<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-23855
U.S. PLASTIC LUMBER CORPORATION
(Name of small business issuer in its charter)
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Nevada 87-0404343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
Check here whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- ----
The number of shares outstanding of the registrant's common stock as of July 31,
1998 is 17,137,331.
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U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
<TABLE>
<CAPTION> PAGE
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<S> <C>
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997................................. F-1
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 1998 and 1997............... F-2
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997................. F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997................. F-4
Notes to Condensed Consolidated Financial Statements............................................................ F-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 2
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................... 13
Item 2. Changes in Securities........................................................................................... 13
Item 5. Other Information............................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................................................ 15
SIGNATURES.............................................................................................................. 17
EXHIBITS................................................................................................................
</TABLE>
<PAGE> 3
Forward Looking Statements
When used in this Form 10-QSB, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected", "intends to" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, including but not limited to economic conditions,
changes in laws or regulations, the Company's history of operating losses,
demand for products and services of the Company, newly developing
technologies, loss of permits, conflicts of interest in related party
transactions, regulatory matters, protection of technology, lack of
industry standards, raw material commodity pricing, the ability to receive
bid awards, the effects of competition and the ability of the Company to
obtain additional financing. Such factors, which are discussed in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the notes to consolidated financial statements, could
affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any opinions
or statements expressed with undue reliance on any such forward-looking
statements, which speak only as of the date made. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis and Plan of Operation
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
and six month periods ended June 30, 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.
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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. The fixed base plants are subject to stringent
regulations by various state and federal agencies.
Business Combinations
The Company makes its decisions to acquire or invest in businesses
based on financial and strategic considerations.
Acquisitions Completed During the Three Months Ended June 30, 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. (See Note 2 to the Financial Statements - 1998
Acquisitions)
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. (See Note 2 to the Financial Statements - 1998 Acquisitions)
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. (See Note 2 to the Financial
Statements - 1998 Acquisitions)
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.
Joint Venture
Effective the second quarter 1998 The Company's percentage of ownership
in its joint venture with Interstate Industrial Corp. increased to 50.1 %
thereby providing the Company with controlling interest in the joint
venture. Effective with the second quarter the company has consolidated
the financial statements and statement of operations of the joint venture
into the Company's
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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 Second Quarter Ended June 30, 1998 to the Second
Quarter Ended June 30, 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 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 JUNE 30,
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1998 % 1997 %
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(Dollars in Thousands)
<S> <C> <C> <C> <C>
REVENUE:
Plastic Lumber $ 3,497 23.3 $1,608 28.0
Environmental Recycling 11,518 76.7 4,125 72.0
------ --- ----- ----
Total revenue 15,015 100.0 5,733 100.0
OPERATING EXPENSES:
Cost of Sales
Plastic Lumber 2,570 73.5 1,327 82.5
Environmental Recycling 9,509 82.6 2,659 64.5
Depreciation
Plastic Lumber 166 4.7 77 4.8
Environmental Recycling 115 1.0 57 1.4
Corporate 3 0.0 3 0.1
ADMINISTRATIVE EXPENSES:
Selling, General and Administrative
Plastic Lumber 912 26.1 239 14.9
Environmental Recycling 535 4.6 447 10.8
Corporate 304 2.0 302 5.3
Amortization
Plastic Lumber 54 1.5 12 0.7
Environmental Recycling 23 0.2 9 0.2
Corporate 39 0.3 60 1.0
-- --- -- ---
Total Operating Expenses 14,230 94.8 5,192 90.6
Total Operating Income 785 5.2 541 9.4
</TABLE>
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Consolidated Results of Operations
The Company recognized increases in both sales and operating income for
the second quarter ended June 30, 1998 compared to the second quarter ended June
30, 1997. Sales increased $9,282,000 or 162% in the second quarter of 1998 to
$15,015,000 from $5,733,000 in the same period in 1997 the increase was
primarily due to contributions from acquired companies in both business segments
during 1997 and 1998. Operating income increased by $244,000 during the second
quarter of 1998 to $785,000 from $541,000 in the same period in 1997 due to
acquired businesses and to the Company's successful entrance of our
environmental recycling division into the "uplands disposal of dredging market".
The plastic lumber division continued to establish a building products
distribution network through inventory stocking distributors and sales to mass
merchants. The increased volume in these markets is reflected in the improved
gross margin from 17.5% to 26.5% offset by the increase in operating expenses
required to establish the network. The Company continues to invest in research,
engineering and sales and marketing costs in the railroad crosstie and
structural lumber business segments.
Sales
The Company's revenue increased 162% in the second quarter of 1998 over
the same period in 1997. More than 64.7% of the sales growth was attributed to
acquisitions completed during the fiscal year 1997 and the first and second
quarters of 1998.
The plastic lumber division increased 117% to $3,497,000 for the second
quarter of 1998 compared to $1,608,000 during the same period in 1997. Revenue
of $1,683,000 or 89% of the total increase in plastic lumber division revenue
was primarily due to acquisitions of EnviroPlastics Corp. (EPC), Chesapeake
Plastic Lumber (CPL) and Cycle Masters Inc. (CMI) whose operations were acquired
subsequent to the second quarter of 1997. Environmental Specialty Products, Inc.
contributed two months of sales in the second quarter of 1997.
Environmental recycling division contributed $11,518,000 or 76.7%, of
the total sales for the second quarter of 1998 an increase of $7,393,000 over
the second quarter of 1997. The increase was due primarily to the Company's
Joint Venture and Consolidated Technologies, Inc. entrance into the beneficial
re-use of dredging market during the second quarter of 1998. Revenues from the
dredging operations where $3,977,000 or 53.8% to the total increase. The
remaining increase was from the environmental construction services and the
acquisitions of Waste Concepts, Inc. (WCI) and Green Horizons Environmental,
Inc. (GHE) which the Company did not acquire until after the second quarter of
1997. The Company has completed construction of the Carteret Biocycle Corp.
(CBC) facility which began treating contaminated soils bio-organically during
the final week of June 1998. This is expected to add additional revenue and
earnings to this division in the third quarter of 1998.
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Gross Profit
Consolidated gross profit increased $915,000 or 52.5% to $2,659,000
during the second quarter of 1998 compared to $1,744,000 in the second 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 identify and eliminate duplicate operating expenses during
the second quarter of 1998
In the plastic lumber division, acquisitions accounted for all of the
$484,000 increase in gross profit in the second quarter of 1998 compared to the
same period in 1997. The gross profits from these acquisitions accounted for
52.9% of the total increase in gross profit. The Company has made significant
improvement in the Tennessee flow mold facility during the second quarter by
enhancing manufacturing efficiencies and continued development of railroad ties,
structural lumber and other flow molded products to increase the plant's backlog
to absorb the plant's fixed expenses. The capacity in the Wisconsin facility has
more then tripled since the second quarter of 1997 to meet the increased demand
on the Company's decking product and accessories.
The environmental recycling division accounted for the remaining
$431,000 or 47.1% increase in gross profit in the second quarter of 1998 over
the second quarter of 1997. The increase was due primarily to operations
acquired subsequent to the second quarter of 1997 and the dredging operations
performed during the second quarter of 1998. The opening of the CBC facility in
late June 1998 is expected to contribute supplemental gross profit in the third
quarter 1998.
Selling, General and Administrative
Consolidated general and administrative expenses increased $763,000 or
77.2% during the second quarter ended June 30, 1998 compared to the same period
in 1997. As a percentage of sales these expenses decreased to 11.7% for the
three months ended June 30, 1998 from 17.2% in same period in 1997. Acquisitions
accounted for $274,000 or 35.9% 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 $2,000 in the second quarter 1998 over the same comparable
quarter in 1997 despite the addition of several acquisitions.
In the plastic lumber division, administrative expenses increased
$673,000 or 282% during the second quarter of 1998 compared to the second
quarter of 1997 accounting for 88.2% of the total consolidated administrative
expense increase. Acquisitions accounted for $62,000 or 9.2% of the increase.
The Company incurred an estimated $150,000 in the second quarter of 1998 from
the development of 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
costs for research and engineering in order to commercialize the structural
lumber and railroad ties product lines, and to obtain approval of various state
and national building code organizations.
In the environmental recycling division, general and administrative
costs increased $88,000 or 19.7% in the second quarter ended June 30, 1998 over
the comparable period in 1997 accounting for 11.5% of the total consolidated
expense increase primarily due to acquisitions offset by cost reductions
implemented during second quarter 1998.
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Interest Expense
Interest expense increased $202,000 to $245,000 in the second quarter
ended June 30, 1998 from $43,000 in the same quarter in 1997. This was primarily
a result of increased borrowings from the bank line of credit, the financing of
the Wisconsin plant machinery and debt service assumed from businesses acquired
during 1997 and 1998. In addition, the second quarter of 1998 included
amortization of deferred interest costs of $74,000 related to the $4,000,000
line of credit at PNC Bank.
Depreciation and Amortization
Depreciation expense increased $147,000 or 107% during the second quarter ended
June 30, 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 $35,000 or 43.2% to $116,000
during the second quarter of 1998 from $81,000 in the second quarter of 1997
primarily due to goodwill from acquisitions completed subsequent to the second
quarter of 1997 through June 30, 1998.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 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 with percentages of the applicable segment
revenue, for each of the Company's various business segments for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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1998 % 1997 %
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(Dollars in Thousands)
<S> <C> <C> <C> <C>
REVENUE:
Plastic Lumber $ 6,302 27.8 $2,109 27.3
Environmental Recycling 16,373 72.2 5,627 72.7
------ ---- ----- ----
Total revenue 22,675 100.0 7,736 100.0
OPERATING EXPENSES:
Cost of Sales:
Plastic Lumber 4,998 79.3 1,775 84.2
Environmental Recycling 12,887 78.7 3,577 63.6
Depreciation
Plastic Lumber 306 4.9 99 4.7
Environmental Recycling 223 1.4 96 1.7
Corporate 7 0.0 7 0.1
ADMINISTRATIVE EXPENSES:
Selling, General and Administrative
Plastic Lumber 1,572 24.9 514 24.4
Environmental Recycling 1,101 6.7 874 15.5
Corporate 559 2.5 553 7.1
Amortization
Plastic Lumber 89 1.4 24 1.1
Environmental Recycling 49 0.3 18 0.3
Corporate 82 0.4 104 1.3
-- --- --- ---
Total Operating Expenses 21,873 96.5 7,641 98.8
Total Operating Income 802 3.5 95 1.2
</TABLE>
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Consolidated Operations
The Company recognized significant increases in both sales and
operating income for the six months ended June 30, 1998 compared to the six
months ended June 30, 1997. Sales increased $14,939,000 or 193% for the first
half of 1998 to $15,015,000 from $7,736,000 in the same period in 1997.
Operating income increased by $707,000 or 744% to $802,000 for the first six
months of 1998 compared to $95,000 in the same period in 1997. The increase in
both sales and operating income was due to acquired businesses subsequent to
June 30, 1997 and the result of the Company's entrance into the beneficial reuse
of dredge material market during the second quarter of 1998. The plastic lumber
division continued to establish a building products distribution network
through inventory stocking distributors and sales to mass merchants. The
increase volume in these markets is reflected in the improved gross margin from
17.5% to 26.5% offset by the increase in operating expenses required to
establish the network. The Company continues to invest in research, engineering
and sales and marketing costs in the railroad crosstie and structural lumber
business segments.
Sales
The Company's revenue increased 193% in the first two quarters of 1998
over the same period in 1997. More than 98% of the sales growth was attributed
to acquisitions completed subsequent to the second quarter of 1997 and the first
and second quarters of 1998.
The plastic lumber division accounted for $6,302,000 or 27.8% of total
revenue in the first half of 1998 compared to $2,109,000 or 27.3% of total
revenue during the same period in 1997. Sales from the original plastic lumber
companies increased $1,241,000 or 47.6% to $3,848,000 for the six months ended
June 30, 1998 over the 1997 comparable period from $2,607,000. This increase was
a result of the experienced sales and marketing personnel who joined the Company
in late 1997. The remaining $2,952,000 increase in sales was primarily due to
acquisitions of EnviroPlastics Corp. (EPC), Chesapeake Plastic Lumber (CPL) and
Cycle Masters Inc. (CMI) whose operations were acquired subsequent to the second
quarter of 1997.
Environmental recycling division sales during the first two quarters of
1998 were $16,373,000 or 72.2% of total sales an increase of $10,746,000 or 191%
over the first half of 1997. The base business at Clean Earth increased $541,000
or 20.9% in the first half of 1998 due to increased sales efforts by newly
acquired companies and a milder winter season during the first quarter of 1998
allowing easier access to soils requiring treatment. The acquisitions of Waste
Concepts, Inc. (WCI) and Green Horizons Environmental, Inc. (GHE), which the
Company had acquired after the second quarter of 1997, contributed $2,024,000 or
18.8% of the total increase. The remaining increase of $8,181,000 or 76.1% is
attributed to the entrance of Consolidated Technologies, Inc. and the Company's
Joint Venture into the beneficial reuse of dredge material market during the
second quarter of 1998 coupled with a significant increase in our environmental
construction service operations. The Company has completed construction of the
Carteret Biocycle Corp. (CBC) facility which began treating contaminated soils
bio-organically during the final week of June, 1998. This is expected to add
additional revenue and earnings to this division in the third quarter of 1998.
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Gross Profit
Consolidated gross profit increased $2,077,000 or 95.2% to $4,259,000
during the six months ended June 30, 1998 compared to $2,182,000 in the same
period in 1997. The increase was attributed to the acquired businesses from both
business segments subsequent to the second quarter of 1997 and to the dredging
operations performed during second quarter of 1998. Business units in both
business segments began to eliminate and consolidate duplicate operating
expenses during the first half of 1998 however, these units continued to incur
certain non-recurring expenses associated with the unit combinations.
In the plastic lumber division, acquisitions accounted for most of the
$762,000 increase in gross profit in the first six months of 1998 compared to
the same period in 1997. The gross profits from these acquisitions accounted for
62.5% of the total increase in gross profit. An increase of $300,000 was
attributed to the expanded capacity at our manufacturing plant in Wisconsin.
Plant capacity in the Wisconsin facility has tripled since the first half of
1997 to meet the increased demand of the Company's decking products. The Company
continues to invest in the Tennessee flow mold plant to improve manufacturing
efficiencies and develop railroad ties, structural lumber and other flow molded
products to increase the plant's backlog to absorb the plant's fixed expenses.
The environmental recycling division accounted for the remaining
$1,315,000 or 63.6% increase in gross profit in the first half of 1998 over the
same period of 1997. The acquisitions and dredging operations accounted for
virtually all of the increase. The opening of the CBC facility in late June 1998
is expected to contribute supplemental gross profit in the third quarter 1998.
General and Administrative
Consolidated general and administrative expenses increased $1,291,000
or 66.5% during the six months ended June 30, 1998 compared to the same period
in 1997. Acquisitions accounted for $624,000 or 48.3% 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 $13,000 in the first half of 1998 over the
same comparable quarter in 1997 despite the addition of several acquisitions.
In the plastic lumber division, administrative expenses increased
$1,051,000 or 205% during the first two quarters of 1998 compared to the first
half of 1997 accounting for 81.4% of the total consolidated expense increase.
Acquisitions accounted for $222,000 or 21.1% of the increase. The Company
incurred an estimated $200,000 in the second quarter of 1998 to develop a
national sales distribution network and a centralized customer service center
for the plastic lumber operations.
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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 costs for research and engineering in order to
commercialize the structural lumber and railroad ties product lines, and to
obtain approval of various state and national building code organizations.
In the environmental recycling division, general and administrative
costs increased $227,000 or 26.0% for the six months ended June 30, 1998 over
the comparable period in 1997 accounting for 17.6% of the total consolidated
expense increase primarily due to acquisitions offset by cost reductions
implemented during the first six months of 1998.
Interest Expense
Interest expense increased $326,000 to $390,000 for the six months
ended June 30, 1998 over the same period in 1997 primarily as a result of
increased borrowings from the bank line of credit, the financing of the
Wisconsin plant machinery and debt service assumed from businesses acquired
during 1997 and 1998. In addition, the first half of 1998 included amortization
of deferred interest costs of $120,000 related to the $4,000,000 line of credit
at PNC Bank. Total debt (including amounts owed to affiliates) increased by
$7,796,000 or 233% over the past year through credit lines and acquired debt and
has proportionately increased debt service.
Depreciation and Amortization
Depreciation expense increased $536,000 or 165% during the first two quarters of
1998 compared to the same comparable period in 1997 reflecting the increase in
property, plant and equipment from both acquisitions and continued capital
investments. Amortization expense increased $74,000 during the six months ended
June 30, 1998 over the same six months ended June 30, 1997 primarily due to
goodwill from acquisitions completed during 1997 and the first half of 1998.
Liquidity and Capital Resources
Total cash and cash equivalents totaled $1,536,000, or 3.5% of the total assets,
at June 30, 1998, an increase of $366,000 from December 31, 1997. Cash used for
operating activities was $3,415,000. Accounts receivable increased $6,645,000,
or 95.7%, from fiscal year-end 1997, primarily due to the significant increase
in revenues during 1998, especially in the second quarter, and also due to the
accounts receivable from acquisitions during the first half of 1998. Inventories
increased $1,614,000, or 107%, from December 31, 1997 primarily due to a build
up of our decking products to meet increased customer demand. Accounts payable
and accrued expenses increased to $9,871,000 from fiscal year-end 1997 due to
the increase in business levels including inventory.
The Company's investing activities used $7,162,000 of cash primarily due to
capital expenditures of machinery and equipment purchases for additional
capacity in the plastic lumber division and for the construction of our
Carteret Biocycle facility which commenced operations in the final week of
June, 1998. In addition, the Company made $512,000 in advances to the Company's
Joint Venture.
Total cash provided by financing activities was $10,943,000. These activities
consisted of $2,291,000 in proceeds from the exercise of A Warrants registered
during the second quarter of 1998 and proceeds from the issuance of Series B
Preferred Stock Private Placement which raised $4,410,000 during the second
quarter of 1998. Proceeds from borrowings made primarily on the $4,000,000 line
of credit secured from PNC Bank in January, 1998, the existing $1,500,000
credit line from PNC and additional equipment financing totaled $5,107,000.
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<PAGE> 12
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 June 30, 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. Recently the bank has approved an increase in the credit facility by
$2,000,000 and has extended the term of the facility to September 30, 1999.
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 June 30, 1998 the Company had
financed a total of $566,000 from PNC Leasing Corp.
The Company has completed construction of 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 has commenced operations in late June of 1998 at an estimated
construction cost of $2.0 million.
In May 1998, the Company had authorized and completed a Series B
Preferred Stock Offering. The Company has raised $4,431,000 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
common stock. 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.
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<PAGE> 13
The Company continues to seek acquisition candidates that can be
vertically integrated into either the recycled plastic lumber or environmental
recycling operations. In the recycled plastic lumber operation, targeted
companies include manufacturers and distributors of recycled plastic products as
well as raw material regrind operations. In the environmental recycling
operation, targeted companies include soil recycling companies including
bio-organic methodologies and construction companies involved in on-site
clean-up and potential joint ventures with dredging operations for remediation
and disposal of contaminated soils. The Company is actively seeking additional
financing, including a credit facility, to meet our future needs.
To the extent the Company needs additional financing for the activities
and transactions set forth herein, the Company may avail itself of additional
private placements, additional debt financing, the registration of the Series B
warrants, and other sources of capital which may be available, including any
combination of these.
Seasonality
The Company does experience a seasonal slow down during the winter
months due to the fact that its environmental operations are located in the
Northeast United States, and therefore, adverse weather can 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
The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sentive. Any of the Company's programs that
recognized a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company plans to
devote all resources required to resolve any significant year 2000 issues in a
timely manner.
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
-12-
<PAGE> 14
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 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved as plaintiff or defendant in various
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of unregistered shares during the three months ended June 30, 1998 are
as follows:
On or about April 1, 1998, the Company issued a total of 6,000 shares to two
employees as a bonus for past services rendered.
-13-
<PAGE> 15
During March-April 1998, the Company issued 916,477 shares to Series A Warrant
holders who exercised their warrants pursuant to a Notice of Redemption issued
by the Company to the Series A Warrant holders on March 6, 1998. Of these shares
847,329 shares were actually issued during the second quarter as 69, 148 were
issued during the first quarter.
On or about May 12, 1998, the Company acquired Cycle Masters, Inc. (CMI), a
plastic lumber manufacturing company located in Sweetser, Indiana. The
stockholders of CMI received cash at closing plus 200,000 shares of common stock
of the Company. These transactions were not registered under the Securities Act
of 1933 in reliance on the exemption from registration in Section 4(2) of the
Act, as transactions not involving any public offering. This offering made was
completed without any general or public solicitation. In each case the offering
was done to a very limited number of officers, directors and shareholders of the
companies being acquired. The officers, directors and few shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.
On or about May 20, 1998, the Company acquired the remaining twenty five percent
interest in Consolidated Technologies, Inc. (CTI), an environmental recycling
services company located in Norristown, PA. The stockholders of this interest
received cash at closing plus 30,000 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 June 17, 1998, the Company acquired substantially all the assets of
GeoCore, Inc. (GCI), an environmental services company located in New Jersey.
The stockholders of GCI received 30,000 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 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.
-14-
<PAGE> 16
On or about June 22, 1998, the Company issued 1,000 shares to its Board of
Directors as compensation for the last two board meetings attended by the
non-employee directors.
On or about June 23, 1998, the Company acquired substantially all the assets of
Trimax of Long Island, Inc. and Polymerix, Inc. (Trimax), a plastic lumber
manufacturing company located in Long Island. The consideration paid for the
above stated assets was cash at closing plus 109,474 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. This offering was accomplished through an
auction of the assets conducted by the U.S. Bankruptcy Court of the Eastern
District of New York.
On or about June 30, 1998, the Company issued 12,500 shares of common stock of
the Company to the former shareholders of Advance Remediation and Disposal
Technologies, Inc. as an earn-out bonus for achieving certain financial
performance in accordance with the terms of the purchase agreement in February
1997.
On or about May-June 1998, the Company issued 211,020 shares of Series B
Preferred Stock in a private placement offering. It also carries a 10%
cumulative stock dividend. The Series B Preferred Stock is convertible into
common stock.
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.
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities Exchange
Act of 1934, as amended, (the "Exchange Act"), the Company's stockholders are
notified that the deadline for providing the Company timely notice of any
stockholder proposal to be submitted outside of the Rule 14a-8 process for
consideration at the Company's 1999 Annual Meeting of Stockholders (the "Annual
Meeting") will be March 15, 1999. As to all such matters which the Company does
not have notice on or prior to March 15, 1999, discretionary authority shall be
granted to the persons designated in the Company's proxy related to the Meeting
to vote on such proposal. This change in procedure does not affect the Rule
14a-8 requirements applicable to inclusion of stockholder proposal in the
Company's proxy materials related to the Meeting. A stockholder proposal
regarding the Meeting must be submitted to the Company at its office located at
2300 Glades Road, Suite 440W, Boca Raton, FL 33431, by December 29, 1998, to
receive consideration for inclusion in the Company's 1999 proxy materials. Any
such proposal must also comply with the proxy rules under the Exchange Act,
including Rule 14a-8.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the three months ended March
31, 1998
-15-
<PAGE> 17
(b) Reports on Form 8-K
Form 8-K filed on May 15, 1998 reporting the merger with Cycle
Masters, Inc.
-16-
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
/s/ Mark S. Alsentzer
---------------------------------------
Mark S. Alsentzer, Chairman
CEO and President
/s/ Michael D. Schmidt
---------------------------------------
Michael D. Schmidt, Chief Financial
Officer
-17-
<PAGE> 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,536,409 $ 1,170,120
Accounts receivable (net) 13,585,349 6,940,288
Inventories 3,116,146 1,502,658
Prepaid expenses and other assets 897,803 220,728
----------- -----------
TOTAL CURRENT ASSETS 19,135,707 9,833,794
PROPERTY, PLANT AND EQUIPMENT (Net) 11,684,539 5,775,424
OTHER ASSETS:
Acquired intangibles, net 9,809,710 7,009,244
Other assets 2,358,305 552,914
----------- -----------
TOTAL ASSETS $42,988,261 $23,171,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,351,074 $ 3,788,714
Notes payable, current portion 1,258,908 2,404,607
Notes payable, affiliates 2,400,000 1,956,810
Accrued expenses 2,519,814 1,737,518
Other liabilities 473,594 420,084
----------- -----------
TOTAL CURRENT LIABILITIES 14,003,390 10,307,733
LONG TERM LIABILITIES:
Notes payable, net of current portion 7,483,822 817,011
Deferred income taxes 946,400 580,433
Minority interest 271,535 --
----------- -----------
TOTAL LIABILITIES 22,705,148 11,705,177
----------- -----------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized
5,000,000 shares; issued and outstanding 421,608 and 208,930,
respectively (aggregate liquidation preference of $8,635,180
and $4,178,600, respectively) 423 209
Common stock par value $.0001, authorized
50,000,000 shares; issued and
outstanding 17,122,314 shares and
15,621,599 shares, respectively 1,712 1,562
Additional paid-in capital 21,364,155 12,573,026
Accumulated deficit (1,083,176) (1,108,598)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 20,283,114 11,466,199
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $42,988,261 $23,171,376
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-1
<PAGE> 20
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales, net $ 15,015,520 $ 5,732,812
Cost of goods sold 12,356,373 3,989,233
------------- -----------
GROSS PROFIT 2,659,147 1,743,579
General, administrative and selling 1,875,490 1,202,506
------------- -----------
OPERATING INCOME 783,657 541,073
------------- -----------
Interest income 7,917 11,150
Interest expense (244,905) (43,309)
Minority interests (284,029) --
------------ -----------
INCOME BEFORE INCOME TAXES 262,640 508,914
Provision for income taxes 9,640 --
------------- ----------
NET INCOME 253,000 508,914
Preferred stock dividend earned (109,793) (99,580)
-------------- -----------
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 143,207 $ 409,334
============= ===========
BASIC AND DILUTED INCOME PER SHARE $ .01 $ .03
============= ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC 16,777,833 13,417,568
============= ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED 18,007,041 14,595,890
============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-2
<PAGE> 21
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales, net $ 22,674,781 $ 7,736,308
Cost of goods sold 18,415,194 5,553,892
------------- -----------
GROSS PROFIT 4,259,587 2,182,416
General, administrative and selling 3,460,286 2,087,599
------------- -----------
OPERATING INCOME (LOSS) 799,301 94,817
------------- -----------
Interest income 7,917 21,622
Interest expense (390,237) (63,535)
Minority interests (284,029) --
Gain on sale of assets 105,588 --
------------- -----------
INCOME BEFORE INCOME TAXES 238,540 52,904
Provision for income taxes -- --
------------- -----------
NET INCOME 238,540 52,904
Preferred stock dividend earned (217,948) (205,160)
-------------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 20,592 $ (152,256)
============= ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ .001 $ (.012)
============= ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC 16,261,730 12,963,895
============= ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED 17,398,776 12,963,895
============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-3
<PAGE> 22
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 238,540 $ 52,904
----------- ------------
Adjustments to reconcile net loss to
net cash provided by
operating activities --
Depreciation 536,663 202,119
Amortization 220,793 146,864
Amortization of deferred financing costs 120,120 --
Minority interest in income of Joint Venture
And subsidiary 284,029
Gain on sale of assets 105,588 --
Expense on non-employee equity transactions 61,225 --
Compensation expense on earnout shares 16,093 1,264
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (4,353,128) (1,120,807)
Inventories (768,686) 430,299
Prepaid expenses and other current assets (698,861) (466,369)
Other assets (1,170,158) (43,669)
Accounts payable 1,822,331 (565,182)
Other liabilities 64,130 (150,690)
Accrued expenses 106,482 582,182
----------- ----------
Total adjustments (3,653,379) (983,989)
----------- ----------
Net cash used in operating
activities (3,414,839) (931,085)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,889,153) (443,358)
Advances to joint venture (512,002) --
Cash paid for acquisitions, net of
cash received (2,760,706) (1,522,186)
------------ -----------
Net cash used in investing activities (7,161,861) (1,965,544)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 3,835,413 2,380,000
Proceeds from sale of common stock -- 2,500,000
Proceeds from exercise of Series A warrants 2,291,193 --
Advances (repayment of) due to affiliate 443,190 --
Proceeds from notes payable 5,106,643 1,384,326
Repayment of notes payable (733,450) (747,188)
----------- -----------
Net cash provided by financing
activities 10,942,989 5,517,138
------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 366,289 2,620,509
CASH AND CASH EQUIVALENTS, beginning of
period 1,170,120 854,290
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,536,409 $ 3,474,799
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 270,117 $ 63,535
============ ===========
Income taxes $ 199,456 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-4
<PAGE> 23
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 and six month periods ended June
30, 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., its wholly-owned subsidiaries and the joint
venture after obtaining majority control effective April 1, 1998. 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 Joint venture had no
operations until May 1998 but incurred start up costs of $263,794 in 1997. The
Company manages the day to day dredging operations and has consolidated 100% of
the assets, liabilities and results of operations of the Joint venture after the
Company obtained an additional .1% interest and majority control. A summary of
the 1998 operations of the Joint Venture follows:
Revenues $3,062,903
Operating costs and expenses 2,256,040
Operating income 806,863
Minority interest (403,431)
----------
Income before income taxes 403,432
The company has provided 100% of the funds to finance the start up of the Joint
Ventures operations. The company's investment will be returned before any funds
are distributed to Interstate Industrial Corp. The minority interest in the net
income of the Joint Venture since inception totaling $271,535 is included in
long term liabilities in the accompanying consolidated balance sheet at June 30,
1998.
Reclassifications
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.
F-5
<PAGE> 24
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss)
less preferred stock dividends by the weighted-average number of shares
actually outstanding. Diluted income (loss) per share further considers the
impact of common stock equivalents to the extent that they are dilutive. The
Company's basic and diluted income (loss) per share are substantially equivalent
for both the three and six months ended June 30, 1998 and 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 has been adopted in
1998 (see Note 5).
Supplemental Information On 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.
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 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. 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, any additional shares 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.
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.
On February 24, 1997, the Company acquired Advanced Remediation and
Disposal Technologies, Inc. ("ARDT"), an environmental consulting
F-6
<PAGE> 25
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.
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 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
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 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.
F-7
<PAGE> 26
A summary of the aggregate purchase price of the 1997 acquisitions and
net assets acquired is as follows:
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
===========
1998 Acquisitions
In January 1998, the Company acquired Green Horizon Environmental,
Inc.("GHE"), an environmental services company located in Norristown,
Pennsylvania, 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 $101,763.
In February 1998, the Company acquired 55% of the stock of Consolidated
Technologies, Inc. ("CTI") in exchange for 36,500 shares of the Company's common
stock and contributing $500,000 of cash to CTI. CTI is an environmental
recycling services company located in Norristown, Pennsylvania. Effective June
30, 1998 the Company acquired the remaining 45% of CTI for 30,000 shares of
stock, $25,000 in cash and an agreement to pay one of the sellers a royalty
based on CTI's revenues for the next three years. All of the former owners of
CTI are currently employees of the Company. The aggregate purchase price of
$760,125 exceeded the estimated fair value of the net assets of CTI at June 30,
1998 by $379,527. The $119,403 minority interest in the CTI losses prior to June
30, 1998 are included with the minority interest in the Joint venture on the
statements of operations.
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. CRL
manufactures plastic lumber in Denton, Maryland. The aggregate purchase price of
$420,000 exceeded the estimated fair value of the net assets of CRL by $230,874.
Effective April 30, 1998 the Company acquired 100% of the stock of
Cycle-Masters, Inc. ("CMI") in exchange for $1,600,000 in cash, a $250,000 note
payable on April 30, 1999 and 200,000 shares of the Company's common stock. CMI
manufactures plastic lumber in Sweetser Indiana. The $2,500,000 aggregate
purchase price exceeded the estimated fair value of the net assets of CRL by
$1,955,871.
Effective June 30, 1998 the Company acquired 100% of the stock of
Geocore, Inc. ("GCI") in exchange for 30,000 shares of the Company's common
stock. GCI is an environmental services company in northern New Jersey. The
$153,000 value assigned to the stock exceeded the estimated fair value of the
net assets of GCI by $90,977.
The Company purchased substantially all of the assets of Trimax of Long Island,
Inc. and Polymerix, Inc. ("Trimax") with the approval of the U.S. Bankruptcy
Court. The purchase is being recorded effective June 30, 1998 and includes two
patents for the manufacture of structural plastic lumber. The Company paid
$950,000 in cash and $650,000 of Company stock. The Company has placed 109,474
shares of stock in escrow. The actual number of shares to be issued will be
adjusted based on the average closing price of the Company's stock when the
complete bankruptcy plan is approved. The Company also assumed certain
liabilities and agreed to complete all orders for structural lumber products.
The purchase price exceeded the estimated fair value of Trimax's net tangible
assets and the estimated future costs of fulfilling unprofitable orders by
$247,381.
F-8
<PAGE> 27
A summary of the aggregate purchase price of the 1998 acquisitions and
net assets acquired is as follows:
Aggregate purchase price $ 5,625,000
-----------
Working capital (deficit) (61,124)
Long-term assets 2,770,105
Long-term debt --
Deferred taxes (90,374)
-----------
Acquired intangibles $ 3,006,393
===========
All of the acquisitions in 1996, 1997 and 1998 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 excess of the aggregate purchase price over the
estimated fair value of the net assets acquired in all of the acquisitions (a
total of $10,294,733) has been recorded as acquired intangibles and is being
amortized on a straight-line basis over a period of twenty years from the
effective date of acquisition.
The unaudited pro forma combined results of operations of the Company,
RPI, ARDT, ESP, ITS, EPC, WCI, GHE, CTI, CRL and CMI for the six months ended
June 30, 1998 and year ended December 31,1997 are as follows:
1998 1997
---- ----
Net sales $23,988,926 $ 37,660,835
=========== ============
Net income (loss) $ 543,395 $ (1,704,948)
=========== ============
Basic and diluted income (loss) per share $ .019 $ (.14)
=========== ============
Weighted average shares used in computation 17,541,384 15,144,629
=========== ============
The foregoing unaudited pro forma results of operations reflect
adjustments for amortization of goodwill, depreciation on revalued property and
equipment.Per share amounts are calculated after preferred dividends are
subtracted from net income. 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
Late in 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 The dividend is payable only
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 plus any unpaid dividends. The Series A
Preferred Stock can be redeemed at any time at the sole option of the Company
for $25.00 per share. In 1998, 1000 shares were converted into 7,000 common
shares and 219,786 Series A shares are outstanding at June 30, 1998.
F-9
<PAGE> 28
Series B Convertible Preferred Stock
In May 1998 the Company initiated an offering to accredited investors
of up to 250,000 shares of the Company's Series B Preferred Stock. The Series B
shares have substantially the same rights and features as the Series A Preferred
shares except that the stated and liquidation value of the Series B shares is
$21.00 per share. As of June 30, 1998 the Company had received payments
totalling $4,263,420 for 203,020 shares of Series B Preferred shares. An
additional 8,000 shares were issued in July 1998 before the Company closed the
offering.
Stock Warrants
The Company previously issued 950,000 of 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 Company has
received $2,291,193 from the exercise of 916,477 Series A Warrants in 1998.
The 33,523 unexercised Series A warrants expired on June 30, 1998.
The Series B 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 $6.00 per share at any time for twenty consecutive trading
days. In June the Company extended the expiration date of the series B Warrants
to 90 days after a registration of shares underlying the Series B warrants was
declared effective by the SEC. The Company's registration of the shares
underlying the 950,000 Series B Warrants was declared effective on July 22, 1998
and the warrant holders have until October 20, 1998 to exercise.
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 in 1998 is as
follows:
Number of
Weighted Average Options
Exercise Price Outstanding
---------------- -----------
Outstanding, December 31, 1997 $3.54 1,350,000
Granted 3.50 280,000
Exercised -- --
Canceled -- --
----- ---------
Outstanding, June 30, 1998 $3.58 1,630,000
===== =========
Stock options exercisable at June 30, 1998 $3.50 1,186,669
===== =========
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. The Stout Partnership was
granted 320,000 options at $2.25 per share in January 1998 in exchange for
guaranteeing the Debt underlying the $4,000,000 Line of Credit (see Note 6).
F-10
<PAGE> 29
Nonemployee stock option activity in 1998 is as follows:
Number of
Weighted Average Options
Exercise Price Outstanding
---------------- -----------
Outstanding, December 31, 1997 $1.83 255,789
Granted (see Note 6) 2.25 320,000
Exercised -- --
Canceled -- --
----- -------
Outstanding, June 30, 1998 $2.06 575,789
===== =======
Stock options exercisable as
of June 30, 1998 $2.14 457,895
===== =======
Stock Reserved
At June 30, 1998, common stock was reserved for the following:
USPLC and CEI contingently issuable
shares (see Note 4) 4,573,686
Exercise of Series B Warrants 950,000
Conversion of Preferred Stock 2,951,256
Non employee stock options 575,789
Employee stock options 1,630,000
Shares and contingently issuable under earnout
Provisions 367,000
----------
11,047,731
==========
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 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.
F-11
<PAGE> 30
5. SEGMENT REPORTING
The Company's revenue generating operations are conducted through its
recycled plastic lumber division and its environmental recycling services
division. The recycled plastic lumber division primarily includes the operations
of USPLC, RPI, ESP, EPC, CRL and CMI. The environmental recycling services
division reflects the operating activities of CEI, ARDT, ITS, WCI, CBC, GHE and
CTI.
The operating results of the two segments are set forth below:
<TABLE>
<CAPTION>
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenue:
Environmental recycling $ 11,518 $ 4,125 $ 16,373 $ 5,627
Plastic lumber 3,497 1,608 6,302 2,109
------- ------- -------- -------
Total Revenue $ 15,015 $ 5,733 $ 22,675 $ 7,736
======== ======= ======== =======
Operating income:
Environmental recycling $ 1,336 $ 953 $ 2,112 $ 1,062
Plastic lumber (205) (47) (663) (303)
Corporate (347) (365) (648) (664)
------- ------ -------- --------
$ 784 $ 541 $ 801 $ 95
======= ====== ======= =======
Depreciation and amortization:
Environmental recycling $ 138 $ 66 $ 272 $ 114
Plastic lumber 220 89 395 123
Corporate 42 63 89 111
------ ------ -------- -------
$ 400 $ 218 $ 756 $ 348
====== ====== ======== =======
</TABLE>
The identifiable assets and capital expenditures of the respective
segments is set forth below (in thousands):
<TABLE>
<CAPTION>
June 30, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
Identifiable assets:
Environmental recycling $ 21,228 $ 8,058
Plastic lumber 20,579 15,113
Corporate 1,181 --
-------- -------
$ 42,988 $23,171
======== =======
</TABLE>
<TABLE>
<CAPTION>
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Capital Expenditures
Environmental recycling $ 1,335 $ 102 $ 2,318 $ 159
Plastic lumber 778 132 1,529 284
Corporate -- --
------- ------ ------- -------
$ 2,113 $ 234 $ 3,847 $ 443
======= ====== ======= ======
</TABLE>
F-12
<PAGE> 31
6. LINE OF CREDIT
In January 1998, the Company obtained a $4,000,000 increase in its
revolving line of credit bringing the total line of credit to $5,500,000.
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 $400,000 value of
such options is being amortized as interest over the original 18 month term of
the line of credit. The line bears interest at .50% under the bank's prime rate
and approximately $5,500,000 was outstanding under the line at June 30, 1998. On
August 13, 1998 the Bank added $2,000,000 to the line, bringing the total line
to $7,500,000, and extended the maturity date to September 30, 1999.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 1,536,409 1,170,120
<SECURITIES> 0 0
<RECEIVABLES> 13,585,349 6,940,288
<ALLOWANCES> 0 0
<INVENTORY> 3,116,146 1,302,658
<CURRENT-ASSETS> 19,135,707 9,833,794
<PP&E> 11,684,539 5,775,424
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 42,988,261 23,171,376
<CURRENT-LIABILITIES> 14,003,390 10,307,733
<BONDS> 0 0
0 0
423 209
<COMMON> 1,712 1,562
<OTHER-SE> 21,364,155 12,573,026
<TOTAL-LIABILITY-AND-EQUITY> 20,283,114 11,466,199
<SALES> 0 0
<TOTAL-REVENUES> 22,674,781 7,736,308
<CGS> 18,415,194 5,553,892
<TOTAL-COSTS> 18,415,194 5,553,892
<OTHER-EXPENSES> 3,460,286 2,087,599
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 390,237 63,535
<INCOME-PRETAX> 238,540 52,904
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 238,540 52,904
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 238,540 52,904
<EPS-PRIMARY> .001 (.012)
<EPS-DILUTED> .001 (.012)
</TABLE>
