrative expenses.
SALES
The Company's consolidated sales increased $18,327,000, or
286%, from $6,412,000 in 1996 to $24,739,000 in 1997. The significant increase
in sales came primarily from acquired businesses which were not part of the
Company during year ended December 31, 1996.
Recycled plastic lumber operation sales contributed
$8,131,000, or 32.9%, of the total sales for the twelve months ended December
31, 1997 and the sales from the U.S. Plastic Lumber division, which was acquired
in December 1996, through reversed merger, increased in 1997 by $476,000, or
25.3%, to $2,361,000 from $1,885,000 in the same period in 1996. The remaining
$5,769,000 of sales was attributed to Recycled Plastics Industries (RPI),
Environmental Specialty Plastics (ESP) and EnviroPlastics (EPC) units acquired
during 1997.
In the environmental recycling operations, sales increased by
$10,197,000, or 159%, for the twelve months ended December 31, 1997 as compared
to the same period in 1996. The acquisitions of Advanced Remediation and
Disposal Technologies (ARDT), Integrated Technical Services (ITS) and Waste
Concepts, Inc. (WCI) during 1997 contributed $10,420,000, or 62.7% of the total
environmental recycling sales for 1997. Clean Earth experienced a $223,000
decrease in sales from 1996 to 1997 primarily due to competitive conditions
which caused a reduction in both price and volume.
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<PAGE> 29
GROSS PROFIT
The Company's consolidated gross profit increased $3,939,000
from $1,020,000 in the year ended December 31, 1996 to $4,960,000 for the same
period in 1997. The acquired businesses in both business segments contributed
gross profit of $3,702,000, or 94%, of the total increase. The remaining
increase was from Clean Earth, which experienced reduced depreciation expense
from fully depreciated assets and improve operating performance as compared to
fiscal 1996. This offset by decrease in gross profit from the U.S. Plastic
Lumber division, which was acquired in December 1996.
The recycled plastic lumber operations contributed gross
profit of $732,000. This consisted of $1,178,000 from RPI, ESP and EPC units
acquired during 1997. Offset by ($446,000) from the U.S. Plastic Lumber division
which was acquired in December 1996, through a reverse merger. This decrease was
attributed to one-time charges and lost production incurred in the fourth
quarter of 1997 from consolidating the operations of our Tennessee and Michigan
manufacturing facilities to a new Tennessee facility.
The environmental recycling operations contributed gross
profit of $4,227,000, an increase of $3,207,000, or 314%, for the year ended
December 31, 1997 compared to $1,020,000 in the same period in 1996. The
acquired businesses of ARDT, ITS and WCI contributed $2,524,000, or 78.7%, of
the increase in the environmental recycling operations' gross margin during this
period.
In Clean Earth, the existing plant and equipment was substantially
depreciated in prior years and, consequently, depreciation expenses related to
these items was lower by $466,000 for the year ended December 31, 1997. In
addition, plant operating costs were $.5 million less than the comparable period
in 1996. This is attributed to reductions in the plant fuel costs and decreases
in overall transportation costs in year ended 1997.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses increased
overall $3,689,000, or 281%, for the twelve months ended December 31, 1997. This
increase was primarily due to the addition of several acquisitions in both
business segments. The acquired businesses of USPL, RPI, ARDT, ITS, ESP, EPC and
WCI contributed an additional $4,136,000 to general and administrative expenses.
This increase was offset by certain non-recurring expenses in Clean Earth
experienced during the year 1996.
The recycled plastic lumber segment acquisitions of RPI, ESP
and EPC contributed $675,000 to expenses for the twelve months ended December
31, 1997. The U.S. Plastic Lumber division, which was acquired in December,
1996, through a reverse merger, contributed $2,429,000 to expenses primarily in
the area of corporate administrative and sales and marketing expenses. This
amount was relatively the same as reflected in this division when acquired
December 30, 1996.
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<PAGE> 30
The environmental recycling operations contributed $1,899,000,
an increase of $588,000, or 44.9%, increase over the same period in 1996. The
acquired companies of ARDT, ITS and WCI contributed $1,032,000 million to the
increase during the year 1997 offset by a decrease of $447,000 in Clean Earth
due to certain non-recurring expenses experienced during the year 1996.
INTEREST EXPENSE
Interest expense increased $299,000 for the twelve months
ended December 31, 1997, compared to the same period in 1996. This increase was
a direct result of debt service acquired with the acquisitions made during 1997.
In addition, $123,000 was from borrowing on credit facilities established during
the year 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $159,000
during year ended December 31, 1997 as compared to the same period in 1996. This
increase is due primarily to the amortization of acquired intangibles and
acquired depreciation of $616,000 offset by a decrease of $457,000 in
depreciation in Clean Earth due to fully depreciated assets experienced during
the year 1996.
JOINT VENTURE
In July 1997, the Company formed a joint venture with
Interstate Industrial Corp. of Secaucaus, NJ to bid on dredging and upland
disposal projects. The joint venture was successfully awarded a contract with
the New York City Department of Sanitation estimated at $4.7 million. The
initial phase of the contract was performed in December 1997, generating revenue
of $1.3 million and an operation loss of $264,000. The loss was primarily due to
initial mobilization costs incurred in beginning the contract. In addition, due
to the required start date of the contract, the joint venture had to begin
dredging before fully securing the permits at its intended location and had to
locate a higher cost alternative for the initial disposal. The Company's
proportion of this loss according to the joint venture agreement is 50% or
($132,000).
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 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
27
<PAGE> 31
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. However, the Company has no control over
Year 2000 compliance by the customers and vendors of the Company. If the
Company's customers and vendors are not in Year 2000 compliance, this could
provide a material adverse financial impact to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's notes to consolidated financial
statements.
In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
EARNINGS PER SHARE, and makes them comparable to international EPS standards.
SFAS No. 128 replaces the presentation of primary EPS with a presentation of the
basic EPS and requires dual presentation of basic and diluted EPS on the face of
the reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS No. 128
will be effective for financial statements for both interim and annual periods
ending after December 15, 1997. Based upon the Company's analysis of SFAS No.
128, the Company does not believe that the implementation of SFAS No. 128 will
have a material effect on the computation of its earnings per share. See Note of
the Notes to Consolidated Financial Statements.
In February 1997, the FASB issued SFAS No. 129 "DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE" ("SFAS No. 129"). SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. SFAS
No. 129 will be effective for financial statements for periods ending after
December 15, 1997. Based upon the Company's current capital structure, the
Company does not believe that the implementation of SFAS No. 129 will have a
material effect on the Company's disclosure of information regarding its capital
structure.
In June 1997, FASB issued SFAS No. 130 "REPORTING COMPREHENSIVE INCOME"
("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and
display of comprehensive income in a full set of general purpose financial
statements. The provisions of SFAS No. 130 are effective for fiscal years
beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131 "DISCLOSURE ABOUT SEGMENTS OF
28
<PAGE> 32
AN ENTERPRISE AND RELATED INFORMATION" ("SFAS No. 131"). SFAS No. 131 requires
that public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to stockholders. SFAS
No. 131 also requires that public business enterprises report certain
information about their products and services, the geographical areas in which
they operate and their major customers. The provisions of SFAS No. 131 are
effective for fiscal years beginning after December 15, 1997.
Due to the recent issuance of these pronouncements, the Company has not
completed its analysis of the impact of SFAS No. 130 and SFAS No. 131. And the
Company does not believe that such adoption will have a significant impact on
its financial statement presentation.
BUSINESS
GENERAL
U.S. Plastic Lumber Corporation (the "Company"), a Nevada Corporation,
is a manufacturer and marketer of recycled plastic lumber products and a
provider of environmental recycling services. The Company was incorporated under
the laws of the State of Utah on July 26, 1983, under the name of Front Street
Energy, Inc., and completed an initial public offering of its securities in
1983. The Company changed its corporate domicile to the State of Nevada in June
1992 and changed its name to Front Street, Inc. In 1994, the Company changed its
name to Educational Storybooks International, Inc. when it acquired all the
outstanding stock of Educational Storybooks, Inc. The Company subsequently
divested itself of Educational Storybooks, Inc. and another subsidiary, and had
no significant assets or business until March 1996, when the Company acquired
Earth Care Global Holdings, Inc. ("Earth Care") as a wholly owned subsidiary,
through the acquisition of all the issued and outstanding stock of Earth Care in
a stock for stock exchange (the "Acquisition") and changed its name to U.S.
Plastic Lumber Corporation.
The Company has two distinct business lines. One operation, U.S.
Plastic Lumber Ltd., manufactures structural and non-structural plastic lumber
and fabricates a variety of accessory products, such as park and site amenities,
made from 100% recycled high density polyetheylene. The other operation, Clean
Earth, Inc. 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. The Company owns and operates
nine manufacturing, processing and fabrication facilities in the U.S. The
primary product produced in four of these plants is plastic and lumber profiles
made from recycled plastic waste. Recycled plastic lumber is manufactured in a
variety of colors, profiles and shapes including standard lumber dimensions and
many custom engineered profiles and shapes. The fifth and sixth plants are
fabrication facilities which manufacture value-added products made from the
Company's recycled plastic lumber. The seventh plant is a recycled plastic
processing facility which includes washing, grinding and pelletizing of post
consumer and post industrial plastic
29
<PAGE> 33
waste. Some of this material is used to supply the raw material needs of the
Company's lumber manufacturing facilities. Plastic lumber's principal intended
use is as an environmentally friendly and non-toxic alternative to pressure
treated lumber or rain forest hardwoods, which is suitable for and provides
superior performance in most outdoor applications. The Company's plastic lumber
product can be used in structural and non-structural applications. The Company's
eighth plant operates a process for treating and recycling soil that has been
contaminated with petroleum hydrocarbons and similar compounds through a process
known as thermal desorption. The Company has opened as of July 1, 1998, a ninth
plant which will be utilized for treating and recycling soil through a process
which is bio-organic in nature.
U.S. Plastic Lumber Ltd. is comprised of seven wholly owned
subsidiaries: Earth Care Products of Tennessee, Inc., which operates a
manufacturing plant in Trenton, Tennessee: Earth Care Products of the Midwest,
Inc., which operates a sales and fabrication facility in Mulliken, Michigan;
Recycled Plastics Industries, which operates a sales and manufacturing facility
in Green Bay, Wisconsin; Chesapeake Plastic Lumber, Inc., which operates a
plastic manufacturing facility in Denton, MD; Cycle Masters, Inc., which
operates a plastic manufacturing facility in Sweetser, Indiana, Environmental
Specialty Products, Inc., which runs a sales, fabrication and distribution
center of recycled plastic products in Guasti, California and EnviroPlastics
Corporation, which operates a recycled plastic regrind plant in Auburn,
Massachusetts.
The Company's plastic lumber operation manufactures plastic lumber from
recycled waste plastic to produce a high quality, long lasting alternative to
pressure treated lumber that provides high quality performance in outdoor uses
and is suitable for most nonstructural and structural applications. The Company
has a license using a patent pending technology to manufacture structural
plastic lumber. By producing a high quality recycled plastic lumber product, the
Company conserves natural resources by reducing the need for lumber products
made from wood and at the same time reduces the amount of plastic waste into
landfills while providing a longer lasting, useful product. The Company's
plastic lumber products are intended as an excellent replacement for pressure
treated lumber, which is injected with toxic chemicals to retard decay and
insect infestation. Plastic lumber is not subject to decay or insect infestation
and so will typically outlast wood, especially in applications exposed to
moisture. Recycled plastic lumber is environmentally friendly in that it
eliminates potential pollution from leaching of such toxic chemicals into the
environment.
Clean Earth, Inc. operates a plant in New Castle, Delaware and two
environmental construction companies: Integrated Technical Services, Inc. (ITS),
in Winslow, New Jersey and Advanced Remediation and Disposal Technologies, Inc.
(ARDT) in Coopersberg, Pennsylvania. As of November 18, 1997, the Company also
acquired Waste Concepts, Inc. which provides environmental recycling services
and beneficial re-use of waste materials. As of January 2 ,1998, the Company
also acquired Green Horizon Environmental, Inc., also an environmental recycling
services company. In addition, the Company has started Carteret Biocycle Corp.
which is constructing a recycling facility in Carteret, New Jersey utilizing a
bio-organic methodology of recycling contaminated soils. The Company anticipates
this facility will open during the second quarter of 1998. Clean Earth, Inc.
also owns a majority
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<PAGE> 34
interest of Consolidated Technologies, Inc. (CTI) which provides beneficial
re-use of dredge materials and is an important factor to the Company's plans to
bid on major dredge contracts.
The Company's Clean Earth operation, which offers environmental
recycling services, operates several subsidiaries. Clean Earth of New Castle,
Inc. (CENC) operates a low temperature thermal desorbtion treatment plant that
ensures that contaminated soil is treated in accordance with local, state and
federal regulations. This thermal treatment process removes petroleum
hydrocarbons from the soil and has been recognized by federal and state agencies
(including Delaware, New Jersey, New York, Maryland and Pennsylvania) as a cost
effective technology for cleaning up the environment. Contaminated solids, soils
and construction debris are recycled and reused in construction and industrial
applications. The Company's recycling center in New Castle, Delaware is in a
prime location for servicing the Northeast and Mid-Atlantic regions, where
extensive remodeling and rebuilding of infrastructure and abandoned industrial
property is ongoing. This division also operates Carteret Biocycle Corp., (CBC)
a bioremediation plant located in Carteret, NJ, which will remove petroleum
hydrocarbons from soil. The Company anticipates operations will commence in the
spring of 1998. The plant is similar to the Clean Earth of New Castle, Inc.
(CENC) facility except that its process involves bio-organic destruction of
petroleum hydrocarbons whereas the CENC facility uses low temperature thermal
desorbtion to remove petroleum hydrocarbons from the soil. The remaining
environmental recycling subsidiaries are involved in beneficial re-use of waste
products, upland re-use of dredge materials in strip mines and brownsfield
properties, environmental construction services, and on-site recycling services.
HISTORY AND DEVELOPMENT OF THE COMPANY
In March 1996, the Company entered into an Agreement and Plan of
Reorganization with Earth Care Global Holdings, Inc. ("Earth Care"), a
manufacturer and marketer of recycled plastic products and other recycling
services. Pursuant to the Agreement, the Company effected a reverse split of its
Common Stock on a 1 for 16 basis, and then issued 4,196,316 post split shares of
its authorized but previously unissued Common Stock to acquire all the issued
and outstanding stock of Earth Care in a stock for stock exchange (the
"Acquisition") which was intended to be a tax free reorganization under Section
368(a) of the Internal Revenue Code. See "Certain Transactions" for additional
information.
In April 1996, the Company acquired all of the assets of DuraTech
Industries. DuraTech Industries, in operation since 1986, is a manufacturer of
recycled plastic lumber, recycled plastic shapes and value added products
located in Lake Odessa, Michigan. This acquisition doubled the Company's
recycled plastic lumber sales.
In December 1996, the Company completed a reverse triangular merger
with Clean Earth, Inc. ("Clean Earth"). Clean Earth has been in operation since
1991, and has treated over 600,000 tons of soil and construction debris that
were contaminated with petroleum hydrocarbon wastes, such as fuels, lubricating
oils, tars and gasoline. Clean Earth, Inc. now operates all of environmental
subsidiaries of the Company. See "Certain Transactions" for additional
information.
31
<PAGE> 35
In January 1997, the Company acquired Recycled Plastics Industries,
Inc. (RPI), located in Green Bay, Wisconsin. RPI is a manufacturer of specialty
profile recycled plastic lumber products that was formed in 1989. RPI's
production process utilizes an automated continuous flow extrusion process with
vacuum calibration forming technology. The special products and additional
dimensional lumber capacity complement the Company's existing products
manufactured at the Tennessee and Maryland plants.
In February 1997, the Company acquired Advanced Remediation and
Disposal Technologies, Inc. (ARDT). ARDT is engaged in environmental
construction and clean up of contaminated industrial sites primarily involving
water and soils. On December 31, 1997, ARDT was merged into another wholly-owned
subsidiary of the Company, Integrated Technical Services, Inc., due to the
similarity in services and proximity of operations to one another.
In March 1997, the Company acquired Environmental Specialty Plastics,
Inc. (ESP), a marketing, fabrication and distribution company of recycled
plastic products in Guasti, California. ESP also manufactures custom signs out
of recycled plastic lumber utilizing in house routing equipment and is able to
personalize site amenities, such as benches, ash urns and picnic tables,
engraving logos and designs into recycled plastic end products. This acquisition
provides the Company with a market presence on the west coast.
In March 1997, the Company acquired Integrated Technical Services, Inc.
(ITS) located in Winslow, New Jersey. ITS is engaged in environmental
construction and clean up of contaminated industrial sites primarily involving
water and soils similar to the operations of ARDT.
In June 1997, the Company acquired EnviroPlastics Corporation, in
Auburn, Massachusetts, which operates a recycled plastic processing plant
including the washing, grinding and pelletizing of post-consumer and
post-industrial plastic waste. An estimated 74% of the $3,500,000 in sales for
the year ended December 31, 1997 were from one major customer, Dupont, who was
the prime customer for the pelletized, post-consumer feedstock product on an
exclusive basis with EnviroPlastics Corp.
In June 1997, the Company formed Carteret Biocycle Corp. ("CBC") as a
wholly owned subsidiary of Clean Earth, Inc. CBC has under construction an
80,000 square foot soil recycling facility, for approximately $2,000,000, on a
5-acre leased parcel in Carteret, New Jersey. This facility will recycle
contaminated soils utilizing a bio-organic technology of removing contaminants.
The plant will have the capacity to process approximately 320,000 tons of
contaminated soil annually and is expected to become operational in the second
quarter of 1998. This is an estimate of the plant's potential capacity and there
can be no assurances that these results may be achieved or that the plant will
operate at full capacity year round. CBC has entered into a 30 year ground lease
with two additional ten year options at a rental cost of $211,020 per year for
the initial 30 year term. CBC simultaneously entered into a License and
Operating Agreement with S D & G Aggregates, Inc. which holds a license to
operate a recycling operation on the leased premises. CBC also has a right of
first refusal to
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lease an adjacent 17 acre parcel for potential dredge transfer operations in
conjunction with its other dredging operations.
In July 1997, the Company formed a joint venture partnership with
Interstate Industrial Corp. of Secaucus, New Jersey to bid on dredging and
upland disposal projects. The joint venture company does business as
Interstate/U.S. Plastic Lumber Corp. joint venture.
In November 1997, the Company acquired Waste Concepts, Inc. ("WCI") as
a wholly owned subsidiary of Clean Earth, Inc. WCI is primarily involved in
removing and recycling volumes of waste products for beneficial reuse as well as
providing construction and permitting services for reuse and disposal of dredge
materials. The Company plans to expand its operations to include large volume
handling of dredge material and incinerator ash.
In January 1998, the Company acquired Green Horizon Environmental, Inc.
("GHI") as a wholly owned subsidiary of Waste Concepts, Inc. GHI is primarily
involved in removing and recycling large volumes of incinerator ash, paper pulp
and sewer sludges for beneficial reuse in strip mines. GHI has also been
actively involved with the beneficial re-use of dredge materials and incinerator
ash and is a critical component of the Company's plans to expand its operations.
It operates in the same market area as Waste Concepts, Inc.
In February 1998, the Company acquired an additional 30% interest in
Consolidated Technologies, Inc. ("CTI"). CTI was a start-up company at the time
of the initial investment by the Company, but it has the only permit with the
Commonwealth of Pennsylvania to allow it to dispose of dredge materials mixed
with municipal ash to create a grout like substance used in the reclamation of
strip mines. CTI will enable the Company to bid on dredge projects within
reasonable transportation distance from the strip mine locations in
Pennsylvania. See "Certain Transactions."
In March 1998, the Company acquired substantially all of the assets of
Chesapeake Recycled Lumber, Inc. The Company formed Chesapeake Plastic Lumber,
Inc. ("CPL") as a wholly-owned subsidiary of U.S. Plastic Lumber, Ltd. to own
and operate these assets. The assets primarily consist of plastic lumber
manufacturing equipment and an existing customer base. CPL provides the Company
with additional plant capacity and a regional manufacturing plant located in the
Mid-Atlantic market.
RECENT DEVELOPMENTS
In May 1998, the Company completed a plan of merger with Cycle Masters,
Inc.("CMI") as a wholly owned subsidiary of U. S. Plastic Lumber Ltd.. CMI is a
manufacturer of plastic lumber primarily serving the commercial and industrial
market. CMI is one of the primary competitors of the Company.
In June 1998, the Company completed a Plan of Merger with GeoCore,
Inc., an environmental recycling services company located in New Jersey. The
Company will merge
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GeoCore into one of its other environmental operations and does not plan to
maintain this as a separate operating entity.
In June of 1998, the Company acquired the remaining interests in
Consolidated Technologies, Inc. ("CTI") so that the Company now owns 100% of CTI
as a wholly-owned subsidiary of Clean Earth, Inc.
In June 1998, the Company acquired the assets of Trimax of Long Island,
Inc. and Polymerix, Inc. Trimax operated a structural lumber manufacturing plant
in Ronkakoma, Long Island. Polymerix owned two patents relative to the
manufacture of structural lumber made from recycled plastic.
In June of 1998, the Company became listed on NASDAQ Small Cap Market
and is traded under the symbol, "USPL".
CORPORATE STRUCTURE
The Company is a holding company for the Company's wholly owned
subsidiaries: (i) U.S. Plastic Lumber Ltd., a Delaware corporation, which has
been formed to act as a holding company for all operating recycled plastic
lumber subsidiaries, and (ii) Clean Earth, Inc., a Delaware corporation, is the
holding company which owns all operating environmental recycling subsidiaries.
The following is a list of the Company's indirect subsidiaries:
U.S. Plastic Lumber Ltd. Subsidiaries:
- --------------------------------------
Earth Care Products of the Midwest, Inc., a Florida corporation
Earth Care Products of Tennessee, Inc., a Florida corporation
RPI Acquisition Corp., a Wisconsin corporation (d/b/a Recycled Plastics
Industries)
Environmental Specialty Products, Inc., a California corporation
EnviroPlastics Corp., a Massachusetts corporation
Chesapeake Plastic Lumber, Inc., a Delaware corporation
Cycle-Masters Corporation, an Indiana corporation
Clean Earth Inc. Subsidiaries:
- ------------------------------
Clean Earth of New Castle, Inc., a Delaware corporation
Integrated Technical Services, Inc. a Delaware corporation
Carteret Biocycle Corp., a Delaware corporation
Waste Concepts, Inc., a Pennsylvania corporation
Green Horizon Environmental, Inc., a Pennsylvania corporation, (wholly-owned
subsidiary of Waste Concepts, Inc.)
Consolidated Technologies, Inc., a Pennsylvania corporation
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PROPERTIES
The properties of the Company consist of administrative offices,
manufacturing plants, fabrication and assembly facilities and sales offices. All
of the properties of the Company are leased, as the Company does not own any of
its properties.
The primary properties of the Company are as follows:
Corporate:
Boca Raton, Florida: This location consists of approximately 4,500 sq.
ft. and serves as the Corporate Offices of the Company. It also serves as the
Corporate office of U.S. Plastic Lumber, LTD, the plastic lumber holding company
for all the plastic lumber subsidiaries of the Company. There are present
approximately 12 people employed in this location. The property is in good
condition and is leased. The lease expires in November 2000 and the monthly
rental is $9,000.
Plastic Lumber Operating Facilities:
Auburn, Massachusetts: This location consists of approximately 34,000
sq. ft. and its function consists of receiving and processing HDPE plastic for
use as raw material for the Company's manufacturing plants and for re-sale to
the marketplace. The process includes sorting, regrinding, washing, and
pelletizing HDPE. The property is in good condition and is leased. The lease
expired in June 1998, and the monthly rental is $18,142.
Green Bay, Wisconsin: This location consists of approximately 38,000
sq. ft.. This plant is one of the primary manufacturing plants of the Company.
It produces plastic lumber through a continuous extrusion process. The plant has
recently been expanded to accommodate a fourfold increase in its production
capability. The plant expansion is expected to be complete by the end of March
1998 and which time it will have eight extrusion lines. The property is in good
condition and is leased. The lease expires in January 2008, and the monthly
rental is $11,875.
Sweetser, Indiana: This location consists of approximately 15,600
sq.ft. The plant manufactures plastic lumber for primarily commercial and
industrial applications through a continuous extrusion process. The lease is for
a five year term and expires in May, 2003. The property is in good condition.
The current monthly rental rate is $2,100.
Trenton, Tennessee: This location consists of approximately 50,500 sq.
ft.. The plant is also a manufacturer of plastic lumber. It utilizes Flow Mold
extrusion manufacture plastic lumber and a variety of custom profiles. One line
of this plant is also dedicated to the manufacture of structural lumber, and one
line is dedicated to the manufacture of railroad ties. The property is in good
condition and is leased. The lease expires in September 2002 and the monthly
rental is $6,846.
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Mulliken, Michigan: This location consists of approximately 25,000 sq.
ft. and is the principal location for fabricating and assembling value added
products, such as but not limited to, park benches, trash receptacles, picnic
tables, and many other items. The property is in good condition and is leased.
The lease expires in May 1999, and the monthly rental is $3,333.
Denton, Maryland: This location consists of approximately 80,000 sq. ft
and is the most recently acquired manufacturing plant of the Company. It
currently has two continuous extrusion lines manufacturing a wide variety of
plastic lumber profiles. The property is in good condition and is leased. The
lease expires in February 2003, and the monthly rental is $6,000.
Guasti, California: This location consists of approximately 6,000 sq.
ft.. This facility houses the western Regional Sales office of the Company as
well as consisting of a Distribution warehouse, a fabrication facility for some
specialty benches and trash receptacles made by the Company and the Company's
plastic sign manufacturing facility. The property is in good condition and is
leased. The lease expires in January 1999 and the monthly rental is $1,500.
ENVIRONMENTAL RECYCLING OPERATING FACILITIES:
Norristown, Pennsylvania: This facility is the corporate and
administrative offices for the environmental recycling services operations of
the Company. The property is in good condition and is leased. The lease expires
in December 1999, and the monthly rental is $4,000.
New Castle, Delaware: This property consists of 7.5 acres of buildings
and property consisting of the Thermal Desorption soil recycling operation. The
property is in good condition and is leased. The lease expires in August 2003,
and the monthly rental is based upon the volume of tonnage received at the
facility. The rental for this property has ranged from a low of $9,800 to a high
of $21,600 during 1997.
Carteret, New Jersey: This facility is still under construction, but
the Company anticipates it has become operational in June of 1998. This facility
consists of approximately 80,000 sq. ft. and five acres of property. This
facility will serve two functions. It will recycle soil through a bio-organic
process and it will receive barges with dredge material which the Company will
process for shipment to upland disposal facilities and strip mines for
beneficial re-use reclamation. The property is in good condition and is leased.
The lease expires in December 2027, and the monthly rental is $17,500.
Winslow, New Jersey: This facility is the administrative offices for
the Company's environmental construction services company. The property is in
good condition and is leased. This is a month-to-month lease with rental of
$2,000 per month.
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RECYCLED PLASTIC LUMBER OPERATION
- ---------------------------------
Products
During the past several years, the Company's recycled plastic lumber
division has positioned itself to be one of the largest manufacturers of
recycled plastic lumber, a newly emerging industry. Recycled plastic lumber is
manufactured in a variety of colors, profiles and shapes including standard
lumber dimensions and a variety of custom engineered profiles and shapes.
The Company's recycled plastic lumber products are made from 100%
recycled, post-consumer and post-industrial plastics and are used for numerous
municipal, commercial and residential applications. This non-toxic material is
an environmentally friendly alternative to pressure treated lumber and rare
woods and provides superior performance for most nonstructural, outdoor
applications where traditional wood is subject to moisture damage and rotting.
The Company also produces structural lumber. The Company believes Recycled
plastic lumber products offer these advantages:
* 50 year limited warranty
* Environmentally friendly and non-toxic
* Virtually maintenance free
* Saves trees and reduces use of exotic rain forest hardwoods
* Can be worked with conventional tools
* Aesthetically pleasing wood-like textured surface
* Splinter proof - never rots
* Not affected by termites, ants or other wood borers
* No splitting, cracking or chipping
* Holds nails and screws 40% better than wood
* Non absorbent and waterproof
* No leaching into soil or groundwater
* Most graffiti easily washes off
* Does not promote organic growth when wet
Products built with the Company's recycled plastic lumber have the
appearance of freshly stained or painted wood but the longevity and
maintenance-free qualities of plastic. Recycled plastic products are an ideal
replacement for wood, metal and concrete in numerous applications, including
most non-structural exterior functions. Some of the potential applications are:
* Decking, including supporting structures, for residential and commercial
projects
* Commercial, municipal and residential applications such as park benches,
picnic tables, trash receptacles, car stops, planters and ash urns
* Fencing
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* Highway spacer blocks, guardrail posts, sound attenuation barriers and
speed bumps
* Trailer, farm equipment and railroad box car flooring
* Industrial applications such as pallets, walkways in chemical plants, catwalks
on factory roofs
* Sanitary animal pen flooring
* Railroad ties
* Engineered products such as pier piling cores
* Sea pilings and marine bulkheads
MANUFACTURING
The Trenton, Tennessee manufacturing facility currently has three
closed mold forming extruders, one continuous flow extruder, and one extruder to
manufacture custom product such as barrel rings and guardrail barrier profiles.
Most of the Company's large profiles are manufactured at this facility,
including engineered products such as marine piling cores, retaining wall
timbers and prototype products including the railroad crosstie, highway
guardrail posts, and highway spacer blocks. This facility also produces lumber
in assorted specialty shapes such as bench ends and table legs.
The Green Bay, Wisconsin sales and manufacturing facility operates six
extruders that utilize a vacuum calibration continuous flow forming line. This
process allows for the manufacture of many special profiles, in any length, that
are not able to be produced with conventional roll forming or closed mold
systems. A regional sales office is also maintained in this location. The
facility will also manufacture the Company's "Carefree Decking Systems(TM)," a
specialty product used for decks and rail systems in commercial and residential
applications.
The Denton, Maryland manufacturing facility currently has two extruders
utilizing continuous flow production. The plant contains 80,000 square feet
providing the Company with critical space suitable for production capacity
expansion in the event such is needed.
The Sweetser, Indiana manufacturing facility currently has three
extrusion lines using continuous flow production. The plant consists of 15,600
sq. ft. on 7.5 acres. The facility will focus on manufacturing products for
commercial and industrial applications.
The fabrication facilities in Mulliken, Michigan and Guasti, California
house the assembly line that fabricates most of the value added products sold by
the Company such as picnic tables, park benches and trash receptacles. A
regional sales office is also maintained at these locations.
The Company's manufacturing process involves proprietary technologies
and specialized manufacturing equipment custom built or modified to the
Company's specifications. The manufacturing process utilizes granulated and/or
densified recycled plastic, which in certain cases, contains additives
formulated for desired end use characteristics of the product. A key advantage
of the process is the ability to utilize plentiful, recycled plastic waste to
create a consistent material which can be extruded into a desired shape. While
the end product maintains many of the desirable properties of traditional wood
materials, it also has certain
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characteristics such as moisture resistance which give it an advantage over wood
for many applications.
The primary product of the Company's manufacturing process is molded
plastic lumber in various sizes ranging from 3/8" x 1", to 10" diameter profiles
in various lengths. The Company also markets and sells various engineered or
value added products for specific applications, in which the plastic lumber is
used to make the finished product.
The manufacturing process uses 100% recycled plastic raw material and
consists of three stages. First, the recycled plastic materials received at the
plant are identified and categorized by resin type. These materials are
processed through a series of grinding, densifying and other operations to a
consistent particle size. The ground plastic resins are then blended with other
ingredients such as colorant and UV stabilizers to prepare specific mixes for
the products being produced by the plant. Second, the plastics are heated, mixed
and compounded into a thick molten composite which is extruded through either
closed mold, roll forming or vacuum calibration finishing lines into specified
shapes or profiles using equipment specifically designed for processing recycled
materials. Finally, the extruded products are cooled in a downstream process,
and the resulting profiles are inspected and cut to specific lengths. The
product is then ready to be shipped as plastic lumber in sizes and shapes
corresponding to standard lumber dimensions. The Company utilizes only recycled
polyethylenes and does not use plastics with PVC, toxic chemicals, insecticide
or paint residues. The Company does use other composite material for
manufacturing its structural lumber product line. The Company believes its
manufacturing process produces no harmful environmental by-products or hazardous
waste.
RAW MATERIALS SUPPLY
The Company obtains most of its mixed plastics feedstock through firms
that obtain such materials from a large variety of recycling facilities,
including municipal recycling programs as well as plastics discarded in various
industrial and manufacturing processes. The Company believes the raw material
feedstock is currently purchased from sources which are dependable and adequate
for at least short term and medium term manufacturing requirements. Generally,
the Company attempts to maintain raw materials inventory sufficient to supply
its manufacturing requirements for approximately two months, and management
believes that suitable alternative sources are available in the event of
disruption. In the past, the Company has not experienced any significant
disruptions from a lack of raw material availability or other supply problems.
However, the cost of recycled plastics has been subject to cyclical market
fluctuations over the past several years based on supply and demand. The
Company's long term strategy is to contract directly with Municipal Recycling
Facilities and industrial plastic manufacturers for long term supply to mitigate
the exaggerated fluctuation in pricing and supply. However, no assurances can be
given that raw materials will always be available at commercially reasonable
prices. The Company is generally of the belief that if significant increases in
demand for recycled plastics of a lasting nature were to occur, the potential
supply of recycled plastics could easily be expanded to meet any lasting
increase in demand. The Company believes that both supply and demand will
continue to increase as public awareness
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of the need to recycle plastic waste increases. However, any disruption of
supply arrangements or significant lasting increases in raw materials prices
could have a material adverse effect on the Company's operations. See "Risk
Factors - Availability of Raw Materials."
RESEARCH AND DEVELOPMENT
Extensive testing of recycled plastic lumber has been performed for the
past several years at Rutgers University's Center for Plastics Recycling
Research. The Company has been an active participant along with others in the
research and development process. Since its formation, the Company has also
devoted significant efforts on its own, testing and refining its manufacturing
processes, molds and recipes to improve its finished products.
In May, 1996, after a long period of research and development with the
Company, Rutgers University applied for U.S. Patent Protection for its recycled
plastic composite railroad cross tie and its related manufacturing technology.
These patents, if granted, would be held by Rutgers University, with the Company
being the exclusive worldwide licensee for the sale of this and related products
pursuant to an agreement the Company has with Rutgers University. Rutgers
University has received a Notice of Allowance from the U.S. Patent Office with
respect to its patent application and has paid the issue fees. Rutgers
anticipates the patent will be issued within the next few months barring any
unforeseen circumstances.
A group of plastic lumber manufacturers founded the Plastic Lumber
Trade Association (PLTA) to promote the benefits of plastic lumber and create
proper testing standards. PLTA holds committee meetings three time a year in
conjunction with the American Society of Testing & Materials (ASTM). Complete
ASTM standards are being established for plastic lumber and preliminary test
results are now available from the following institutions:
* Rutgers University's Center for Plastics Recycling Research
* University of Massachusetts at Lowell, Dept. of Engineering
* Batelle, Engineering Mechanics Dept.
* US Army Corps of Engineers Research Laboratories
Several ASTM standards have been developed and approved for plastic
lumber as of July of 1997. This will greatly expand the potential users who are
required to meet specifications and standards known to the wood industry. A
manual for use of residential decking material is anticipated to be approved as
early as mid-1998.
PROPRIETARY TECHNOLOGY
The Company is generally of the belief that maintaining state of the
art technology in its recipes, molds and manufacturing processes and maintaining
the proprietary nature of that technology through trade secrecy is more
important to maintaining a competitive position in the industry than seeking any
legal protections that patents may provide. However, patent protection for
technology related to railroad crossties and the process to manufacture them, is
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currently being sought by Rutgers University, but there is no assurance it will
obtain any such protection. The Company has entered into an agreement with
Rutgers pursuant to which it has exclusively licensed such technology. The
Company has two registered trademarks, "Clean Earth" and "Recyclemaid" and has
made application to the U.S. Patent Office to register trademarks for "Carefree
Deck System," "Duratie" and "Earth Care."
COMPETITION
The recycled plastic lumber industry is a young, highly fragmented
industry with numerous manufacturers and marketers of recycled plastic lumber.
Including the Company, there are approximately 22 members of the Plastic Lumber
Trade Association ("PLTA"). The competition is broken down into two separate
categories: plastic lumber manufacturers using strictly high density
polyethylene and manufacturers that use a mixture of high density and other
polymers to produce a product that is less expensive.
The Company primarily uses only high density polyethylene and additives
at all of its plants. The major competitors in this segment of the market
include Eaglebrook Products, Inc., Chicago, Illinois, Bedford Industries,
Worthington, Minnesota; and NEW Plastics Corp., Luxemburg, Wisconsin. The
Company attempts to compete with these competitors on the basis of price,
quality and service. The two major commingled manufacturers are The Plastic
Lumber Company, Inc., Akron, Ohio and Hammer's Plastics Recycling, Iowa Falls,
Iowa.
There are several competitors which manufacture a composite product
which consists of a mixture of wood and plastic. Trex and AERT are competitors
of the Company using a plastic composite material made with sawdust used to
manufacture primarily deckboard.
In most of its applications, the recycled plastic lumber manufactured
by the Company will also be in direct competition with conventional wood. At
present, the principal competitive disadvantage of recycled plastic lumber
compared to wood is that it is generally more expensive to purchase. Recycled
plastic lumber is comparable in price to high grade cedar and redwood. Although
recycled plastic lumber can be more expensive to initially purchase than
comparable wood, plastic lumber can substantially outlast wood, particularly in
applications where the lumber is exposed to the elements, and can therefore be
more cost effective in the long run.
POTENTIAL MARKETS
By producing a suitable recycled plastic lumber product, the Company
conserves natural resources, reduces the plastic waste into landfills and
provides a useful, maintenance-free product that satisfies this growing market.
One of the major markets for recycled plastic lumber is as a substitute for
pressure treated lumber. There are currently a number of states that have either
passed laws or have on their legislative agenda, restrictions on the use and
disposal of pressure treated lumber. The pressure treating process injects
copper, chromium and arsenic (all carcinogens) into the wood. Pressure treated
wood has legislative restrictions in some states on its disposal methods which
require disposal in toxic waste landfills. Plastic
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lumber is a safe alternative which is fully recyclable and maintenance-free, and
the Company's product consists of both structural and non-structural uses.
In July 1994 the Company was selected to participate in a cooperative
venture with Rutgers University, Norfolk & Southern Railroad, Conrail and the US
Army Corps of Engineers Research Laboratories to develop a prototype railroad
crosstie made from recycled commingled plastic. Rutgers University has performed
extensive tests on many formulas and the Company has developed a prototype that
may have advantages over the creosote wood crosstie. Norfolk & Southern and
Conrail are currently track testing the new prototype. The Company believes it
is the only plastic lumber manufacturer participating in this project. As of
February 1998, the Company's cross ties have approximately 60 MGT (million gross
tons) of service and are performing without any measured defects. In contrast,
creosote wood ties installed at the same time have experienced noticeable wear.
Presently there are approximately 180,000 miles of railroad track in
the United States, with approximately 3,334 crossties per mile or a total of
over 600,000,000 ties in place. In 1995, 18,000,000 crossties were replaced. In
certain applications, the creosote wood crosstie may have an expected useful
life of less than 5 years, creating a tremendous demand for the more durable
recycled plastic crossties that have an estimated useful life in excess of 50
years. Conditions which shorten tie life are moisture, extreme temperature
fluctuations and location relative to curves and switches. Railroads know from
extensive experience which locations require highest maintenance and these will
be the initial target areas for the Company's longer lasting polymer crossties.
Based on the replacement rate of 18 million crossties per year, the total
potential market for this segment of the business is approximately $1.5 billion
annually. The foreign market is estimated at 5 to 10 times as large and the
Company believes wood is less available in that it is a dwindling natural
resource in many of these countries.
The Company is currently in the process of developing new products for
a variety of uses. These new products include component center cores for a
manufacturer of reinforced marine pilings and timbers, structural lumber,
flooring for farm equipment and railroad ties. The Company has been assigned
national stock numbers from the U.S. Defense Construction Supply Center which
controls purchasing for all of the U.S. armed forces.
MARKETING STRATEGIES
The recycled plastic lumber operations of the Company is itself divided
into four distinct classifications. These divisions are (i) fabricated products,
including park and site amenities such as picnic tables, park benches, and trash
receptacles; (ii) building products, including decking systems, golf course
related products, and standard plastic lumber; (iii) engineered products,
including marine piling center cores, highway guardrail spacer blocks, and other
engineered products; and (iv) structural products including railroad ties,
boardwalks and support structures.
The Company employs Regional Sales Managers to market and sell its
products utilizing traditional sources of sales including but not limited to
attending trade shows, select advertising, cold calling, customer referrals, and
the like. The Company also markets and
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sells through distributor relationships; however, it is the Company's policy not
to grant any exclusive territory arrangements. The Company is seeking to expand
its distribution network nationwide.
The focus of the Company's selling strategy is the high quality,
maintenance-free aspect of its product along with high quality customer service.
The Company also focuses on the benefits of its products including such items as
being essentially maintenance-free, 100% recycled, environmentally sensitive,
aesthetically pleasing in appearance, free from rot and insect infestation, and
durable.
The Company has experienced a seasonal slow-down in the winter months
during the past three years but the Company is attempting to reduce the
seasonality of its sales by increasing its marketing efforts in warmer climates
of the U.S. during winter months and by supplying product for custom items which
are not as seasonal.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Although the recycled plastic lumber operations do not generate
significant quantities of waste materials nor any hazardous substances resulting
in hazardous emissions, the Company's operations are, and will in the future be,
subject to numerous existing and proposed laws and regulations designed to
protect the environment from waste materials and particularly hazardous wastes
emissions. The Company does not believe that its waste disposal practices and
manufacturing processes are in violation of any existing or presently proposed
law or regulation or require special handling permits or procedures or otherwise
result in significant capital expenditures that would have a material adverse
effect on operations. Currently, costs of compliance with regulatory
requirements do not materially impact the financial condition of the Company.
However, there can be no assurance that regulatory requirements will not in the
future adversely affect operations or require the introduction of costly
additional manufacturing or waste disposal practices, which could adversely
affect the Company's financial condition.
ENVIRONMENTAL RECYCLING OPERATION
SERVICES
The Company offers a wide array of services in this operation including
soil treatment through either thermal desorption or bioremediation,
environmental construction services, upland disposal of dredge materials,
beneficial re-use of industrial wastes, and on-site recycling services.
Clean Earth of New Castle, Inc. was founded in 1991 to provide a safe,
cost effective and final solution to the environmental problem of dealing with
soils and construction debris contaminated with petroleum hydrocarbons such as
diesel fuel, heating fuel, kerosene, jet fuel and gasoline, by treating such
soils so they can be recycled as clean fill. The treatment process heats the
contaminated soils in a controlled environment to a point that the contaminants
are volatized into a gas phase and then incinerated in an afterburner. In 1995,
Clean Earth
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modified its plant to recycle products at higher temperatures (up to 1,100
degrees Fahrenheit), and is now capable of treating soils contaminated with
heavier products such as number 6 oil, refinery wastes, waste oils and coal
distillates such as coal tar. The facility is currently seeking two permit
modifications to help reduce costs. One permit modification is to allow the
facility to burn waste oil rather than natural gas in winter months. Natural gas
is at its highest cost in winter months and waste oil is at its lowest. The
second permit modification has already been approved by the State of Delaware
for accepting sewer sludge into the process. The addition of sewer sludge will
significantly reduce the volume of water consumed by the plant, increase the
volume of clean soil, and generate revenue for the Company.
Carteret Biocycle Corp. was founded in 1997 and opened its facility for
business in late June of 1998. This facility serves a similar function as Clean
Earth of New Castle, Inc., except that its remediates soil contaminated with
petroleum hydrocarbons through a bio-organic process. The operational costs for
this facility are substantially less than thermal desorption, yet the Company
anticipates the tipping fee (the fee charged its customers to treat wastes at
the facility) for this facility will be similar to its tip fee at the Clean
Earth of New Castle facility. In addition, Carteret Biocycle is strategically
located to receive materials by truck, rail or barge. This location is also well
suited to receive dredge materials from the New York/New Jersey harbor,
transferring the dredge materials to rail and shipping the material for
disposition in Pennsylvania strip mines. The Company believes it has positioned
itself to be one of very few companies able to take advantage of this new
market.
The Company's beneficial re-use operation, known as Waste Concepts,
Inc. ("WCI"), was acquired in November 1997. WCI oversees the business of
beneficial re-use of industrial wastes and manages the Company's wholly-owned
subsidiary Consolidated Technologies, Inc. ("CTI"), an operation focused
exclusively on the beneficial upland re-use of dredge materials. The Company
believes that this area will provide one of the most important strategic growth
opportunities available to the Company, and in the environmental industry in
general. CTI is an environmental industry group which was formed with a mission
to provide research and operations for the beneficial re-use of dredged
materials from the Raritan Estuary (New York/New Jersey Harbor) as recyclable
fill for the remediation and reclamation of Pennsylvania strip mines. CTI has
experimented with numerous samples of dredge sediments and has identified
proprietary recipes for the creation of engineered fill materials through
solidification and stabilization of the dredged sediments. These mix designs are
formulated from 100 percent waste materials and industry by-products.
One of the more exciting opportunities for the Company is the
beneficial re-use of dredge materials. As of September 1997, the federal
government has prohibited off-shore dumping of dredge material. The Company has
positioned itself to take advantage of this new market opportunity by finding
ways to re-use dredge material mixed with other products to create a pozzolonic
fill which can be used for cover material and clean fill. One example of this is
the Company has disposal rights granted by the Pennsylvania DEP to utilize
dredge material mixed with coal ash or incinerator ash to produce a grout like
substance suitable to reclaim strip mines. Strip mines represent a very
significant environmental issue for Pennsylvania.
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CTI has been successful in the permitting of a 550,000 cubic yard
demonstration project involving the beneficial re-use of treated dredge
materials for the reclamation of an abandoned strip mine known as the Bark Camp
Mine Complex. The Company has entered into a No-Cost Contract with the
Commonwealth of Pennsylvania Department of Environmental Protection (PADEP) to
reclaim a portion of the Bark Camp site with dredge materials and other
industrial by-products. The Company has marketed a turnkey concept for this
demonstration which incorporates everything from the physical dredging
activities in the New York Harbor to the final placement of the engineered fill
product at the Bark Camp Strip Mine site.
The CTI business consists of the dredging, processing and beneficial
re-use of dredge material removed from harbors as engineered structural fill
material capable of being utilized for development of commercial or industrial
sites, or as fill for reclamation of abandoned strip mines.
The Company believes CTI is strategically positioned to capture a major
share of the New York/New Jersey Harbor dredge disposal market. CTI has obtained
the first and, to the Company's knowledge, only beneficial re-use permit for
utilizing manufactured fill created from dredge material for abandoned strip
mine reclamation in Pennsylvania. In addition, the Company has been successful
in permitting the first fixed-base commercial off-loading, processing and
transfer facility at a waterfront property in New Jersey. CTI filed a similar
permit application for a second fixed-base commercial treatment and transfer
facility in New York State in January 1998 and expects it to be issued in the
Summer of 1998.
In addition to its plants, the Company has subsidiaries which perform
services in environmental construction, on site remediation, beneficial re-use
of industrial wastes, UST (underground storage tanks) removals, landfill
capping, on-site stabilization and treatment of hazardous waste to non-hazardous
waste materials, consulting services and other ancillary environmental services.
REGULATION
The business of treating or otherwise handling waste materials is
highly regulated under the Resource Conservation and Recovery-Act ("RCRA") and
Comprehensive Environmental Responsibility, Compensation and Liability-Act
("CERCLA"). The generator of the waste is financially and legally responsible
for that waste forever, and is strictly liable for the costs of clean up and
disposal of such wastes. Disposing of the waste in a landfill or mixing it with
other materials does not eliminate that liability. Therefore, proper control and
tracking of all wastes materials handled by the Company is essential for the
Company to avoid any liabilities with respect to such wastes. The Company takes
precaution not only to eliminate, if possible, the liability of its customers,
who are the generators of the contaminated soil and debris, but also to maintain
proper control and tracking of each waste stream brought which it handles. Once
the waste has successfully been treated, the liability is significantly reduced.
The product, once treated, is no longer classified as waste, but is a reusable
material.
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Although the Company strives to conduct its operations in compliance
with all applicable laws and regulations, the environmental industry is heavily
regulated at different government levels and the Company believes that in the
existing climate of heightened legal and political concerns, in the normal
course of its operations, the Company could receive fines or penalties or need
to expend funds for remedial work and related activities. Historically, the
Company has not been the recipient of fines or penalties, but there can be no
assurances that this will continue.
It may be necessary to expend considerable time, effort and money to
keep the Company in compliance with applicable environmental, zoning, health and
safety regulations. In addition, due to the possibility of unanticipated factual
or regulatory developments, the amounts and timing future environmental
expenditures and compliance could vary substantially from those currently
anticipated.
SALES AND MARKETING
As indicated, the environmental recycling operation is involved in a
number of markets, including but not limited to remediation of contaminated
soil, coal tar, upland disposal of dredge materials and the recycling of sewer
sludge and municipal incinerator ash to productive use. Each of these markets is
substantial and the markets are tied together via the contracting services arm
of Clean Earth. These service companies can remove, provide on site clean-up,
and transport these materials to other divisions of the Company for recycling
and re-use of the products in an environmentally safe manner.
The Company has recently begun bidding on large contracts to receive
dredge material. Prior to September 1997, dredge material from harbors was
dumped in the oceans. New federal regulations require upland disposal of this
material. Every harbor throughout the country will be faced with how to deal
with this issue and abide by these new federal regulations. This market is new,
and the Company has the permits in place to provide for using the dredge
materials to reclaim abandoned strip mines as opposed to disposing of the
material in landfills.
The Company is also expanding the capabilities of its facility in
Delaware to process material such as sewer sludge, for which permitting has
already been obtained, and municipal incinerator ash. These products are
currently landfilled. The Company will process the sewer sludge and recover the
nutrients which will be mixed with the clean soil to provide an improved product
for resale.
The principal sales and marketing advantage that Clean Earth has over
its competitors is a broad range of services allowing customers a one stop
shopping concept - not only contracting services but also the facilities to
process material. In addition, the Company has a distinct advantage built into
its quality control system. Comprehensive disclosure and testing systems ensures
proper tracking of material as well as on site testing confirming that only
acceptable material is permitted onto its site. Rigorous quality control
procedures are essential as they relate to the responsibility and liability in
handling of material not only to the Company but also to its customers.
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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 impact the Company's
performance.
COMPETITION AND BARRIERS TO ENTRY
Clean Earth has several large competitors which provide similar
services within the northeast and mid-Atlantic states. These competitors include
R-3 Technologies in Bristol, Pennsylvania, TPST in Baltimore, Maryland, MART in
Vineland, New Jersey and SRP in Philadelphia, Pennsylvania. Clean Earth has
obtained a permit to process coal tar materials from Delaware Natural Resources
and Environmental Commission ("DNREC") and believes that this provides a niche
market. The nearest competitor with similar capabilities is R-3 Technologies
which is approximately 50 miles from the facility.
There are significant barriers to entry for this line of business.
First and foremost, the siting, permitting and licensing process is time
consuming and costly. Second, there is a large capital investment required to
build the plants and purchase the equipment necessary to operate the facility.
Additionally, contracts must be awarded to obtain the incoming product as well
as contracts to dispose of the material after it has been treated in order to
operate an economically feasible facility. Finally, this type of operation
requires technically trained individuals to operate and ensure that the facility
remains in strict compliance with environmental laws. Some of our competitors
are national companies with greater name recognition, greater economic resources
and significantly larger business size.
PLANT OPERATIONS
The treatment plant is operated with a strict commitment to safety,
health and environmental issues coupled with a rigorous system of controls,
which lends credence to the "Certificate of Destruction and Recycling" issued to
each generator.
The Waste Tracking System starts before the contaminated soil is
accepted at the plant gate. A comprehensive disclosure testing and manifesting
system ensures that the solids brought to the facility fall well within the
limits of Clean Earth's permits and treatment capacities. This system mirrors
the procedures of hazardous waste facilities. Furthermore, Clean Earth runs an
EOX test (Extractable Organic Halogens) on every load of material before it is
authorized for unloading in the storage buildings. In addition, management runs
several spot checks with the comprehensive on-site laboratory with respect to:
GC (Gas Chromatographer) for PCB's (Poly Chlorinated Biphenyls)
GC for VOC identification (Volatile Organic Compounds)
GC with high temperature desorber for THC (Total Hydrocarbons) & Desorption
Temperature
EOX analyzer and the screening equipment for fines content
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These tests enable Clean Earth to determine quickly and efficiently
that the materials that are received are in accordance with their
characterization by the generator. This sizable investment in equipment and
personnel protects both the facility and the customers against the possibility
of receiving undesirable wastes.
The storage buildings are large, fully enclosed structures and are
built on continuous concrete slabs. Runoffs from the buildings are collected and
checked regularly. The buildings are divided into small compartments to maintain
a rigorous separation and tracking of each waste stream that minimizes
commingling. This mitigates the potential liability to a small quantity in the
case an undesirable waste is detected after it has been accepted. This also ties
into the sophisticated waste tracking system that mobilizes a network of eight
micro-computers so as to monitor each load of material from the time of
reception to the treatment test results. These computers function on-line and
enables operators to view and analyze, at any time, all the information relative
to a given shipment.
In addition to this set of comprehensive control and recording devices
that insure compliance with the various permit requirements, Clean Earth further
guarantees the facility's performance by testing the production daily. As
recommended in EPA publication #SW846, Clean Earth composites a sample for every
300 tons of production and tests it for BTEX with a GC and for TPH by the EPA
418 method, using an independent State certified laboratory. For coal tars, the
treated materials are also tested for PAH's (Polynuclear Aromatic Hydrocarbons)
by the EPA 8270 method. It is the Company's belief that this treatment plant is
the first in the industry to control its emissions with a C.E.M. (Continuous
Emissions Monitoring) system. Information is collected minute by minute and
stored on computers for control purposes; this information is available to both
customers and regulators. The property itself is monitored through several
monitoring wells, that are tested quarterly. The test results are reported to
DNREC.
LIABILITY INSURANCE
Clean Earth has fully bonded the costs of a closure plan approved by
DNREC. In addition, Clean Earth has secured a total of $7 million of General
Liability and of Environmental Impairment Liability insurance coverages. The
waste generating companies recycled product is also protected with $1 million
single/$2 million aggregate Products and Completed Operations coverage that
includes a five year tail coverage.
EMPLOYEES
The Company and its subsidiaries employ a total of approximately 297
persons through the United States. Of this number, approximately 7 persons are
employed at the corporate office, approximately 193 persons are employed in the
plastic lumber operations and approximately 97 persons are employed in the
environmental recycling operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the directors and executive officers of
the Company, their ages, terms of office and all positions. Directors are
divided into classes which are elected for staggered terms of four years, and
serve until the annual meeting of the year in which the terms expire, or until
their successors are duly elected by the stockholders and qualify. Officers and
other employees serve at the will of the Board of Directors.
<TABLE>
<CAPTION>
Name of Director/Officer Age Term Served(expires) Positions with the Company
- ------------------------ --- -------------------- --------------------------
<S> <C> <C>
Mark S. Alsentzer 42 May 1994 (2000) Chairman, President & Chief
Executive Officer/Director
Lester Moody 68 May 1996 (2002) Director
James Blosser 58 Aug 1996 (1999) Director
Roger Zitrin 49 Nov 1996 (2002) Director
August C. Schultes III 50 Feb 1997 (2000) Director
Gary J. Ziegler 49 Feb 1997 (2000) Director
Bruce C. Rosetto 40 Secretary/General Counsel
Michael D. Schmidt 49 Treasurer/Chief Financial Officer
</TABLE>
The following is a description of the biographical information of each of the
Company's directors:
MARK S. ALSENTZER, CHAIRMAN, DIRECTOR, PRESIDENT & CEO; Mr. Alsentzer
has served as a director since May 1994. As former President of Stout
Environmental, Inc., Mr. Alsentzer developed that company from $2 million to $90
million in revenues and 46 to 700 employees. In 1992, Stout Environmental merged
with Republic Industries, where Mr. Alsentzer remained as Vice President of
Republic Environmental Systems, Inc. In addition, Mr. Alsentzer was Director of
Cemtech, a company which grew from $3 to $21 million and was sold to Waste
Management in 1991. Mr. Alsentzer founded Clean Earth, which is currently a
wholly owned subsidiary of the Company and a leading recycler of contaminated
soil and debris located in the northeast. Mr. Alsentzer has a B.S. in Chemical
Engineering from Lehigh University and an MBA from Farleigh Dickenson
University.
LESTER E. MOODY, DIRECTOR; Mr. Moody has served as a director since May
1996. He is presently a partner in George B. Jones & Co. Dealership Sales LLC.,
representing automobile dealers, in sales and purchases of dealerships. He was a
member of General Motors Automobile and Dealer Advisory Council, and is on the
Board of Directors of Miami Heart Institute, the Board of Directors of C&S Bank,
and the Board of Directors of 100 Club of Fort Lauderdale. Mr. Moody was an
automobile dealer for approximately forty years, owning nine different
dealerships, including Pontiac, Toyota, Cadillac, Buick, Honda and Acura. Mr.
Moody attended Christian Brothers College.
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JAMES J. BLOSSER, DIRECTOR; Mr. Blosser has served as a director since
August 1996. He was the former Executive Vice President and General Counsel of
Huizenga Holdings, Inc. In addition, Mr. Blosser served as special counsel to
the Miami Dolphins, Florida Panthers and the Florida Marlins. He was formerly a
partner in Ruden, McClosky, Smith, Schuster & Russell, P.A., is currently a
member of the Florida Bar, New York Bar and the American Bar Association, and is
extremely active in community affairs. Mr. Blosser received his J.D. from the
University of Miami.
ROGER N. ZITRIN, DIRECTOR; Dr. Zitrin has served as a director since
November 1996. Dr. Zitrin was the founder and President of the Heart Association
of Palm Beach County where he was a practicing physician specializing in
cardiology until he retired in 1992. He is presently acting as an independent
investor and investment advisor. Dr. Zitrin is the founder of Florida Medical
Laser Corp. and Gold Coast Specialty Lab and co-founder of Physicians Cardiac
Imaging. He is presently acting as financial advisor to Gold Coast Ventures,
Inc. and serving as a Board member of Associated Home Health. Dr. Zitrin is a
graduate of Rutgers College of Medicine and Dentistry.
AUGUST C. SCHULTES III, DIRECTOR; Mr. Schultes has served as a director
since February 1997. Mr. Schultes is Chairman of the Board and CEO of A.C.
Schultes, Inc., a contracting and service organization specializing in water
well drilling, water and waste water treatment, and pump and motor repair
services with offices in Maryland, Delaware and two (2) locations in New Jersey
for over seventy - five years. He is also the Chairman of the Board and CEO of
Life Care Institute, a medical diagnostic center with facilities to perform
stress tests, CAT scans, MRI scans and physical therapy located in New Jersey.
He was also the founder, Chairman of the Board and CEO of Stout Environmental,
Inc., a full service hazardous waste environmental company. Mr. Schultes is a
graduate of Penn State University and has a BS in Civil Engineering.
GARY J. ZIEGLER, DIRECTOR; Mr. Ziegler has served as a director since
February 1997. Mr. Ziegler is President of Consultants and Planners, Inc., which
provides operating services to several water utility companies in New Jersey.
Mr. Ziegler is a Professional Engineer and Professional Planner in New Jersey, a
Professional Engineer in Maryland, Pennsylvania, Ohio and New York and a member
of the American Society of Civil Engineers and the National Society of
Professional Engineers. He was President of W.C. Services, Inc. and Vice
President of Stout Environmental, Inc. Mr. Ziegler is a graduate of Clemson
University with a BS degree in Civil Engineering.
The following is a description of the Company's officers who are not also
directors:
BRUCE C. ROSETTO, Age 40, VICE PRESIDENT AND GENERAL COUNSEL/SECRETARY;
Mr. Rosetto joined the Company in January 1997 and his primary responsibilities
are acting as General Counsel to the Company, mergers and acquisitions, SEC
reporting investor relations and performing the functions as corporate
secretary. Previously, his role included sales management. Mr. Rosetto was a
partner in a New Jersey law firm; Paschon, Feurey, and Rosetto from 1982-86. In
1986, Mr. Rosetto became Chairman and CEO of Consolidated Waste Services of
America, Inc., a fully integrated environmental company, building that
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company primarily through mergers and acquisitions into one of the largest
privately owned environmental companies in New Jersey until its acquisition by
USA Waste Services in October 1997. In 1994, he became Chairman and CEO of Hemo
Biologics International, Inc., a biologic products company. He graduated from
LaSalle University in 1979 with a BA Degree in Political Science, and from
Villanova University School of Law in 1982, with a JD Degree. He is currently a
member of the Florida and New Jersey Bar Associations.
MICHAEL SCHMIDT, Age 49, TREASURER AND CHIEF FINANCIAL OFFICER; Mr.
Schmidt joined the Company in December 1997 and is responsible for the Company's
overall financial direction and SEC reporting, accounting operations and
accounting controls. Mr. Schmidt has over 20 years of public and private
accounting experience including 10 years in the environmental industry. Prior to
joining the Company, Mr. Schmidt served as Chief Financial Officer of Republic
Environmental Systems, Inc., a publicly traded company and a leading
environmental service provider, headquartered in Blue Bell, Pennsylvania, a
position he held for approximately ten years. Mr. Schmidt has a Bachelor of
Science in Business Administration from Rowan University and is a Certified
Public Accountant in the State of New Jersey.
MICHAEL A. LUPO, Age 65, PRESIDENT - PLASTIC LUMBER DIVISION; Mr. Lupo
has extensive domestic and international experience in sales, marketing,
operations, finance, systems, and stockholders relations serving consumer,
industrial and service-oriented businesses. For the past 15 years, he has served
as Executive Vice President, Chief Financial Officer and a Director in the
Building Products Industry. He has been responsible for directing and
negotiating leverage buy outs, mergers and acquisitions, initial public
offerings, secondary and follow on offerings. He has also directed listings to
NASDAQ, American and New York Stock Exchanges. Mr. Lupo is a graduate of St.
John's University.
The Environmental Recycling Division of the Company is primarily led by the
following three individuals.
MICHAEL GOEBNER; Age 36; PRESIDENT of two subsidiaries for the Company,
CARTERET BIOCYCLE CORP., the bioremediation facility, and CLEAN EARTH OF NEW
CASTLE INC., the thermal desorption facility. He also has substantial experience
in industrial waste management, uplands disposal, and regulatory permitting. He
has 17 years experience in the environmental recycling business predominately in
the New York, New Jersey marketplace. His former experience included work for
subsidiaries of Republic Environmental Systems, Inc. as a Lab Technician,
Supervisor, Process Control Manager, Hazardous Waste Coordinator/Government
Contracts Administrator and Director of Business Development for Waste
Conversions, Inc. He also served as the General Manager of Innovative Soil
Technologies, Inc. and Vice President/General Manager of Republic Environmental
Recycling, Inc.
STEVEN C. SANDS; Age 30; PRESIDENT OF WASTE CONCEPTS AND CONSOLIDATED
TECHNOLOGIES, INC.; His expertise is industrial waste management with experience
in all phases of construction and environmental management. Mr. Sands has a B.S.
in engineering from Duke University and subsequently completed education at
Exxon for environmental engineering for service stations and at Owens Corning
for installation of UST systems.
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Mr. Sands is a pioneer in the beneficial re-use of industrial wastes and dredge
materials and has significant experience in transporting waste material.
THEODORE BUDZYNSKI; Age 36; PRESIDENT OF THE INTEGRATED TECHNICAL
SERVICES subsidiary. His expertise is in environmental construction management
and consulting. This subsidiary specializes in environmental recycling and
disposal, in situ and ex situ remediation, environmental transportation
services, and the handling of many industrial waste products. His former
experience was as a Project Manager with Waste Conversions, Inc., Operations
Manager for Enroserv, Inc., Vice President and General Manager of Enroserv, Vice
President and General Manager of Stout Environmental Company.
EXECUTIVE COMPENSATION
The following table summarizes compensation paid or accrued during the
past three fiscal years for the Company's Chief Executive Officer. No other
officer made in excess of $100,000 (salary plus bonuses) during the past fiscal
year.
<TABLE>
<CAPTION>
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
- --------------- ---------- ---------------------------------------- ----------------------------- ----------- ------------------
Name and Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal ($) ($) Compensation Stock Underlying Payouts Compensation
Position ($) (1) Awards Options/ ($) ($)
SARs (#)
- --------------- ---------- ----------- ---------- ----------------- -------------- -------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Mark 1997 150,000 -0- -0- 36,000
Alsentzer, CEO 1996 107,800 955,000(2)
- --------------- ---------- ----------- ---------- ----------------- -------------- -------------- ----------- ------------------
</TABLE>
(1) Excludes perquisites and other personal benefits that do not exceed
the lesser of $50,000 or 10% of each officer's total salary and bonus.
(2) In 1996 Mr. Alsentzer received 400,000 Common Stock warrants at the
lower of $2.25 per share or the market price per share based on gross
sales exceeding $7,500,000 over any consecutive 12 month period or
gross sales of $700,000 per month for three consecutive months
whichever occurs first. The exercise price is the lower of (i) $2.25
per share or (ii) the market price on the last day of each quarter.
Mr. Alsentzer also receives an additional 50,000 Common Stock warrants
per year for three years at the lower of $3.50 or market price at date
of exercise. Mr. Alsentzer also received an additional 400,000 Common
Stock warrants as an incentive to induce Mr. Alsentzer to enter into
an employment agreement with the Company at the lower of (i) $4.00 or
(ii) the market price on any employment anniversary date over the next
ten years. Mr. Alsentzer also received 5,000 shares of options to
purchase Common Stock at $2.50 per share for converting a personal
loan owed by the Company into preferred stock.
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<PAGE> 56
EMPLOYMENT AGREEMENTS
Mark S. Alsentzer - Chairman, Chief Executive Officer and President.
(See footnote 2 above.) Mr. Alsentzer's employment agreement is for a five year
term beginning December 24, 1996. In addition to the compensation listed above,
Mr. Alsentzer receives a $3,000 per month reimbursement for living expenses and
reimbursement for expenses related to a residential unit. Mr. Alsentzer may be
terminated for cause under the employment agreement defined as (i) the
conviction of a felony crime involving moral turpitude, (ii) the intentional and
knowing violation of the employment agreement which results in substantial and
material injury to the Company; or (iii) conduct with respect to the Company or
its business which is intended to injure the Company and does injure the Company
in a material and substantial way or constitutes a course of grossly negligent
conduct, done in bad faith and not intended to benefit the Company, and which
injures the Company in a material and substantial way. In the event, Mr.
Alsentzer is terminated for cause or he elects to leave the employ of the
Company, then Mr. Alsentzer shall be entitled to receive all unissued warrants
for which the conditions of issuance have otherwise been met and all accrued but
unpaid salary. If the employment period ceases due to the death of Mr.
Alsentzer, the election of the Company to terminate without cause, or his
permanent disability as defined in the agreement, then Mr. Alsentzer shall
receive a lump sum cash payment equal to two years base salary as defined in the
agreement and all unissued warrants for which the conditions have not been
otherwise met shall be issued to Mr. Alsentzer without regard to performance of
the conditions for issuance, provided, however, that if the employment ceases
hereunder prior to the expiration of two years from the commencement of the
employment agreement then Mr. Alsentzer shall not receive the lump sum cash
payment equal to two years base salary. If employment ceases for any reason,
within twelve months thereafter the Company shall cause all warrants held by
employee to be registered. This Agreement requires Mr. Alsentzer to spend a
minimum of 75% of his time and effort devoted to performing the functions of
his employment agreement.
Bruce C. Rosetto - Vice President and General Counsel/Secretary. Mr.
Rosetto has an employment agreement with the Company with a three year term
commencing on March 1, 1997 with a base salary of $100,000 per year. He was also
granted an option to purchase 75,000 shares of Common Stock at $3.50 per share
which vested 25,000 immediately, 25,000 on June 1, 1999 and 25,000 on June 1,
2000. The options are for a term of ten years unless terminated in which event
the options must be exercised within 30 days. Mr. Rosetto may be terminated for
cause under the employment agreement defined as (i) the failure to substantially
perform his duties, (ii) the engaging in gross negligence or willful misconduct
which causes injury to the Company; (iii) a violation of the restrictive
covenants and confidentiality provisions of the employment agreement; or (iv)
the conviction of a felony involving moral turpitude. In the event, Mr. Rosetto
is terminated for cause or he elects to leave the employ of the Company, then
Mr. Rosetto shall be entitled to receive accrued salary and expenses. In the
event the Company terminates Mr. Rosetto, he shall be entitled to receive his
then current Base salary for twelve months plus all Company benefits to be paid
on his behalf for twelve months. Mr. Rosetto also has provisions concerning a
covenant not to compete and violate corporate confidences for two years
beginning on the date of termination.
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<PAGE> 57
Michael D. Schmidt - Chief Financial Officer/Treasurer. Pursuant to a
letter agreement, Mr. Schmidt is paid a Base salary of $100,000 per year
commencing December 1, 1997. He also has an Option to purchase 50,000 shares of
Common Stock at $3.50 per share which vest 25,000 shares immediately, 12,500
vest on June 1, 1999 and 12,500 on June 1, 2000 and are for a term of ten years
unless terminated in which event they must be exercised with 30 days. Mr.
Schmidt also receives $5,400 per year as an auto allowance.
Michael A. Lupo - President of U.S. Plastic Lumber Ltd. Pursuant to a
letter agreement commencing January 1, 1998, Mr. Lupo has a Base salary of
$75,000 per year. He also has an Option to purchase 25,000 shares of Common
Stock at $3.50 per share which vested immediately. An additional option to
purchase up to 100,000 shares of Common Stock at $3.50 per share based upon
meeting certain performance criteria relative to Operating Income which vest
immediately upon the occurrence of meeting the performance criteria. Up to an
additional $100,000 in incentive compensation, payable in either stock or cash,
for year ended December 31, 1998 also based upon meeting certain Operating
Income targets.
Michael Goebner - President of Carteret Biocycle Corp. and Clean Earth
of New Castle, Inc. Pursuant to an letter agreement commencing August 1997, Mr.
Goebner has a Base salary of $100,000 per annum. He is also provided with a
company car. He also has an option to purchase 15,000 shares of Common Stock at
$4.50 per share with another option at the end of his first year of employment
to purchase an additional 15,000 shares at the market price of the Common Stock
at the end of the first year of employment. He was also provided an earn out for
5,000 shares of stock based upon meeting certain EBIT criteria.
Steven C. Sands - President of Waste Concepts, Inc. Pursuant to a
written employment agreement with a term for five years commencing November 18,
1997, Mr. Sands has a Base salary of $125,000 per annum. He receives $7,200 per
year as an auto allowance. He has an option to purchase 10,000 shares of Common
Stock at $6.00 per share. He also has an earn out of 25,000 shares based upon
Waste Concepts meeting certain financial performance goals at the rate of 5,000
shares per year for each of the next five years. The Employment Agreement
contains no change of control provisions. Mr. Sands may be terminated for cause
under the employment agreement defined as (i) the failure to substantially
perform his duties, (ii) the engaging in gross negligence or willful misconduct
which causes injury to the Company; (iii) a violation of the restrictive
covenants and confidentiality provisions of the employment agreement; or (iv)
the conviction of a felony involving moral turpitude. In the event, Mr. Sands is
terminated for cause or he elects to leave the employ of the Company, then Mr.
Sands shall be entitled to receive accrued salary and expenses. In the event the
Company terminates Mr. Sands, he shall be entitled to receive his then current
Base salary for twelve months plus all Company benefits to be paid on his behalf
for twelve months. Mr. Sands also has provisions concerning a covenant not to
compete and violate corporate confidences for two years beginning on the date of
termination.
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DIRECTOR COMPENSATION
Beginning on May 15, 1996, the Board adopted a compensation package for
non-employee directors which provides for the award of 100 shares of the
Company's non-registered Common Stock for each meeting attended and 60 shares of
non-registered Common Stock for each Committee meeting attended not held in
conjunction with a regular board meeting. On March 18, 1998, the Board of
Directors unanimously passed approval of an independent director stock option
grant for 1997 whereby each non-employee director would receive 2,500 options to
purchase non-registered shares of Common Stock of the Company for $3.50 per
share. On June 3, 1998, the shareholders of the Company at its Annual Meeting
approved the non-employee director stock option grant. Directors who are
employees of the Company are not paid any fees or additional compensation for
service as members of the Board of Directors or any committees thereof.
STOCK OPTIONS
The Board of Directors of the Company has granted options to acquire
120,000 shares of Common Stock to the Company's key employees and officers.
Awards of options to the Company's Chief Executive Officer are reported in the
summary compensation. Awards consist of stock options (both non-qualified
options and options intended to qualify as "Incentive" stock options under
Section 422 of the Internal Revenue Code of 1986, as amended), restricted stock
awards, deferred stock awards, stock appreciation rights and other stock-based
awards. The Board of Directors has determined the persons to whom awards are
granted, the number of awards granted and the specific terms of each grant,
including the vesting thereof and the exercise price. Awards under this grant,
which have not otherwise been canceled by termination of employment and the
non-exercise of option rights, were made as follows: Lee Anderson, 20,000
options granted January 27, 1997; Michael Enden, 10,000 options granted May 15,
1996; and Mark Rogers, 10,000 options granted on May 15, 1996.
On June 3, 1998, the shareholders of the Company approved granting each
non-employee director 2,500 options to purchase Common Stock of the Company at
an exercise price of $3.50 per share.
OPTIONS/WARRANTS GRANTED DURING 1997
The following table sets forth as to the chief executive officer of the
Company certain information with respect to option/warrant grants during 1997 as
follows: (i) the number of shares of Common Stock underlying options granted,
(ii) the percentage that such options represent of all options granted to
officers and employees during the year, (iii) the exercise price, and (iv) the
expiration date. It should be noted that actual value of the options may be
significantly different from the value shown in the assumptions, and the value
actually realized, if any, will depend upon the excess of the market value of
the Common Stock over the option exercise price at the time of exercise.
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<PAGE> 59
<TABLE>
<CAPTION>
- ------------------- ---------------------- ------------------------------------------ ------------------- --------------
Number of Securities
Underlying % of Total Options/Warrants Exercise Price Expiration
Name Warrants/Options Granted To Employees in fiscal year Per Share Date
Granted
- ------------------- ---------------------- ------------------------------------------ ------------------- --------------
<S> <C> <C> <C> <C> <C>
Mark S. Alsentzer 320,000 57.1% 2.25 12/19/2007
- ------------------- ---------------------- ------------------------------------------ ------------------- --------------
</TABLE>
No options granted to the chief executive officer have been exercised during
1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by: (i) each person who is
known to the Company to be the beneficial owner of five percent (5%) or more of
the outstanding Common Stock, (ii) each director of the Company, (iii) the
Company's executive officers; and (iv) all directors and executive officers of
the Company as a group.
The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly they may
include securities owned by or for, among others, the wife and/or minor children
or the individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or shares
voting or investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Beneficial ownership may be
disclaimed as to certain of the securities. All shares listed in the table below
are Common Shares.
<TABLE>
<CAPTION>
Amount of
Shares Percent
Name And Address** Beneficially Owned Of Class
- ------------------ ------------------ --------
<S> <C> <C>
Directors and
Executive Officers:
- -------------------
Mark Alsentzer 6,897,831(1) 37.8%
Lester E. Moody 237,900(2) 1.4%
James J. Blosser 181,468(3) 1.1%
Roger Zitrin 340,370(4) 2.0%
August C. Schultes III 5,849,882(5) 33.8%
Gary J. Ziegler 6,132,639(6) 35.5%
Bruce C. Rosetto 111,000(7) *
Michael D. Schmidt 99,500(8) *
All executive officers
and directors as a group
(8 persons) 8,361,030 49.3%
</TABLE>
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<TABLE>
<CAPTION>
5% Holders:
- -----------
<S> <C> <C>
Stout Partnership(9) 5,720,000 31.8%
101 Jessup Rd., Thorofare, NJ 08086
Lancer Partners, L.P.(10) 500,000 2.9%
200 Park Ave., Ste 3900 New York, NY 10166
Michael Lauer(10) 50,000 *
200 Park Ave., Ste 3900 New York, NY 10166
Lancer Voyager Fund(10) 50,000 *
200 Park Ave., Ste 3900 New York, NY 10166
Lancer Offshore, Inc.(10) 511,111 2.9%
200 Park Ave., Ste 3900 New York, NY 10166
</TABLE>
* Less than 1%.
** All addresses of the executive officers and directors is that of the Company
1 Includes 955,000 shares which Mr. Alsentzer presently has the right to
acquire through the exercise of outstanding options, 48,286 shares not
presently outstanding which he has the right to acquire through conversion of
outstanding preferred stock, 18,000 shares beneficially owned through Adams
Oil Corporation, 5,400,000 shares as to which Mr. Alsentzer has shared voting
power, which are held of record by Stout Partnership, a partnership in which
Mr. Alsentzer is a general partner and 320,000 shares which he has the right
to acquire through the exercise of options beneficially owned through Stout
Partnership.
2 Includes 144,682 shares which Mr. Moody presently has the right to acquire
through conversion of outstanding preferred stock.
3 Includes 5,000 shares which Mr. Blosser presently has the right to acquire
through the exercise of outstanding options and 175,868 shares not presently
outstanding which he has the right to acquire through conversion of
outstanding preferred stock.
4 Includes 26,810 shares which Mr. Zitrin presently has the right to acquire
through conversion of outstanding preferred stock.
5 Includes 98,882 shares which Mr. Schultes presently has the right to acquire
through conversion of outstanding preferred stock, 18,000 shares beneficially
owned through Adams Oil Corporation, 5,400,000 shares as to which Mr.
Schultes has shared voting power, which are held of record by Stout
Partnership, a partnership in which Mr. Schultes is a general partner, and
320,000 shares which he has the right to acquire through the exercise of
options beneficially owned through Stout Partnership.
6 Includes 412,139 shares which Mr. Ziegler presently has the right to acquire
through the conversion shares of outstanding preferred stock, 5,400,000
shares as to which Mr. Ziegler has shared voting power, which are held of
record by Stout Partnership, a partnership in which Mr. Ziegler is a general
partner, and 320,000 shares which he has the right to acquire through the
exercise of options beneficially owned through Stout Partnership.
7 Includes 75,000 shares Mr. Rosetto has the right to acquire through the
exercise of options and 7,000 shares he has the right to acquire through the
conversion of outstanding preferred stock.
8 Includes 50,000 shares Mr. Schmidt has the right to acquire through the
exercise of options and 24,500 shares he has the right to acquire through the
conversion of outstanding preferred stock.
9 Certain officers and directors of the Company are general partners of Stout
Partnership, including Mark S. Alsentzer, August C. Schultes III, and Gary J.
Ziegler.
10 Lancer Partners, L.P., Michael Lauer, Lancer Voyager Fund and Lancer
Offshore, Inc. are affiliated with one another and are controlled by the same
general partner.
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<PAGE> 61
CERTAIN TRANSACTIONS
During the past two fiscal years, the Company has entered into several
significant acquisitions and other transactions with affiliates. The terms of
these transactions were, in some instances, determined without the benefit of
arms length bargaining or negotiation and necessarily involve conflicts between
the interests of the related parties and the Company. These are as follows:
On February 1, 1996 the Earth Care Global Holdings, a predecessor of
the Company, acquired certain assets of Earth Care Partners (ECP), a partnership
controlled by certain former officers/stockholders (including the former
Chairman of the Company) of the Company for a total purchase price of $200,000.
In exchange therefore, the partners of ECP received 112,926 shares of the
Company's Common Stock. At December 31, 1996, $113,535 of receivables due from
certain partners of ECP was included in accounts and notes receivable. Certain
partners of ECP have agreed to pledge 70,579 shares of their holdings in the
Company's Common Stock as collateral for the repayment of such receivables,
although such pledge has not been formally perfected. At such time as those
shares are registered, such partners have agreed to repay the Company. In August
1997, one of the former partners of ECP alleged that the Company wrongfully
issued shares to certain of the other partners of ECP. The Company responded by
appointing an independent board committee to examine the facts surrounding the
ECP acquisition. Independent counsel was retained to thoroughly review the ECP
transaction to insure that this related party transaction was in fact properly
authorized and executed. Independent counsel has reported its findings and made
certain recommendations to the independent board committee. Based upon these
recommendations, the Company is reviewing its legal remedies and simultaneously
therewith, ECP and the Company are currently involved in negotiations to resolve
all issues arising out of the ECP acquisition.
On or about November 5, 1997, Eugene Arnold, Jr. (a former director of
the Company), Vernon C. Walker, and R. Wayne Raffety (collectively "Arnold")
filed suit in the United States District Court for the Eastern District of
Pennsylvania against the Company and former directors David Farrow and Harold
Gebert. Arnold's claims arose out of a venture capital loan made by Arnold to
the Company on January 12, 1995 (the "Loan"), the principal and interest of
which was paid by the Company. Arnold contends that at the time of the Loan,
Gebert and Farrow agreed to a grant of warrants of their stock in the Company,
and that Gebert and Farrow, on behalf of either the Company or themselves, also
made assurances that Arnold would be protected against any dilution of the
shares of stock. The litigation was settled and dismissed on or about February
20, 1998. The Company agreed to pay Arnold 15,000 shares of Common Stock on or
before June 30, 1999.
On December 31, 1996 and simultaneous to the closing of the Clean Earth
merger, the Stout Partnership (owners of Clean Earth, Inc.) extended a note to
the Company in the amount of $500,824 at Federal prime rate plus 1%. The
proceeds were used to pay off the note payable to Magellan Finance Co which
matured on December 31, 1996. The interest paid in 1997 with respect to this
note was $2,000.
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<PAGE> 62
Clean Earth, Inc. incurred administration and service fees to its
stockholders, Mark S. Alsentzer, August C. Schultes, III, and other members of
the Schultes family, of $500,000 in the year ended December 31, 1996.
On January 23, 1997 A. C. Schultes, Inc., loaned the Company an
additional $700,000 at Federal Reserve prime rate plus 1%, the proceeds of which
some were used to partially fund the RPI acquisition. The Company has since
borrowed additional cash from A. C. Schultes, Inc. and as of September 30, 1997
owed $1,200,000 on an unsecured line of credit from A. C. Schultes, Inc. at
Federal Reserve prime rate plus 1%. The interest paid in 1997 with respect to
this note was $98,000. The total available facility from A. C. Schultes, Inc is
$2,300,000 and is renewable on an annual basis. August C. Schultes III is a
director of the Company and the Chairman and CEO of A. C. Schultes, Inc.
On or about December 12, 1997, the Board of Directors granted warrants
to Stout Partnership providing it the right to purchase 320,000 shares at an
exercise price of $2.25 per share. This grant was in consideration of Stout
Partnership and each of the individual members of the partnership personally
guaranteeing a revolving discretionary line of credit in the amount of
$4,000,000 on behalf of the Company with PNC Bank of Delaware. In addition to
the personal guarantees, the individual members of the partnership pledged
$2,000,000 in cash or 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.
During the period February 1998 - May 1998, the Company acquired 100%
interest in Consolidated Technologies, Inc. The remaining interests purchased by
the Company were held by Steve Sands, Timothy Fogerty, Al Silkroski, and Michael
Roscoe, all of who became shareholders of this Company through previous
acquisitions and all of whom were and still are employees of the Company.
In June 1998, the Company acquired GeoCore, Inc. for a purchase price
of 30,000 shares of common Stock of the Company. Steven C. Sands, a senior
manager for the Company held a 50% interest in GeoCore, Inc. Mr. Sands has
placed his entire portion of the purchase price in escrow for up to two years to
support the representations and warranties of the Plan of Merger Agreement.
The Company has leased a manufacturing facility from entities
controlled by individuals who are stockholders. Until October 20,1997, at the
rate of $7,000 per month, the Company leased a manufacturing facility located in
Tennessee from the entity from which the Company acquired the assets used in
such manufacturing operation, and the owner of which, Thomas P. Brock, became a
stockholder of the Company in such acquisition. The Company has terminated this
lease and relocated its facility into a larger rented facility in a nearby
Tennessee location. The Company's RPI subsidiary leases approximately 38,000
square feet of office and manufacturing space from Plastic Properties, LLC. The
lease provides for minimum rentals of
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<PAGE> 63
$11,875 per month through December 31, 2008 with an option to renew for an
additional 5-year terms. Lee Anderson, President of RPI and Vice President of
U.S. Plastic Lumber Ltd., is a partner in Plastic Properties, LLC. The Company
has leased approximately 15,600 sq. ft. in Sweetser, Indiana from James P. Cole,
the principal shareholder of Cycle Masters, Inc. prior to its acquisition by the
Company. The rental is for a five year period beginning at $2,000 per month in
the first year and then graduating to $3,000 per year in the third thru fifth
years. Mr. Cole also acts as an independent sales representative for the Company
and is compensated on a commission only basis. The Company leases an
environmental construction office consisting of approximately 5,000 sq. ft. on
approximately two acres of property in Winslow, NJ at the rate of $2,500 per
month for a period of three years. The landlord is an entity which has four
partners, two of which are also employees of this Company, Theodore Budzynski
serves as President of Integrated Technical Services, Inc. and Vice President of
Clean Earth, Inc. Martin Brubaker serves as Vice President of Sales for
Integrated Technical Services, Inc.
CONFLICTS OF INTEREST
The Company does not have any formal policy concerning the direct or
indirect pecuniary interest of any of its officers, directors, security holders
or affiliates in any investment to be acquired or disposed of by the Company or
in any transaction to which the Company is a party or has an interest.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
The General Corporation Law of Nevada permits provisions in the
articles, by-laws or resolutions approved by shareholders which limit liability
of directors for breach of fiduciary duty to certain specified circumstances,
namely, breaches of their duties of loyalty, acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, acts
involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. The Company's by-laws indemnify its Officers and Directors to
the full extent permitted by Nevada law. The by-laws with these exceptions
eliminate any personal liability of a Director to the Company or its
shareholders for monetary damages for the breach of a Director's fiduciary duty
and therefore a Director cannot be held liable for damages to the Company or its
shareholders for gross negligence or lack of due care in carrying out his
fiduciary duties as a Director. The Company's Articles provide for
indemnification to the full extent permitted under law which includes all
liability, damages and costs or expenses arising from or in connection with
service for, employment by, or other affiliation with the Company to the maximum
extent and under all circumstances permitted by law. Nevada law permits
indemnification if a director or officer acts in good faith in a manner
reasonably believed to be in, or not opposed to, the best interest's of the
corporation. A director or officer must be indemnified as to any matter in which
he successfully defends himself. Indemnification is prohibited as to any matter
in which the director or officer is adjudged liable to the corporation. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the
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<PAGE> 64
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
DESCRIPTION OF SECURITIES
The following statements do not purport to be complete and are
qualified in their entirety by reference to the detailed provisions of the
Company's Articles of Incorporation and Bylaws, copies of which will be
furnished to an investor upon written request therefor. See "Additional
Information."
COMMON STOCK
The Company is presently authorized to issue 50,000,000 shares of
$.0001 par value Common Stock. The Company presently has 17,122,314 shares of
Common Stock outstanding. The Company has reserved from its authorized but
unissued shares a sufficient number of shares of Common Stock for issuance of
the Shares offered hereby. The shares of Common Stock issuable on completion of
the offering will be, when issued in accordance with the terms of the offering,
fully paid and non-assessable.
The holders of Common Stock, including the Shares offered hereby, are
entitled to equal dividends and distributions, per share, with respect to the
Common Stock when, as and if declared by the Board of Directors from funds
legally available therefor. No holder of any shares of Common Stock has a
pre-emptive right to subscribe for any securities of the Company nor are any
common shares subject to redemption or convertible into other securities of the
Company. Upon liquidation, dissolution or winding up of the Company, and after
payment of creditors and preferred stockholders, if any, the assets will be
divided pro-rata on a share-for-share basis among the holders of the shares of
Common Stock. All shares of Common Stock now outstanding are fully paid, validly
issued and non-assessable, except as set forth relative to the Earth Care
Partners transaction discussed in the Certain Transactions section. Each share
of Common Stock is entitled to one vote with respect to the election of any
director or any other matter upon which shareholders are required or permitted
to vote. Holders of the Company's Common Stock do not have cumulative voting
rights, so that the holders of more than 50% of the combined shares voting for
the election of directors may elect all of the directors, if they choose to do
so and, in that event, the holders of the remaining shares will not be able to
elect any members to the Board of Directors.
PREFERRED STOCK
The Company is also presently authorized to issue 5,000,000 shares of
$.001 par value Preferred Stock. Under the Company's Articles of Incorporation,
as amended, the Board of Directors has the power, without further action by the
holders of the Common Stock, to designate the relative rights and preferences of
the preferred stock, and issue the preferred stock in such one or more series as
designated by the Board of Directors. The designation of
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<PAGE> 65
rights and preferences could include preferences as to liquidation, redemption
and conversion rights, voting rights, dividends or other preferences, any of
which may be dilutive of the interest of the holders of the Common Stock or the
Preferred Stock of any other series. The issuance of Preferred Stock may have
the effect of delaying or preventing a change in control of the Company without
further shareholder action and may adversely effect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, the issuance of preferred stock could depress the market price of
the Common Stock. The Board of Directors effects a designation of each series of
Preferred Stock by filing with the Nevada Secretary of State a Certificate of
Designation defining the rights and preferences of each such series. Documents
so filed are matters of public record and may be examined in accordance with
procedures of the Nevada Secretary of State, or copies thereof may be obtained
from the Company.
The Board of Directors of the Company has designated 250,000 shares as
Series A Preferred Stock, with a 10% cumulative stock dividend, payable
semiannually on March 31 and September 30 of each year, commencing on September
30, 1996, at a rate of 10% per annum. The Company has issued 218,588 shares of
Series A Preferred Stock. Each share of Series A Preferred Stock is convertible:
(i) at the option of the holder into Common Stock of the Company at the rate of
seven (7) shares of Common Stock for each share of Series A Preferred Stock, and
(ii) mandatorily converted into Common Stock on the date on which a Registration
Statement, which is filed with the U.S. Securities and Exchange Commission and
would yield proceeds to the Company in excess of $10 million, is declared
effective by the SEC. The Series A Preferred Stock is subject to redemption by
the Company at its option at any time commencing from the date of issue of such
Series A Preferred Stock at a price of $25.00 per share. In the event of any
liquidation, after payment of debts and other liabilities, the stockholders of
Series A Preferred Stock will be entitled to receive, before the stockholders of
any Common Stock, the stated value of $20 per share. None of the Series A
Preferred Stock issued has been redeemed by the Company as of the date hereof.
The Board of Directors of the Company has designated 211,020 shares as
Series B Preferred Stock, with a 10% cumulative stock dividend, payable
semiannually on March 31 and September 30 of each year, commencing on September
30, 1998, at a rate of 10% per annum. The Company is currently in the process of
offering the Series B Preferred Stock. Each share of Series B Preferred Stock is
convertible: (i) at the option of the holder into Common Stock of the Company at
the rate of seven (7) shares of Common Stock for each share of Series B
Preferred Stock, and (ii) mandatorily converted into Common Stock on the date on
which a Registration Statement, which is filed with the U.S. Securities and
Exchange Commission and would yield proceeds to the Company in excess of $10
million, is declared effective by the SEC. The Series B Preferred Stock is
subject to redemption by the Company at its option at any time commencing from
the date of issue of such Series B Preferred Stock at a price of $25.00 per
share. The Series B Preferred Stock is also subject to a Stock Sale Restriction
Agreement prohibiting any private or public sales of the stock for a period of
twelve months from the date of purchase. In the event of any liquidation, after
payment of debts and other liabilities, the stockholders of Series B Preferred
Stock will be entitled to receive, before the stockholders of any Common Stock,
the stated value of $21 per share.
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<PAGE> 66
None of the Series B Preferred Stock issued has been converted into Common Stock
of the Company or redeemed by the Company as of the date hereof.
SERIES B WARRANTS
The Company also distributed Series B Warrants as part of its reverse
merger into Educational Storybooks, so the Company now has 950,000 Series B
Common Stock purchase warrants (the "Warrants") outstanding. The Warrants are
exercisable at $4.50 per share for the Series B Warrants, subject to
effectiveness of registration of the Warrants and underlying shares, within 45
days from the date the registration statement is declared effective.
(a) The Company may redeem all or a portion of the Warrants,
in each case at $.01 per warrant upon 30 days prior written notice to
the warrant holders in the event the Closing bid price of the Company's
Common Stock exceeds or equals $6.00 then the Series B Warrants may be
redeemed. The warrants may only be redeemed if a current registration
statement is in effect with respect thereto. Any warrant holder who
does not exercise his Warrants prior to the Redemption Date, as set
forth on the Company's Notice of Redemption, will forfeit his right to
purchase the shares of Common Stock underlying such Warrants, and after
such Redemption Date any outstanding Warrants referred to in such
Notice will become void and be canceled. If the Company does not redeem
such Warrants, such warrants will expire at the conclusion of the
exercise period unless extended by the Company.
(b) The Company may at any time, and from time to time, extend
the exercise period of the Warrants provided that written notice of
such extension is given to the warrant holders prior to the expiration
date thereof. Also, the Company may, at any time, reduce the exercise
price thereof by written notification to the holders thereof. The
Company does not presently contemplate any extensions of the exercise
period or reduction in the exercise price of the Warrants.
(c) The Warrants contain anti-dilution provisions with respect
to the occurrence of certain events, such as stock splits or stock
dividends. The anti-dilution provisions do not apply in the event of a
merger or acquisition. In the event of liquidation, dissolution or
winding-up of the Company, warrant holders will not be entitled to
participate in the assets of the Company. Warrant holders have no
voting, preemptive, liquidation or other rights of a stockholder of a
Company, and no dividends may be declared on the Warrants.
(d) The Warrants may be exercised by surrendering to the
Company, a Warrant certificate evidencing the Warrants to be exercised,
with the exercise form included therein duly completed and executed,
and paying to the Company the exercise price per share in cash or check
payable to the Company. Stock certificates will be issued as soon
thereafter as practicable.
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(e) The Warrants are not exercisable until the Warrants and
the shares of Common Stock underlying the Warrants are registered. The
Company has agreed to file with the Commission a registration statement
with respect to the issuance of such shares underlying the Warrants.
The effective date of such registration will be the "Commencement Date"
for determining the exercise period of such Warrants. The Company will
also seek to register or qualify the Common Stock issuable upon the
exercise of the Warrants under the Blue Sky laws of all states in which
holders of the Warrants may reside.
(f) The Warrants are deemed to be "restricted securities" in a
manner similar to the definition of that term used in Rule 144 and will
only be transferable, prior to registration, upon a showing to the
satisfaction of the Company that the transfer is exempt from the
registration provisions of the Securities Act of 1933. The Warrants are
stamped with a restrictive legend.
TRANSFER AGENT
The transfer agent for the Company is Interwest Stock Transfer Co.,
1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
ANNUAL REPORTS
The Company intends to furnish annual reports to shareholders which
will contain financial statements audited by independent certified public
accountants and such other interim reports as the Company may determine.
EARN OUT SHARES AND EARN OUT OPTIONS
Pursuant to various agreements entered into between the Company and the
former shareholders of Earth Care, Clean Earth, ARDT, ITS, EPC, WIF, GHI and CTI
as part of the acquisitions of those companies, up to a total of 4,847,186
shares of the Company's Common Stock is subject to the right of such
shareholders to receive such stock under certain conditions relating to
earnings, sales or production levels reached by the Company or by the entities
of which these person were formerly shareholders.
The Earth Care Historical Shareholders are entitled to receive on a pro
rata basis an aggregate of 2,000,000 additional shares of the Company's Common
Stock at any time prior to December 31, 2000, in the event that Earth Care, on a
consolidated basis, reaches production or sales of at least 2,000,000 pounds of
plastic lumber product per month for three consecutive months.
The Clean Earth Historical Shareholders are entitled to receive on a
pro rata basis an aggregate of 2,573,686 additional shares of the Company's
Common Stock at any time prior to December 31, 2000, in the event that the
Company, on a consolidated basis, reaches
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production or net sales of at least 2,000,000 pounds of plastic lumber product
per month for three consecutive months.
The ARDT Shareholders are entitled to receive on a pro rata basis an
aggregate of up to 75,000 additional shares of the Company's Common Stock during
1998 in the event that ARDT reaches certain specified levels of profits as
defined in the agreement during each of those years. Upon issuance, the Company
will record compensation expense equal to the excess of the then current market
value of the shares.
Two key operating officers at ITS are entitled to receive an aggregate
of up to 16,000 additional shares of the Company's stock during 1998 in the
event that ITS reaches certain specified levels of sales and profits, as defined
in the acquisition agreement, during each of those years. Upon issuance, the
Company will record compensation expense equal to the current market value of
the shares over the exercise price of $5.00 per share.
Two key operating officers of EnviroPlastics Corp. (EPC) have been
granted options to purchase an aggregate of up to 90,000 shares on a pro rata
basis of the Company's Common Stock during 1997, 1998 and 1999 provided certain
specified levels of profits, as defined in the agreement, are met during each of
those years. The Company granted 30,000 options for 1997 performance.
The stockholder of Waste Concepts, Inc. (WCI) has been provided with
the right to earn additional shares of the Company's stock equal to 25,000
shares over the next five years in the event Waste Concepts, Inc. meets certain
EBIT levels during each of those years.
The stockholders of Green Horizon Environmental, Inc. (GHI) have been
provided with the right to earn additional shares, not to exceed 12,500 shares
per year for each of the next four years, based upon EBIT for each of those
years.
The stockholders of Consolidated Technologies, Inc. (CTI), whose
interest was purchased by the Company, have the right to earn additional shares
based upon meeting certain performance objectives by June 1, 1999. These former
stockholders of CTI have the right to earn 182,500 shares of the Company on a
cumulative basis.
OTHER OUTSTANDING NON-EMPLOYEE OPTIONS
The Company has reserved 353,684 shares of the Company's Common Stock
for issuance upon exercise of an option held by a former creditor of Earth Care
(the "Magellan Option"). The option is exercisable at an aggregate amount of
$626,021 for all 353,684 shares, with the option expiring as to 117,895 shares
on December 31, 1997 (these shares have been exercised by shareholder and
consideration has been paid to the Company), 117,895 shares on December 31, 1998
and 117,894 shares on June 30, 1999. In the event the Magellan Option is not
exercised in whole or in part, then those shares reserved for the Option shall
be issued on a pro rata basis to the persons who are the historical shareholders
of the Company at
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no cost, in proportion to the shares they owned. These options are incorporated
as part of the registration of the stock options sought pursuant to this
Prospectus.
On or about December 12, 1997, the Board of Directors granted options
to Stout Partnership providing it the right to purchase 320,000 shares at an
exercise price of $2.25 per share. This grant was in consideration of Stout
Partnership and each of the individual members of the partnership personally
guaranteeing a revolving discretionary line of credit in the amount of
$4,000,000 on behalf of the Company with PNC Bank of Delaware. In addition to
the personal guarantees, the individual members of the partnership pledged
$2,000,000 in cash or 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. These options are
incorporated as part of the registration of the stock options sought pursuant to
this Prospectus.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 17,122,314 shares of the Company's Common Stock outstanding
prior to the exercise of any Warrants, 4,307,887 shares are freely tradable or
eligible to be sold in the public market that exists for the Common Stock. In
addition, the Series B Warrants, totaling another 950,000 shares will be
immediately freely tradable upon issuance as will the 2,205,789 shares of stock
options, subject to the vesting requirements of each individual grant. In
addition, up to 1,477,140 shares of Common Stock convertible from the Series B
Preferred Stock offering will be immediately freely tradable upon the effective
date of this Registration Statement. Furthermore, all of the remaining shares of
Common Stock presently outstanding are restricted and/or affiliate securities
which are not presently, but may in the future be sold into any public market
that may exist for the Common Stock, pursuant to Rule 144 promulgated pursuant
to the Securities Act of 1933, as amended (the "Securities Act"). The majority
of these remaining shares are subject to Stock Sale Restriction Agreements,
which, in large part, expire on December 31, 1998. Sales of substantial amounts
of this Common Stock in the public market could adversely affect the market
price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or group
of persons whose shares are aggregated), including affiliates of the Company,
can sell within any three-month period, an amount of restricted securities that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or (if the Stock becomes quoted on NASDAQ or a stock exchange),
the reported average weekly trading volume during the four calendar weeks
preceding the sale; provided at least one year has elapsed since the restricted
securities being sold were acquired from the Company or any affiliate of the
Company, and provided further that certain other conditions are also satisfied.
If at least two years have elapsed since the restricted securities were acquired
from the Company or an affiliate of the Company, a person who has not been an
affiliate of the Company for at least three months can sell restricted shares
under Rule 144 without regard to any limitations on the amount. Future sales
66
<PAGE> 70
by current shareholders could depress the market prices of the Common Stock in
any such market.
PLAN OF DISTRIBUTION
This Prospectus and the registration statement of which it is part
relate to the offer and sale of 950,000 shares of Common Stock of the Company
underlying Series B Warrants; up to 211,020 shares of Series B Preferred Stock
convertible into 1,477,140 shares of Common Stock; and 2,205,789 shares
underlying the stock options. The securities registered hereby include 950,000
shares of Common Stock issuable upon the exercise of the Series B Warrants at an
exercise price of $4.50 per share. The Series B Warrants were distributed as a
dividend with respect to the Common Stock of the Company to shareholders of
record as of March 18, 1996. By their terms, the Warrants were not exercisable
and did not constitute an offer by the Company to sell the Shares prior to the
date of this prospectus. The Warrants are now exercisable until 45 days after
the registration statement is declared effective.
The offering of the Series B Warrants; the stock options, and the
Series B Preferred Stock will be managed by the Company without an underwriter,
and the Shares will be offered and sold by the Company, without any discount,
sales commissions or other compensation being paid to anyone in connection with
the offering. In connection therewith, the Company will pay the costs of
preparing, mailing and distributing this Prospectus to the holders of the
Warrants and stock options. Brokers, nominees, fiduciaries and other custodians
will be requested to forward copies of this Prospectus to the beneficial owners
of securities held of record by them, and such custodians will be reimbursed for
their expenses.
There is no assurance that all or any of the Shares will be sold, nor
any requirement, or escrow provisions to assure that, any minimum amount of
Warrants or options will be exercised. All funds received upon the exercise of
any Warrants or options will be immediately available to the Company for its
use.
EXERCISE PROCEDURES
Warrants may be exercised in whole or in part by presentation of the
Warrant Certificate, with the Purchase Form on the reverse side thereof filled
out and signed at the bottom thereof, together with payment of the Exercise
Price and any applicable taxes at the principal office of Interwest Stock
Transfer Co., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
Payment of the Exercise Price shall be made in lawful money of the United States
of America by wire transfer or check payable to the order of "U.S. Plastic
Lumber Corp."
67
<PAGE> 71
Options may be exercised in whole or in part by the payment of the
Exercise Price and any applicable taxes at the principal office of the Company.
Payment of the Exercise Price shall be made in lawful money of the United States
of America by wire transfer or check payable to the order of "U.S. Plastic
Lumber Corp."
All holders of warrants or options will be given an independent right
to exercise their purchase rights. If, as and when properly completed and duly
executed notices of exercise are received by the Transfer Agent and/or Warrant
Agent, together with the Certificates being surrendered, if applicable, and full
payment of the Exercise Price in cleared funds, the checks or other funds will
be delivered to the Company and the Transfer Agent and/or Warrant Agent will
promptly issue certificates for the underlying Common Stock. It is presently
estimated that certificates for the shares of Common Stock will be available for
delivery in Salt Lake City, Utah at the close of business on the tenth business
day after the receipt of all required documents and funds.
LEGAL MATTERS
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.
The Company received notice from its Chief Executive Officer, Mark S,
Alsentzer, on or about July 2, 1998 that the Pennsylvania Department of
Environmental Protection had issued himself and Mr. Schultes, a director of the
Company, a letter which raised issues of non-compliance by these individuals
with a 1992 Settlement Agreement between the Pennsylvania Department of
Environmental Protection and Mr. Alsentzer, Mr. Schultes and other parties not
related in any manner to the Company. The 1992 Settlement Agreement requires, in
part, that Mr. Alsentzer, Mr. Schultes, and other parties disclose their
ownership interests in and not participate in any companies performing regulated
waste activities within Pennsylvania. The investigation developed due to the
Company's recent acquisition of 100% interest in Consolidated Technologies, Inc.
("CTI"). CTI may be involved in a regulated waste activity in the Commonwealth
of Pennsylvania, and as a result is involved in the permitting process with the
Pennsylvania Department of Environmental Protection. The Company is
investigating this matter and is currently negotiating a settlement with the
Pennsylvania Department of Environmental Protection. The Company believes it is
close to a resolution of this matter, however, there can be no assurance that
the Company will be able to negotiate a successful resolution.
68
<PAGE> 72
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
Audited Consolidated Financial Statements as of
December 31, 1997 and 1996 and for the years ended
December 31, 1997 and 1996 F-2 to F-23
Unaudited Consolidated Financial Statements as of March 31,
1998 and 1997 and for the three months ended March 31, 1998
and 1997 F-24 to F-34
Unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1998 and unaudited Pro Forma Consolidated Statements of Operations
for the three months ended March 31, 1998 and the twelve months
ended December 31, 1997 F-35 to F-41
CYCLE-MASTERS, INC.
Audited Balance Sheet as of September 30, 1997 and
Statements of Income and Retained Earnings and Cash Flows
for each of the years in the two years ended September 30,
1997. Unaudited Balance Sheet as of March 31, 1998 and unaudited
Statements of Income and Retained Earnings and Cash Flows for the
six months ended March 31, 1998 and 1997 F-42 to F-51
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Plastic Lumber Corp.:
We have audited the accompanying consolidated balance sheet of U.S. Plastic
Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997. The consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from 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 audit provides 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 U.S. Plastic Lumber
Corp. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 20, 1998.
F-2
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
U.S. Plastic Lumber Corp.:
We have audited the accompanying consolidated balance sheet of U.S. Plastic
Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 1996. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from 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 audit provides 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 U.S. Plastic Lumber
Corp. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KUNTZ LESHER SIEGRIST & MARTINI LLP
Lancaster, Pennsylvania
December 18, 1997
F-3
<PAGE> 75
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,170,120 $ 854,290
Trade receivables, net 6,903,921 1,396,644
Other receivables 36,367 455,000
Inventories 1,502,658 486,978
Prepaid expenses and other current assets 220,728 99,462
------------ ------------
Total current assets 9,833,794 3,292,374
PROPERTY AND EQUIPMENT, net 5,775,424 935,718
ACQUIRED INTANGIBLES, net 7,009,244 2,810,328
OTHER ASSETS 552,914 9,655
------------ ------------
Total assets $ 23,171,376 $ 7,048,075
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,788,714 $ 1,065,081
Current portion of notes payable 2,404,607 707,582
Due to affiliates 1,956,810 200,000
Accrued expenses 1,737,518 701,257
Other liabilities 420,084 27,654
------------ ------------
Total current liabilities 10,307,733 2,701,574
NOTES PAYABLE, net of current portion 817,011 6,730
DEFERRED INCOME TAXES 580,433 --
------------ ------------
Total liabilities 11,705,177 2,708,304
------------ ------------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized 5,000,000
shares; issued and outstanding 208,930 and 74,970, respectively (aggregate
liquidation preference of $4,178,600 and $1,499,400, respectively) 209 75
Common stock par value $.0001, authorized 50,000,000
shares; issued and outstanding 15,621,599 and 11,672,349
shares, respectively 1,562 1,167
Additional paid-in capital 12,573,026 4,436,758
Accumulated deficit (1,108,598) (98,229)
------------ ------------
Total stockholders' equity 11,466,199 4,339,771
------------ ------------
Total liabilities and stockholders' equity $ 23,171,376 $ 7,048,075
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 76
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET REVENUES $ 24,739,381 $ 6,411,656
COST OF GOODS SOLD 19,779,872 5,391,225
------------ ------------
Gross profit 4,959,509 1,020,431
OPERATING EXPENSES 5,280,813 1,311,155
------------ ------------
Operating loss (321,304) (290,724)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 50,879 53,156
Interest expense (307,636) (8,397)
Equity in losses of joint venture (131,897) --
------------ ------------
Total other income (expense) (388,654) 44,759
------------ ------------
Loss before income taxes and extraordinary item (709,958) (245,965)
INCOME TAX BENEFIT (4,329) (65,691)
------------ ------------
Loss before extraordinary item (705,629) (180,274)
EXTRAORDINARY ITEM - gain on involuntary conversion,
net of income taxes of $44,500 -- 66,859
------------ ------------
Net loss $ (705,629) $ (113,415)
Preferred stock dividends earned (409,705) --
------------ ------------
Net loss attributable to
common stockholders $ (1,115,334) $ (113,415)
============ ============
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ -- $ (.03)
Extraordinary item (.08) .01
------------ ------------
Net loss per share $ (.08) $ (.02)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,053,862 6,696,805
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 77
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------------------- -------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ -- 7,714,286 $ 771
Purchase and retirement of treasury stock -- -- (2,314,286) (231)
Cash dividends
USPLC/CEI (Note 2) 74,970 75 6,272,349 627
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 74,970 75 11,672,349 1,167
Preferred stock issuances 119,000 119 -- --
Preferred stock dividends 14,960 15 -- --
Business acquisitions -- -- 2,190,150 219
Sale of common stock -- -- 1,111,111 111
Common stock issued under earnout
agreements -- -- 28,500 3
Exercise of nonemployee stock options -- -- 202,589 20
Licensing agreement -- -- 187,500 19
Noncompete agreements -- -- 72,572 7
Dura Tech agreement -- -- 150,500 15
Issuance of shares -- -- 6,328 1
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 208,930 $ 209 15,621,599 $ 1,562
------------ ============ ============ ============
<CAPTION>
Additional Accumulated
Paid-in-Capital Deficit Total
--------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 2,999,229 $ 963,186 $ 3,963,186
Purchase and retirement of treasury stock (1,099,769) -- (1,100,000)
Cash dividends (948,000) (948,000)
USPLC/CEI (Note 2) 2,537,298 -- 2,538,000
Net loss -- (113,415) (113,415)
------------ ------------ ------------
Balance, December 31, 1996 4,436,758 (98,229) 4,339,771
Preferred stock issuances 2,379,881 -- 2,380,000
Preferred stock dividends 304,725 (304,740) --
Business acquisitions 2,277,262 -- 2,277,481
Sale of common stock 2,499,889 -- 2,500,000
Common stock issued under earnout
agreements 63,087 -- 63,090
Exercise of nonemployee stock options 358,565 -- 358,585
Licensing agreement 93,731 -- 93,750
Noncompete agreements 80,681 -- 80,688
Dura Tech agreement 75,235 -- 75,250
Issuance of shares 3,212 -- 3,213
Net loss -- (705,629) (705,629)
------------ ------------ ------------
Balance, December 31, 1997 $ 12,573,026 $ (1,108,598) $ 11,466,199
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 78
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (705,629) $ (113,415)
-------------- ------------
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation 520,888 621,452
Amortization 268,279 8,245
Provision for uncollectible accounts 219,053 21,704
Equity in losses of joint venture 131,897 -
Compensation expense on earnout shares 63,090 -
Write-off of abandoned and fire damaged property and
equipment - 68,085
Deferred income taxes (169,252) 121,300
Changes in operating assets and liabilities, net of Acquisition:
Accounts receivable (1,388,682) 620,760
Inventories (575,126) (39,630)
Prepaid expenses and other current assets (100,166) 72,767
Other assets (373,466) -
Accounts payable (874,589) 243,363
Other liabilities 260,533 -
Accrued expenses 269,242 193,020
-------------- ------------
Total adjustments (1,748,299) 1,931,066
-------------- ------------
Net cash (used in) provided by operating activities (2,453,928) 1,817,651
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,625,356) (251,035)
Cash paid for acquisitions, net of cash received (1,595,000) 225,468
-------------- ------------
Net cash used in investing activities (4,220,356) (25,567)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock 2,503,213 -
Proceeds from sale of preferred stock 2,380,000 -
Proceeds from stock option exercises 358,585 -
Advances from affiliate 1,900,000 -
Repayment of amounts due to affiliate (200,000) -
Proceeds from notes payable 1,379,987 -
Repayment of notes payable (1,331,671) -
Dividends paid - (948,000)
Payment for purchase of treasury stock - (1,100,000)
---------------- ------------
Net cash provided by (used in) financing activities 6,990,114 (2,048,000)
-------------- ------------
</TABLE>
(Continued)
F-7
<PAGE> 79
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 315,830 (255,916)
CASH AND CASH EQUIVALENTS, beginning of year 854,290 1,110,206
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,170,120 $ 854,290
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 302,305 $ 8,397
=========== ===========
Income taxes $ -- $ 50,000
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
See Notes 2, 6, 10 and 12 for information regarding common and
preferred shares issued for acquisitions, noncompete agreements, licensing
agreement, modification of Dura Tech agreement and note to
stockholder/directors.
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 80
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
U.S. Plastic Lumber Corp. and its subsidiaries 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of U.S.
Plastic Lumber Corp. and its wholly-owned subsidiaries as follows: Earth Care
Products of America, Inc., Earth Care Products of Tennessee, Inc., Earth Care
Products of the Midwest, Inc., Clean Earth, Inc., Clean Earth of New Castle,
Inc., Recycled Plastic Industries, Inc., Environmental Specialty Products, Inc.,
EnviroPlastics Corporation, Earth Care Products of New Jersey, Inc., Integrated
Technical Services, Inc., Advanced Remediation and Disposal Technologies, Inc.,
Waste Concepts, Inc. and Carteret Biocycle Corporation (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Carteret Biocycle Corporation ("CBC") was formed in June 1997. CBC will operate
a bio-organic recycling facility for contaminated soils.
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 December 31, 1997, the carrying value of the
Company's investment in joint venture represented its share of the net losses of
the joint venture, or $131,897. Such amount is included in other liabilities in
the accompanying 1997 consolidated balance sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosure of
contingent 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined by
the first-in, first-out method.
F-9
<PAGE> 81
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed for
financial statement purposes by the use of the straight-line method over the
estimated useful lives of the assets. Accelerated methods of computing
depreciation are used for tax purposes. Upon sale or retirement, the cost and
related accumulated depreciation of such assets are removed from the accounts
and any resulting gain or loss realized is credited or charged to income during
the period. Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals, improvements and betterments are capitalized.
ACQUIRED INTANGIBLES
The excess of cost over the fair value of net assets of businesses acquired is
amortized on a straight-line basis over a period of twenty years. Amortization
expense was $268,279 in 1997. Accumulated amortization was $268,279 at December
31, 1997.
It is the Company's policy to evaluate the excess of cost over the net assets of
businesses acquired based on an evaluation of such factors as the occurrence of
a significant adverse event or change in the environment in which the business
operates or if the expected undiscounted future net cash flows are less than the
carrying amount of the asset. An impairment loss would be recorded in the period
such determination is made.
REVENUE RECOGNITION
Revenues from the Company's plastic lumber division are recognized at the date
the products are shipped. Revenues from the environmental recycling division are
recognized upon treatment and certification.
The Company provides for estimated losses on doubtful accounts. The following is
a summary of activity of the Company's allowance accounts:
1997 1996
--------- ---------
Balance, beginning of year $ 148,744 $ 127,040
Provision for doubtful accounts 219,053 21,704
Write-offs (47,662) --
Allowance of acquired entities 154,895 --
--------- ---------
Balance, end of year $ 475,030 $ 148,744
========= =========
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." In accounting for stock-based
transactions with nonemployees, the Company records compensation expense when
these types of options are issued. As permitted by SFAS No. 123, the Company
accounts for stock-based compensation granted to employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax
F-10
<PAGE> 82
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement basis and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to be settled or realized.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred and were approximately
$81,068 and $18,500 in 1997 and 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Company maintains its cash and cash equivalents with
various financial institutions which are primarily located in the Eastern United
States. At December 31, 1997, the Company had bank balances of approximately
$786,000 in excess of amounts insured by federal deposit insurance. Trade
receivables are concentrated primarily in the Northeastern United States. The
Company generally does not require collateral from its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, receivables, accounts
payable, due to affiliates and notes payable. The carrying amounts reported in
the consolidated balance sheet for these financial instruments approximate their
fair value.
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. As
the Company incurred losses in 1997 and 1996, basic and diluted loss per share
are the same.
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." Both Statements are required
to be adopted in 1998. The Company does not believe that such adoption will have
a significant impact on its financial statement presentation.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
2. ACQUISITIONS
1996 ACQUISITION
Effective December 30, l996, 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 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
F-11
<PAGE> 83
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 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 11. 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.
The following unaudited pro forma information presents a summary of the 1996
consolidated results of operations of USPLC and CEI as if the acquisition had
occurred January 1, 1996:
Net revenues $ 6,627,000
=============
Loss before extraordinary item $ (2,303,000)
=============
Net loss $ (2,236,000)
=============
Basic and diluted loss per share:
Loss before extraordinary item $ (.18)
Extraordinary item .01
-------------
Net loss $ (.17)
=============
These unaudited pro forma results have been prepared for comparison purposes
only and include adjustments for depreciation on revalued property and
equipment, amortization of goodwill, and to reflect the provision for income
taxes at an effective rate of 40%. They do not purport to be indicative of the
results of operations which actually would have resulted had the combination
been in effect on January 1, 1996, or of future results of operations of the
consolidated entities.
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
F-12
<PAGE> 84
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 $277,000. 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 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 $1,526,000. 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
$1,217,000. 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:
Aggregate purchase price $ 3,972,481
-----------
Working capital (deficit) (619,316)
Long-term assets 2,813,281
Long-term debt (1,965,040)
Deferred taxes (815,885)
-----------
Acquired intangible items $ 4,459,441
===========
F-13
<PAGE> 85
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.
The unaudited pro forma combined results of operations of the Company, RPI,
ARDT, ESP, ITS, EPC, and WCI for 1997 and 1996, after giving effect to certain
pro forma adjustments are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Net sales $33,494,446 $ 24,927,343
=========== ============
Loss before extraordinary items $(1,261,188) $ (2,243,194)
=========== ============
Basic and diluted loss per share $ (.09) $ (.15)
=========== ============
Weighted average shares used in computation 14,797,128 15,125,028
=========== ============
</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. INVENTORIES
Inventories consist of the following:
1997 1996
---------- ----------
Supplies $ 66,103 $ 71,143
Raw materials 508,360 83,887
Work-in-process 16,214 --
Finished goods 911,981 331,948
---------- ----------
$1,502,658 $ 486,978
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Useful
Lives 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Buildings 30 years $ 1,146,948 $ --
Machinery and equipment 7 to 10 years 7,806,148 3,779,540
Leasehold improvements Life of lease 134,063 409,470
Furniture and fixtures 5 years 407,446 23,822
------------ ------------
9,494,605 4,212,832
Less - accumulated depreciation (3,719,181) (3,277,114)
------------ ------------
$ 5,775,424 $ 935,718
============ ============
</TABLE>
Depreciation expense was $520,888 and $621,452 for the years ended December 31,
1997 and 1996, respectively.
F-14
<PAGE> 86
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Line of credit, bearing interest at 9% due December 31,
1998, collateralized by substantially all of the assets of
certain subsidiaries of the Company $ 600,000 $ --
Promissory bank note, payable in monthly installments through
September 1, 2002, bearing interest at 9%, collateralized by
substantially all of the assets of certain subsidiaries of
the Company 255,501 --
Promissory bank note, payable in monthly installments through
September 1, 2001, bearing interest at 9%, collateralized by
substantially all of the assets of certain subsidiaries of
the Company 174,469 --
Promissory bank note, payable in monthly installments through April
29, 1999, bearing interest at 8.25%, collateralized by property
and inventory of certain subsidiaries of the Company 231,620 --
Promissory note payable, interest payments due monthly bearing
interest at prime plus 2% (8.5% at December 31, 1997), balloon
payment due September 1, 1998, collateralized by all assets of
certain subsidiaries of the Company 318,750 --
Note payable, payable in monthly installments through April 1,
2002, bearing interest at 7.565%, collateralized
by all assets of a subsidiary of the Company 387,772 --
Promissory note payable, currently due in total, bearing
interest at 7.5% collateralized by all assets of certain
subsidiaries of the Company 280,561 --
Noninterest bearing note payable with customer due February 1998 300,000 --
Line of Credit, interest payments due monthly bearing interest at
10.25%, with an open maturity, collateralized by various assets
of a subsidiary of the Company 142,143 --
Promissory note payable, payable in monthly installments through
July 19, 1998, bearing interest at 10.5%, collateralized by all
assets of a certain subsidiaries of the Company 110,900 134,724
</TABLE>
(Continued)
F-15
<PAGE> 87
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Note payable to stockholder, bearing interest at prime,
plus 1%, repaid in January 1997 $ -- $ 500,824
Other notes payable, maturing from payable on demand to May 31,
2001, bearing interest ranging from 8.3 to 11.75%, collateralized
by various assets of the Company 419,902 78,764
------------ -------------
Total debt 3,221,618 714,312
Less- current portion (2,404,607) (707,582)
------------ -------------
Long-term debt $ 817,011 $ 6,730
============ =============
</TABLE>
Long-term debt matures as follows:
YEAR ENDING AMOUNTS
------------
1998 $ 2,404,607
1999 327,565
2000 211,510
2001 204,533
2002 73,403
------------
$ 3,221,618
============
6. 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. Through
December 31, 1997, the Company had issued 208,930 shares of its 10% convertible
preferred stock, including accumulated dividends, for net proceeds of
$3,879,400.
COMMON STOCK
In June of 1997, in settlement of a liability accrued at December 31, 1996,
which resulted from modification of certain of its agreements related to its
acquisition of DuraTech Industries, the Company issued an additional 150,500
shares of its common stock, together with $30,000 in cash.
During 1997, the Company issued 1,111,111 shares of its common stock for net
proceeds of $2,500,000.
F-16
<PAGE> 88
TREASURY STOCK
Prior to the Merger, CEI acquired 2,314,286 shares of its common stock from its
sole stockholder for $1,100,000 during June and September 1996. Effective with
the Merger, those treasury shares were cancelled and retired.
STOCK WARRANTS
At December 31, 1997, the Company had outstanding 950,000 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 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 March 20, 1998, the Company had
not registered the underlying common stock for the Series B Warrants.
EMPLOYEE STOCK OPTIONS
During 1997 and 1996, the Company 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 Average Number of
Exercise Options
Price Outstanding
-------------- -----------
<S> <C> <C>
Outstanding, December 31, 1996 $4.26 307,000
Granted 3.47 1,220,000
Exercised - -
Canceled 4.33 (177,000)
------ -----------
Outstanding, December 31, 1997 $3.54 1,350,000
===== ===========
Stock options exercisable $3.54 1,191,667
===== ===========
</TABLE>
The weighted average fair value per share as of the grant date was $.90 for
stock options granted in 1997.
Additional information regarding options outstanding at December 31, 1997 as
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- -------------------------
Range of Weighted Weighted
Exercise Prices Average Average
----------------------- Exercise Exercise
Low High Number Price Number Price
------- ------- ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
$ 2.22 $ 4.00 1,210,000 $ 3.29 1,090,000 $ 3.29
4.50 7.22 140,000 5.96 101,667 6.47
------- ------- ----------- ------ ----------- ------
$ 2.25 $ 7.22 1,350,000 $ 3.54 1,191,667 $ 3.54
======= ======= =========== ====== =========== ======
</TABLE>
F-17
<PAGE> 89
The following table summarizes the pro forma consolidated results of operations
of the Company as though the fair value based accounting method in SFAS 123 had
been used in accounting for employee stock options, for the year ended December
31, 1997. The pro forma impact of such options for the year ended December 31,
1996 was not material.
As reported results of operations:
Net loss $ (705,629)
Net loss per share basic and diluted $ (.05)
Pro forma results of operations:
Net loss $ (759,558)
Net loss per share basic and diluted $ (.05)
For purposes of the above disclosure, the determination of the fair value of
stock options granted in 1997 was based on the following: (i) a risk free
interest rate of 7.5%; (ii) expected option lives of seven years; (iii) expected
volatility in the market price of the Company's common stock of 75%; and (iv) no
expected dividends on the underlying common stock.
The Company had an agreement with a key employee under which, options were to be
granted to the employee based upon revenue levels and other factors, at prices
which could be below fair market value. Effective December 31, 1997, the Company
modified the agreement to fix the number of options at 950,000, and to fix the
exercise prices of such options at prices which range from $2.25 to $4.00. As
the fair value of the Company's stock at the date of the modification was not in
excess of the exercise prices, no compensation expense was recorded in
connection with such modification.
NONEMPLOYEE STOCK OPTIONS
Magellan Finance Corporation ("Magellan"), a stockholder, holds an option to
purchase up to 353,684 shares of the Company's common stock at $1.77 per share.
The option expires as follows: 117,895 options on December 31, 1997; 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. In December 1997, Magellan exercised 117,894 of the options.
<TABLE>
<CAPTION>
Number of
Weighted Average Options
Exercise Price Outstanding
--------------- -----------
<S> <C> <C>
Outstanding, December 31, 1996 $ 1.81 463,379
Granted -- --
Exercised 1.77 (202,589)
Canceled 2.50 (5,000)
-------- --------
Outstanding, December 31, 1997 $ 1.83 255,790
======== ========
Stock options exercisable $ 1.88 137,895
======== ========
</TABLE>
The weighted average fair value of the stock options exercised was $2.25. See
Note 13
F-18
<PAGE> 90
STOCK RESERVATIONS
At December 31, 1997, common stock was reserved for the following:
USPLC and CEI contingently issuable shares 4,723,686
Exercise of Series A and Series B Warrants 1,900,000
Conversion of Preferred Stock 1,464,449
Nonemployee stock options 255,790
Employee stock options 1,350,000
Shares and options contingently issuable under
earnout provisions 168,000
---------
9,861,925
=========
7. EMPLOYEE BENEFIT PLANS
The Company has defined contribution 401(k) and profit sharing plans which cover
substantially all employees who have met the eligibility requirements. Employees
may contribute up to the maximum allowable under current regulations to the
401(k). There are no employee contributions to the profit sharing plan. The
Company's contribution to each plan is at the discretion of the Company. There
were no Company contributions to the plans during 1997 and 1996.
8. INCOME TAXES
The provision for income taxes includes federal and state taxes currently
payable and those deferred because of temporary differences between financial
statement and tax basis of assets and liabilities. The components of the
provision for income taxes (benefit) included in the consolidated statements of
income is as follows:
1997 1996
---------- ----------
Current:
Federal $ - $ (144,812)
State 164,923 (42,179)
---------- ----------
164,923 (186,991)
---------- ----------
Deferred:
Federal (95,839) 94,918
State (73,413) 26,382
---------- ----------
(169,252) 121,300
---------- ----------
$ (4,329) $ (65,691)
========== ==========
The provision for income taxes differed from the amount obtained by applying the
federal statutory income tax rate to pre-tax accounting income, as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax at statutory rate of 34% $(241,386) $ (83,628)
State taxes, net of Federal benefit 23,691 (26,995)
Nondeductible goodwill 88,578 --
Increases in valuation reserves 124,788 44,932
--------- ---------
Income tax benefit $ (4,329) $ (65,691)
========= =========
</TABLE>
Deferred taxes primarily represent the impact of businesses acquired in 1997 who
formerly accounted for Federal income taxes on a cash basis.
F-19
<PAGE> 91
9. GAIN ON INVOLUNTARY CONVERSION
During March 1996, fire damaged equipment at the CEI. The extraordinary gain
represents the excess of insurance proceeds received over the loss incurred. The
Company and the insurance carrier have reached a final settlement in February
1997 for an additional $455,000. This amount is reflected in the December 31,
1996 balance sheet as a receivable. Total insurance proceeds amounted to
$805,000 for the year ended December 31, 1996.
10. RELATED PARTY TRANSACTIONS
In 1997, the Company borrowed $1,900,000 from a company controlled by a member
of the Board of Directors and his family. The note bears interest at prime plus
1% and is due on demand.
In 1996, the Company incurred administrative and service fees to various
stockholders and directors totaling $500,000. No such costs were incurred in
1997.
During 1996, certain stockholders and directors loaned the Company $120,000
which was later converted into Series A Preferred Stock. Each of the five
participating stockholder/directors also received 5,000 stock options to
purchase common stock at $2.50 per share.
The Company leases certain office space and manufacturing facilities from
entities controlled by individuals who are stockholders. These leases provide
for minimum annual rentals of $423,779 through 2000. The manufacturing facility
lease was terminated in December 1997.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, equipment, manufacturing facilities, and land
under non-cancelable operating leases which expire at various dates through
2028.
Future minimum payments are as follows for the years ending December 31:
Affiliates Third Parties Total
---------- ------------- ----------
1998 $ 138,779 $ 602,565 $ 741,344
1999 142,500 355,799 498,299
2000 142,500 301,477 443,977
2001 142,500 295,676 438,176
2002 142,500 271,677 414,177
Thereafter 718,438 5,355,000 6,073,438
---------- ---------- ----------
Total $1,427,217 $7,182,194 $8,609,411
========== ========== ==========
The Company leases land at its soil recycling facility at a rental of $1.00 per
ton of soil received with a minimum rental of $50,000 per year. Rent expense
under this lease was $192,223 and $144,915 in 1997 and 1996, respectively. The
lease currently expires in 1998 and contains three five-year renewal options.
The lessor has the right and option at the time of renewal to require the
Company to purchase the property at a purchase price of $100,000 per acre
subject to annual escalations based on the Consumer Price Index from inception
of the lease. The Company currently leases 7.5 acres of land.
Rent expense for all operating leases for the years ended December 31, 1997 and
1996 was approximately $563,000 and $300,000, respectively.
F-20
<PAGE> 92
COVENANT NOT TO COMPETE
The Company has a covenant not to compete agreement for which the Company pays
$2.00 per ton of soil received for processing. These payments expire August 31,
1998. The expense for the covenant not to compete for 1997 and 1996 amounted to
$384,446 and $336,546, respectively.
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 l997, a former partner of ECP alleged that the Company had wrongfully
issued shares to the other partners of ECP in connection with the 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.
LICENSING AGREEMENT
During February of 1997, the Company entered into a licensing agreement with
Rutgers University for the rights to commercially develop, manufacture and sell
a composite building material from recycled waste. In exchange for $10,000 in
cash and 187,500 shares of the Company's common stock, the Company received an
exclusive license to use this material for certain applications, including
railroad ties, marine pilings and building materials. The total consideration
was valued at $103,750 and has been recorded as a component of other assets in
the accompanying 1997 consolidated balance sheet. This agreement is in effect
F-21
<PAGE> 93
for at least ten years from the date of the initial product sales and requires
the Company to pay a maintenance fee and a 3% royalty fee. Such fees are subject
to certain minimum payment thresholds, as follows:
Maintenance Royalty
Fee Fee
----------- -----------
1998 $ 5,000 $ 25,000
1999 10,000 40,000
2000 10,000 60,000
2001 10,000 60,000
2002 10,000 60,000
Thereafter 60,000 360,000
----------- -----------
Total $ 105,000 $ 605,000
=========== ===========
ROYALTY AGREEMENT
CBC has a license and operating agreement with SD&G Aggregates, Inc. ("SD&G") to
conduct remediation of contaminated soils. The Company pays SD&G a royalty of 2%
of sales. As CBC had no revenues in 1997, no such royalty payments were made.
SIGNIFICANT CUSTOMERS
One of EPC's customers accounted for 74% of its total revenues of approximately
$3,500,000.
12. 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 and EPC. The environmental recycling division
reflects the operating activities of CEI, ARDT, ITS, WCI and CBC.
The operating results of the respective segments are set forth below (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Plastic lumber division $ 8,130 $ --
Environmental recycling division 16,609 6,412
-------- --------
$ 24,739 $ 6,412
======== ========
Operating income (loss):
Plastic lumber division $ (1,033) $ --
Environmental recycling division 2,312 (291)
Corporate (1,600) --
-------- --------
$ (321) $ (291)
======== ========
Depreciation and amortization:
Plastic lumber division $ 392 $ --
Environmental recycling division 237 629
Corporate 160 --
-------- --------
$ 789 $ 629
======== ========
</TABLE>
F-22
<PAGE> 94
Information with respect to identifiable assets and capital expenditures of the
respective segments is set forth below (in thousands):
December 31,
1997 1996
------- -------
Identifiable assets:
Plastic lumber division $15,113 $ --
Environmental recycling division 8,058 7,048
Corporate -- --
------- -------
$23,171 $ 7,048
======= =======
Capital expenditures:
Plastic lumber division $ 1,126 $ --
Environmental recycling division 1,499 251
Corporate -- --
------- -------
$ 2,625 $ 251
======= =======
13. SUBSEQUENT EVENTS
In January 1998, the Company acquired Green Horizon Environmental, Inc., an
environmental services company, in exchange for 50,000 shares of common stock.
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 will be 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 123 of approximately $400,000 will be
amortized as interest over the term of the line of credit of 18 months.
In February 1998, the Company acquired the majority interest of Consolidated
Technologies, Inc. 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.
In March 1998, the Company acquired substantially all of the assets of
Chesapeake Recycled Lumber, Inc. in exchange for $200,000 in cash and 97,500
shares of the Company's common stock.
F-23
<PAGE> 95
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<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.
F-24
<PAGE> 96
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)
PREFERRED STOCK DIVIDEND EARNED............................. (108,155) (105,580)
----------- -----------
Net loss attributable to common stockholders...... $ 122,615 $ 561,589
=========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (.01) $ (.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.
F-25
<PAGE> 97
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.
F-26
<PAGE> 98
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
F-27
<PAGE> 99
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
F-28
<PAGE> 100
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
F-29
<PAGE> 101
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.
F-30
<PAGE> 102
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>
F-31
<PAGE> 103
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Reservations
At March 31, 1998, common stock was reserved for the following:
<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.
F-32
<PAGE> 104
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.
F-33
<PAGE> 105
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.
F-34
<PAGE> 106
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma consolidated financial information gives
effect to the combination for financial reporting purposes of U.S. Plastic
Lumber Corp. and the subsidiary companies owned as of December 31, 1996 (USPLC)
with the following companies acquired since December 31, 1996:
Recycled Plastics Industries, Inc. (RPI), acquired January 27, 1997
Advanced Remediation and Disposal Technologies, Inc. (ARDT), acquired
February 24, 1997
Environmental Speciality Products, Inc. (ESP), acquired March 28, 1997
Integrated Technical Services, Inc. (ITS), acquired March 31, 1997
EnviroPlastics Corporation (EPC), acquired June 30, 1997
Waste Concepts, Inc. (WCI), acquired November 18, 1997
Green Horizon Environmental, Inc. (GHE), acquired January 2, 1998
Chesapeake Plastic Lumber, Inc. (CPL), acquired March 1, 1998
Cycle-Masters, Inc. (CMI), acquired May 13, 1998
The pro forma consolidated financial information is based on the historical
financial statements of USPLC, RPI, ARDT, ESP, ITS, EPC, WCI, GHE, CPL, and CMI,
and on estimates and assumptions set forth below and in the notes to the pro
forma consolidated financial information. Insignificant acquisitions and
companies with insignificant or no operations (e.g. CTI) are not included in the
pro forma information.
The pro forma consolidated balance sheet as of March 31, 1998 gives effect
to the combination of USPLC and CMI as if the acquisition had occurred on the
latest balance sheet date, March 31, 1998. As of March 31, 1998 the balance
sheets of USPLC, RPI, ARDT, ESP, ITS, EPC, WCI, GHE and CPL are included in the
USPLC consolidated balance sheet.
The pro forma consolidated statements of operations present pro forma
results from operations for the year ended December 31, 1997 and the three
months ended March 31, 1998. For purposes of the pro forma consolidated
statements of operations, the acquisitions of RPI, ARDT, ESP, ITS, EPC, WCI, GHE
CPL and CMI are included as if the acquisitions had occurred on January 1, 1997.
The pro forma consolidated statements of operations for the three months
ended March 31, 1998 includes: (i) the unaudited financial information of USPLC
for the three months ended March 31, 1998 (which includes USPLC and GHE for the
three months ended March 31, 1998, and CPL for the one month ended March 31,
1998; (ii) the unaudited financial information of CPL for the two month period
ended February 28, 1998; and (iii) the unaudited financial information of CMI
for the three months ended March 31, 1998.
The pro forma consolidated statements of operations for the year ended
December 31, 1997 (which includes the audited financial information of USPLC for
the year ended December 31, 1997, RPI for the eleven months ended December 31,
1997, ARDT for the ten months ended December 31, 1997, ESP and ITS for the nine
months ended December 31, 1997, EPC for the six months ended December 31, 1997
and WCI for the one month ended December 31, 1997; (ii) the unaudited financial
information of GHE for the year ended December 31, 1997; (iii) the unaudited
financial information of CPL for the year ended December 31, 1997; and (iv) the
audited financial information of CMI for the year ended September 30, 1997.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial information presented herein is not
necessarily indicative of the results the companies would have obtained had the
acquisitions occurred on January 1, 1997, as assumed, or of the future results
of the companies. The pro forma consolidated financial information should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in the Prospectus.
F-35
<PAGE> 107
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
PROFORMA CONSOLIDATED BALANCE SHEET
-----------------------------------
MARCH 31, 1998
--------------
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
USPLC CMI Adjustments Pro Forma
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,096,911 $ 621 (1,600,000)a $ (502,468)
Accounts receivable, net 6,452,550 545,582 6,998,132
Inventories 1,768,790 398,108 2,166,898
Prepaid expenses and other 401,638 -- 401,638
------------ ------------ ----------- ------------
Total current assets 9,719,889 944,311 (1,600,000) 9,064,200
PROPERTY, PLANT AND EQUIPMENT (net) 7,649,571 806,361 86,418 c 8,542,350
OTHER ASSETS:
Acquired intangibles, net 7,556,753 24,696 1,891,218 c 9,472,667
Other assets 2,014,760 -- -- 2,014,760
Investment in joint venture 575,915 -- -- 575,915
------------ ------------ ------------ ------------
Total assets $ 27,516,888 $ 1,775,368 $ 377,636 $ 29,669,892
============ ============ ============ ============
</TABLE>
(Continued)
F-36
<PAGE> 108
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
PROFORMA CONSOLIDATED BALANCE SHEET
-----------------------------------
MARCH 31, 1998
--------------
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Pro Forma
USPLC CMI Adjustments Pro Forma
----- --- ----------- ---------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable, current portion $ 2,484,458 $ 370,309 $ -- $ 2,854,767
Notes payable, affiliates 1,006,810 -- -- 1,006,810
Accounts payable 3,745,951 214,464 -- 3,960,415
Accrued expenses 1,220,937 264,754 -- 1,485,691
Other liabilities 357,071 -- -- 357,071
------------ ------------ ------------ ------------
Total current liabilities 8,815,227 849,527 -- 9,664,754
NOTES PAYABLE, net of current portion 5,364,453 453,477 250,000 a 6,067,930
DEFERRED INCOME TAXES 633,656 -- -- 633,656
MINORITY INTEREST 225,000 -- -- 225,000
------------ ------------ ------------ ------------
Total liabilities 15,038,336 1,303,004 250,000 16,591,340
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock 221 -- 221
Common stock 1,590 -- 20 a 1,610
599,980 a
Additional paid-in capital 13,812,918 107,995 (107,995) b 14,412,898
Accumulated deficit (1,336,177) 364,369 (364,369) b (1,336,177)
------------ ------------ ------------ ------------
Total stockholders' equity 12,478,552 472,364 127,636 13,078,552
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 27,516,888 $ 1,775,368 $ 377,636 $ 29,669,892
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
F-37
<PAGE> 109
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
USPLC CPL CMI Adjustments Pro Forma
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 7,659,261 $ 46,686 $ 905,819 $ -- $ 8,611,766
Cost of sales 6,058,821 60,371 497,723 -- 6,616,915
------------ ----------- ------------ ------------ ------------
Gross profit 1,600,440 (13,685) 408,096 -- 1,994,851
General, administrative and selling 1,584,796 40,925 247,448 32,980 b,c 1,906,149
------------ ----------- ------------ ----------- ------------
Operating income (loss) 15,644 (54,610) 160,648 (32,980) 88,702
Other income 105,588 -- 612 106,200
Interest expense (145,332) (2,748) -- (45,313) d (193,393)
Equity in loss of JV -- -- -- --
Provision for income (taxes) credits 9,640 -- (54,720) 45,080 e --
------------ ----------- ------------ ----------- ------------
Net income (loss) (14,460) (57,358) 106,540 (33,213) 1,509
Preferred stock dividends (108,155) -- -- -- (108,155)
------------ ----------- ------------ ----------- ------------
Net income (loss) attributable
to common stockholders $ (122,615) $ (57,358) $ 106,540 $ (33,213) $ (106,646)
============ =========== ============ =========== ============
Basic and diluted loss per share $ (0.01) $ (0.01)
============ ============
Weighted average shares outstanding 15,737,443 16,017,654
============ ============
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
F-38
<PAGE> 110
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
USPL RPI ARDT ESP ITS EPC
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 24,739,381 $ 82,868 $ 38,276 $ 147,145 $ 1,785,026 $ 2,891,508
Cost of sales 19,779,873 62,604 59,984 137,434 1,483,824 3,125,953
-------------- ------------- ------------- ------------- ------------- -------------
Gross profit 4,959,508 20,264 (21,708) 9,711 301,202 (234,445)
General, administrative and selling 5,280,813 13,032 38,432 131,545 188,586 285,019
-------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) (321,305) 7,232 (60,140) (121,834) 112,616 (519,464)
Other income 50,879 189 -- -- -- -
Interest expense (307,635) (2,055) (1,911) (1,693) (4,638) (51,639)
Equity in loss of JV (131,897) -- -- -- -- -
Provision for income (taxes) credits 4,329 -- -- 29,918 (18,738) 97,822
-------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) (705,629) 5,366 (62,051) (93,609) 89,240 (473,281)
Preferred stock dividends (409,705) -- -- -- -- --
-------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) attributable
to common stockholders $ (1,115,334) $ 5,366 $ (62,051) $ (93,609) $ 89,240 $ (473,281)
============== ============= ============= ============= ============= =============
Basic and diluted loss per share $ (0.08)
=============
Weighted average shares outstanding 14,053,862
=============
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
(continued)
F-39
<PAGE> 111
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Pro Forma
WCI GHE CPL CMI Adjustments Pro Forma
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 4,791,242 $ 911,304 $ 704,560 $ 2,614,861 $ (1,041,433)a $ 37,664,738
Cost of sales 3,903,960 762,615 848,240 1,570,240 (1,041,433)a 30,693,294
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 887,282 148,689 (143,680) 1,044,621 -- 6,971,444
General, administrative and selling 953,229 52,391 167,066 667,128 147,047 b,c 7,924,288
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (65,947) 96,298 (310,746) 377,493 (147,047) (952,844)
Other income (16,665) -- 9,473 -- 43,876
Interest expense (24,823) (4,182) (23,250) (61,007) (181,250)d (664,083)
Equity in loss of JV -- -- -- -- (131,897)
Provision for income (taxes) credits -- -- -- (122,000) 8,669 e --
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) (107,435) 92,116 (324,523) 194,486 (319,628) (1,704,948)
Preferred stock dividends -- -- -- -- -- (409,705)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) attributable
to common stockholders $ (107,435) $ 92,116 $ (324,523) $ 194,486 $ (319,628) $ (2,114,653)
============ ============ ============ ============ ============ ============
Basic and diluted loss per share $ (0.14)
============
Weighted average shares outstanding 15,144,629
============
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
F-40
<PAGE> 112
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
------------------------------------------
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
-----------------------------------------------------
1. Unaudited Pro Forma Consolidated Balance Sheet Adjustments
a. Adjustments to reflect the payment of cash and issuance of 200,000
shares of common stock and notes payable to effect the acquisition of
Cycle-Masters, Inc. ("CMI") on May 13, 1998.
b. Adjustment to eliminate the capital stock, additional paid-in-capital
and retained earnings of CMI.
c. Adjustment to reflect the purchase price allocation of CMI acquired
assets and liabilities to estimated fair value.
2. Unaudited Pro Forma consolidated Statements of Operations Adjustments
a. Adjustment to eliminate intercompany sales.
b. Adjustment to reflect increase in amortization expense of the
goodwill recorded on the acquisitions accounted for as purchases.
c. Adjustment to reflect depreciation expense on equipment recorded at
the fair value for acquisitions accounted for as purchases.
d. Adjustment to reflect interest expense for cash paid and or notes
payable issued for acquisitions, net of debt not assumed or replaced.
e. Adjustment to eliminate all income taxes provided by acquired
companies prior to the acquisition. No income tax credits are
recorded on the pro forma loss for the year ended December 31, 1997.
f. The weighted average shares outstanding used to calculate pro forma
income per share is based on the historical average number of shares
of common stock outstanding during the period adjusted for the
acquisitions as if they had occurred on January 1, 1997. For both the
year ended December 31, 1997 and the six months ended March 31, 1998,
common stock equivalents have been excluded because they are
antidilutive.
F-41
<PAGE> 113
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Shareholders of
Cycle-Masters, Inc.:
We have audited the accompanying balance sheet of Cycle-Masters, Inc. (an
Indiana corporation) as of September 30, 1997, and the related statements of
income and retained earnings and cash flows for each of the two years in the
period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cycle-Masters, Inc. as of
September 30, 1997, and the results of its operations and cash flows for each of
the two years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
April 30, 1998 (except with respect to
the matter discussed in Note 7, as to
which the date is May 13, 1998).
F-42
<PAGE> 114
CYCLE-MASTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,990 $ 621
Trade receivables, less allowance for doubtful
accounts of $11,300 at September 30, 1997 and
$20,000 (unaudited) at March 31, 1998 323,103 545,582
Inventories 297,268 398,108
---------- ----------
Total current assets 638,361 944,311
PROPERTY AND EQUIPMENT, net 679,937 806,361
OTHER ASSETS 30,972 24,696
---------- ----------
Total assets $1,349,270 $1,775,368
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219,077 $ 214,464
Accrued expenses 152,857 264,754
Line of credit -- 259,500
Current portion of notes payable 110,809 110,809
---------- ----------
Total current liabilities 482,743 849,527
NOTES PAYABLE, net of current portion 309,728 253,477
NOTE PAYABLE TO STOCKHOLDER 200,000 200,000
---------- ----------
Total liabilities 992,471 1,303,004
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized 1,000 shares;
issued and outstanding 500 shares 107,995 107,995
Retained earnings 248,804 364,369
---------- ----------
Total stockholders' equity 356,799 472,364
---------- ----------
Total liabilities and stockholders' equity $1,349,270 $1,775,368
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part
of these balance sheets.
F-43
<PAGE> 115
CYCLE-MASTERS, INC.
-------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
-------------------------------- ---------------------------------
1996 1997 1997 1998
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 1,836,223 $ 2,614,861 $ 1,242,430 $ 1,513,850
COST OF GOODS SOLD 1,058,146 1,570,240 759,808 889,264
------------- ------------- ------------- -------------
Gross profit 778,077 1,044,621 482,622 624,586
OPERATING EXPENSES 520,411 667,128 323,390 409,149
------------- ------------- ------------- -------------
Operating income 257,666 377,493 159,232 215,437
INTEREST EXPENSE 60,941 61,007 31,099 31,172
------------- ------------- ------------- -------------
Income before income
taxes 196,725 316,486 128,133 184,265
PROVISION FOR INCOME
TAXES 48,568 122,000 49,400 68,700
------------- ------------- ------------- -------------
Net income 148,157 194,486 78,733 115,565
RETAINED EARNINGS
(ACCUMULATED DEFICIT),
beginning of period (93,839) 54,318 54,318 248,804
------------- ------------- ------------- -------------
RETAINED EARNINGS,
end of period $ 54,318 $ 248,804 $ 133,051 $ 364,369
============= ============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-44
<PAGE> 116
CYCLE-MASTERS, INC.
-------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
------------------------ --------------------------
1996 1997 1997 1998
---------- --------- --------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 148,157 $ 194,486 $ 78,733 $ 115,565
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 39,508 59,379 14,547 33,000
Provision for uncollectible accounts 33,844 649 -- 31,300
Changes in operating assets and liabilities:
Accounts receivable (167,319) 44,900 (132,384) (253,779)
Inventories (59,382) (98,672) 20,881 (100,840)
Prepaid expenses 7,835 --
Other assets (11,931) 8,847 14,335 6,276
Accounts payable 101,652 8,193 (49,015) (4,613)
Accrued expenses 16,122 101,658 66,726 111,897
--------- --------- --------- ---------
Total adjustments (39,671) 124,954 (64,910) (176,759)
--------- --------- --------- ---------
Net cash provided by operating activities 108,486 319,440 13,823 (61,194)
--------- --------- --------- ---------
</TABLE>
(Continued)
F-45
<PAGE> 117
CYCLE-MASTERS, INC.
-------------------
STATEMENTS OF CASH FLOWS
------------------------
(continued)
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
------------------------ --------------------------
1996 1997 1997 1998
---------- --------- --------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(118,426) $(270,433) $ (47,429) $(159,424)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and line of credit 142,636 226,397 134,000 259,500
Repayment of notes payable (122,587) (262,850) (105,162) (56,251)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 20,049 (36,453) 28,838 203,249
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 10,109 12,554 (4,768) (17,369)
CASH AND CASH EQUIVALENTS, beginning of period (4,673) 5,436 5,436 17,990
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 5,436 $ 17,990 $ 668 $ 621
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 61,342 $ 62,264 $ 31,099 $ 31,172
========= ========= ========= =========
Income taxes $ 20,568 $ 47,516 $ 18,918 $ 92,629
========= ========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-46
<PAGE> 118
CYCLE-MASTERS, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Cycle-Masters, Inc. (the "Company") is engaged in the manufacturing of recycled
plastic lumber from post-consumer plastic waste. The Company's plastic lumber
customers are located throughout the United States.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of the Company's management, the balance sheet as of March 31,
1998 and the statements of income and retained earnings and cash flows for the 6
months ended March 31, 1997 and 1998 include all adjustments necessary in order
to make those financial statements not misleading.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosure of
contingent 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less at the date of purchase to be cash equivalents. At
September 30, 1997, the Company had no cash equivalents.
F-47
<PAGE> 119
INVENTORIES
The Company's inventories are valued at the lower of cost (first-in, first-out)
or market. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Supplies $ 29,470 $ 38,776
Raw materials 62,129 33,532
Finished goods 205,669 325,800
------------- -------------
$ 297,268 $ 398,108
============= =============
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed for
financial statement purposes by the use of the straight-line method over the
estimated useful lives of the assets. Accelerated methods of computing
depreciation are used for tax purposes. Upon sale or retirement, the cost and
related accumulated depreciation of such assets are removed from the accounts
and any resulting gain or loss realized is credited or charged to income during
the period. Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals, improvements and betterments are capitalized.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Useful September 30, March 31,
Lives 1997 1998
-------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment 10 - 15 years $ 568,805 $ 659,265
Tools and dies 10 years 52,330 62,386
Trucks 5 years 54,948 71,538
Leased property 5 years 20,269 20,269
Office equipment 5 years 15,559 16,453
Leasehold improvements Life of lease 91,528 132,952
------------ ------------
803,439 962,863
Less- Accumulated depreciation and
amortization (123,502) (156,502)
------------ ------------
$ 679,937 $ 806,361
============ ============
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
F-48
<PAGE> 120
difference between the financial statement basis and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to be settled or realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, trade receivables,
accounts payable and notes payable. The carrying amounts of these financial
instruments approximate their fair value.
2. ACCRUED EXPENSES
Accrued expenses consists of the following:
September 30, March 31,
1997 1998
----------- -----------
(Unaudited)
Accrued payroll $ 16,602 $ 66,018
Accrued taxes 118,984 95,059
Accrued commissions -- 72,992
Other 17,271 30,685
----------- -----------
$ 152,857 $ 264,754
=========== ===========
3. NOTE PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
September 30, March 30,
1997 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Installment notes payable bearing interest at rates
ranging from 7.5% to 8.4%, due in aggregate
installments of $3,461 through March 2002,
secured by vehicles and machinery $ 77,444 $ 59,508
Note payable at $2,357 per month, including
interest at 9.0%, due December 12, 2001, secured
by substantially all assets of the Company 99,567 89,726
</TABLE>
(Continued)
F-49
<PAGE> 121
<TABLE>
<CAPTION>
September 30, March 30,
1997 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Note payable at $1,655 per month, including
interest at 9.0%, due April 30, 2001, secured by
substantially all assets of the Company $ 60,653 $ 53,313
Notes payable bearing interest at rates ranging
from 6.4% to 12.032%, due in aggregate
installments of $4,142 through December 2002,
secured by equipment 182,673 161,739
Other 200 --
------------- ------------
420,537 364,286
Less - Current portion (110,809) (110,809)
------------- ------------
Long-term debt $ 309,728 $ 253,477
============= ============
</TABLE>
The following is a summary of principal maturities of long-term debt:
Year Ended
September 30, Amount
----------------- ------------
1998 $ 110,809
1999 102,366
2000 87,487
2001 86,675
2002 33,200
------------
$ 420,537
============
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases equipment under operating leases. The following is a schedule
of future minimum lease payments required under the leases at September 30,
1997:
Fiscal Year
Ended Amount
------------- ----------
1998 $ 31,812
1999 31,812
2000 31,812
---------
$ 95,436
=========
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LITIGATION
From time-to-time, the Company may be engaged in routine litigation and disputes
incidental to its business. The Company does not believe that the ultimate
resolution of any of these matters will have a material adverse effect on the
accompanying financial statements.
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
---------------------------- ----------------------------
1996 1997 1997 1998
----------- ---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Federal $ 40,668 $ 109,300 $ 44,300 $ 61,300
State 7,900 12,700 5,100 7,400
----------- ---------- ---------- ---------
$ 48,568 $ 122,000 $ 49,400 $ 68,700
=========== ========== ========== =========
</TABLE>
The provision for income taxes differs from the expense that would result from
applying federal statutory rates primarily due to the provision for state income
taxes and, in fiscal 1996, due to the utilization of net operating loss
carryforwards.
6. RELATED PARTY TRANSACTIONS
The Company has a note payable to a stockholder in the amount of $200,000. The
note bears interest at 9.5% and is due in January 2000. Related party interest
expense paid on this note amounted to $18,000 in fiscal 1996 and $19,000 in
fiscal 1997.
The Company leases its building from its majority stockholder for $600 per month
on a month to month basis.
The Company paid commissions to a stockholder amounting to $89,606 in fiscal
1996 and $164,162 in fiscal 1997.
7. SUBSEQUENT EVENT
On May 13, 1998, the Company was acquired by U.S. Plastic Lumber Corp., an
unaffiliated company, for approximately $2.45 million in cash, stock and notes.
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U.S. PLASTIC LUMBER CORP.
4,632,929 SHARES
COMMON STOCK
PROSPECTUS
_______________, 1998
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAT THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES COVERED HEREBY IN ANY JURISDICTION OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS PAGE
- ----------------- ----
AVAILABLE INFORMATION............................. 2
PROSPECTUS SUMMARY ............................... 3
RISK FACTORS...................................... 6
DILUTION.......................................... 14
USE OF PROCEEDS................................... 15
MARKET INFORMATION
& DIVIDEND POLICY................................ 15
MANAGEMENT'S DISCUSSION
AND ANALYSIS..................................... 17
BUSINESS.......................................... 23
MANAGEMENT........................................ 41
PRINCIPAL SHAREHOLDERS.............................48
CERTAIN TRANSACTIONS.............................. 50
DESCRIPTION OF SECURITIES......................... 53
SHARES ELIGIBLE FOR FUTURE
SALE............................................. 58
PLAN OF DISTRIBUTION.............................. 59
LEGAL MATTERS..................................... 60
FINANCIAL STATEMENTS........................See Index
69
<PAGE> 124
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes, charter provisions, bylaws, contracts or other arrangements under
which controlling persons, directors or officers of the registrant are insured
or indemnified in any manner against any liability which they may incur in such
capacity are as follows:
(a) Section 78.751 of the Nevada Business Corporation Act provides that each
corporation shall have the following powers:
1. A corporation may indemnify any person who was or is a party or is threatened
to be made party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, except an
action by or in the right of the corporation, by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction, determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
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<PAGE> 125
3. To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections 1 and 2, or in defense of any claim, issue
or matter therein, he must be indemnified by the corporation against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a court or
advanced pursuant to subsection 5, must be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting of
directors who were not parties to the act, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were not parties
to the act, suit or proceeding so orders, by independent legal counsel, in a
written opinion; or
(d) If a quorum consisting of directors who were not parties to the act, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
5. The certificate or articles of incorporation, the bylaws or an agreement made
by the corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
director of officers may be entitled under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in or ordered by a
court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking indemnification
or advancement of expenses may be entitled under the certificate or articles of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, for either an action in his official capacity or an
action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to subsection 2 or for the
advancement of expenses made pursuant to subsection 5, may not be made to or on
behalf of any director or officer if a final adjudication establishes that his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action.
II-2
<PAGE> 126
(b) Continues for a person who has ceased to be a director, officer, employee or
agent and inures to the benefit of the heirs, executors and administrators of
such a person."
(b) The registrant's Articles of Incorporation limit liability of its Officers
and Directors to the full extent permitted by the Nevada Business Corporation
Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth all estimated costs and expenses, other than
underwriting discounts, commissions and expense allowances, payable by the
registrant in connection with the maximum offering for the securities included
in this registration statement:
Amount
------
SEC registration fee $ 5,000.00
Blue sky fees and expenses 2,000.00
Printing and shipping expenses 1,000.00
Legal fees and expenses 8,000.00
Accounting fees and expenses 9,000.00
Transfer and Miscellaneous expenses 2,000.00
-----------
Total $ 27,000.00
* All expenses are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Unless otherwise indicated, all share numbers have been adjusted for
the reverse merger stock split of 1 to 16. Also, unless otherwise indicated,
these securities were issued as restricted securities and the certificates were
stamped with restrictive legends to prevent any resale without registration
under the Securities Act of 1933 (The "Act") or in compliance with an exemption.
During 1994, the Company (which was then known as Front Street, Inc.),
issued 18,750,000 shares (pre-split) in February and 15,000,000 shares of Common
Stock (pre-split) in June, in connection with the acquisitions of Educational
Storybooks, Inc. and one other company, both of which were privately held
companies, in stock for stock exchanges which were intended to be tax free
reorganizations under Section 368(a) of the Internal Revenue Code. Later that
same year, these acquisitions were both rescinded and the stock issued was
cancelled. 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 made to a very
limited number of officers, directors and shareholders of the
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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.
In October 1995, the Company (which was then known as Educational
Storybooks International, Inc.) issued 200,000 shares of Common Stock
(pre-split) for $10,000 in a private placement. 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. In each
case the offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officer, 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.
In March 1996, the Company entered into an Agreement and Plan of
Reorganization with Earth Care Global Holdings, Inc. ("Earth Care"), pursuant to
which the Company reverse split its common stock on a 1 for 16 basis, and then
issued 4,196,316 post split shares of its authorized but previously unissued
common stock to the shareholders of Earth Care to acquire all the issued and
outstanding stock of Earth Care in a stock for stock exchange, which was
intended to be a tax free reorganization under Section 368(a) of the Internal
Revenue Code, and was accounted for, for financial reporting purposes, as an
acquisition by Earth Care 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 an offering made to accredited investors, all of whom were officers
and directors of Earth Care and/or represented that they were otherwise
accredited investors.
As a condition precedent to the closing of the Earth Care acquisition,
the Company raised $1,000,000 of capital through an offering of its Common
Stock. The offering was completed and the acquisition closed on or about March
28, 1996. These transactions were not registered under the Act in reliance on
the exemption from registration in Section 3(b) of the Act, and Rule 504 of
Regulation D promulgated thereunder, in that securities with an aggregate
offering price not exceeding $1,000,000 were offered and sold by an issuer that
was not subject to the reporting requirements of the Securities Exchange Act of
1934, and was not an investment company or a company that had no specified
business purpose.
In April 1996, the Company acquired all of the assets of DuraTech
Industries. The Company issued 24,772 post-split shares of its authorized but
previously unissued common stock to the shareholders of Duratech to acquire all
the issued and outstanding stock of Duratech in a stock for stock exchange which
was intended to be a tax free reorganization under Section 368(a) of the
Internal Revenue Code. 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. 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
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<PAGE> 128
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.
In December 1996, the Company formed Clean Earth, Inc. and through it
acquired a wholly owned subsidiary, Clean Earth of New Castle, Inc. The Company
issued 5,400,000 post-split shares of its authorized but previously unissued
common stock to the shareholders of Clean Earth to acquire all the issued and
outstanding stock of Clean Earth in a stock for stock exchange which was
intended to be a tax free reorganization under Section 368(a) of the Internal
Revenue Code. 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. 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.
In January 1997, the Company acquired Recycled Plastics Industries,
Inc. (RPI), located in Green Bay, Wisconsin. The Company paid $1,200,000 in cash
and issued 1,000,000 shares of its Common Stock to the shareholders of RPI in
the acquisition. 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. 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.
In February 1997, the Company acquired Advanced Remediation and
Disposal Technologies, Inc. (ARDT). ARDT is engaged in environmental consulting
and clean up of contaminated sites primarily involving water and soils. The
Company issued 300,000 shares of its Common Stock to the former shareholders of
ARDT. 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. 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.
During the period from June 1996 through February 1997, the Company has
offered and sold 208,930 shares of Class A Preferred Stock to investors at $20
per share, and raised $3,879,400 in proceeds. 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
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public offering. The securities were sold primarily to officers, directors or
other acquaintances who were familiar with the business of the Company and were
able to assess the risks and merits of the investment.
During 1996, the Company issued a total of 5,565 shares of Common Stock
pursuant to the exercise of outstanding options held by two individuals who were
officers or directors of the Company. In 1997, the Company issued 500 shares to
directors for attendance at meetings. 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.
During February 1997, the Company issued 187,500 shares plus cash and
royalty fees in connection with the licensing agreement with Rutgers University.
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 was completed without any general
or public solicitation. The offering was done to a single investor which had
knowledge and experience in business matters to enable them to evaluate the
risks and merits of the investment. This investor also had a pre-existing
business relationship with the Company.
On March 28, 1997, the Company acquired Environmental Specialty
Plastics (ESP), a marketing and distribution company of recycled plastic lumber
products in Guasti, California. The shareholders of ESP received cash plus
25,150 shares of the Company's common stock for a purchase price of $123,581
(see Footnote 2 of Financial Statements for additional information). 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 March 31, 1997, the Company acquired Integrated Technical Services,
Inc. (ITS), an environmental consulting and construction company in Winslow, New
Jersey. The stockholders of ITS received as acquisition consideration, cash plus
185,000 shares of the Company's common stock, and an additional 47,572 shares of
common stock for the for the non-compete agreements (see Footnote 2 of Financial
Statements for additional information). 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.
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<PAGE> 130
On June 20, 1997, the Company issued 1,111,111 shares of Common Stock
to two investment funds, a partnership, and one accredited private investor.
These transactions were not registered under the Act in reliance on the
exemption from registration in Rule 506 of Regulation D, promulgated under
Section 4(2) of the Act, as transactions not involving any public offering,
consisting of sales made solely to accredited investors. Each entity investor
has assets substantially in excess of $5,000,000 and was not formed for the
purpose of investing in the securities. The natural person who invested has net
worth substantially in excess of $1,000,000.
On June 30, 1997, the Company acquired EnviroPlastics Corp., (EPC) a
recycled plastic raw material regrind operation in Auburn, MA. The stockholders
of EPC received 280,000 shares of the Company's common stock as the purchase
price plus 25,000 shares as consideration for non-compete agreements (see
Footnote 2 of Financial Statements for additional information). 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 June 30, 1997, the Company issued 150,000 shares to the former
shareholders of DuraTech Industries, Inc. as part of an earn out provision in
the purchase documents of that acquisition. These earn out shares were
accelerated in part in exchange for salary concessions made by the former
shareholders of DuraTech Industries, Inc. 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.
On November 18, 1997, the Company acquired Waste Concepts, Inc. (WCI),
an environmental recycling services company located in Norristown, PA. The
stockholder of WCI received cash at Closing plus 400,000 shares of common stock
of the Company (see Footnote 2 of Financial Statements for additional
information). 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 January 2, 1998, the Company acquired Green Horizon
Environmental, Inc. (GHI), an environmental recycling services company located
in Norristown, PA. The stockholders of GHI received 50,000 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
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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 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 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. In May 1998, the Company
acquired the remaining 45% interest in CTI. An additional 30,000 shares were
issued as a part of this transaction. 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 this individual enabled him to evaluate the risks and merits of
the investment.
On May 12, 1998, the Company completed a plan of merger with
Cycle-Masters, Inc. the stockholders of which received 200,000 shares of the
common stock of the Company.
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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 this individual enabled him to
evaluate the risks and merits of the investment.
On May 20, 1998, the Company acquired the remaining interest in
Consolidated Technologies, Inc.. The Company issued 30,000 shares of the Common
Stock of the Company as part of the transaction. 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 this individual enabled him to evaluate the risks and merits of
the investment.
On June 19, 1998, the Company acquired GeoCore, Inc. through a plan of
merger. The Company issued 30,000 shares of the Common Stock of the Company as
part of the transaction. 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 this
individual enabled him to evaluate the risks and merits of the investment.
On June 22, 1998, the Company acquired substantially all the assets of
Trimax of Long Island, Inc. and Polymerix, Inc. with the approval of the U.S.
Bankruptcy court of the Eastern District of New York. The Company issued 109,474
shares of the Common Stock of the Company as part of the transaction. 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 this individual enabled him to evaluate
the risks and merits of the investment.
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.
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ITEM 27. EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBITS
Filing
Sec No. Document Exhibit No. Incorporated
------- -------- ----------- ------------
From
----
<S> <C> <C> <C> <C>
2 Agreement & Plan of Reorganization 2.1* Initial filing of
(Earth Care/Educational Storybooks) Form SB-2 on
March 7, 1997
3 Articles of Incorporation (Front Street) 3.1* " "
3 Articles of Amendment (Front Street) 3.2* " "
3 Articles of Amendment (Educational Storybooks) 3.3* " "
3 Articles of Amendment (Educational Storybooks) 3.4* " "
3 Articles of Merger (Educational Storybooks and 3.5* " "
U.S. Plastic Lumber Corp.)
3 By-Laws 3.6* " "
4 Common Stock Specimen Certificate 4.1* " "
4 Warrant Agreement 4.2* " "
4 Series B Warrant Certificate 4.4* " "
4 Series B Preferred Stock Offering 4.5* Filed with
Form 10-QSB
on 4/19/98
5 Opinion of Legality 5.1*
10 Clean Earth Acquisition Agreement 10.3* " "
10 RPI Acquisition Agreement 10.4* " "
10 Employment Agreement - Mark Alsentzer 10.6* " "
10 Rutgers Licensing Agreement 10.9* " "
10 ITS Acquisition Agreement 10.11* " "
10 EPC Acquisition Agreement 10.12* " "
</TABLE>
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<PAGE> 134
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
10 ICC/USPL Joint Venture Agreement 10.13* " "
10 S D & G License and Operating Agreement 10.14* " "
10 Ground Lease Agreement (Carteret Biocycle) 10.15* " "
10 Lease Agreement (Plastic Properties LLC/RPI) 10.18* " "
10 Lease Agreement (Dalphon Sr./Clean Earth) 10.19* " "
10 Lease Agreement (Consol. Realty/EPC) 10.21* " "
10 Lease Agreement (Waste Concepts, Inc.) 10.22* Amendment No. 2
of Form SB-2 filed
on January 9, 1998
10 Lease Agreement (Earth Care Partners of Tennessee) 10.23* " "
10 WCI Acquisition Agreement 10.24* " "
10 CTI Stock Purchase Agreement 10.25* " "
10 Employment Agreement - Steven Sands 10.26* " "
10 Employment Agreement - Bruce Rosetto 10.27* " "
10 ICC/USPL Joint Venture II 10.28* " "
10 PNC Bank of Delaware - Promissory Note 10.29* " "
10 Letter Employment Agreement - Michael D. Schmidt 10.30* Form 10-KSB
filed 3/31/98
10 Plan of Merger - Cycle-Masters, Inc. 10.31* Filed with
Form 8K on
4/15/98
11 Statement re computation of per share earnings 11.1* Filed with
Form 10-QSB
On 4/19/98
21 List of subsidiaries 21.1* Form 10-QSB
filed 4/19/98
23 Consent of Accountants 23.1
23.2 Consent of Independent Public Accountants 23.2
27 Financial Data Schedules 27* Form 10-QSB
filed 4/19/98
</TABLE>
II-11
<PAGE> 135
*Exhibit previously filed
Incorporated by reference the Company's registration Statement on Form
SB-2 previously filed with the Securities and Exchange Commission on
February 11, 1998, Form 8-K filed on March 2, 1998, Form 10-KSB filed on
March 31, 1998, Form 10-QSB filed on May 19, 1998 and Form 8K filed on May
15, 1998.
ITEM 28. UNDERTAKINGS
The registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii) Include any additional or changed material information on the plan of
distribution; and
(iii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Supplement the Prospectus, after the end of the subscription period to
include the results of the subscription offer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 136
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Boca
Raton, State of Florida, on July 10, 1998.
U.S. PLASTIC LUMBER CORP.
By: /s/ Mark S. Alsentzer
-----------------------
Mark S. Alsentzer, President (Chief Executive Officer)
By: /s/ Michael Schmidt
---------------------
Michael Schmidt, (Chief Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Bruce C. Rosetto, the undersigned's true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing,
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature: /s/ Mark S. Alsentzer Date: July 10, 1998
----------------------------------
Mark S. Alsentzer, President & Director
Signature: /s/ Lester E. Moody Date: July 10, 1998
----------------------------------
Lester E. Moody, Director
Signature: /s/ James Blosser Date: July 10, 1998
----------------------------------
James Blosser, Director
Signature: /s/ Roger N. Zitrin Date: July 10, 1998
----------------------------------
Roger N. Zitrin, Director
Signature: /s/ August C. Schultes, III Date: July 10, 1998
-----------------------------------
August C. Schultes, III, Director
II-13
<PAGE> 137
Signature: /s/ Gary J. Ziegler Date: July 10, 1998
----------------------------------
Gary J. Ziegler, Director
II-14
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Miami, Florida,
July 10, 1998.
<PAGE> 1
EXHIBIT 23.2
-----------------------------------
KUNTZ LESHER SIEGRIST & MARTINI LLP
-----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
215 S. CENTERVILLE ROAD
P.O. BOX 8408
LANCASTER, PA 17604
(717) 394-5666
FAX (717) 394-0693
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the inclusion in this registration statement on Form SB-2
of our report dated December 18, 1997, on our audit of the consolidated
financial statements of U.S. Plastic Lumber Corp. and Subsidiaries.
/s/ KUNTZ LESHER SIEGRIST & MARTINI LLP
------------------------------------------
KUNTZ LESHER SIEGRIST & MARTINI LLP
CERTIFIED PUBLIC ACCOUNTANTS
Lancaster, Pennsylvania
July 13, 1998
