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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
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(Name of small business issuer in its charter)
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Nevada 87-0404343
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(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
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(Address and telephone number of principal executive
offices and place of business)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, Par Value $.0001 N/A
Check here whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III
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of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year was $24,739,000.
The aggregate market value of the voting common equity held by non-affiliates of
the registrant on February 28, 1998 based on the average bid and asked price on
such date, being $6.56 per share, was $41,976,296. The aggregate market value of
preferred stock held by non-affiliates of the registrant on February 28, 1998
was $ 4,761,743.
The number of shares outstanding of the registrant's common stock as of February
28, 1998 is 15,786,363.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement relating to its 1998 Annual Meeting of Stockholders which will
be filed with the Commission within 120 days after the end of the registrant's
fiscal year. Certain exhibits are incorporated by reference to the Registrants'
Registration Statement on Form SB-2 and Amendments thereto filed with the
Securities and Exchange Commission on February 11, 1998.
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PART I
ITEM 1. 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
seven manufacturing, processing and fabrication facilities in the U.S. The
primary product produced in three 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 fourth and fifth plants are
fabrication facilities which manufacture value-added products made from the
Company's recycled plastic lumber. The sixth 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 superior performance in most outdoor applications.
The Company's plastic lumber product can be used in structural and
non-structural applications. The Company's seventh 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 anticipates an eighth plant to open during the second
quarter of 1998 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 six 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
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Lake Odessa, 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; 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 superior 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 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 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
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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.
FORWARD LOOKING STATEMENTS
When used in this Annual Report, 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."
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 was
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.
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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 $210,000 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 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.
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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 such dredge material and incinerator ash.
RECENT DEVELOPMENTS
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. See "Recent Sales of
Unregistered Securities for the Last Three Years" for additional information.
In February 1998, the Company acquired an additional 30% interest in
Consolidated Technologies, Inc. ("CTI"). The Company now owns a majority
interest in 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" and "Recent Sales of Unregistered Securities for the Last
Three Years" for additional information.
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. See "Recent Sales of Unregistered Securities for the Last
Three Years" for additional information.
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:
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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
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CLEAN EARTH INC. SUBSIDIARIES:
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Clean Earth of New Castle, Inc., a Delaware corporation
Advance Remediation and Disposal Technologies, Inc., a Pennsylvania corporation
(eff. 12/31/97 merged into Integrated Technical Services, Inc.)
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,
(55% shareholder interest)
RECYCLED PLASTIC LUMBER OPERATION
PRODUCTS
During the past several years, the Company's recycled plastic lumber
division has positioned itself to be a leading manufacturer 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. Recycled plastic lumber products offer these
unique advantages:
o 50 year limited warranty
o Environmentally friendly and non-toxic
o Virtually maintenance free
o Saves trees and reduces use of exotic rain forest hardwoods
o Can be worked with conventional tools
o Aesthetically pleasing wood-like textured surface
o Splinter proof - never rots
o Not affected by termites, ants or other wood borers
o No splitting, cracking or chipping
o Holds nails and screws 40% better than wood
o Non absorbent and waterproof
o No leaching into soil or groundwater
o Most graffiti easily washes off
o 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:
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o Decking, including supporting structures, for residential and commercial
projects
o Commercial, municipal and residential applications such as park benches,
picnic tables, trash receptacles, car stops, planters and ash urns
o Fencing
o highway spacer blocks, guardrail posts, sound attenuation barriers and
speed bumps
o Trailer, farm equipment and railroad box car flooring
o Industrial applications such as pallets, walkways in chemical plants,
catwalks on factory roofs
o Sanitary animal pen flooring
o Railroad ties Engineered products such as pier piling cores
o 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", 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 fabrication facilities in Lake Odessa, Michigan and Guasti, CA 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 superior characteristics such as moisture resistance
which give it an advantage over wood for many applications.
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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's 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 who
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 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.
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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 in the second quarter of 1998 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:
o Rutgers University's Center for Plastics Recycling Research
o University of Massachusetts at Lowell, Dept. of Engineering
o Batelle, Engineering Mechanics Dept.
o 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 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".
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COMPETITION
The recycled plastic lumber industry is a young, highly fragmented industry
with over 30 small manufacturers and many more 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; Cycle-Masters, Inc., Sweetster, Indiana 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. The Company also believes that
environmental restrictions are presently impeding forestry operations in United
States forests. A second factor impeding the use of pressure treated lumber is
the toxic leaching characteristics. Chemicals injected into pressure treated
lumber contain hazardous constituents which are released into the soil and
create potentially toxic and hazardous conditions. Such factors may reduce if
not eliminate any price advantage that wood presently has with respect to its
initial cost.
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 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.
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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
is superior in many ways to 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 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.
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The focus of the Company's selling strategy is the high quality,
maintenance-free aspect of its product along with superior customer service. The
Company also focuses on the benefits of its products including such items as
being 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
and emissions. The Company does not believe that its waste disposal practices
and manufacturing processes will be 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 financial condition of the Company.
ENVIRONMENTAL RECYCLING OPERATION
PRODUCTS & 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
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
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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 anticipates opening its
facility for business in the second quarter 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. Waste Concepts oversees the business of
beneficial re-use of industrial wastes and manages the Company's controlling
interest in 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.
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.
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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 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 Spring 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.
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 of 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
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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.
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, NJ and SRP in Philadelphia, Pennsylvania. Clean Earth has obtained a
permit to 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
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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 process 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 a high temperature desorber for THC (Total Hydrocarbons) and Desorption
Temperatures EOX analyzer and the screening equipment for fines content
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.
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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 191
persons through the United States. Of this number, approximately 117 persons are
employed in the plastic lumber operations and 74 persons are employed in the
environmental recycling operations.
RISK FACTORS
RISKS INHERENT IN THIS COMPANY
OPERATING LOSSES. The Company incurred an operating loss of $291,000 for
the year ended December 31, 1996 and an operating loss of $321,000 for the year
ended December 31, 1997. The success of operations in the future will be largely
dependent upon the Company's ability to substantially increase its sales
revenue, as to which there is no assurance.
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., Integrated
Technical Services, Inc., Environmental Specialty Plastics, Inc., EnviroPlastics
Corp., Advanced Remediation and Disposal Technologies, Inc., Waste Concepts,
Inc., and Green Horizon Environmental, Inc. as well as the granting or issuance
of various stock, options and other rights to members of management, principal
stockholders, and other affiliates. See "Item 12. Certain Transactions".
ACCESS TO CAPITAL. The Company has limited access to capital. There can be
no assurances that the Company will have necessary and appropriate levels of
capital to operate its business.
NEED FOR ADDITIONAL FINANCING. The Company will require additional capital
in connection with the manufacture, marketing and 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 ion 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.
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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 keep such employees in the future.
RISKS RELATED TO THE NATURE OF THE BUSINESS
NEWLY DEVELOPING INDUSTRY. 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
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. Historically, suppliers have provided
adequate quantities of such raw materials at favorable costs. 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 AND MARKETING. The Company's recycled plastic lumber business
faces 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 superior suitability
characteristics of recycled plastic lumber for certain applications, as well as
appealing to the environmental consciousness of consumers. 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
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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
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 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
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Company's manufacturing capabilities. It may be necessary to expend considerable
time and 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 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. 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 unique and
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.
ITEM 2. 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 3,300 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 1998 and the monthly
rental is $5,067.
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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 expires 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.
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.
LAKE ODESSA, MICHIGAN: This location consists of approximately 16,000 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 1998, 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.
23
<PAGE> 24
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.
CARTERET, NEW JERSEY: This facility is still under construction, but the
Company anticipates it will become operational in the second quarter 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 $15,000.
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.
ITEM 3. 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,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year end 1997, no matters were
submitted to a vote of the security holders, through proxy solicitation or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Transactions in the Company's Common Stock are reported on the OTC
Electronic Bulletin Board. The Common Stock of the Company has traded in the
over-the-counter market on a limited and sporadic basis, and is quoted under the
symbol ECPL. The following table sets forth the high and low bid price
quotations for each calendar quarter during the last two fiscal years. 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 Annual Report to
reflect post split amounts throughout.
24
<PAGE> 25
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
December 31, 1997 $ 4.4375 $ 4.875
The above prices represent interdealer quotations, without retail markup,
markdown or commissions, and may not represent actual transactions. As of
February 28, 1998, there were approximately 742 record holders of the Company's
Common Stock, including those beneficial owners listed with CEDE & Co..
CAPITALIZATION
PRIMARY SHARES:
- ---------------
Common Stock (1,808,506 shares
are freely tradable) 15,786,363
FULLY DILUTED:
- --------------
Preferred Shares (convert @ 7:1
common) 1,464,449
Series A Warrants 950,000
Series B Warrants 950,000
Other Warrants and Options 1,925,789
Earn Out shares and Options 224,000
Historical Shareholder earn out 4,573,686
----------
Subtotal 10,087,924
----------
Fully Diluted Equity 25,874,287
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. Certain divisions or subsidiaries recently acquired by the
Company have in the past (prior to their acquisition by the Company) paid cash
dividends, but 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 in accordance with the terms thereof. Under Nevada corporate law, no
dividends or other distributions may be made which would render the Company
insolvent or reduce assets to less than the sum of its liabilities plus the
amount needed to satisfy outstanding liquidation preferences.
25
<PAGE> 26
RECENT SALES OF UNREGISTERED SECURITIES DURING THE LAST THREE YEARS
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 wee 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
(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 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 (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.
26
<PAGE> 27
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 securities. 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 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.
27
<PAGE> 28
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 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.
28
<PAGE> 29
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.
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
29
<PAGE> 30
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 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. (See Footnote 13 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
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. 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
30
<PAGE> 31
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.
EARN-OUT SHARES AND OPTIONS
Pursuant to various agreements entered into between the Company and the
former shareholders of Earth Care, Clean Earth, ARDT, ITS, EPC, WCF, 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 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 87,500 additional shares of the Company's common stock during
1997 and 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 1997 and 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 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.
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<PAGE> 32
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 125,000 shares of the Company on a
cumulative basis.
OTHER OUTSTANDING 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 no cost, in proportion to the shares they owned.
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.
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<PAGE> 33
ITEM 6. 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 years
ended December 31, 1997 and 1996. This discussion should be read in conjunction
with consolidated financial statements and notes thereto of the Company which
are included elsewhere herein.
BUSINESS SEGMENT INFORMATION
The following table sets forth business segment operating data along with
costs and expenses as a percent of the related business segment revenue:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------- ----------------------
1997 % 1996 %
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE:
ENVIRONMENTAL RECYCLING $ 16,609 67.1 $ 6,412 100.0
PLASTIC LUMBER 8,130 32.9 --
-------- ------- ------
TOTAL REVENUE 24,739 100.0 6,412 100.0
OPERATING EXPENSES:
COST OF SALES:
ENVIRONMENTAL RECYCLING 12,161 73.2 4,762 74.3
PLASTIC LUMBER 7,110 87.5 --
DEPRECIATION
ENVIRONMENTAL RECYCLING 220 1.3 630 9.8
PLASTIC LUMBER 288 1.7 --
CORPORATE 12 0.0 --
SELLING, GENERAL AND ADMINISTRATIVE
ENVIRONMENTAL RECYCLING 1,899 11.4 1,311 20.5
PLASTIC LUMBER 1,661 20.4 --
CORPORATE 1,440 5.8 --
AMORTIZATION
ENVIRONMENTAL RECYCLING 17 0.0 --
PLASTIC LUMBER 104 1.3 --
CORPORATE 148 0.1 --
-------- ------
TOTAL OPERATING EXPENSES 25,060 101.3 6,703 104.5
TOTAL OPERATING LOSS (321) (1.3) (291) (4.5)
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
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,
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<PAGE> 34
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 a reverse 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.
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.
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<PAGE> 35
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.
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,
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<PAGE> 36
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).
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED DECEMBER 31, 1997
Total cash increased $316,000 for the twelve months ended December 31,
1997. Cash used in operating activities totaled $2,327,000 and consisted
primarily of increases in accounts receivable totaling $1,389,000, depreciation
and amortization (a non-cash item) totaling $789,000 and a decrease in accounts
payable and accrued expenses totaling $478,000. Cash used in investing
activities totaled $4,347,000 and included capital expenditures of primarily
plant equipment and heavy machinery of $2,625,000 and $1,722,000 of cash paid
for acquisitions. Total cash provided by financing activities totaled $6,990,000
as the Company received $5,242,000 in cash proceeds from private placements of
preferred stock, common stock and the exercise of stock options. The Company
borrowed $1,900,000 from Schultes, Inc. (a related party) and also borrowed
$1,332,000 from the $1,500,000 line of credit available from PNC Bank. The
proceeds from these notes were used to pay $200,000 owed to affiliates,
$1,380,000 to pay off acquired debt, with the remaining $1,748,000 used
primarily for investing activities.
Due to favorable response to the Company's new "Carefree Decking
System(TM)", the Company has expanded the capacity of the RPI subsidiary. The
Company has extended the Lease and increased the square footage of leasehold
premises by 18,000 square feet to the existing leased facility and has add
several new extruders and vacuum calibration systems in addition to the two
existing extruders at this site. The estimated cost of this project is $750,000
and has been financed through PNC Leasing Corp. The Company has access to a
$2,500,000 line of credit from A.C. Schultes, Inc., a company owned by Director,
August C. Schultes, III, at Federal Reserve prime rate plus 1%. The amount
borrowed against this line as of December 31, 1997 was $1,900,000. The Company
has a committed bank line of credit facility of $1,500,000 with PNC Bank at the
bank's prime rate plus .5%. As of December 31, 1997, the Company had borrowed
$1,030,000 against this line.
In January 1998, the Company had secured an additional line of credit from
PNC Bank of $4 million 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 member 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. See "Certain Transactions."
The Company has also committed to building a bio-organic soil recycling
facility in Carteret, New Jersey as part of a start-up company named Carteret
Biocycle, Inc, which is a wholly owned subsidiary of Clean Earth, Inc. (see
Certain Transactions). This facility is
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<PAGE> 37
expected to be completed in the second quarter of 1998 at an estimated cost of
$2.0 million and will be financed through a conventional bank loan facility.
The Company will require additional working capital to expand and upgrade
plant equipment in its Maryland and Tennessee plastic lumber facilities. In the
event that sales of the Company's railroad tie product expands beyond current
projections, it may be necessary for the Company to seek working capital to
construct and purchase equipment for a plant dedicated to railroad ties.
Additionally, the Company will require working capital for the
environmental recycling operations, especially as it relates to the dredging
opportunities being pursued by the Company.
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,
consulting 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 financings 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
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). The Company does not believe it utilizes computers
with this type of program and, thus, the Company does not anticipate any
financial impact as a result.
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
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<PAGE> 38
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 basic EPS
and requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
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 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Dismissal of Independent Accountant
1. The engagement of the former independent accountant, Kuntz Lesher
Siegrist & Martini LLP was terminated by the Company on February 26, 1998 solely
due to the fact that the Board of Directors of the Company had made a
determination that based upon its current stage of development, the best
interest of the Company would be served by engaging a "Big Six" independent
accounting firm.
2. The principal accountant's report on the financial statements for either
of the past two years did not contain an adverse opinion or a disclaimer of
opinion, nor was qualified nor modified as to uncertainty, audit scope, or
accounting principles.
3. The decision to change accountants was approved by the Board of
Directors of the Company.
4. During the registrant's two most recent fiscal years preceding such
dismissal there were no matters of disagreements between the Company and its
former independent accountants.
5. The former independent accountants have not advised the registrant
during the two most recent fiscal years preceding of any of the following
events:
(a) that the internal controls necessary for the registrant to develop
reliable financial statements do not exist;
(b) that it can no longer rely on management's representations or that
it is unwilling to be associated with the financial statements prepared by
management;
(c) that it needs to significantly expand the scope of its audit or
that information has come to its attention which may materially impact the
fairness or reliability of a previously issued audit report or financial
statements issued or to be issued covering the fiscal period subsequent to the
date of the most recent financial statements covered by an audit report or that
it can no longer rely on management's representations or that it is unwilling to
be associated with the financial statements prepared by management; or that due
to the accountant's dismissal, it did not expand the scope of its audit or
conduct such further investigation; or
(d) that there have been any issues that have not been resolved to the
satisfaction of the former independent accountant or that would otherwise affect
its ability to render an unqualified audit report.
6. The registrant has provided a copy of the disclosures being made herein
to its former independent accountant in compliance with Item 304 (a)(3) of
Regulation S-K.
(b) Engagement of new Independent Accountants.
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<PAGE> 40
1. The Company has engaged the firm of Arthur Andersen LLP as its new
independent accountants to conduct the 1997 audit. This action has been approved
by the Board of Directors of the Company.
2. The newly engaged accountants have not been consulted regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the registrant's financial statements; or any matter that was either the subject
of a disagreement or a reportable event.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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> <C>
Mark S. Alsentzer 42 May 1994 (2000) Chairman, President & Chief
Executive Officer/Director
Lester Moody 68 May 1996 (1998) Director
James Blosser 58 Aug 1996 (1999) Director
Roger Zitrin 49 Nov 1996 (1998) Director
August C. Schultes III 50 Feb 1997 (2000) Director
Gary J. Ziegler 49 Feb 1997 (2000) Director
Bruce C. Rosetto 39 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 Engineer from
Lehigh University and an MBA from Farleigh Dickenson University.
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<PAGE> 41
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.
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 Northwest 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 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.
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The following is a description of the Company's officers who are not also
directors:
BRUCE C. ROSETTO, Age 39, 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 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.
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
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<PAGE> 43
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. 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.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation" relating to the 1998 Annual Meeting is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" relating to the
1998 Annual Meeting is incorporated herein by reference.
ITEM 12. CERTAIN TRANSACTIONS
The information contained in the Proxy Statement under the caption "Certain
Transactions" relating to the 1998 Annual Meeting is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS
EXHIBITS
<TABLE>
<CAPTION>
FILING
SEC NO. DOCUMENT EXHIBIT NO. INCORPORATED FROM
------- -------- ----------- ------------------
<S> <C> <C> <C>
2 Agreement & Plan of Reorganization 2.1* Initial filing of Form SB-2
(Earth Care/Educational Storybooks) on March 7, 1997
3 Articles of Incorporation (Front Street) 3.1* Initial filing of Form SB-2
on March 7, 1997
3 Articles of Amendment (Front Street) 3.2* Initial filing of Form SB-2
on March 7, 1997
3 Articles of Amendment (Educational Storybooks) 3.3* Initial filing of Form SB-2
on March 7, 1997
</TABLE>
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<PAGE> 44
<TABLE>
<S> <C> <C> <C>
3 Articles of Amendment (Educational Storybooks) 3.4* Initial filing of Form SB-2
on March 7, 1997
3 Articles of Merger (Educational Storybooks and 3.5* Initial filing of Form SB-2
U.S. Plastic Lumber Corp.) on March 7, 1997
3 By-Laws 3.6* Initial filing of Form SB-2
on March 7, 1997
4 Common Stock Specimen Certificate 4.1* Initial filing of Form SB-2
on March 7, 1997
4 Warrant Agreement 4.2* Initial filing of Form SB-2
on March 7, 1997
4 Series A Warrant Certificate 4.3* Initial filing of Form SB-2
on March 7, 1997
4 Series B Warrant Certificate 4.4* Initial filing of Form SB-2
on March 7, 1997
10 Jeanell Sales Corp. Acquisition Agreement 10.1* Initial filing of Form SB-2
on March 7, 1997
10 Duratech Acquisition Agreement 10.2* Initial filing of Form SB-2
on March 7, 1997
10 Clean Earth Acquisition Agreement 10.3* Initial filing of Form SB-2
on March 7, 1997
10 RPI Acquisition Agreement 10.4* Initial filing of Form SB-2
on March 7, 1997
10 ARDT Acquisition Agreement 10.5* Initial filing of Form SB-2
on March 7, 1997
10 Employment Agreement - Mark Alsentzer 10.6* Initial filing of Form SB-2
on March 7, 1997
10 Employment Agreement - Harold Gebert 10.7* Initial filing of Form SB-2
on March 7, 1997
10 Employment Agreement - David Farrow 10.8* Initial filing of Form SB-2
on March 7, 1997
10 Rutgers Licensing Agreement 10.9* Initial filing of Form SB-2
on March 7, 1997
10 ESP Acquisition Agreement 10.10* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 ITS Acquisition Agreement 10.11* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 EPC Acquisition Agreement 10.12* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 ICC/USPL Joint Venture Agreement 10.13* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 S D & G License and Operating Agreement 10.14* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Ground Lease Agreement (Carteret Biocycle) 10.15* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Lease Agreement (Brock Mgt/Earth Care TN) 10.16* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Lease Agreement (APEC/Earth Care Midwest) 10.17* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Lease Agreement (Plastic Properties LLC/RPI) 10.18* Amendment No. 1 of Form SB-2
filed on August 26, 1997
</TABLE>
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<PAGE> 45
<TABLE>
<S> <C> <C> <C>
10 Lease Agreement (Dalphon Sr./Clean Earth) 10.19* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Lease Agreement (Glades Twin Plaza/Earth Care) 10.20* Amendment No. 1 of Form SB-2
filed on August 26, 1997
10 Lease Agreement (Consol. Realty/EPC) 10.21* Amendment No. 1 of Form SB-2
filed on August 26, 1997
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* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 WCI Acquisition Agreement 10.24* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 CTI Stock Purchase Agreement 10.25* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 Employment Agreement - Steven Sands 10.26* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 Employment Agreement - Bruce Rosetto 10.27* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 ICC/USPL Joint Venture II 10.28* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 PNC Bank of Delaware - Promissory Note 10.29* Amendment No. 1 of Form SB-2
filed on January 9, 1998
10 Letter Employment Agreement - Michael D. Schmidt 10.30
11 Statement re computation of per share earnings 11.1*
21 List of subsidiaries 21.1
27 Financial Data Schedules 27
</TABLE>
Incorporated by reference the Company's registration Statement on Form SB-2
previously filed with the Securities and Exchange Commission on February 11,
1998 and Form 8-K filed on March 2, 1998.
* Exhibit previously filed
45
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. Plastic Lumber Corporation
By:
----------------------------------------
Mark S. Alsentzer, Chairman of the Board
Chief Executive Officer and President
Date: March 31, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C>
/s/ Mark S. Alsentzer
- ----------------------------------- Date: March 31, 1998
Mark S. Alsentzer, Chief Executive Officer and President
Chairman (Principal Executive Officer)
/s/ Michael D. Schmidt
- ----------------------------------- Date: March 31, 1998
Michael D. Schmidt, Chief Financial Officer
Treasurer (Principal Financial and Accounting Officer)
/s/ August C. Schultes III
- ----------------------------------- Date: March 31, 1998
August C. Schultes III, Director
/s/ Gary J. Ziegler
- ----------------------------------- Date: March 31, 1998
Gary J. Ziegler, Director
/s/ Roger N. Zitrin
- ----------------------------------- Date: March 31, 1998
Roger N. Zitrin, Director
/s/ Lester E. Moody
- ----------------------------------- Date: March 31, 1998
Lester E. Moody, Director
/s/ James J. Blosser
- ----------------------------------- Date: March 31, 1998
James J. Blosser, Director
</TABLE>
46
<PAGE> 47
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
<S> <C>
Reports of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
<PAGE> 48
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> 49
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> 50
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> 51
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)
============ ============
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ (.05) $ (.03)
Extraordinary item -- .01
------------ ------------
Net loss per share $ (.05) $ (.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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
<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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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 $ (2,312) $ --
Environmental recycling division (1,033) (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> 69
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> 1
EXHIBIT 10.30
October 28, 1997
Mr. Michael Schmidt
6 Sycamore Lane
Woodstown, NJ 08098
Dear Mike:
I am very pleased that you will be joining U.S. Plastic Lumber Corporation
(USPL) as our Chief Financial Officer. We are planning your starting date to be
December 1, 1997. I expect you will be spending most of your time in Florida as
well as traveling to our facilities and potential merger candidates. The
following will be your compensation package as we discussed:
a) Salary of $100,000 per year payable on a weekly basis.
b) Relocation allocation of $20,000 payable against expenses or
anticipated expenses as they occur.
c) You will be granted 25,000 options to purchase USPL stock at a price
of $5.00 per share which was the closing price on October 24, 1997.
These options are granted under our Employee Stock Option Plan.
d) You will receive two (2) weeks vacation for the first year of
employment and three (3) weeks thereafter. After seven (7) years, you
will receive four (4) weeks of vacation.
e) All health benefits available to USPL's executive group will be made
available to you.
f) USPL will provide temporary living expenses for you through April 1,
1997.
g) Auto allowance of $450 per month.
Mike, I am certainly pleased that we are back together. With the benefit of our
past experiences, I am confident we can build a substantial company that will
provide solid returns to our shareholders. I look forward to spending the
November 1st weekend helping familiarize you with our company.
Very truly yours,
Mark S. Alsentzer
Chairman/President/CEO
MSA:km
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
--------------------
SUBSIDIARY - DOING BUSINESS AS STATE OF INCORPORATION
Earth Care Products of America, Inc. (inactive) Florida
Earth Care Products of Tennessee, Inc. Florida
Earth Care Products of the Midwest, Inc. Florida
Earth Care Products of New Jersey, Inc. (inactive) Florida
Clean Earth of New Castle, Inc. Delaware
Delaware Improvement Corp. (inactive) Delaware
Clean Earth In-Situ (inactive) Delaware
Recycled Plastics Industries, Inc. Wisconsin
Advanced Remediation and Disposal Technologies, Inc. Pennsylvania
Environmental Specialty Products, Inc. California
Integrated Technical Services, Inc. New Jersey
Enviroplastics Corporation Delaware
Chesapeake Plastic Lumber, Inc. Delaware
Green Horizon Environmental, Inc. Pennsylvania
Waste Concepts, Inc. Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF U.S. PLASTIC LUMBER CORPORATION FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996 AND TWELVE MONTHS ENDED, DECEMBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 854,290 1,170,120
<SECURITIES> 0 0
<RECEIVABLES> 2,000,388 7,415,318
<ALLOWANCES> 148,744 475,030
<INVENTORY> 486,978 1,502,658
<CURRENT-ASSETS> 3,292,274 9,833,794
<PP&E> 4,212,832 9,494,605
<DEPRECIATION> 3,277,114 3,719,181
<TOTAL-ASSETS> 7,048,075 23,171,376
<CURRENT-LIABILITIES> 2,701,574 10,307,733
<BONDS> 6,730 817,011
0 0
75 209
<COMMON> 1,167 1,562
<OTHER-SE> 4,338,529 11,464,428
<TOTAL-LIABILITY-AND-EQUITY> 7,048,075 23,171,376
<SALES> 6,411,656 24,739,381
<TOTAL-REVENUES> 6,411,656 24,737,381
<CGS> 5,391,225 19,779,872
<TOTAL-COSTS> 5,391,225 19,779,872
<OTHER-EXPENSES> 1,311,155 5,280,813
<LOSS-PROVISION> 0 (131,897)
<INTEREST-EXPENSE> 8,397 307,636
<INCOME-PRETAX> (245,965) (709,958)
<INCOME-TAX> (65,691) (4,329)
<INCOME-CONTINUING> (180,274) (705,629)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 66,859 0
<CHANGES> 0 0
<NET-INCOME> (113,415) (705,629)
<EPS-PRIMARY> (.02) (.05)
<EPS-DILUTED> .00 0
</TABLE>
