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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23855
U.S. PLASTIC LUMBER CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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NEVADA 87-0404343
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
(561) 394-3511
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PLACE OF
BUSINESS)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.0001 N/A
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Check here whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
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 of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year was $45,704,940.
The aggregate market value of the voting common equity held by
non-affiliates of the registrant on February 26, 1999 based on the average bid
and asked price on such date, being $8.00 per share, was $110,467,568. The
aggregate market value of the common stock underlying the preferred stock held
by non-affiliates of the registrant on February 26, 1999 was $16,177,728.
The number of shares outstanding of the registrant's common stock as of
February 26, 1999 is 20,299,535.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III: Portions of the Registrant's definitive Proxy Statement relating
to its 1999 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
Statements on Form SB-2 and Amendments thereto filed with the Securities and
Exchange Commission on February 11, 1998 and July 22, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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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. It was incorporated in June 1992. In 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 reverse merger stock for stock exchange
(the "Acquisition") it changed its name from Educational Storybooks
International, Inc. 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. As a result of the recent
acquisition of the Eaglebrook companies, the Company now also manufactures a
composite product made from plastic and wood fiber in addition to plastic sheet
products for the packaging industry. The second 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.
Within the plastic lumber division, the Company owns and operates seven
manufacturing, processing and fabrication facilities in the U.S. The primary
product produced in five of these plants is plastic lumber profiles made from
recycled plastic waste. Recycled plastic lumber is manufactured in a variety of
colors, profiles and shapes including standard lumber dimensions and many custom
engineered profiles and shapes. The sixth plant is a fabrication facility which
manufactures value-added products made from the Company's recycled plastic
lumber. The seventh plant is a recycled plastic processing facility which
includes washing, grinding and pelletizing of post consumer and post industrial
plastic waste. The Eaglebrook operation also provides the Company with a plastic
processing facility. 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 and rain forest hardwoods, which is
suitable for and provides superior performance in most outdoor applications.
Within the environmental operations, the Company operates three facilities.
The first plant treats and recycles soil that has been contaminated with
petroleum hydrocarbons and similar compounds through a process known as thermal
desorption. The Company's second plant treats and recycles soil through a
process which is bio-organic in nature. Finally, the Company has a plant that
recycles oils, solvents and heavy metal contaminated waste.
U.S. Plastic Lumber Ltd. is comprised of two wholly owned subsidiaries:
Eaglebrook Plastics, Inc. and Eaglebrook Products, Inc.
The Company's plastic lumber operation manufactures plastic lumber from
recycled waste plastic, and in some instances plastic composite lumber with
additives including fiberglass, 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
and other products with wood fiber as an additive. The Company has a license to
use a patented technology and also owns two patents 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 going
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.
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Clean Earth, Inc. operates plants in New Castle, Delaware, Carteret, New
Jersey and Kearny, New Jersey. It also owns an environmental construction
company: Integrated Technical Services, Inc. (ITS), in Winslow, New Jersey.
Clean Earth, Inc. also owns 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 disposal 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. 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 also removes petroleum hydrocarbons from soil. The plant is
similar to the CENC facility except that its process involves bio-organic
destruction of petroleum hydrocarbons whereas the CENC facility uses low
temperature thermal desorbtion to remove petroleum hydrocarbons from the soil.
The Clean Earth division also has a subsidiary, S & W Waste, Inc. which is
involved in the recycling and beneficial re-use of industrial wastes. The plant
is a permitted RCRA facility. The remaining environmental recycling
subsidiaries, Integrated Technical Services, Inc. and Consolidated Technologies,
Inc., 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, access to capital, dilution, expertise, Year 2000
risks, newly developing technologies, loss of permits, conflicts of interest and
related party transactions, regulatory matters, protection of technology,
environmental concerns, ability to implement Company's growth strategy,
seasonality, operating hazards and insurance coverage, 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."
Subsequent Events
On January 28, 1999, the Company acquired its largest competitor in the
recycled plastic lumber industry, Eaglebrook Plastics, Inc. ("Plastics") and
Eaglebrook Products, Inc. ("Products") with cash, a convertible debenture and
the issuance 1,668,025 shares of the common stock of the Company. Plastics
operates a recycled plastic processing plant including the washing, grinding and
pelletizing of post-consumer and post-industrial plastic waste and providing the
raw material for many of the manufacturing operations of the Company. Products
is a manufacturer of recycled plastic lumber and composite plastic lumber
utilizing an automated continuous flow extrusion process with vacuum calibration
forming technology similar to that in the other manufacturing plants owned by
the Company.
The special products and additional dimensional lumber capacity complement
the Company's existing products and provides the Company with a dominant
manufacturing capacity in the industry. This acquisition
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is important to the Company due to a number of factors: (i) it provides the
Company with the status of being the largest manufacturing of recycled plastic
lumber in the industry; (ii) it provides the Company with a product line that
management of the Company believes will provide the Company with significant
inroads into the alternative wood market, aside from 100% recycled plastic
products; (iii) it provides significant vertical integration aspects relative to
plant consolidation, increased purchasing power and greater efficiency in
operations; (iv) it provides a top-notch management team to manage the entire
plastic lumber division of the Company; (v) it increases the distribution
network of the Company; and the Company believes it will generate strong cash
flow and operating profits. The Eaglebrook companies had gross sales in 1998 of
$22,145,000 before $1,706,000 of intercompany eliminations with operating income
of $1,325,000. See "Recent Sales of Unregistered Securities for the Last Three
Years" for additional information.
On January 7, 1999, the Company executed a contract to acquire the all of
the stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA which is very similar to the
Company's soil remediation facility in New Castle, DE and has been a competitor
of the Company. AWI provides environmental services which are very similar to
that provided by the Company environmental services division. The Company signed
a Management Contract on January 7, 1999 taking over all responsibility for day
to day management and financial control of SRP and AWI as of that date.
Unaudited sales of SRP and AWI, prior to intercompany eliminations, for year
ended December 31, 1998 were $14,922,000 with unaudited net income of
$2,025,000. The Company finalized its transaction with Brass on or about March
18, 1999. The Company purchased Brass for cash plus 1,000,000 shares of the
Company's common stock plus 1,500,000 warrants to purchase the Company's common
stock.
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. 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, a manufacturer of recycled plastic lumber, recycled plastic shapes
and value added products located in Lake Odessa, Michigan since 1986. This
acquisition doubled the Company's recycled plastic lumber sales at that time.
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.
In January 1997, the Company acquired Recycled Plastics Industries, Inc.
(RPI), located in Green Bay, Wisconsin. RPI, formed in 1989, is a manufacturer
of specialty profile recycled plastic lumber products. RPI's production process
utilizes an automated continuous flow extrusion process with vacuum calibration
forming technology.
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
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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 ("EPC"), in
Auburn, Massachusetts, which operates a recycled plastic processing plant
including the washing, grinding and pelletizing of post-consumer and
post-industrial plastic waste. A significant portion of the sales of EPC for the
year ended December 31, 1998 were from one major customer, Dupont, with which
EPC has an exclusive contract to provide pelletized, post-consumer feedstock
product.
In June 1997, the Company formed Carteret Biocycle Corp. ("CBC") as a
wholly owned subsidiary of Clean Earth, Inc. CBC has an 80,000 square foot soil
recycling facility, on a 5-acre leased parcel in Carteret, New Jersey. This
facility recycles contaminated soils utilizing a bio-organic technology of
removing contaminants. The plant has the capacity to process approximately
320,000 tons of contaminated soil annually. 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 CTI's
dredging operations.
In July 1997, the Company formed a joint venture partnership with
Interstate Industrial Corp. of Clifton, New Jersey to bid on dredging and upland
disposal projects. The joint venture company does business as Interstate/U.S.
Plastic Lumber Corp. joint venture.
In November 1997, the Company acquired Waste Concepts, Inc. ("WCI") as a
wholly owned subsidiary of Clean Earth, Inc. WCI is primarily involved in
removing and recycling large volumes of waste products for beneficial reuse as
well as providing construction and permitting services for reuse and disposal of
dredge materials. The Company plans to expand its operations to include large
volume handling of dredge material and incinerator ash.
In January 1998, the Company acquired Green Horizon Environmental, Inc.
("GHI") as a wholly owned subsidiary of Waste Concepts, Inc. GHI is primarily
involved in removing and recycling large volumes of incinerator ash, paper pulp
and sewer sludges for beneficial reuse in strip mines. GHI has also been
actively involved with the beneficial re-use of dredge materials and incinerator
ash and is a critical component of the Company's plans to expand its dredging
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 and June 1998, the Company acquired an additional interest in
Consolidated Technologies, Inc. ("CTI") having previously been a 25% minority
stockholder as of November, 1997. The Company now owns 100% 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's permits 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.
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In May 1998, the Company acquired Cycle-Masters, Inc. ("CMI") which owns
and operates a plastic lumber manufacturing facility in Sweetser, Indiana. CMI
provides the Company with additional manufacturing capacity and institutional
sales for our plastic lumber division. See "Recent Sales of Unregistered
Securities for the Last Three Years" for additional information.
In June 1998, the Company acquired GeoCore, Inc. ("GCI") which operates an
environmental services company in New Jersey. GCI provides the Company with
additional remediation services to offer its customer base, including tank
cleaning and remediation services. See "Recent Sales of Unregistered Securities
for the Last Three Years" for additional information.
In June 1998, the Company acquired substantially all of the assets of
Trimax of Long Island, Inc. and Polymerix, Inc. Trimax was a manufacturer of
structural plastic lumber made from recycled plastic and operated in Ronkokoma,
Long Island. Polymerix owned two patents relative to the structural lumber
manufacturing process. These assets were purchased by the Company with the
approval of the U.S. Bankruptcy Court for the Eastern District of New York as
Trimax and Polymerix had filed a bankruptcy petition in January 1998. See
"Recent Sales of Unregistered Securities for the Last Three Years" for
additional information.
In December 1998, the Company acquired S & W Waste, Inc., a RCRA facility
that recycles and provides beneficial re-use of industrial waste and disposes of
contaminated materials. See "Recent Sales of Unregistered Securities for the
Last Three Years" for additional information.
The Company implemented a corporate restructuring as of December 31, 1998
in which it merged many of the subsidiaries together. Recycled Plastic
Industries, Environmental Specialty Products, EnviroPlastics, Earth Care of the
Midwest, Earth Care of Tennessee, Chesapeake Plastic Lumber, and CycleMasters
were merged into U.S. Plastic Lumber Ltd. Within the environmental division,
Green Horizon Environmental was merged into Waste Concepts Inc, then Waste
Concepts Inc and GeoCore were merged into Integrated Technical Services.
Advanced Remediation & Disposal had previously been merged into Integrated
Technical Services.
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, (ii) Clean Earth, Inc., a Delaware corporation, is the
holding company which owns all operating environmental recycling subsidiaries,
and (iii) U.S. Plastic Lumber Finance Corporation, a Delaware holding company
established to provide financing to the subsidiaries of the Company. The
following is a list of the Company's indirect subsidiaries:
U.S. Plastic Lumber Ltd. Subsidiaries:
Eaglebrook Plastics, Inc., an Illinois corporation
Eaglebrook Products, Inc., an Illinois corporation
Clean Earth Inc. Subsidiaries:
Clean Earth of New Castle, Inc., a Delaware corporation
Integrated Technical Services, Inc. a Delaware corporation
Carteret Biocycle Corp., a Delaware corporation
Consolidated Technologies, Inc., a Pennsylvania corporation
S & W Waste, Inc., a New Jersey corporation
Soil Remediation of Philadelphia, Inc., a Delaware corporation
Allied Waste, Inc., a Delaware corporation
U.S. Plastic Lumber Finance Corporation Subsidiaries:
U.S. Plastic Lumber IP Corporation, a Delaware corporation
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Recycled Plastic Lumber Operation
Products
During the past several years, the Company's recycled plastic lumber
division has positioned itself to be 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 primarily made from 100%
recycled, post-consumer and post-industrial plastics and are used for numerous
municipal, commercial and residential applications. With the acquisition of the
Eaglebrook companies, the Company now also manufactures a composite lumber
product consisting of plastic and wood fiber. 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 plastic lumber manufactured from a patented process.
Recycled plastic lumber products offer these unique advantages:
- Environmentally friendly and non-toxic
- Virtually maintenance free
- Saves trees and reduces use of exotic rain forest hardwoods
- Can be worked with conventional tools
- Aesthetically pleasing wood-like textured surface
- Splinter proof -- never rots
- Not affected by termites, ants or other wood borers
- No splitting, cracking or chipping
- Holds nails and screws 40% better than wood
- No toxic leaching into soil or groundwater
- Most graffiti easily washes off
Products built with the Company's recycled plastic lumber have the
appearance of freshly stained or painted wood but the longevity and
maintenance-free qualities of plastic. Recycled plastic products are an ideal
replacement for wood, metal and concrete in numerous applications, including
most non-structural exterior functions. Some of the potential applications are:
- Decking, including supporting structures and railings, for residential
and commercial projects
- Commercial, municipal and residential applications such as park benches,
picnic tables, trash receptacles, stadium seats, planters, and endless
other uses
- Trailer, farm equipment and railroad box car flooring
- Industrial applications such as pallets, walkways in chemical plants,
catwalks on factory roofs, coil cradles and other specialized
applications
- Sanitary animal pen flooring
- Railroad ties
- Sea pilings and marine bulkheads
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Manufacturing
The Trenton, Tennessee manufacturing facility currently has three closed
mold forming extruders and one continuous flow extruder. The focus of the
production in Tennessee is large dimensional plastic lumber, such as structural
lumber, 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 plastic in assorted
specialty shapes such as bench ends and table legs produced in a mold rather
than an extruder.
The Green Bay, Wisconsin manufacturing facility (approximately 36,000 sq.
ft.) operates seven 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. The facility will also manufacture the Company's
"Carefree Decking Systems"(R), a specialty product used for decks and rail
systems in commercial and residential applications.
The Chicago, Illinois manufacturing facility (approximately 260,000 sq.
ft.) operates twelve 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. This facility also provides processing of post consumer
and post industrial plastics utilized by the Company as raw material. This
facility is the headquarters of all of the plastic lumber operations of the
Company. One of the specialty products developed at this facility is the "Smart
Deck"(R), a composite product, consisting of plastic and wood, used for decks in
commercial and residential applications. The Smart Deck(R) product line was
developed to compete directly with several manufacturers of composite deck
product throughout the country. An addition, a 100% plastic sheet product
DuraPack(R) is manufactured at this facility to service the packaging industry.
The Sweetser, Indiana manufacturing facility currently has three extruders
utilizing continuous flow production. It produces lumber product primarily for
industrial and commercial customers. The product in this facility is often
customized to meet the specifications of an OEM manufacturer.
The Denton, Maryland manufacturing facility currently has three extruders
utilizing continuous flow production. It produces lumber product similar to that
of the Green Bay facility. The plant contains 80,000 square feet providing the
Company with critical space suitable for production capacity expansion in the
event such is needed.
During 1998, the fabrication facilities in Mulliken, Michigan and Guasti,
CA housed the assembly process 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 Michigan
facility will be closed during 1999 due to its proximity to the Chicago facility
acquired by the Company in January, 1999, to streamline costs and increase
efficiency. The Chicago facility also provides fabrication of value added
products on behalf of the Company.
The Company's manufacturing process involves proprietary technologies and
specialized manufacturing equipment that was 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 that 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.
The primary product of the Company's manufacturing process is 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 primarily 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
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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 and its Smart
Deck(R) line of products. 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 its own
operations or 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 is not dependent
on any one source to obtain its supplies. The Company believes the raw material
feedstock is currently purchased from sources that are dependable and adequate
for at least short term and medium term manufacturing requirements. Availability
of raw material has not been a problem for the Company. 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. Therefore, 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.
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, Louisiana State University and other research facilities. The Company
has been an active participant along with others in the research and development
process, and the Company has spent in excess of $1,000,000 developing new
products. 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 was granted U.S. Patent Protection for its recycled
plastic composite railroad cross tie and its related manufacturing technology.
These patents are 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.
The Company is also the owner of two patents purchased in June 1998 with
the assets of Polymerix and Trimax providing the Company with the technology and
process to manufacture a structural plastic lumber product. The Company
continues to evaluate its patents to determine if improvements can be made
providing the Company with additional protection from its competitors.
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
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three time a year in conjunction with the American Society of Testing &
Materials (ASTM). Complete ASTM standards are being established for plastic
lumber and preliminary test results are now available from the following
institutions:
- Rutgers University's Center for Plastics Recycling Research
- University of Massachusetts at Lowell, Dept. of Engineering
- Batelle, Engineering Mechanics Dept.
- US Army Corps of Engineers Research Laboratories
Several ASTM standards have been developed and approved for plastic lumber
as of July of 1997. Many more are under consideration. This will greatly expand
the potential users who are required to meet specifications and standards known
to the wood industry.
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, the Company owns two patents on
its structural lumber product and has an exclusive worldwide license on the
Rutgers patent. The two patents were purchased as part of the Polymerix/ Trimax
asset acquisition through the bankruptcy court. The first Trimax patent expires
on July 9, 2008 and the second patent expires on May 18, 2010. The Company has a
patent application pending for process and composition relating to the
manufacture of wood fiber and polymer composite. The Company believes these
patents are important to provide it with a competitive position in the market.
The Company has several license agreements relative to patented
technologies of others. The Rutgers patent expires on August 4, 2015. Our
license agreement with Rutgers has a duration that extends the life of the
patent depending upon the Company maintaining its contract rights thereunder.
The Company has a license with Paul Adam for the manufacturing and commercial
sale of contaminated or impacted dredge material from a wide variety of
industrial waste streams that it uses in it environmental division. The Adam
License extends for the duration of the Adam patent, December 5, 2011, unless
either party seeks to terminate the agreement earlier for reasons set forth in
the License Agreement. The Company also has a non-exclusive license with the
Strandex Corporation to manufacture composite lumber products. The Strandex
License Agreement expires on April 22, 2011. The Company believes these licenses
are important to provide it with a competitive position in the market.
The Company has several registered trademarks and several more currently
pending application for registration. The registered trademarks of the Company
are as follows: Carefree Decking System(R), Smartdeck(R), Clean Earth(R),
Recyclemaid(R), Cyclewood(R) (in Japan only), Trimax(R), Durawood(R),
Durapack(R), RecycleDesign(R), Global Garden(R), SmartTrim(R). The Company has a
variety of trademark applications pending including Duratie(TM) and
Cyclewood(TM). The Company takes an aggressive attitude toward the protection of
its proprietary technology.
Competition
The recycled plastic lumber industry is a young, highly fragmented industry
with over 20 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
NEW Plastics Corp., Luxemburg, Wisconsin and a variety of small "mom and pop"
organizations. The Company attempts to compete with these competitors on the
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basis of price, quality and service. Two competitors manufacture commingled
plastic 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(R), TimberTech and AERT are
competitors of the Company using a plastic composite material made with sawdust
used to manufacture primarily deckboard. TREX(R) has a strong distribution
system in place, and therefore, is the most widely disseminated product of all
of the competitors of the Company. The recent acquisition by the Company of the
Eaglebrook companies will enable the Company to compete directly against the
composite deck manufacturers through the Smart Deck(R) product developed by
Eaglebrook.
The Company believes that its competitive position in the market with the
acquisition of the Eaglebrook companies has increased substantially. In large
part this is due to several factors, including but not limited to, wider
distribution of the Company's products nationally, cross-selling of separate
products to the entire distribution network, increased purchasing power which
can lower the Company's cost basis, and a strong management team with a long
history of success in this industry.
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. Composite
lumber is about 20% less expensive than recycled plastic lumber. Although
recycled plastic lumber and composite lumber can be more expensive to initially
purchase than comparable wood, plastic lumber and composite 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 wood is the toxic leaching characteristics.
Chemicals injected into pressure treated wood 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
pressure treated wood presently has with respect to its initial cost.
Potential Markets
By producing a suitable recycled plastic lumber and composite lumber
product, the Company conserves natural resources, reduces the plastic waste
entering landfills and provides a useful, maintenance-free product that
satisfies this growing market. One of the major markets for recycled plastic
lumber and composite 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 that is fully
recyclable and maintenance-free. The Company's product consists of both
structural and non-structural profiles.
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. As of February 1999, the
Company's cross ties have approximately 100 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 large demand for the more durable recycled
plastic crossties that have an estimated useful life in excess of 50 years.
Conditions which shorten creosote wood tie life are moisture, extreme
temperature
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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 many foreign countries because it is
a dwindling natural resource in many of foreign countries.
Although the plastic railroad tie is still undergoing testing, sufficient
test data exists which shows the plastic railroad tie is performing well enough
to enable the Company to market its railroad tie product to the railroad
industry. The primary issue in the Company's growth plans regarding the plastic
railroad tie is cost. The Company's current pricing structure is approximately
double the cost of a comparable wood tie. The Company markets its tie on the
basis of life cycle cost savings. There can be no assurances that the Company's
marketing strategy will be successful in creating demand for the Company's
railroad tie product.
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, stairs
for spas, flooring for farm equipment, railroad ties and many other products.
Marketing Strategies
The business and operations of the Company is itself divided into three
distinct divisions. These are (i) engineered products, including Carefree
Decking(R), Smartdeck(R) systems, fabricated products, marine & government and
OEM/industrial businesses; (ii) packaging sheet division, including DuraPack(R)
plastic slipsheets, tier sheets and other related packaging products; and (iii)
recycled resins division, including post consumer & industrial plastic
processing and trading of engineering grade resins.
The Company employs market focused Sales Specialists and industry specific
representatives 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. The Company is seeking to expand its
distribution network nationwide in certain markets.
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's sales are not dependent upon a few customers, but rather the company
is currently positioned whereby it has broad diversity in its customer base.
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, by supplying product for custom items which
are not as seasonal and by increasing its industrial sales which tend to be less
seasonal in nature.
Government Regulation and Environmental Matters
Although the recycled plastic and composite lumber operations do not
generate significant quantities of waste materials or hazardous substances
resulting in hazardous emissions, the Company's operations are and will in the
future be subject to numerous existing and proposed laws and regulations
designed to protect the environment from waste materials and particularly
hazardous wastes emissions. The Company is subject to federal, state and local
laws regarding the environment, occupational health and safety and other
regulations applicable to the Company's business. (See Regulation under the
Environmental Recycling Division section for additional discussion of
environmental regulations affecting the Company's business.) The primary
regulations affecting the plastic lumber divisions are air quality emissions
from our manufacturing plants, disposal of solid and liquid wastes, waste water,
and storm water discharge. 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
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capital expenditures that would have a material adverse effect on operations.
Currently, costs of compliance with regulatory requirements for the plastic
lumber division do not materially impact the financial condition of the Company,
although many times the delays in approving permit modifications can slow the
ability of the Company to quickly adapt to changing market conditions. 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. Additionally, as with manufacturing
practices in general, in the event of a release or threat of release of any
hazardous substance by the Company, such a release could have a material adverse
effect upon the Company whether said release or threat of release is (i)
directly or indirectly caused by the Company or (ii) from any of the properties
owned or leased by the Company or (iii) any associated offsite disposal of the
wastes of the Company or (iv) from prior activities on property now owned or
leased by 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. The
Company is not dependent on a few large customers, but has a broad base of
customers.
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 from the Delaware Environment and Natural Resources Commission
("DENRC") to help reduce costs. One permit modification, which is still pending,
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. Switching to waste oil as a fuel in the winter months will enable
more efficient costs translating to improved operating margins. The second
permit modification has already been approved by the DENRC for accepting sewer
sludge into the process. The addition of sewer sludge will significantly reduce
the volume of water consumed by the plant, increase the volume of clean soil,
and generate revenue for the Company.
Carteret Biocycle Corp. was founded in 1997 and opened its facility for
business in the third 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
tipping fee (the fee charged its customers to treat wastes at the facility) for
this facility is 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 Consolidated
Technologies, Inc. ("CTI"), was acquired in early to mid 1998. CTI oversees the
business of beneficial re-use of industrial wastes including the 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
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materials through solidification and stabilization of the dredged sediments.
Essentially, these mix designs are formulated from 100 percent waste materials
and industry by-products.
As of September 1997, the federal government has prohibited off-shore
dumping of contaminated dredge material. The Company has positioned itself to
take advantage of this new market opportunity by finding ways to re-use
contaminated 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.
The CTI business consists of the dredging, processing and beneficial re-use
of contaminated 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 to its plants, the Company has a subsidiary, Integrated
Technical Services, Inc. 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.
Regulatory Matters
All of the Company's principal business activities within the environmental
division are subject to extensive and evolving environmental, health, safety,
and transportation laws and regulations at the federal, state and local levels.
These regulations our administered by the EPA in the United States and various
other federal, state, and local environmental, zoning, health, and safety
agencies in the United States and elsewhere, many of which periodically examine
the Company's operations to monitor compliance with such laws and regulations.
Many of the facilities of the Company operate under permits granted by one or
more federal, state, or local agencies. Obtaining necessary permits to operate
the facilities of the Company are often times difficult, time-consuming,
expensive and may be opposed by local citizens as well as environmental groups.
Once obtained, operating permits are subject to modification and revocation by
the issuing agency. Compliance with current and future regulatory requirements
may require the Company, as well as others in our industry, from time to time,
to make significant capital and operating expenditures. Federal, state, and
local governments have from time to time proposed or adopted other types of
laws, regulations, or initiatives with respect to the environmental services
industry, including laws, regulations, and initiatives to ban or restrict the
international, Interstate, or intrastate shipment of wastes, impose higher taxes
on out-of-state waste shipments than upon in-state shipments, limit the type of
waste that may be disposed of at existing facilities, mandate waste minimization
initiatives, and re- classify certain categories of non-hazardous waste as
hazardous. Such regulations, laws and initiatives can create situations which
have a material adverse effect on the Company's environmental business.
The Company makes a continuing effort to anticipate regulatory, political,
and legal developments that might affect operations, but is not always able to
do so. The Company cannot predict the extent to which any legislation or
regulation that may be enacted, amended, repealed, re-interpreted, or enforced
in the future may
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affect its operations. Such actions could adversely affect the Company's
operations for impact the Company's financial condition or earnings.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. During the ordinary course of its operations, the Company
may from time to time receive citations or notices from such authorities that a
facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of such citations or notices, the Company will
work with the authorities to address their concerns. Failure to correct the
problems to the satisfaction of the authorities could lead to monetary
penalties, curtailed operations, jail terms, facility closure, or an inability
to obtain permits for additional sites or modifications to permits an existing
sites.
As a result of changing government in the public attitudes in the area of
environmental regulation and enforcement, management anticipates that
continually changing apartments and health, safety, and environmental protection
laws will require the Company and others engaged in the environmental industry
to continually modify and upgrade various facilities including altering methods
of operations and cost that may be substantial. Today, the Company has not had
to expand in material amount to vanity, modify or alter any of its existing
facilities resulting from changes in environmental protection laws. To his
knowledge, the Company is currently in compliance in all material respects with
all applicable federal, state, and local laws, permits, regulations, and orders
affecting its operations or noncompliance would resulting in the material
adverse effect on the Company's financial condition, results of operations or
cash flows. There's no shortage of the Company will not have to expand
substantial amounts for such actions the future.
The Company expects to grow in part by acquisition of additional
environmental facilities. Although the Company conducts due diligence
investigations of the past practices of the businesses that acquires, it can
have no assurance that, through its investigation, it will identify all
potential environmental problems or risks. As a result, the Company may have
acquired, or in the future acquire, facilities that have unknown environmental
problems and related liabilities. The Company seeks to mitigate the foregoing
risks by obtaining environmental representations and indemnities from the
sellers of the businesses that it acquires. However, there can be no assurances
that the Company will be able to rely on any such indemnities if an
environmental liability exists.
Generally, under environmental laws, 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. 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.
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.
Federal Regulations.
The primary U.S. federal statutes affecting the business of the Company are
summarized below.
(1) The Resource Conservation and Recovery Act of 1976, as amended
("RCRA") establishes the framework for federal, state, and local government
cooperation in controlling the management of non-hazardous and hazardous
solid waste. These regulations established minimum standards for
environmental facilities and may impose significant liabilities and costs
upon the Company. The Company does not believe that the cost of complying
with such standards will have a material adverse effect its operations.
(2) The Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), among other things, provides
for the cleanup of sites from which there is a
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release or threatened release of a hazardous substance into the
environment. CERCLA imposes joint and several liability for the cost of
cleanup and for damages to natural resources upon the present and former
owners or operators of facilities or sites from which there is a release or
threatened release of hazardous substances to the extent the disposal of
hazardous substances for which there is a release which occurred during
their period of ownership or operation. Waste generators and transporters
also have strict liability under this statute. Liability under CERCLA is
not dependent upon the intentional disposal of "hazardous wastes"' as
defined under RCRA. It can be founded upon the release or threatened
release, even as result of lawful, unintentional, and non-negligent action,
of any one of more than 700 "hazardous substances," including very small
quantities of such substances. Therefore, if the Company has transported
waste material and lawfully disposed of it at a properly licensed facility,
the Company can still have liability on the CERCLA which can be very
substantial. The Company does have environmental liability insurance,
however, there can be no assurances that the amount of should insurance
would be sufficient to cover costs pursuant to the statute. The Company
attempts to minimize its exposure under this statute by selecting disposal
facilities and transporters who the Company believes maintain strict
compliance its with all environmental laws and who carry environmental
liability insurance of their own.
(3) The Clean Air Act. This statute provides for the federal, state
and local regulation of the emission of air pollutants. These regulations
impose emission limitations and monitoring and reporting requirements on
various operations of the Company, including its soil treatment facilities
and its S&W Waste facility. It is not anticipated by the Company that the
cost of compliance with this statute will have a material adverse effect on
the Company.
(4) The Occupational Safety and Health Act of 1970 (the "OSHA Act").
The Lucia act authorizes the Occupational Safety and Health Administration
to promulgate occupational safety and health standards. Various of the
standards, including standards for notices of hazards, safety within the
workplace, and handling of hazardous substances, may apply to the Company's
operations.
(5) The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act") establishes rules for regulating the discharge of pollutants into
streams, rivers, groundwater, or other surface waters from a variety of
sources, including hazardous and non-hazardous disposal sites. Runoff from
the Company's facilities could require the Company to apply for in obtain
discharge permits, conduct a sampling and monitoring, and, under certain
circumstances, reduce the quantity of pollutants, if any, in those
discharges. Generally, the Company would be required to obtain a storm
water discharge permit even before the time it begins development of a
facility so, therefore, this statute is likely to affect the construction
or expansion of existing facility. The Clean Water Act provides civil,
criminal, and administrative penalties for violation of its provisions.
State and Local Regulation.
The states in which the Company operates have their own laws and
regulations that may be more strict than comparable federal laws and regulations
governing hazardous and non-hazardous waste disposal, water and air pollution,
releases and cleanup of hazardous substances and liability for such matters. The
states also have adopted regulations governing the siting, design, operation,
maintenance, closure, and post closure maintenance of disposal facilities. The
Company's facilities and operations are likely to be subject to many, if not
all, of these types of requirements. There can be no assurance that these laws
and regulations will not have a material adverse effect on the operations or
financial condition of the Company.
Sales and Marketing
As indicated, the environmental recycling operation is involved in a number
of markets, including but not limited to remediation of contaminated soil, coal
tar, upland disposal of dredge materials and the recycling of sewer sludge and
municipal incinerator ash to productive use. Each of these markets is
substantial and the markets are tied together via the contracting services arm
of Clean Earth. These service companies can provide on site clean-up, removal
and transportation of these materials to other divisions of the Company for
recycling and re-use of the products in an environmentally safe manner.
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The Company has recently begun bidding on large contracts to receive dredge
material. Prior to September 1997, contaminated dredge material from harbors was
dumped in the oceans. New federal regulations require upland disposal of this
material. The Company believes every harbor throughout the country will be faced
with how to deal with this issue and abide by these new government 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 and re-use 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. One distinct advantage of the Company is its quality control system.
The Company's comprehensive disclosure and testing systems ensures proper
tracking of material as well as on site testing to insure that only acceptable
material is permitted onto its sites. 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 treat coal tar materials from Delaware Natural Resources and
Environmental Commission ("DNREC") and believes that this provides a niche
market as very few competitors have this capability.
There are significant barriers to entry for this line of business. First
and foremost, the siting, permitting and licensing process is time consuming and
costly. Second, there is a large capital investment required to build the plants
and purchase the equipment necessary to operate the facility. Additionally,
contracts must be awarded to obtain the incoming product as well as contracts to
dispose of the material after it has been treated in order to operate an
economically feasible facility. Finally, this type of operation requires
technically trained individuals to operate and ensure that the facility remains
in strict compliance with environmental laws. Some of our competitors are
national companies with greater name recognition, greater economic resources and
significantly larger business size.
Plant Operations
The soil treatment plants and the S & W Waste RCRA facility are operated
with a strict commitment to safety, health and environmental issues coupled with
a rigorous system of controls, which lends credence to the "Certificate of
Destruction and Recycling" issued to each generator.
The Waste Tracking System starts before the contaminated soil is accepted
at the plant gate. A comprehensive disclosure testing and manifesting system
ensures that the solids brought to the facility fall well within the limits of
Clean Earth's permits and treatment capacities. This system mirrors the
procedures of hazardous waste facilities. Furthermore, Clean Earth runs an EOX
test (Extractable Organic Halogens) on every load of material before it is
authorized for unloading in the storage buildings. In addition, management runs
several spot checks with the comprehensive on-site laboratory with respect to:
GC (Gas Chromatographer) for PCB's (Poly Chlorinated Biphenyls)
GC for VOC identification (Volatile Organic Compounds)
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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 at each facility 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 rigorous separation and tracking of each waste stream
and 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 final 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, there is a comprehensive control system with recording devices
that insure compliance with the various permit requirements, Clean Earth further
guarantees the facility's performance by testing the production daily. As
recommended in EPA publication #SW846, Clean Earth composites a sample for every
300 tons of production and tests it for BTEX with a GC and for TPH by the EPA
418 method, using an independent State certified laboratory. For coal tars, the
treated materials are also tested for PAH's (Polynuclear Aromatic Hydrocarbons)
by the EPA 8270 method. It is the Company's belief that this treatment plant is
the first in the industry to control its emissions with a C.E.M. (Continuous
Emissions Monitoring) system. Information is collected minute by minute and
stored on computers for control purposes; this information is available to both
customers and regulators. The property itself is monitored through several
monitoring wells, that are tested quarterly. The test results are reported to
DNREC.
Liability Insurance and Bonding Capabilities
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.
The Clean Earth division has also obtained a $50,000,000 performance
capability to enable the environmental remediation companies to participate in
more significant projects.
EMPLOYEES
The Company and its subsidiaries employ on a full time basis a total of
approximately 489 persons through the United States. Of this number,
approximately 307 persons are full time permanent employees of the plastic
lumber operations, inclusive of the Eaglebrook companies purchased in January
1999 which has approximately 95 full time permanent employees; and 175 persons
are full time permanent employees in the environmental recycling operations.
There are 7 persons full time permanent employees at the corporate headquarters.
RISK FACTORS
Risks Inherent In This Company
Operating Losses. The Company incurred an operation 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 Company was successful in reporting an operating
profit for the 1998 fiscal year, equal to $1,437,226, but there can be no
assurances that this will continue. 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.
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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. 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, consolidate existing operations, and otherwise implement its plan of
operations, the Company will be required, among other things, to raise
additional capital. While the Company has existing lines of credit, there can be
no assurance that such debt financing will be available to the Company in the
future or that such debt financing will be available in the amounts required by
the Company or on terms acceptable to the Company. The failure of the Company to
obtain financing in adequate amounts and on acceptable terms could have an
adverse effect on the Company's business, financial condition and results of
operations.
Dilution. The Company has reserved for issuance a substantial amount of
shares for future issuance. See Capitalization Table in Section entitled "Other
Outstanding Options". In total, on December 31, 1998, the Company had reserved
for future issuance 10,475,545 shares with 18,230,528 shares currently
outstanding. Of the shares reserved, 4,573,686 shares ("Earn Out Shares") are
related to an earn out provision in the Agreement and Plan of Reorganization
with Educational Storybooks International, Inc. dated March 29, 1996. Upon the
reverse merger into the public shell, the parties had agreed to an earn out
bonus in the event net sales or production of 2,000,000 pounds of plastic lumber
per month for three consecutive months, subject to the limitations of the
Agreement and Plan of Reorganization. Upon achieving that sales or production
level as defined therein, the shareholders of Earth Care Global Holdings as of
March 29,1996 and the shareholders of Clean Earth, Inc.(collectively the
"Historical Shareholders") would receive the Earn Out Shares. No additional
assets or cash is placed into the Company in the event such sales or production
goal is achieved, therefore, the dilution from the issuance of these shares will
directly impact all shareholders who purchased stock subsequent to March 29,
1996 and who still hold stock on the date the earn out shares are issued,
assuming the sales or production goal is met and the shares are issued. As of
December 31, 1998, the net tangible book value of the Company was $13,073,793 or
$.72 per share of Common Stock. Net tangible book value per share represents
total tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding. After pro forma adjustments given to the effect of the
issuance of the Earn Out Shares, the pro forma adjusted net tangible book value
of the Company as of December 31, 1998 would have been $.57 per share. This
represents an immediate dilution of $.15 per share to all stockholders of the
Company who are not Historical Shareholders.
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.
Year 2000 Risks. Many existing computer programs use only two digits to
identify a year in the date field. In other words, date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. 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"). This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process loan or other transactions, send statements or late notices, or
engage in similar normal business activities.
Although the Company currently estimates that its Information Technology
systems will be Year 2000 compliant by the end of 1999, no assurance can be
given that it will meet this time frame. The Company is in the process of
developing a contingency plan in the event its systems are not Year 2000
compliant on a timely basis. The Company's accounting software is Year 2000
compliant. The Company is in the process of conducting an internal audit of its
non-information technology systems (e.g. manufacturing equipment embedded
computer systems) and software to determine what issues, if any, exist. Upon
completion of its internal audit, the Company will evaluate the full scope of
issues, related costs, and available remedies to insure the Company's
non-information systems and those of its major customers and vendors continue to
meet its internal needs. The Company does not anticipate a material financial
impact as a result of the Year 2000 Issue nor does it anticipate any material
financial expenditures to remedy the Year 200 date change within its own
software. Anticipated costs for system and software modifications, if any, will
be expensed as incurred.
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<PAGE> 20
However, the Company has no control over Year 2000 compliance by the
customers and vendors of the Company. The Company is currently unable to predict
the extent to which Year 2000 issues will affect these third parties, or the
extent to which it would be vulnerable to the failure of these parties to
remediate any Year 2000 issues on a timely basis. If the Company's customers and
vendors are not in Year 2000 compliance, this could provide a material adverse
financial impact to the Company, however, the Company does not believe this is
likely based upon the due diligence it has conducted to date with respect to the
Year 2000 readiness of its major customers and vendors. The Company is in the
process of developing a contingency plan in the event these vendors or customers
are not Year 2000 compliant on a timely basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Potential Conflicts of Interest/Agreements Not Subject to Arm's Length
Negotiations. Various conflicts of interest between the Company and the Stout
Partnership may arise, persons serving as directors, officers and employees of
both the Company and the Stout Partnership may have conflicting duties to each.
Mark Alsentzer, August C. Schultes, III and Gary J. Ziegler are all general
partners in the Stout Partnership which owns 5,400,000 shares of the Company's
Common Stock and options to purchase 320,000 additional shares of such stock. In
addition, ownership interests of the Company's directors in the Stout
Partnership could also create or appear to create potential conflicts of
interest when such directors are faced with decisions that could have different
implications for the Company and for the Stout Partnership. Because a majority
of the Board of the Company are also Stout partners, agreements related to
monies provided by the Stout Partners and Schultes, Inc. were not the result of
arm's-length negotiations, although the Company has attempted to have any
agreements with Stout Partners and/or Schultes, Inc. be as similar to terms
negotiated by the Company are comparable contracts with third parties for which
there was substantial arms length negotiations. These agreements may include
terms and conditions that may be more or less favorable to the Company than
terms contained in similar agreements negotiated with third parties. See
"Certain Transactions."
Ability to Implement the Company's Growth Strategy. The Company's growth
strategy is dependent upon its ability to continue to increase profit margins
through integration of acquisitions, consolidation of plants and operations,
increased consumer acceptance of alternative wood products, and increased
production capacity. Implementation of this strategy will depend in large part
on the Company's ability to: (i) expand through strategic acquisitions of
companies in new and complementary industries; (ii) obtain adequate financing on
favorable terms to fund this growth strategy; (iii) develop and expand its
customer base; (iv) hire, train and retain skilled employees; (v) strengthen
brand identity and successfully implement its marketing campaigns; (vi) continue
to expand in the face of increasing competition; (vii) continue to negotiate the
Company's supply contacts and sales agreements on terms that increase or
maintain the Company's current profit margins; and (viii) create sufficient
demand for plastic lumber and other products. The Company's failure with respect
to any or all of these factors could impair its ability to successfully
implement its growth strategy which could have a material adverse effect on its
results of operations and financial condition.
Environmental Concerns. In the course of its business, the Company may
acquire or lease in the future, storage facilities or other properties in
connection with the operation of its business. Under various U.S. federal, state
or local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or chemical releases at such property, and may be
held liable to a governmental entity or to third parties for property damage,
personal injury and investigation and cleanup costs incurred by such parties in
connection with the contamination. The liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the ability of the owner or operator to sell or rent such
property or to borrow using such property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances also may be liable
for the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not the facility is owned or operated by such
person. In addition,
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the owner or operator of a contaminated site may be subject to common law claims
by third parties based on damages and costs resulting from environmental
contamination emanating from such property.
Seasonality. The Company's business is seasonal in nature. Historically,
the Company has generated a substantial portion of its revenues during the
second and third quarters of its fiscal year. If for any reason the Company's
revenues fall below those normally expected during the second and third quarters
of its fiscal year, the Company's business, financial condition, and results of
operations would be adversely affected.
Risks Related to the Nature of the Business
Newly Developing Industry. The reclamation and recycling of plastic and
the manufacture of plastic lumber for use in construction, and other composite
materials containing recycled 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 post-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
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
generators of post-consumer & industrial recycled plastic materials. 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 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.
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Lack of 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 be aware of this method of judging
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 for 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.
Extensive Regulations. The Company's businesses are subject to extensive
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
completed properly. 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 Company's manufacturing
capabilities. It may be necessary to expend considerable time, effort and money
to keep the Company's existing or acquired facilities in compliance with
applicable environmental, zoning, health and safety regulations and as to which
there may not be adequate insurance coverage. In addition, due to the
possibility of unanticipated factual or regulatory developments, the amounts and
timing of future environmental expenditures and compliance could vary
substantially from those currently anticipated. See "Plastic Lumber
Operation -- Governmental Regulation and Environmental Matters" and
"Environmental Recycling Operation -- Regulatory Matters"
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 technology related to railroad
crossties and the process to manufacture
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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"
Reliance on 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.
Operating Hazards and Insurance Coverage. The Company's businesses involve
a variety of operating risks, including risk of fire, explosions, blow outs, and
environmental hazards. The Company's operations could also be disrupted by
hurricanes, floods, fires and other acts of God. Additionally, within the
plastic manufacturing division of the Company, the Company makes products which
it sells to consumers across the country, and as a result, product liability
occurrences can pose a substantial risk. Any of these occurrences could result
in substantial losses to the Company due to injury, loss of life, severe damage,
clean-up responsibilities, regulatory investigation and penalties and suspension
of operations. The Company maintains insurance coverage against some, but not
all, potential risks; however, the re can be no assurance that such insurance
will be adequate to cover all losses or exposure for liability. The Company
cannot predict whether insurance will continue to be available at premium levels
that justify its purchase or whether insurance will continue to be available at
all. The occurrence of an event not covered fully by insurance, could cause the
Company to sustain a material adverse effect upon its business, operating
results and financial condition.
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 with one exception, its property
at the S & W Waste, Inc. facility in Kearny, New Jersey. The Company has options
to purchase on several of the properties it leases.
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. There are presently
approximately 15 people employed in this location. The property is in good
condition and is leased. The lease expires in November 2001 and the monthly
rental is $5,067.
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 is a month to
month tenancy, and the monthly rental is $18,142.
Chicago, Illinois: This location consists of approximately 260,000 sq. ft.
and is the primary manufacturing facility of the Company. This location is also
the headquarters of the Company's plastic division. It produces plastic and
composite lumber profiles through a continuous extrusion process. It
manufactures the Smart Deck(R) product line. It also processes, sorts, grinds
and washes HDPE, much of it used by the Company as a raw material for its
manufacturing plants. The property is in good condition and is leased with an
option to purchase. The lease expires in January 2009 and the monthly rental is
$39,181 per month.
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 and manufactures
the Carefree Deck(R) product line. The property is in good condition and is
leased. The lease expires in January 2008, and the monthly rental is $11,875.
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Sweetser, Indiana: This location consists of approximately 15,600 sq. ft.
and 7.5 acres. The facility manufactures plastic lumber primarily for industrial
and commercial applications through the continuous extrusion process. The
property is in good condition and is leased with an option to purchase. The
lease expires on April 30, 2003 and the monthly rental is currently $2,000 per
month.
Trenton, Tennessee: This location consists of approximately 90,000 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 with an option to purchase. The lease expires in
September 2002 and the monthly rental is $13,491.
Mulliken, 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 1999, and the monthly rental is $3,333. The Company is
not currently negotiating to renew this lease as the Company intends to
consolidate its fabrication operations into its new Chicago facility.
Denton, Maryland: This location consists of approximately 80,000 sq. ft.
It currently has several 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 is a month to month tenancy 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.
Blue Bell, Pennsylvania: This facility serves as an administrative office
for the environmental division consisting of 1,570 sq. ft. The lease expires in
December 1999 and the monthly rental is approximately $2,100.
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 became operational in the third
quarter of 1998. This facility consists of approximately 80,000 sq. ft. and five
acres of property. This facility may serve two functions. Currently, it recycles
soil through a bio-organic process and it may be able to 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 with an option to purchase the leased premises and
adjacent property. The lease expires in December 2027, and the monthly rental is
$17,500.
Kearny, New Jersey: This facility is the administrative offices and
consists of the treatment, storage and disposal facility for the S & W Waste
operations of the Company. It consists of approximately 7 acres and is owned by
the Company. The facility is in good condition.
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 lease has a rental of $2,500 per month.
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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 1998, 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 NASDAQ Small
Cap Market. The Common Stock of the Company is quoted under the symbol "USPL".
Prior to June 1998, the Company traded sporadically on the OTC Electronic
Bulletin Board under the symbol "ECPL". The following table sets forth the high
and low bid price quotations for each date specified below during the last two
fiscal years.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
- ------------- -------- -------
<S> <C> <C>
March 31, 1997........................................... $6.50 $6.00
June 30, 1997............................................ $6.125 $5.75
September 30, 1997....................................... $6.00 $6.00
December 31, 1997........................................ $4.875 $4.4375
March 31, 1998........................................... $7.625 $7.1875
June 30, 1998............................................ $6.9375 $6.0625
September 30, 1998....................................... $3.375 $3.0625
December 31, 1998........................................ $6.0625 $4.9375
</TABLE>
The above prices represent interdealer quotations, without retail markup,
markdown or commissions, and may not represent actual transactions. As of
February 26, 1999, there were approximately 516 record holders of the Company's
Common Stock and approximately 2,400 beneficial owners listed with CEDE & Co.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on its Common Stock
and does not anticipate or contemplate paying dividends on Common Stock in the
foreseeable future. It is the present intention of management of the Company to
utilize all available funds for the development of the Company's business. The
Company does intend to pay stock dividends on its outstanding Series A and B
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.
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 that occurred in March 1996. Also, unless
otherwise indicated, these securities were issued as restricted securities and
the certificates were stamped with restrictive legends to prevent any resale
without registration under the Securities Act of 1933 (The "Act") or in
compliance with an exemption.
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
24
<PAGE> 26
1 for 16 basis, and then issued 4,196,316 post split shares of its authorized
but previously unissued common stock to the shareholders of Earth Care to
acquire all the issued and outstanding stock of Earth Care in a stock for stock
exchange, which was intended to be a tax free reorganization under Section
368(a) of the Internal Revenue Code, and was accounted for, for financial
reporting purposes, as an acquisition by Earth Care of the Company. This
transaction was not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as an offering made to accredited
investors, all of whom were officers and directors of Earth Care and/or
represented that they were otherwise accredited investors.
As a condition precedent to the closing of the Earth Care acquisition, the
Company raised $1,000,000 of capital through an offering of its 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 cash and issued
1,000,000 shares of its Common Stock to the shareholders of RPI in the
acquisition. This transaction was not registered under the Act in reliance on
the exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
In February 1997, the Company acquired Advanced Remediation and Disposal
Technologies, Inc. (ARDT). ARDT is engaged in environmental consulting and clean
up of contaminated sites primarily involving water and soils. The Company issued
300,000 shares of its Common Stock to the former shareholders of ARDT. This
transaction was not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made
25
<PAGE> 27
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 $4,178,600 in gross 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 (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 was completed
without any general or public solicitation. In each case the offering was done
to a very limited number of officers, directors and shareholders of the
companies being acquired. The officers, directors and few shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.
On March 31, 1997, the Company acquired Integrated Technical Services, Inc.
(ITS), an environmental consulting and construction company in Winslow, New
Jersey. The stockholders of ITS received as acquisition consideration, cash plus
185,000 shares of the Company's common stock, and an additional 47,572 shares of
common stock for the 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.
26
<PAGE> 28
On June 30, 1997, the Company acquired EnviroPlastics Corp., (EPC) a
recycled plastic raw material regrind operation in Auburn, MA. The stockholders
of EPC received 280,000 shares of the Company's common stock as the purchase
price plus 25,000 shares as consideration for non-compete agreements (see
Footnote 2 of Financial Statements for additional information). These
transactions were not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made was completed without any general or public
solicitation. In each case the offering was done to a very limited number of
officers, directors and shareholders of the companies being acquired. The
officers, directors and few shareholders had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of these individuals enabled them to
evaluate the risks and merits of the investment.
On June 30, 1997, the Company issued 150,000 shares to the former
shareholders of DuraTech Industries, Inc. as part of an earn out provision in
the purchase documents of that acquisition. These earn out shares were
accelerated in part in exchange for salary concessions made by the former
shareholders of DuraTech Industries, Inc. These transactions were not registered
under the Act in reliance on the exemption from registration in Section 4(2) of
the Act, as transactions not involving any public offering.
On November 18, 1997, the Company acquired Waste Concepts, Inc. (WCI), an
environmental recycling services company located in Norristown, PA. The
stockholder of WCI received cash at Closing plus 400,000 shares of common stock
of the Company (see Footnote 2 of Financial Statements for additional
information). These transactions were not registered under the Act in reliance
on the exemption from registration in Section 4(2) of the Act, as transactions
not involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
On 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 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 company
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 February 27, 1998, the Company acquired substantially all the assets of
Chesapeake Recycled Lumber, Inc. (CRL), a plastic lumber manufacturing company
located in Denton, MD. The stockholders of CRL received cash at closing plus
97,500 shares of common stock of the Company. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. This
offering made was completed without any general or public solicitation. In each
case the offering was done to a very limited number of officers, directors and
shareholders
27
<PAGE> 29
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 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 company 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 relationships with the Company. The knowledge and
experience of this individual enabled him to evaluate the risks and merits of
the investment.
Effective April 30, 1998 the Company acquired 100% of the stock of
Cycle-Masters, Inc. ("CMI"), a manufacturer of plastic lumber in Sweetser,
Indiana. The stockholder of CMI received 200,000 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 him
to evaluate the risks and merits of the investment.
During the period from April 1998 through June 1998, the Company had
offered and sold 211,020 shares of Class B Preferred Stock to investors at $21
per share, and raised $4,431,420 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 accredited investors, 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.
Effective June 30, 1998 the Company acquired 100% of the stock of Geocore,
Inc. ("GCI") a small environmental services company in northern New Jersey. The
stockholder of GCI received 30,000 shares of common stock of the Company. These
transactions were not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made was completed without any general or public
solicitation. In each case the offering was done to a very limited number of
officers, directors and shareholders of the companies being acquired. The
officers, directors and few shareholders had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of this individual enabled him to evaluate
the risks and merits of the investment.
On June 30, 1998, the Company acquired the remaining forty-five percent
interest in Consolidated Technologies, Inc. (CTI), an environmental recycling
services company located in Norristown, PA. The stockholder of this company
received 40,000 shares of common stock of the Company with additional shares to
be paid in the event certain performance criteria are met. These transactions
were not registered under the Act in reliance on the exemption from registration
in Section 4(2) of the Act, as transactions not involving any public offering.
This offering made was completed without any general or public solicitation. In
each case the offering was done to a very limited number of officers, directors
and shareholders of the companies being acquired. The officers, directors and
few shareholders had strong knowledge and experience in business matters as well
as pre-existing business relationships with the Company. The knowledge and
experience of this individual enabled him to evaluate the risks and merits of
the investment.
The Company purchased substantially all of the assets of Trimax of Long
Island, Inc. and Polymerix, Inc. ("Trimax") with the approval of the U.S.
Bankruptcy Court. The purchase is effective June 30, 1998 and includes two
patents for the manufacture of structural plastic lumber. Upon approval of the
Bankruptcy Plan
28
<PAGE> 30
in December 1998, the Company issued 118,391 shares of common stock. This
offering made was completed without any general or public solicitation. The
Company obtained a "No Action" letter from the Securities and Exchange
Commission regarding the ability of the creditors before the bankruptcy court to
sell the stock being issued pursuant to the Plan without restriction.
On December 31, 1998, the Company acquired the stock of S & W Waste, Inc.
(S & W), an environmental recycling services company located in Kearny, NJ. The
stockholder of this company received 320,000 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 this individual enabled him to
evaluate the risks and merits of the investment.
On December 22, 1998 and January 26, 1999, the Company raised $6,500,000 in
the form of convertible securities from Halifax Fund LP and Societe de General
LP. The transaction is structured as a convertible debenture carrying a 5%
coupon. See Exhibits 10.34 and 10.35. As part of the transaction, the Company
has agreed to register Common Stock underlying the Debentures at which point the
investment funds can elect to convert all or any portion of their Debentures
into Common Stock. 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.
On January 28, 1999, the Company acquired the stock of Eaglebrook Plastics,
Inc. and Eaglebrook Products, Inc., a plastic recycling and manufacturing
company located in Chicago, IL. In addition to cash and a convertible debenture,
the stockholders of these companies received 1,668,025 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 this individual enabled him to
evaluate the risks and merits of the investment.
On January 7, 1999, the Company executed a contract to acquire the all of
the stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA which is very similar to the
Company's soil remediation facility in New Castle, DE and has been a competitor
of the Company. AWI provides environmental services which are very similar to
that provided by the Company environmental services division. The Company signed
a Management Contract on January 7, 1999 taking over all responsibility for day
to day management and financial control of SRP and AWI as of that date.
Unaudited sales of SRP and AWI, prior to intercompany eliminations, for year
ended December 31, 1998 were $14,922,000 with unaudited operating income of
$2,025,000. The Company finalized the transaction with Brass on or about March
18, 1999. The Company purchased Brass for cash plus 1,000,000 shares of common
stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to purchase 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 this
individual enabled him to evaluate the risks and merits of the investment.
29
<PAGE> 31
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.
Pursuant to Section 701(f) of Regulation S-K of the Exchange Act, the
Company is providing the following information with respect to the use of
proceeds from the Form SB-2 Registration Statement declared effective by the SEC
on February 28, 1998, File No. 333-22949. The offering terminated on May 19,
1998 at which point the Company filed a post effective amendment no. 1 to the
Form SB-2 Registration Statement de-registering 33,523 shares of Common Stock,
par value $.0001. The class of securities registered were Common Stock of the
Company, par value $.0001. The amount of shares registered was 950,000 shares at
a price of $2.50 per share for an aggregate offering price of $2,375,000. A
total of 916,477 shares were registered raising the Company a total of
$2,291,192.50. The Company expended $300,000 in legal, accounting, printing and
other costs in connection with this registration. There was no underwriter
expense or any direct or indirect payments to any officer, director or
affiliate. The net offering proceeds to the Company was $1,991,192.50. The net
offering proceeds were used for general working capital purposes and funding the
acquisition of Cycle Masters Inc.
EARN-OUT SHARES AND OPTIONS
Pursuant to various agreements entered into between the Company and the
former shareholders of acquired companies, up to a total of 4,749,186 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, certain subsidiaries of 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 production or net
sales of at least 2,000,000 pounds of plastic lumber product per month for three
consecutive months, subject to the limitations of the Agreement and Plan of
Reorganization entered into by Earth Care and Educational Storybooks
International, Inc. in December 1995. See "Risk Factors -- Dilution".
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 the Earth Care
Historical Shareholders obtain their additional shares pursuant to the terms of
the above mentioned Agreement and Plan of Reorganization. See "Risk
Factors -- Dilution".
The stockholder of Waste Concepts, Inc. (WCI) has been provided with the
right to earn additional shares of the Company's stock equal to 20,000 shares
over the next four years in the event WCI meets certain operating income levels
during each of those years.
The stockholder of Integrated Technical Services, Inc. (ITS) has been
provided with the right to earn additional shares of the Company's stock equal
to 23,000 shares over the next year in the event ITS meets certain operating
income levels during the 1999 fiscal year.
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 132,500 shares of the Company on a
cumulative basis.
There are numerous members of the management of the Company and its
subsidiaries who have been granted options subject to each manager meeting
certain performance criteria.
The Table below sets forth the capitalization structure of the Company as
of December 31, 1998.
30
<PAGE> 32
OTHER OUTSTANDING OPTIONS
The Company has reserved 117,895 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 no later than June 30, 1999 at an
exercise price of $1.77 per share. 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.
On or about September 16, 1998 the Company granted 10,000 options to a
consultant at an exercise price of $3.50 per share as a result of his assisting
the Company in raising money.
On or about December 22, 1998, the Company granted 50,000 warrants to each
Halifax Fund LP and Societe de General LP at an exercise price of $7.21 per
share as part of the consideration of a $4,000,000 investment made in the
Company by convertible securities.
CAPITALIZATION
(As of December 31, 1998)
<TABLE>
<S> <C>
Primary Shares:
Common Stock (5,626,145 shares are freely tradable).... 18,230,528
Fully Diluted:
Series A Preferred Shares (convert @ 7:1 common)....... 1,596,084
Series B Preferred Shares (convert @ 7:1).............. 1,082,879
Convertible debentures................................. 756,001
Warrants and Options................................... 2,291,395
Earn Out shares........................................ 175,500
Historical Shareholder earn out........................ 4,573,686
----------
Subtotal....................................... 10,475,545
Fully Diluted Equity........................... 28,706,073
</TABLE>
On or about January 26, 1999, the Company granted 37,500 warrants to
Halifax Fund LP and 25,000 warrants to Societe de General LP at an exercise
price of $7.21 per share as part of the consideration of a $2,500,000 investment
made in the Company by convertible securities.
On or about January 10, 1999, the Company granted options to purchase
127,500 shares of its Common Stock to Columbine Financial Solutions, Inc. as
consideration for assisting the Company in financial public relations and
raising money. The exercise price on 85,000 of these options is $5.00 per share
and the remaining 42,500 options have an exercise price of $7.50 per share.
Upon the closing of the purchase of Brass, the Company granted 1,500,000
warrants to Louis Paolino, Jr. The warrants were part of the merger
consideration.
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 the years ended
December 31, 1998 and 1997. This discussion should be read in conjunction with
consolidated financial statements and notes thereto which are included elsewhere
herein.
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<PAGE> 33
BUSINESS SEGMENTS
The Company has two distinct business segments-manufacturing plastic lumber
and environmental recycling. The Plastic Lumber Division manufactures structural
and non-structural plastic lumber and a variety of accessory products such as
park and site amenities, made from 100% recycled high density polyethylene. The
structural plastic lumber is manufactured under processes that are protected by
patents.
The Environmental Recycling Division provides environmental recycling
services including environmental construction services, upland disposal of
dredge materials, beneficial re-use of industrial wastes, and on-site recycling
services. The Division also operates two plants providing thermal desorption and
bioremediation of soil brought to the plants by third parties as well as its
sister environmental service companies.
BUSINESS COMBINATIONS
The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. See Note 2 to the consolidated financial
statements for summaries of the business combinations completed in 1998 and
1997. See Eaglebrook and Brass Acquisitions in 1999 below.
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 and construction companies involved
in on-site clean up and companies with specialized technologies for beneficial
reuse of dredge material, ash and biosolids.
SEASONALITY
The Company experiences a seasonal slow down during the winter months
because its environmental operations are located in the Northeast United States
where adverse weather and normal ground freezing can impact the Company's
performance. Additionally, sales of certain plastic lumber products slow
significantly in the winter months.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth revenue, with percentages of total revenue,
and costs of sales, depreciation, selling, general and administrative expenses
and amortization, along with percentages of the applicable segment revenue, for
each of the Company's two business segments.
<TABLE>
<CAPTION>
1998 % 1997 %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales:
Plastic Lumber........................................ $15,720 34.4 $ 8,130 32.9
Environmental Recycling............................... 29,985 65.6 16,609 67.1
------- ----- ------- -----
Total revenue......................................... 45,705 100.0 24,739 100.0
Cost of Sales:
Plastic Lumber........................................ 10,943 69.6 7,110 87.5
Environmental Recycling............................... 22,583 75.6 12,161 73.2
Depreciation:
Plastic Lumber........................................ 851 5.4 288 3.5
Environmental Recycling............................... 649 2.2 220 1.3
Corporate............................................. 12 0.0 12 0.0
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
1998 % 1997 %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Selling, General and Administrative:
Plastic Lumber........................................ 4,258 27.1 1,661 20.4
Environmental Recycling............................... 3,019 10.1 1,899 11.4
Corporate............................................. 1,339 2.9 1,440 5.8
Amortization:
Plastic Lumber........................................ 264 1.7 104 1.3
Environmental Recycling............................... 188 0.4 17 0.1
Corporate............................................. 162 0.4 148 0.6
------- ----- ------- -----
Total Operating Expenses...................... 44,268 96.9 25,060 101.3
Total Operating Income (Loss)................. 1,437 3.1 (321) (1.3)
Operating Income (Loss) by Segment
Plastic Lumber........................................ (596) (3.8) (1,033) (12.7)
Environmental Recycling............................... 3,546 11.8 2,312 13.9
Corporate............................................. (1,513) (3.3) (1,600) (6.5)
------- ----- ------- -----
Total Operating Income........................ $ 1,437 3.1 $ (321) (1.3)
</TABLE>
CONSOLIDATED SALES AND OPERATING INCOME
The Company recognized significant increases in both sales and operating
income for 1998 compared to 1997. Sales increased 85% for 1998 to $45,705,000
from $24,739,000 in 1997. Of the $20,966,000 increase in consolidated revenues,
approximately $11,489,000 was attributable to acquisitions completed after June
30, 1997, $4,555,000 to the start up of dredging operations in 1998, $1,803,000
to the start up of the CBC facility July 1, 1998 and the remaining $3,119,000 to
internal growth.
Consolidated operating income increased by $1,758,000 to $1,437,000 for
1998 compared to a loss of $321,000 in 1997. The increase in operating income
was primarily due to businesses acquired in 1998, the entrance into the
beneficial reuse of dredge material market in the second quarter of 1998 and
improved Plastic Lumber plant utilization.
SALES BY SEGMENT
Plastic Lumber Division sales increased by $7,590,000 or 93% to $15,720,000
in 1998 compared to $8,130,000 in 1997. Sales by the original plastic lumber
companies and companies acquired before January 31, 1997 increased $1,759,000 to
$9,889,000 for 1998 from $8,130,000 for 1997. This 22% increase in "same plant"
sales is attributable to establishing a network of "stocking" distributors and
selling to the mass merchant market in 1998. The remaining $5,831,000 of the
increase in Plastic Lumber sales was due to the 1998 acquisitions of CPL, CMI
and the assets of Trimax and the July 1, 1997 acquisition of EPC.
Environmental Recycling Division sales for 1998 were $29,985,000, an
increase of $13,376,000 or 81% over the $16,609,000 for 1997. The acquisitions
of WCI, GHE and Geocore, Inc., which the Company acquired after November of
1997, contributed approximately $5,658,000 or 42% of the total increase. The
recently constructed CBC facility, which began treating contaminated soils
bio-organically in June 1998, added sales of $1,803,000 or 14% of the increase.
The entrance of CTI and the Company's Joint Venture into the beneficial reuse of
dredge material market during the second quarter of 1998 generated $4,555,000 or
34% of the increase. The remaining $1,360,000 or 10% of the sales increase came
from internal growth due to the vertical integration of newly acquired
companies.
GROSS PROFIT
Consolidated gross profit increased $5,726,000 or 115% to $10,686,000 for
1998 compared to $4,960,000 in 1997. The gross profit as a percent of revenue
improved by 3.4 percentage points from 20.0% in 1997 to 23.4% in 1998. The
increase was attributed to acquisitions in both business segments subsequent to
June 30,
33
<PAGE> 35
1997 and to the start up of dredging operations in 1998. Business units in both
Divisions continued to eliminate and consolidate duplicative operating expenses
during 1998, however, 1998 results include certain non-recurring expenses
associated with the unit combinations.
Plastic Lumber Division acquisitions in 1998 accounted for $1,670,000 or
52% of the $3,211,000 increase in Plastic Lumber Division gross profit in 1998.
Approximately $618,000 or 19% of the increase in gross profit came from
including a full year for EPC compared with only 6 months of EPC operations
included in 1997. The remaining $923,000 or 29% of the increase came from the
original Plastic Lumber operations and expanded plant capacity at these
facilities.
Environmental Recycling Division acquisitions after November 30, 1997
accounted for $1,248,000 or 50% of the $2,515,000 increase in gross profit in
1998 over 1997. The opening of the CBC facility in late June 1998 contributed
$1,049,000 of gross profit and the new dredging operations contributed $648,000
to gross profit for 1998. The soil remediation and environmental construction
service companies' gross profit was $428,000 lower in 1998 due to delays in the
commencement dates of certain contracts in the $10 million backlog of
environmental construction service contracts.
Cost of sales (including depreciation) as a percent of Plastic Lumber sales
improved significantly from 81% in 1997 to 75% in 1998. Profitability improved
at all of the Lumber plants as a result of implementing manufacturing
efficiencies in the Tennessee flow mold facility and tripling the capacity of
the Wisconsin facility. The Plastic Lumber Division expects continued
improvement in gross profit margins in 1999 from several sources: the Eaglebrook
acquisition in January 1999: the national distribution network for residential
products; the anticipated "BOCA certification" of the CareFree decking product
("BOCA certification" provides automatic approval by local building inspectors);
the expansion into industrial products; the addition of patented structural
lumber to the product offerings; and the further development of railroad ties.
Environmental Recycling Division cost of sales (including depreciation and
amortization of site development costs) increased as a percent of sales from 75%
in 1997 to 78% in 1998. The higher gross margins from Environmental Recycling
Division acquisitions was more than offset by the lower gross profit margins on
environmental construction contracts. The Environmental Recycling Division
expects to improve gross profit levels in environmental construction services
and an even greater gross margin contribution from a full year's operations from
the CBC facility in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A")
Consolidated SG&A expenses increased $3,616,000 or 72% to $8,616,000 for
1998 from $5,000,000 in 1997. However, as a percentage of consolidated sales,
SG&A expenses improved from 20% for 1997 to 19% in 1998. Efficiencies in the
Environmental Recycling Division only partially offset Plastic Lumber costs
incurred to establish a national sales distribution network. Corporate
administrative expenses improved to 2.9% of sales in 1998 from 5.8% in 1997
despite making several acquisitions in 1998.
Plastic Lumber SG&A expenses increased $2,597,000 or 156% in 1998 compared
to $1,661,000 in 1997. Acquisitions made since the beginning of 1997 accounted
for $605,000 or 23% of the Plastic Lumber increase. Plastic Lumber SG&A as a
percent of sales increased from 20% in 1997 to 27% in 1998. The Plastic Lumber
Division incurred significant expenses developing and maintaining a national
sales distribution network and a centralized customer service center. These
expenses included adding a Vice President of Sales, regional sales and product
line managers as well as personnel for customer service. The Plastic Lumber
Division also incurred significant trade show and travel expenses to increase
the Company's sales coverage and to integrate acquired manufacturing operations
with existing manufacturing plants. The Plastic Lumber Division also continued
to invest in research and engineering to commercialize the structural lumber and
railroad tie product lines.
Environmental Recycling Division SG&A expenses improved from 11.4% of
related revenue in 1997 to 10.1% in 1998, despite making several acquisitions
and starting up the dredging operations.
34
<PAGE> 36
INTEREST EXPENSE
Interest expense increased $918,000 to $1,225,000 in 1998 over the $307,000
in 1997. The increase is the result of increased borrowings from the bank lines
of credit for working capital and to finance acquisitions, the start up of
dredging operations and additional Plastic Lumber plant capacity. It also
includes debt service assumed from businesses acquired during 1997 and 1998 and
$272,000 of amortization of deferred financing costs of increasing the line of
credit at PNC Bank in December of 1997 and obtaining the new credit agreement
with a division of Southern Pacific Bank in October 1998.
Total notes payable and capital leases increased by $13,125,000 or 253%
from $5,179,000 at December 31, 1997 to $18,304,000 at December 31, 1998.
Excluding the $272,000 amortization of deferred financing costs, interest
expense increased by $646,000 or 210%. Interest expense did not increase in the
same proportion as the debt increase because a disproportionate share of the
total debt increase came in the second half of 1998.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased $990,000 or 190% in 1998 compared to 1997
reflecting the significant increase in plant and equipment from both
acquisitions and continued capital investments. Amortization expense increased
$347,000 in 1998 over 1997 due to goodwill from the numerous acquisitions
completed in the second half of 1997 and first half of 1998 and from CTI's
dredge site development costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $901,970 at December 31, 1998 a decrease
of $268,150 from the $1,170,120 at December 31, 1997. Cash used in operating
activities was $6,251,592. The significant increase in revenues during the
second half of 1998 resulted in a significant increase in accounts receivable
and Plastic Lumber inventories. The Company used its revolving credit agreements
to finance the increase in accounts receivable and inventories and to pay down
accounts payable and accrued expenses of acquired companies.
Cash used in investing activities was primarily for capital expenditures.
The Environmental Recycling Division made capital expenditures in 1998 for
property, plant and equipment totaling $4,385,000 including $2,503,000 for the
Carteret Biocycle facility, $689,000 for dredge material handling and mixing
equipment, $550,000 for environmental construction service equipment and
$586,000 to improve its Delaware soil remediation plant and soil handling
equipment. The Plastic Lumber Division made machinery and equipment purchases
totaling $2,831,000 primarily to expand capacity at the Maryland Wisconsin,
Indiana and Tennessee manufacturing facilities, to provide recycled plastic
washing facilities in its Massachusetts plant and to establish structural lumber
and railroad tie production lines in its Tennessee facility. The Company also
used a total of $3,885,197 to acquire companies with plant & equipment valued at
$6,387,000. The Company used its credit agreements to fund $2,045,000 of
permitting and development of the dredge soil reclamation site and $1,230,000 of
working capital needed to start up the dredging operations of both Consolidated
Technologies and the Joint Venture.
Cash provided by financing activities totaled $19,153,471, including
$8,724,972 of net additional bank and equipment financings, $3,956,000 of net
proceeds from the issuance of 5% convertible subordinated debentures (see Note 6
to Consolidated Financial Statements) and $6,472,499 net proceeds from equity
financings. In addition, the Company assumed $2,774,105 of debt owed by 7
acquired companies and incurred $954,952 of additional debt to make the
acquisitions.
Proceeds from new bank and capital lease equipment borrowings totaled
$16,134,000 including $13,499,000 under the new credit facility with a division
of Southern Pacific Bank ("SPB"). The $672,000 of costs paid out to obtain the
SPB credit agreement is being amortized over the agreement's 5 year term. The
proceeds of the SPB loans were used to pay off $8,300,000 outstanding under the
PNC Bank revolving credit agreement and approximately $770,000 of various
equipment loans. During the first ten months of 1998 the Company had borrowed an
additional $7,270,000 under its revolving credit agreement with PNC Bank.
35
<PAGE> 37
During 1998 the Company also borrowed $778,000 from an equipment leasing
company, $736,000 from an insurance premium financing company, $550,000 from a
state of Pennsylvania development commission and $571,000 from various equipment
financing companies at favorable interest rates. Repayments of various
non-affiliated notes payable, capital leases and credit agreements totaled
$12,160,112, including $8,300,000 to PNC Bank, $2,060,000 on other loans
outstanding at December 31, 1997, $552,000 on the new bridge and term loans with
SPB, $362,000 on the Premium finance loan and $710,000 on debt assumed in
acquisitions. The Company also paid back the entire $1,956,810 it owed to
affiliates at December 31, 1997.
Equity financings in 1998 included $2,291,000 of proceeds from the exercise
of Series A warrants and $4,431,420 from a Private Placement of 211,020 shares
of Series B Preferred Stock for $21 per share. The Series B Preferred Stock has
a cumulative 10% stock dividend and each preferred share is convertible into
seven common shares. (See Note 7 to the consolidated financial statements.) The
Company incurred expenses totaling $483,788 to register the common stock
underlying the warrants and the Series B convertible preferred stock.
In January 1998, the Company obtained a $4,000,000 increase in its line of
credit from PNC Bank to $5,500,000 with repayment originally due on June 30,
1999. The line was secured by certain assets of the Company and the personal
guarantees of members of the Stout Partnership (See Certain Transactions). In
the second and third quarters of 1998 the PNC line was increased to $8,400,000
and the term was extended to September 30, 1999. As of October 9, 1998, the
Company had borrowed a total of $8,300,000 against the PNC line of credit when
it was paid off with proceeds from the SPB credit facility.
In October 1998 the Company completed negotiations on a $30 million credit
facility with a division of Southern Pacific Bank (See Note 5 to the
consolidated financial statements). In October 1998 the Company used this line
to payoff the aforementioned PNC Bank line and $690,000 of notes payable secured
by equipment at six subsidiary locations. In addition the Company drew down a
$2,000,000 bridge loan payable over 18 months. On March 1, 1999 the $1,440,000
balance on the bridge loan was converted into a real estate loan with payments
of $6,000 per month and a balloon payment due October 10, 2003. On December 31,
1998 the Company executed a $490,000 term loan with SDPB to repay certain loans
owed by S&W Waste, Inc. As of December 31, 1998 the Company had loans totaling
$12,946,683 outstanding under the SPB agreement.
The additional unused portion of the SPB line will be used to expand
existing operations, increase working capital and to finance acquisitions. An
additional $175,000 of financing cost is due on June 9, 1999 to make the full
$30 million available to borrow against eligible assets pursuant to the terms of
the SPB agreement.
The Company will require additional working capital for the environmental
recycling operations, especially for the dredging opportunities being pursued by
the Company. Although, there are no material commitments in place currently for
capital expenditures, the Company also anticipates requiring additional working
capital to expand and upgrade its plastic lumber manufacturing facilities as
sales levels increase and as the structural lumber and railroad tie products
begin to take hold within their markets. The Company also anticipates using
working capital to fund research and development costs with respect to its new
products.
ACQUISITION OF BRASS IN 1999
On January 7, 1999, the Company executed a contract to acquire all of the
stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). The Company
signed a Management Contract taking over all responsibility for day to day
management and financial control of SRP and AWI on January 7, 1999. Unaudited
sales of SRP and AWI, prior to intercompany eliminations, for the year ended
December 31, 1998 were $14,922,000 with unaudited operating income of
$2,025,000. The Company purchased Brass for cash plus 1,000,000 shares of
restricted common stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to
purchase common stock of the Company. The real estate and accounts receivable of
Brass will secure loans to fund the cash portion of the purchase price.
36
<PAGE> 38
ACQUISITION OF EAGLEBROOK IN 1999
On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook") located in Chicago,
Illinois. The Company purchased Eaglebrook for cash plus 1,668,025 shares of
restricted common stock, $4,000,000 of convertible secured debentures and
150,000 options to purchase Company stock. The unaudited sales of Eaglebrook
were $22,145,000 before $1,706,000 of intercompany eliminations and the
unaudited combined operating income was $1,325,000 for the year ended December
31, 1998.
ISSUANCE OF ADDITIONAL CONVERTIBLE SUBORDINATED DEBENTURES IN 1999
On January 27, 1999 the Company issued an additional $2,500,000 of
Convertible Subordinated debentures to the same debenture holders with
substantially the same terms as the $4,000,000 issued on December 22, 1998 (See
Notes 6 and 13 to the Financial Statements). The proceeds were used in the
purchase of Eaglebrook.
LOANS FROM RELATED PARTIES
On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company. The loan bears interest at 10% and matures in 18 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership borrowed
the $5,000,000 from PNC Bank and the individual partners have personally
guaranteed the loan.
In January 1999 the Company borrowed $1,500,000 from a company owned by one
of the directors and his family. The loan bears interest at 1% over prime and
matures in 12 months. The proceeds were used in the Eaglebrook acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 SFAS 133 was issued by the Financial Accounting Standards
Board establishing accounting and reporting standards for derivative instruments
and hedging activities. The Company does not have any derivative instruments or
use any hedging activities. Accordingly, adoption of this standard will not
affect the company's financial position or results of operations.
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 accounting software used by the Company is
Year 2000 compliant (meaning it recognizes dates in the Year 2000 and beyond) at
most subsidiary operations. The Company anticipates upgrading the accounting
software in those remaining subsidiaries in mid 1999. The Company does not
anticipate a material financial impact as a result of the Year 2000 Issue nor
does it anticipate any material financial expenditure to remedy the Year 2000
date change within its own software. In fact, the Company expenditures to date
on investigating and remedying Year 2000 issues has been insignificant.
The Company is nearly complete in the process of conducting an internal
audit of its computer systems and software to determine what issues, if any,
exist. Upon completion of its internal audit, the Company will evaluate the full
scope of issues, related costs, and available remedies to insure the Company's
systems continue to meet its internal needs. Anticipated costs for system and
software modifications will be expensed as incurred. The Company is also in the
process of conducting an internal audit of its non-information technology
systems (e.g. manufacturing equipment embedded computer systems) to determine
what, if any, issues may exist in those systems.
However, the Company has no control over Year 2000 compliance by the
customers and vendors of the Company. If the Company's customers and vendors are
not in Year 2000 compliance, this could provide a
37
<PAGE> 39
material adverse financial impact to the Company. The Company has made inquiry
to all of its major customers and suppliers in an attempt to assess the Year
2000 readiness of its major customers and suppliers. The results of this inquiry
have not revealed any issues that the Company believes can have a material
adverse effect on the financial condition of the Company.
38
<PAGE> 40
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......... 39
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 40
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997................................ 41
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997.................... 42
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997................................ 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To U.S. Plastic Lumber Corp.:
We have audited the accompanying consolidated balance sheets of U.S.
Plastic Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U.S. Plastic
Lumber Corp. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 19, 1999.
39
<PAGE> 41
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 901,970 $ 1,170,120
Accounts receivable, net.................................... 12,334,903 6,940,288
Inventories................................................. 4,869,006 1,502,658
Prepaid expenses and other assets........................... 1,278,402 220,728
----------- -----------
Total current assets.............................. 19,384,281 9,833,794
Property, plant and equipment, net.......................... 17,890,636 5,775,424
Acquired intangibles, net................................... 9,553,642 7,009,244
Other assets................................................ 5,376,403 552,914
----------- -----------
Total assets...................................... $52,204,962 $23,171,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 4,229,972 $ 3,788,714
Notes payable and capital leases, current portion........... 3,635,300 2,404,607
Notes payable, affiliates................................... -- 1,956,810
Accrued expenses............................................ 1,564,944 1,737,518
Other current liabilities................................... 1,097,762 420,084
----------- -----------
Total current liabilities......................... 10,527,978 10,307,733
Notes payable and capital leases, net of current portion.... 14,669,104 817,011
Deferred income taxes....................................... 130,281 580,433
Minority interest........................................... 250,164 --
Convertible subordinated debentures, net of discount........ 3,555,556 --
----------- -----------
Total liabilities................................. 29,133,083 11,705,177
----------- -----------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized
5,000,000 shares; issued and outstanding 382,709 shares
and 208,930 shares, respectively (aggregate liquidation
preference of $7,808,877 and $4,178,600, respectively).... 383 209
Common stock par value $.0001, authorized 50,000,000 shares;
issued and outstanding 18,230,528 shares and 15,621,599
shares, respectively...................................... 1,823 1,562
Additional paid-in capital.................................. 24,669,247 12,573,026
Accumulated deficit......................................... (1,599,574) (1,108,598)
----------- -----------
Total stockholders' equity........................ 23,071,879 11,466,199
----------- -----------
Total liabilities and stockholders' equity........ $52,204,962 $23,171,376
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
40
<PAGE> 42
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales, net.................................................. $45,704,940 $24,739,381
Cost of goods sold.......................................... 35,019,270 19,779,872
----------- -----------
Gross profit.............................................. 10,685,670 4,959,509
Selling, general and administrative expenses................ 9,248,444 5,280,813
----------- -----------
Operating income (loss)................................... 1,437,226 (321,304)
Interest income............................................. 40,801 50,879
Interest expense............................................ (1,225,158) (307,636)
Minority interest in joint venture and subsidiary........... (262,659) (131,897)
Gain on sale of assets...................................... 105,588 --
----------- -----------
Income (loss) before income taxes......................... 95,798 (709,958)
Income tax benefit.......................................... -- (4,329)
----------- -----------
Net income (loss)......................................... 95,798 (705,629)
Preferred stock dividends earned............................ (677,078) (409,705)
----------- -----------
Net loss attributable to common stockholders.............. $ (581,280) $(1,115,334)
=========== ===========
Loss per share-basic and diluted............................ $ (.03) $ (.08)
=========== ===========
Weighted average common shares outstanding-basic and
diluted................................................... 16,876,651 14,053,862
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
41
<PAGE> 43
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 74,970 $ 75 11,672,349 $1,167 $ 4,436,758 $ (98,229) $ 4,339,771
Sale of Series A preferred
stock......................... 119,000 119 -- -- 2,379,881 -- 2,380,000
Preferred stock dividends....... 14,960 15 -- -- 304,725 (304,740) --
Business acquisitions........... -- -- 2,190,150 219 2,277,262 -- 2,277,481
Sale of common stock............ -- -- 1,111,111 111 2,499,889 -- 2,500,000
Common stock issued under
earnout agreements............ -- -- 28,500 3 63,087 -- 63,090
Exercise of nonemployee stock
options....................... -- -- 202,589 20 358,565 -- 358,585
Licensing agreement............. -- -- 187,500 19 93,731 -- 93,750
Noncompete agreements........... -- -- 72,572 7 80,681 -- 80,688
Dura Tech agreement............. -- -- 150,500 15 75,235 -- 75,250
Other issuances................. -- -- 6,328 1 3,212 -- 3,213
Net loss........................ -- -- -- -- -- (705,629) (705,629)
------- ---- ---------- ------ ----------- ----------- -----------
Balance at December 31, 1997.... 208,930 209 15,621,599 1,562 12,573,026 (1,108,598) 11,466,199
Business acquisitions and
earnout agreements............ -- -- 952,875 96 3,455,857 -- 3,455,953
Sale of Series B preferred
Stock......................... 211,020 211 -- -- 4,431,209 -- 4,431,420
Exercise of options and
warrants...................... -- -- 1,044,372 105 2,524,762 -- 2,524,867
Costs of issuing common and
preferred shares.............. -- -- -- -- (483,788) -- (483,788)
Shares and value of options
issued to directors and the
Stout Partnership............. -- -- 4,400 -- 512,685 -- 512,685
Shares, warrants and options
issued in connection with
convertible debentures........ -- -- 114,800 11 548,949 -- 548,960
Debenture proceeds allocated to
10% conversion discount....... -- -- -- -- 444,444 -- 444,444
Other issuances................. -- -- 29,030 3 75,338 -- 75,341
Conversion of Preferred to
Common........................ (66,207) (66) 463,452 46 20 -- --
Preferred stock dividends....... 28,966 29 -- -- 586,745 (586,774) --
Net income...................... -- -- -- -- -- 95,798 95,798
------- ---- ---------- ------ ----------- ----------- -----------
Balance at December 31, 1998.... 382,709 $383 18,230,528 $1,823 $24,669,247 $(1,599,574) $23,071,879
======= ==== ========== ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
42
<PAGE> 44
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 95,798 $ (705,629)
------------ -----------
Adjustments to reconcile net income to net cash (used in)
operating activities:
Depreciation.............................................. 1,511,209 520,888
Amortization of all intangibles and dredge site
development costs...................................... 614,829 268,279
Amortization of deferred financing costs.................. 272,366 --
Minority interest in Joint Venture and subsidiary......... 262,659 131,897
Provision for doubtful accounts........................... 100,769 219,053
Gain on sale of assets.................................... 105,588 --
Payments of state income taxes............................ (242,441) --
Compensation expense related to common shares issued...... 170,678 63,090
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................... (3,104,811) (1,388,682)
Inventories............................................ (2,632,092) (575,126)
Prepaid expenses and other current assets.............. (1,035,010) (100,166)
Other assets........................................... (404,491) (373,466)
Accounts payable....................................... (953,868) (874,589)
Other liabilities...................................... 263,940 91,281
Accrued expenses....................................... (1,276,715) 269,242
------------ -----------
Total adjustments................................. (6,347,390) (1,748,299)
------------ -----------
Net cash used in operating activities............. (6,251,592) (2,453,928)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (7,239,396) (2,625,356)
Capital expenditures for dredge disposal site permits and
costs.................................................. (2,045,436) --
Cash paid for acquisitions, net of cash received.......... (3,885,197) (1,595,000)
------------ -----------
Net cash used in investing activities............. (13,170,029) (4,220,356)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock....................... -- 2,503,213
Proceeds from exercise of warrants........................ 2,291,193 --
Proceeds from sales of preferred stock.................... 4,431,420 2,380,000
Costs of issuing warrants and preferred stock............. (483,788) --
Proceeds from issuance of convertible debentures.......... 4,000,000 --
Proceeds from stock option exercises...................... 233,674 358,585
Advances (repayment of) due to affiliates, net............ (1,956,810) 1,700,000
Proceeds from notes payable and capital leases............ 23,513,840 1,379,987
Payment of deferred financing and convertible debenture
issue costs............................................ (715,946) --
Payments of notes payable and capital leases.............. (12,160,112) (1,331,671)
------------ -----------
Net cash provided by financing activities......... 19,153,471 6,990,114
------------ -----------
Net change in cash and cash equivalents..................... (268,150) 315,830
Cash and cash equivalents, beginning of period.............. 1,170,120 854,290
------------ -----------
Cash and cash equivalents, end of period.................... $ 901,970 $ 1,170,120
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE> 45
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company")
are engaged in the manufacturing of recycled plastic lumber and other products
and environmental remediation services, including recycling of soils which have
been exposed to hydrocarbons and the beneficial reuse of dredge materials. The
Company's plastic lumber customers are located throughout the United States. The
Company's environmental remediation, dredge and 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 U.S. Plastic Lumber,
LTD, Clean Earth, Inc., Carteret Biocycle Corp. ("CBC"), Clean Earth of New
Castle, Consolidated Technologies, Inc. ("CTI"), Integrated Technical Services,
Inc. ("ITS") and S&W Waste, Inc. (See subsidiary mergers effective December 31,
1998 in Note 2). All significant intercompany balances and transactions have
been eliminated in consolidation.
In July 1997, the Company and Interstate Industrial Corp. ("IIC") formed a
50/50 joint venture dredging business. The joint venture had minor operations in
1997 incurring a loss of $263,794. The Company manages the day to day dredging
operations and has consolidated 100% of the assets, liabilities and results of
operations of the joint venture after the Company obtained majority control
effective April 1, 1998. A summary of the 1998 operations of the Joint Venture
follows:
<TABLE>
<S> <C>
Revenues.................................................... $3,062,903
Operating costs and expenses................................ 2,298,779
----------
Operating income............................................ 764,124
Minority interest........................................... (382,062)
----------
Company's portion of income before income taxes............. $ 382,062
==========
</TABLE>
The Company provided 100% of the funds to finance the joint venture's
operations and all of its cash advances will be returned before any funds are
distributed to IIC. The IIC minority interest in the net income of the joint
venture since inception totaling $250,164 is shown as minority interest in the
accompanying consolidated balance sheet at December 31, 1998. The $119,403
minority interest in the CTI losses prior to June 30, 1998 are combined with the
$382,062 minority interest in the IIC joint venture in the statement of
Operations.
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.
44
<PAGE> 46
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined by the first-in, first-out method.
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 for acquired intangibles was $468,449 in 1998 and $268,279
in 1997. Accumulated amortization of acquired intangibles excluding the Trimax
patents was $716,039 at December 31, 1998 and $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.
OTHER ASSETS
The Company incurred $2,045,436 of costs in 1997 and 1998 to permit and
develop dredge material disposal sites in strip mines in Pennsylvania. The costs
are being amortized over the total number of yards currently permitted for
disposal including $71,071 of amortization in 1998. The $358,478 value assigned
to the Trimax patents acquired in 1998 is being amortized over 15 years
including $25,000 of amortization in 1998. Other assets are summarized as
follows at December 31, 1998:
<TABLE>
<S> <C>
Dredge disposal permits and site development, net........... $1,974,365
Deferred credit agreement financing costs, net.............. 799,425
Deferred convertible debenture costs, net................... 686,280
Deposits.................................................... 392,223
Patents, net................................................ 333,478
Other....................................................... 1,190,632
----------
$5,376,403
==========
</TABLE>
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 when services are performed or upon treatment and
certification for disposal of contaminated soil.
45
<PAGE> 47
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides for estimated losses on doubtful accounts. The
following is a summary of activity of the Company's allowance accounts:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Balance, beginning of year............................ $ 475,030 $148,744
Provision for doubtful accounts....................... 100,769 219,053
Write-offs............................................ (265,700) (47,662)
Allowance of acquired entities........................ 150,808 154,895
--------- --------
Balance, end of year.................................. $ 460,907 $475,030
========= ========
</TABLE>
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 recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. 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 $106,022 and $81,068 in 1998 and 1997, 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, 1998, the Company had bank balances of approximately
$1,270,000 (including issued but not cleared checks) in excess of amounts
insured by federal deposit insurance. Trade receivables are concentrated
primarily in the Northeastern United States. The Company 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, notes payable and convertible subordinated
debentures. The carrying amounts reported in the consolidated balance sheet for
these financial instruments approximate their fair value.
LOSS PER SHARE
Basic income or loss per share is computed by dividing net income or loss
less preferred stock dividends by the weighted-average number of shares actually
outstanding. Diluted income or loss per share attributable to common
stockholders further considers the impact of common stock equivalents to the
extent that they are
46
<PAGE> 48
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dilutive. The Company's basic and diluted loss per share are the same for both
1998 and 1997 because the common stock equivalents are anti dilutive. See Notes
6 and 7 for potentially dilutive securities.
COMPREHENSIVE INCOME
During the years ended December 31, 1998 and 1997 the Company did not have
any changes in its stockholders equity resulting from non-owner sources.
Accordingly, comprehensive income as set forth in SFAS No. 130 was equal to the
net loss amounts presented in the statements of operations.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year totaled $849,585 and $302,305 for interest in the
years ended December 31, 1998 and 1997, respectively, and $242,441 for income
taxes in 1998 (none paid in 1997).
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
See Notes 2, 5, 6, 7, 11 and 13 for information regarding common shares,
stock options, stock warrants and debt issued for acquisitions, non compete
agreements, licensing agreement, earnout agreements, the convertible
subordinated debentures and loan guarantees by the Stout partners.
2. ACQUISITIONS
1997 ACQUISITIONS
The Company acquired three companies in the plastic lumber business and
three companies in the environmental services business in 1997. The $3,872,481
total purchase price for all six acquisitions consisted of 2,190,150 shares of
common stock valued at an aggregate of $2,277,481 and cash payments totaling
$1,595,000. Several of the acquisitions include non compete agreements and
earnout provisions based on achieving specified profitability levels for key
employees and former owners.
A summary of the allocation of the $3,872,481 aggregate purchase price of
the 1997 acquisitions to net assets acquired follows:
<TABLE>
<S> <C>
Working capital (deficit)................................... $ (675,752)
Long-term assets............................................ 2,813,281
Long-term debt assumed...................................... (1,965,040)
Deferred tax liabilities.................................... (815,885)
Acquired intangibles........................................ 4,515,877
-----------
Aggregate purchase price.................................... $ 3,872,481
===========
</TABLE>
1998 ACQUISITIONS
In January 1998 the Company acquired Green Horizon Environmental, Inc.
("GHE"), an environmental services company located in Norristown, Pennsylvania.
In February 1998, the Company acquired 55% of the stock of Consolidated
Technologies, Inc. ("CTI"), an environmental recycling services company located
in Norristown, Pennsylvania.
On February 28, 1998 the Company acquired substantially all of the assets
of Chesapeake Plastic Lumber, Inc. ("CPL"), a manufacturer of plastic lumber in
Denton, Maryland.
Effective April 30, 1998 the Company acquired 100% of the stock of
Cycle-Masters, Inc. ("CMI"), a manufacturer of plastic lumber in Sweetser,
Indiana.
47
<PAGE> 49
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective June 30, 1998 the Company acquired 100% of the stock of Geocore,
Inc. ("GCI") a small environmental services company in northern New Jersey.
Effective June 30, 1998 the Company acquired the remaining 45% of CTI. The
$119,403 minority interest in the CTI losses prior to June 30, 1998 are combined
with the minority interest in the joint venture with IIC in the statement of
Operations.
Effective June 30, 1998 the Company purchased substantially all of the
assets of Trimax of Long Island, Inc. and Polymerix, Inc. ("Trimax") through the
U.S. Bankruptcy Court. The Trimax purchase includes two patents for the
manufacture of structural plastic lumber.
On December 30, 1998 the Company acquired 100% of S&W Waste, Inc. ("S&W"),
a RCRA facility that recycles and beneficially re-uses industrial wastes and
disposes of contaminated materials, located in northern New Jersey.
The total purchase price of $8,517,273 for all of the 1998 acquisitions
consisted of 952,875 shares of USPL common stock valued at an aggregate of
$3,535,660, cash payments of $3,705,000, issuance of debt totaling $954,952,
costs totaling $303,868 and $17,793 assigned to options granted to a former
owner. Several of the acquisitions include non compete agreements, stock options
and earnout provisions based on achieving specified profitability levels for key
employees and former owners.
A summary of the allocation of the aggregate purchase price of the 1998
acquisitions follows:
<TABLE>
<S> <C>
Working capital (deficit)................................... $ (846,926)
Long-term assets............................................ 7,101,976
Net deferred tax assets..................................... 333,303
Long-term debt.............................................. (1,535,609)
Acquired intangibles........................................ 3,464,529
-----------
Aggregate purchase price.................................... $ 8,517,273
===========
</TABLE>
All of the acquisitions in 1997 and 1998 have been accounted for as
purchases. Accordingly, the results of operations of the acquired companies are
included in the Consolidated Financial Statements for periods subsequent to the
date of acquisition. The excess of the aggregate purchase price over the
estimated fair value of the net assets acquired has been recorded as acquired
intangibles and is being amortized on a straight-line basis over a period of
twenty years from the effective date of each acquisition (15 years for the
$358,478 assigned to the Trimax patents).
Effective December 31, 1998 all of the companies in the Plastic Lumber
division were merged into U.S. Plastic Lumber, LTD and Waste Concepts, Inc., GHE
and GCI were merged into ITS.
The unaudited pro forma combined results of operations of the Company and
all of its subsidiaries for the years ended December 31, 1998 and 1997, after
giving effect to certain pro forma adjustments as if the acquisitions had taken
place on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales......................................... $54,280,394 $44,751,710
=========== ===========
Net income (loss)................................. $ 297,452 $(1,809,460)
=========== ===========
Net loss attributable to common stockholders...... $ (379,626) $(2,219,165)
=========== ===========
Net loss per share-basic and diluted.............. $ (.02) $ (.14)
=========== ===========
Weighted average shares used in computation....... 17,405,486 15,530,628
=========== ===========
</TABLE>
48
<PAGE> 50
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill, depreciation on re-valued buildings and equipment
and interest on cash paid to the sellers. Per share amounts are calculated after
preferred dividends are subtracted from net income. They do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions occurred at January 1, 1997 or of future results of operations
of the consolidated entities.
3. INVENTORIES
Inventories consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials....................................... $1,046,926 $ 574,463
Finished goods...................................... 3,822,080 928,195
---------- ----------
$4,869,006 $1,502,658
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
USEFUL LIVES 1998 1997
-------------- ----------- -----------
<S> <C> <C> <C>
Land.............................. $ 2,600,000 $ --
Buildings......................... 30 to 40 years 3,515,923 1,146,948
Machinery and equipment........... 7 to 20 years 16,015,112 7,806,148
Leasehold improvements............ Life of lease 360,365 134,063
Furniture and office equipment.... 5 years 673,450 407,446
----------- -----------
23,164,850 9,494,605
Less -- accumulated
depreciation.................... (5,274,214) (3,719,181)
----------- -----------
$17,890,636 $ 5,775,424
=========== ===========
</TABLE>
Depreciation expense was $1,511,209 and $520,888 for the years ended
December 31, 1998 and 1997, respectively.
5. NOTES PAYABLE AND CAPITAL LEASES
LINE OF CREDIT AND NEW CREDIT FACILITY
In January 1998, the Company obtained a $4,000,000 increase in its
revolving line of credit bringing the total line of credit to $5,500,000. To
obtain this increase the Stout partners, consisting of the Company's Chairman
and two directors, pledged assets and guaranteed the line. In exchange for this
guarantee the Company granted 320,000 non-employee stock options, exercisable at
$2.25 per share, to the Stout Partnership. The $400,000 value of such options is
being amortized as interest over the original 18 month term of the line of
credit. On August 13, 1998 the Bank added $2,000,000 to the line, bringing the
total line to $7,500,000, and extended the maturity date to September 30, 1999.
The line was increased to $8,400,000 in October before it was repaid from
proceeds of the new credit agreement. (See Note 13 for continuing loan from
Stout Partnership.)
In October 1998 the Company negotiated a five year line of credit for
$30,000,000 with a division of Southern Pacific Bank ("SPB"). The draws on the
line are collateralized by specific equipment and/or inventory and eligible
accounts receivable. The line bears interest at 1% over prime on inventory and
receivable loans, 1.25% over prime on equipment loans and 2% over prime on real
estate loans. The prime rate
49
<PAGE> 51
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was 7.75% on December 31, 1998. Loans secured by specific equipment are payable
over terms up to 7 years in equal monthly installments with the unpaid balance
due in October 2003. The total costs of obtaining the line aggregating
approximately $850,000 are being amortized over the five year term of the
agreement as interest expense.
In the fall of 1998 the Company made net draws of $13,008,766 including
$4,883,766 secured by accounts receivable and inventory, $6,125,000 secured by
specific equipment and a $2,000,000 bridge loan which, subsequent to year end,
converted to a real estate loan. The proceeds were used to payoff the PNC Bank
line and approximately $770,000 of loans secured by specific equipment at six
subsidiary locations. Certain equipment loans were left in place for various
business reasons. On December 30, 1998 an additional $490,000 equipment loan was
taken out in connection with the purchase of S&W.
Notes payable and capital leases consist of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Line of credit, bearing interest at 9% due
December 31, paid in October 1998............... $ -- $ 600,000
Non interest bearing money purchase mortgage note
payable in monthly installments of $18,939
through December 31, 2009 including interest
imputed at 8.5%, collateralized by the S&W
facility........................................ 1,620,637 --
Premium finance agreement payable in monthly
installments of $63,383 through May 31, 1999
including interest at 7.12%..................... 311,352 --
Bridge loan converted to Real Estate Loan under
the loan agreement with SPB on March 1, 1999
payable in monthly installments of $6,000 with a
balloon payment due October 10, 2003, bearing
interest at 2% over prime, collateralized by the
CBC facility.................................... 1,666,667 --
Equipment term loans under loan agreement with
SPB, due in monthly installments of $78,750 and
a balloon payment due October 9, 2003, bearing
interest at prime plus 1.25%, collateralized by
equipment of certain subsidiaries of the
Company......................................... 6,396,250 --
Capital lease payable in monthly installments of
$15,470 through July 24, 2003 including interest
at 8.58%, collateralized by certain plastic
lumber equipment................................ 717,462 --
Note payable in monthly installments through April
1, 2002, bearing interest at 7.565%,
collateralized by all assets at the Auburn, MA
facility........................................ 318,382 387,772
Notes payable to government agency, payable in
monthly installments totaling $9,505, including
interest at 5% to 5.5%.......................... 486,184 --
Non interest bearing note with customer, payable
at $.01 per pound of plastic shipped to the
customer (approximately 700,000 pounds per
month).......................................... 239,663 300,000
Receivables and Inventory loans under loan
agreement with SPB, interest payments due
monthly at prime plus 1%, collateralized by
substantially all accounts receivable and
$1,667,000 of inventories of subsidiaries of the
Company......................................... 4,883,766 --
Other notes payable, bearing interest ranging from
7.5% to 10.5%, repaid in 1998................... -- 1,869,635
</TABLE>
50
<PAGE> 52
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note payable to sellers of CMI, bearing interest
at 8.5%, due on May 31, 1999.................... 436,605 --
Note payable to seller of S&W, bearing interest at
prime, plus 1%, repaid on February 2, 1999...... 500,000 --
Other notes and capital leases payable monthly,
maturing from November 8, 2000 to October 9,
2003, with interest ranging from 6% to 11.75%,
collateralized by various equipment of
subsidiaries of the Company..................... 727,436 64,211
----------- -----------
Total notes payable and capital leases............ 18,304,404 3,221,618
Less current portion.............................. (3,635,300) (2,404,607)
----------- -----------
Long-term portion................................. $14,669,104 $ 817,011
=========== ===========
</TABLE>
Notes payable and capital leases mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNTS
- ----------- -----------
<S> <C>
1999.................................................... $ 3,635,300
2000.................................................... 1,666,923
2001.................................................... 1,597,968
2002.................................................... 1,530,468
2003.................................................... 8,797,126
2004 and later.......................................... 1,076,619
-----------
$18,304,404
===========
</TABLE>
6. CONVERTIBLE SUBORDINATED DEBENTURES
On December 22, 1998 the Company issued $4,000,000 of subordinated
debentures convertible into common stock at the lower of $5.29 or 90% of the
lowest trading price in the four days preceding the conversion date. The
$444,444 allocated to the 10% discount on conversion was recorded as additional
paid-in-capital and will accrete to the debentures outstanding as additional
interest expense over the period to the earliest conversion date. The conversion
price is adjustable downward if, in the one year period ending December 22,
1999, the Company issues convertible securities or common stock at a more
favorable price than the debenture conversion price. The 5% per annum debenture
interest is payable 1.25% per quarter starting April 1, 1999. The Company issued
the debenture holders warrants to purchase 100,000 shares of common stock for
$7.215 per share at any time before December 22, 2003. See Note 13 for issuance
of additional $2,500,000 debentures subsequent to year end.
The Debentures mature on December 22, 2003, however, beginning on June 22,
1999 the debenture holders have the right to force the Company to redeem up to
$1,000,000 of debentures at a 10% premium (i.e. $1,100,000 for $1,000,000 of
debentures). In addition the debenture holders can require the Company to redeem
100% of the debentures at a 30% premium if the Company fails to register the
underlying shares with the Securities and Exchange Commission before August 19,
1999. The Company intends to register the shares underlying the debentures
before August 19, 1999 and keep the registration statement effective until
December 22, 2001 as required by the debenture agreement.
The debenture holders can force the Company to issue up to $1,500,000 of
debentures on the same terms at any time until December 22, 2001. This "Call"
right is in addition to the $2,500,000 of debentures issued in January 1999 (See
Note 13). The Company can compel the debenture holders to purchase an additional
$500,000 of debentures between June 22, 1999 and December 22, 1999. However, the
maximum total
51
<PAGE> 53
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debentures that can be issued is $8,000,000. The Company must issue additional
warrants in the same proportion (2.5%) as any additional debentures are issued.
The Company incurred costs totaling $688,116 related to the $4,000,000
debentures including $197,600 assigned to the 100,000 warrants. These costs are
being amortized as additional interest expense over the five year term of the
debentures. The unamortized balance is included in other assets. If the
debentures are converted into common stock the unamortized balance will be
charged to additional paid-in-capital.
7. CAPITAL STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
In 1996 and 1997 the Company sold 193,970 shares of the Company's Series A
Preferred Stock for total gross proceeds of $3,879,400. The shares are nonvoting
and have a 10% cumulative stock dividend payable semiannually. The dividend is
payable only in Series A Preferred Stock. No cash dividends will be paid. Each
share is convertible into seven shares of the Company's Common Stock at the
option of the stockholder or mandatorily on the date a registration statement,
which would yield the Company $10 million in proceeds, is declared effective by
the Securities and Exchange Commission ("SEC"). 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 per share plus any unpaid dividends. The Series A
Preferred Stock can be redeemed at any time at the sole option of the Company
for $25 per share. In 1998 approximately 2,431 Series A shares were converted
into 17,017 common shares.
Semi annual 5% stock dividends were declared as of March 31 and September
30 each year for a total of 21,511 and 14,960 Series A shares in 1998 and 1997,
respectively. At December 31, 1998 approximately 228,012 Series A shares are
outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
In the summer of 1998 the Company issued 211,020 shares of Series B
Preferred Stock to accredited investors. The Series B shares have substantially
the same rights and features as the Series A Preferred shares except that the
stated and liquidation value of the Series B shares is $21.00 per share.
A 5% stock dividend of 7,455 Series B shares was declared as of September
30, 1998 for the pro rata portion of the six month period that the Series B
preferred shares were outstanding. In 1998 approximately 63,776 Series B shares
were converted into 446,432 common shares. At December 31, 1998 approximately
154,697 Series B shares are outstanding.
EMPLOYEE STOCK OPTIONS
The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and is
generally tied to the market price of the Company's freely trading shares. The
term for exercising the stock options is generally ten years. Stock options
granted by the
52
<PAGE> 54
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company generally vest ratably over a period of three years. Employee stock
option activity in 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF
WEIGHTED AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING
---------------- -----------
<S> <C> <C>
Outstanding at December 31, 1996................. $4.26 307,000
Granted........................................ 3.47 1,220,000
Exercised...................................... -- --
Canceled....................................... 4.33 (177,000)
----- ---------
Outstanding at December 31, 1997................. $3.54 1,350,000
Granted........................................ 3.65 536,000
Exercised...................................... -- --
Canceled....................................... 4.43 (215,000)
----- ---------
Outstanding at December 31, 1998................. $3.46 1,671,000
===== =========
Options exercisable at December 31, 1998......... $3.41 1,207,334
===== =========
</TABLE>
Additional information regarding options outstanding at December 31, 1998
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
RANGE OF --------------------------- ---------------------------
EXERCISE PRICES WEIGHTED WEIGHTED
- ---------------- AVERAGE AVERAGE
LOW HIGH NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- ------ ------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$2.25 $4.00 1,533,500 $3.30 1,109,833 $3.23
4.50 7.22 137,500 5.24 97,501 5.42
- ----- ----- --------- ----- --------- -----
$2.25 $7.22 1,671,000 $3.46 1,207,334 $3.41
===== ===== ========= ===== ========= =====
</TABLE>
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 years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
As reported results of operations:
Net income (loss)................................ $ 95,798 $ (705,629)
========= ===========
Net loss attributable to common stockholders..... $(581,280) $(1,115,334)
========= ===========
Net loss per share basic and diluted............. $ (.03) $ (.08)
========= ===========
Pro forma results of operations:
Net loss......................................... $(100,822) $ (759,558)
========= ===========
Net loss attributable to common stockholders..... $(777,900) $(1,169,263)
========= ===========
Net loss per share basic and diluted............. $ (.06) $ (.08)
========= ===========
</TABLE>
For purposes of the above disclosure, the determination of the fair value
of stock options granted in 1998 and 1997 was based on the following: (i) a risk
free interest rate of 7.5%; (ii) expected option lives of seven
53
<PAGE> 55
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NONEMPLOYEE STOCK OPTIONS
Magellan Finance Corporation ("Magellan"), a stockholder, was originally
granted options to purchase up to 353,684 shares of the Company's common stock
at $1.77 per share. Magellan exercised 117,895 of the options in 1997 and
another 117,895 options in September 1998. The remaining 117,894 options expire
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 USPL
stockholders at no cost.
The Stout Partnership was granted 320,000 options at $2.25 per share in
January 1998 in exchange for enabling the Company to obtain a line of credit by
providing guarantees (see Notes 5 and 13). In 1998 options for a total of 37,500
shares at a $3.50 exercise price were granted to outside directors. A total of
$100,000 was recorded as compensation expense and added to additional
paid-in-capital for these nonemployee director options. Options for 20,000
shares with a $5 exercise price were also granted in one of the 1998
acquisitions and options for 10,000 shares with a $3.50 price were granted in
connection with the convertible debentures.
Nonemployee stock option activity in 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF
WEIGHTED AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING
---------------- -----------
<S> <C> <C>
Outstanding at December 31, 1996................. $1.81 463,379
Granted........................................ -- --
Exercised...................................... 1.77 (202,589)
Canceled....................................... 2.50 (5,000)
----- --------
Outstanding at December 31, 1997................. $1.83 255,790
Granted........................................ 2.55 387,500
Exercised...................................... 1.80 (122,895)
Canceled....................................... -- --
----- --------
Outstanding at December 31, 1998................. $2.37 520,395
===== ========
Stock options exercisable........................ $2.54 402,500
===== ========
</TABLE>
STOCK WARRANTS
The Company previously issued 950,000 of Series A and 950,000 Series B
warrants to purchase the Company's common stock at $2.50 and $4.50 per share,
respectively. The Company received $2,291,193 from the exercise of 916,477
Series A warrants in 1998. The 33,523 unexercised Series A warrants expired on
June 30, 1998. None of the Series B warrants were exercised and all 950,000 of
the Series B warrants expired in the third quarter of 1998.
The Company issued the debenture holders warrants to purchase 100,000
shares of common stock for $7.215 per share at any time before December 22,
2003. Warrants to purchase 62,500 shares for $7.215 per share will be issued in
1999 as a result of the issuance of $2,500,000 of convertible debentures in
January 1999 (see Notes 6 and 13).
EARNOUT AGREEMENT
The Company has earnout agreements with certain shareholders that provide
for 4,573,686 shares of the Company's Common Stock to be reserved for issuance
if certain sales/production goals for plastic lumber product are achieved prior
to December 31, 2000 as set forth in the March 29, 1996 Agreement and Plan of
54
<PAGE> 56
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reorganization between Earth Care Global Holdings, Inc. and Educational
Storybooks International, Inc. The additional shares, if any, will be issued at
their then current fair value and allocated to acquired intangibles as an
additional cost of the reverse merger of Earth Care Global Holdings, Inc. with
USPL and the subsequent reverse merger of USPL with Clean Earth Inc. ("CEI") in
1996.
STOCK RESERVED
At December 31, 1998, common stock was reserved for the following:
<TABLE>
<S> <C>
Shares contingently issuable to USPL and CEI shareholders... 4,573,686
Conversion of Series A and B Preferred Stock................ 2,678,963
Non employee stock options.................................. 520,395
Employee stock options...................................... 1,671,000
Shares contingently issuable under other earnout
provisions................................................ 175,500
Warrants issued to convertible debenture holders............ 100,000
Convertible debentures...................................... 756,001
----------
10,475,545
==========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has defined contribution 401(k) and profit sharing plans that
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. The
Company contributed $5,772 to one of the plans during 1998 (none in 1997).
9. 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
operations is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal............................................ $ -- $ --
State.............................................. 148,000 164,923
--------- ---------
148,000 164,923
--------- ---------
Deferred:
Federal............................................ (14,828) (95,839)
State.............................................. (133,172) (73,413)
--------- ---------
(148,000) (169,252)
--------- ---------
$ -- $ (4,329)
========= =========
</TABLE>
55
<PAGE> 57
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differed from the amount obtained by
applying the federal statutory income tax rate to pre-tax accounting income
(loss), as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Tax at statutory rate of 34%......................... $ 32,571 $(241,386)
State taxes, net of Federal benefit.................. 9,786 60,397
Nondeductible goodwill............................... 155,601 88,720
Increases (decreases) in valuation reserves.......... (169,252) 124,788
Other................................................ (28,706) (36,848)
--------- ---------
Income tax benefit................................. $ -- $ (4,329)
========= =========
</TABLE>
Deferred taxes primarily represent the impact of businesses acquired in
1998 and 1997 that formerly accounted for Federal income taxes on a cash basis
and differences between the fair market value and tax basis of equipment owned
by acquired companies. At December 31, 1998 the Company had Federal and state
net operating loss carryforwards of approximately $6,000,000 and $4,300,000,
respectively, that expire in 2002 through 2012. For financial reporting purposes
a valuation allowance of $2,300,000 has been established to offset the net
deferred tax assets related to these carryforwards. If realized in the future,
most of the benefit of these carryforwards will be recorded as a reduction of
acquired intangible assets.
In 1998 the Company reduced the valuation reserves on deferred tax assets
of Companies acquired in 1996 and 1997. Accordingly, net deferred tax
liabilities and the related acquired intangibles were reduced by $150,000.
Deferred tax assets of acquisitions in 1998 also reduced the net deferred tax
liability.
10. RELATED PARTY TRANSACTIONS
In 1997 and 1998, the Company borrowed up to $2,400,000 under a $2,500,000
line of credit agreement from a company controlled by a member of the Board of
Directors and his family. The line of credit bears interest at prime plus 1% and
expires on June 30, 1999. No balance was outstanding at December 31, 1998 (See
Note 13) and $1,956,810 was outstanding at December 31, 1997. The Company paid
$171,849 and $90,938 in interest on this line in 1998 and 1997, respectively.
11. COMMITMENT AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, equipment, manufacturing facilities, and
land under non-cancelable operating leases that expire at various dates through
2028. Future minimum payments are as follows for the years ending December 31:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
1999........................................................ $ 968,000
2000........................................................ 858,000
2001........................................................ 758,000
2002........................................................ 710,000
2003........................................................ 589,000
Thereafter.................................................. 5,501,000
----------
Total............................................. $9,384,000
==========
</TABLE>
The Company leases approximately 7.5 acres of 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 $219,986 and $192,223 in
1998 and 1997, respectively. The lease was renewed for five years in 1998 and
contains two
56
<PAGE> 58
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 escalation based on the Consumer Price Index
from inception of the lease.
The Company currently leases approximately 5 acres of land under the CBC
facility. The lease term is 30 years with two renewal options Rent expense for
all operating leases for the years ended December 31, 1998 and 1997 was
approximately $1,013,000 and $563,000, respectively.
EMPLOYMENT AGREEMENTS
At December 31, 1998, the Company had employment agreements with certain
officers and key employees. Salaries and benefits expense recorded under the
Agreements totaled approximately $1,714,000 and $792,000 during years ended
December 31, 1998 and 1997, respectively. Future minimum payments under these
employment agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ----------
<S> <C>
1999................................................. $1,864,000
2000................................................. 1,659,000
2001................................................. 1,053,000
2002................................................. 303,000
2003................................................. 46,000
----------
$4,925,000
==========
</TABLE>
COVENANT NOT TO COMPETE
The Company had a covenant not to compete agreement requiring payments of
$2.00 per ton of soil received for processing. Payments under the covenant not
to compete totaled $187,008 and $384,446 for 1998 and 1997, respectively. The
requirement to make payments ended on August 31, 1998.
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.
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 consolidated balance sheet. This agreement is in effect 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
future payment thresholds, as follows:
57
<PAGE> 59
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MAINTENANCE ROYALTY
FEE FEE
----------- --------
<S> <C> <C>
1999................................................. $ 10,000 $ 40,000
2000................................................. 10,000 60,000
2001................................................. 10,000 60,000
2002................................................. 10,000 60,000
2003................................................. 10,000 60,000
Thereafter........................................... 50,000 300,000
-------- --------
$100,000 $580,000
======== ========
</TABLE>
The Company had minimal initial product sales in 1998 and paid $21,667 of
maintenance and prorated royalty fees in 1998 after the initial shipments of
railroad ties were made to potential customers for testing.
ROYALTY AGREEMENT
Carteret Biocycle, Inc. ("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 CBC's sales. CBC commenced operations in
July 1998 and recorded royalty expense of $ 33,360 in 1998.
SIGNIFICANT CUSTOMERS
The Plastic Division had sales to one customer of $4,117,000 in 1998 and
$2,590,000 in 1997.
12. SEGMENT REPORTING
The Company's sales generating operations are conducted through its Plastic
Lumber Division and its Environmental Recycling Division. Separate monthly
consolidated financial statements are prepared for each division. There are no
intersegment or foreign revenues. The corporate administrative expenses consist
of the executive officers of the Company and include the legal, accounting and
enterprise wide cash management functions and public company expenses.
Substantially all of the debt and related interest expense is also retained at
corporate. The corporate administrative and interest expenses are not allocated
to the two Divisions for management reports. The operating income of each of the
Divisions is the principal measurement tool used to manage the two segments.
58
<PAGE> 60
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results of each segment and the reconciliation of each
element to the consolidated statement of operations for each of the years ended
December 31, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenues:
Environmental recycling................................ $29,985 $16,609
Plastic lumber......................................... 15,720 8,130
------- -------
$45,705 $24,739
======= =======
Operating income (loss):
Environmental recycling................................ $ 3,546 $ 2,312
Plastic lumber......................................... (596) (1,033)
Corporate.............................................. (1,513) (1,600)
------- -------
$ 1,437 $ (321)
======= =======
Depreciation and amortization:
Environmental recycling................................ $ 837 $ 237
Plastic lumber......................................... 1,115 392
Corporate.............................................. 174 160
------- -------
$ 2,126 $ 789
======= =======
</TABLE>
Information with respect to assets and capital expenditures of the segments
and reconciliation to the financial statements is set forth below (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Segment assets at December 31:
Environmental recycling................................ $26,761 $ 8,058
Plastic lumber......................................... 22,915 15,113
Corporate.............................................. 2,529 --
------- -------
$52,205 $23,171
======= =======
Capital expenditures for the years ended December 31:
Environmental recycling................................ $ 4,385 $ 1,499
Plastic lumber......................................... 2,831 1,126
Corporate.............................................. 23 --
------- -------
$ 7,239 $ 2,625
======= =======
</TABLE>
13. SUBSEQUENT EVENTS
ACQUISITION OF BRASS
On January 7, 1999, the Company executed a contract to acquire all of the
stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA similar to the Company's soil
remediation facility in New Castle, DE and has been a competitor of the Company.
AWI provides environmental services similar to the Company's environmental
services division. The Company signed a Management Contract on January 7, 1999
taking over all responsibility for day to day management and financial control
of SRP and AWI as of that date. Unaudited sales of SRP and AWI, prior to
intercompany eliminations, for the year ended December 31, 1998 were $14,922,000
with unaudited operating income of
59
<PAGE> 61
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,025,000. The Company finalized its transaction with Brass in March 1999. The
Company purchased Brass for cash plus 1,000,000 shares of restricted common
stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to purchase common
stock of the Company. The real estate and accounts receivable of Brass will
secure loans to fund the cash portion of the purchase price. The acquisition of
Brass will be accounted for as a purchase.
ACQUISITION OF EAGLEBROOK
On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook"), located in Chicago,
Illinois. Eaglebrook processes HDPE for use as a raw material and produces
plastic lumber similar to the Company's. Eaglebrook also produces composite
lumber through a continuous extrusion process. The Company purchased Eaglebrook
for cash plus 1,668,025 shares of restricted common stock, $4,000,000 of
convertible secured debentures and 150,000 options to purchase common stock. The
acquisition of Eaglebrook will be accounted for as a purchase.
The Company will lease the 260,000 square foot Chicago facility from the
sellers for ten years at a monthly rental of $39,181 with an option to purchase
the facility for $3,000,000. The Sellers all signed three year employment
contracts and will manage the Company's Plastic Lumber Division.
The unaudited sales of both Eaglebrook companies were $22,145,000, before
$1,706,000 of intercompany eliminations, and the unaudited operating income was
$1,325,000 for the year ended December 31, 1998.
ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES
On January 26, 1999 the Company issued an additional $2,500,000 of
Convertible Subordinated debentures to the same debenture holders with
substantially the same terms as the $4,000,000 issued on December 22, 1998 (see
Note 6). The debenture holders can demand repayment of the $2,500,000 only
during the first quarter of 2000. The proceeds were used in the purchase of
Eaglebrook.
LOANS FROM RELATED PARTIES
On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company. The loan bears interest at 10% and matures in 18 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership borrowed
the $5,000,000 from PNC Bank and the individual partners have personally
guaranteed the loan. In January 1999 the Company borrowed $1,500,000 from a
company owned by one of the directors and his family (see Note 10). The loan
bears interest at 1% over prime and matures in 12 months. The proceeds were used
in the Eaglebrook acquisition.
60
<PAGE> 62
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information contained in the Proxy Statement under the caption "Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure"
relating to the 1999 Annual Meeting is incorporated herein by reference.
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 DIRECTOR SINCE (TERM EXPIRES) POSITIONS WITH THE COMPANY
- ------------------------ --- --------------------------------------------------------
<S> <C> <C>
Mark S. Alsentzer.................. 43 May 1994 (2000) Chairman, President & Chief Executive
Officer/Director
Roger Zitrin....................... 50 November 1996 (2002) Director
August C. Schultes III............. 52 February 1997 (2000) Director
Gary J. Ziegler.................... 51 February 1997 (1999) Director
Bruce C. Rosetto................... 41 Secretary/GeneralCounsel
Michael D. Schmidt................. 50 Treasurer/Chief Financial Officer
</TABLE>
The following is a description of the biographical information of each of
the Company's directors for the last five years unless otherwise indicated:
MARK S. ALSENTZER, Chairman, Director, President & CEO; Mr. Alsentzer has
served as a director since May 1994. As former President of Stout Environmental,
Inc. Mr. Alsentzer developed that company from $2 million to $90 million in
revenues and 46 to 700 employees. In 1992, Stout Environmental merged with
Republic Industries, where Mr. Alsentzer remained as Vice President of Republic
Environmental Systems, Inc. In addition, Mr. Alsentzer was Director of Cemtech,
a company which grew from $3 to $21 million and was sold to Waste Management in
1991. Mr. Alsentzer founded Clean Earth, which is currently a wholly owned
subsidiary of the Company and a leading recycler of contaminated soil and debris
located in the northeast. Mr. Alsentzer has a B.S. in Chemical Engineering from
Lehigh University and an MBA from Farleigh Dickenson University.
ROGER N. ZITRIN, Director; Dr. Zitrin has served as a director since
November 1996. Dr. Zitrin was the founder and President of the Heart Association
of Palm Beach County where he was a practicing physician specializing in
cardiology until he retired in 1992. He is presently acting as an independent
investor and investment advisor. Dr. Zitrin is the founder of Florida Medical
Laser Corp. and Gold Coast Specialty Lab and co-founder of Physicians Cardiac
Imaging. He is presently acting as financial advisor to Gold Coast Ventures,
Inc. and serving as a Board member of Associated Home Health. Dr. Zitrin is a
graduate of Rutgers College of Medicine and Dentistry.
AUGUST C. SCHULTES III, Director; Mr. Schultes has served as a director
since February 1997. Mr. Schultes is Chairman of the Board and CEO of A.C.
Schultes, Inc., a contracting and service organization specializing in water
well drilling, water and waste water treatment, and pump and motor repair
services with offices in Maryland, Delaware and two (2) locations in New Jersey
for over seventy-five years. He is also the Chairman of the Board and CEO of
Life Care Institute, a medical diagnostic center with facilities to perform
stress tests, CAT scans, MRI scans and physical therapy located in New Jersey.
He was also the founder, Chairman of the Board and CEO of Stout Environmental,
Inc., a full service hazardous
61
<PAGE> 63
waste environmental company. Mr. Schultes is a graduate of Penn State University
and has a BS in Civil Engineering.
GARY J. ZIEGLER, Director; Mr. Ziegler has served as a director since
February 1997. Mr. Ziegler is President of Consultants and Planners, Inc., which
provides operating services to several water utility companies in New Jersey.
Mr. Ziegler is a Professional Engineer and Professional Planner in New Jersey, a
Professional Engineer in Maryland, Pennsylvania, Ohio and New York and a member
of the American Society of Civil Engineers and the National Society of
Professional Engineers. He was President of W.C. Services, Inc. and Vice
President of Stout Environmental, Inc. Mr. Ziegler is a graduate of Clemson
University with a BS degree in Civil Engineering.
The following is a description of the Company's officers who are not also
directors:
BRUCE C. ROSETTO, Age 41, 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. 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 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 50, 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information contained in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" relating to the 1999 Annual
Meeting is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation" relating to the 1999 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
1999 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 1999 Annual Meeting is incorporated herein by
reference.
62
<PAGE> 64
PART IV
ITEM 13. EXHIBITS AND REPORTS
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S>
2.1 Agreement & Plan of Reorganization [Earth Care/Educational
Storybooks] (Incorporated by reference from Exhibit 2.1 to
the Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on March 7, 1997)
3.1 Articles of Incorporation [Front Street] (Incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
3.2 Articles of Amendment [Front Street] (Incorporated by
reference from Exhibit 3.2 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
3.3 Articles of Amendment [Educational Storybooks] (Incorporated
by reference from Exhibit 3.3 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
3.4 Articles of Amendment [Educational Storybooks] (Incorporated
by reference from Exhibit 3.4 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
3.5 Articles of Merger [Educational Storybooks and U.S. Plastic
Lumber Corp.] (Incorporated by reference from Exhibit 3.5 to
the Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on March 7, 1997)
3.6 By-Laws (Incorporated by reference from Exhibit 3.6 to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on March 7, 1997)
4.1 Common Stock Specimen Certificate (Incorporated by reference
from Exhibit 4.1 to the Company's Registration Statement on
Form SB-2 (File No. 333-22949) filed with the SEC on March
7, 1997)
4.2 Warrant Agreement (Incorporated by reference from Exhibit
4.2 to the Company's Registration Statement on Form SB-2
(File No. 333-22949) filed with the SEC on March 7, 1997)
4.3 Series A Warrant Certificate (Incorporated by reference from
Exhibit 4.3 to the Company's Registration Statement on Form
SB-2 (File No. 333-22949) filed with the SEC on March 7,
1997)
4.4 Series B Warrant Certificate (Incorporated by reference from
Exhibit 4.4 to the Company's Registration Statement on Form
SB-2 (File No. 333-22949) filed with the SEC on March 7,
1997)
10.1 Jeanell Sales Corp. Acquisition Agreement (Incorporated by
reference from Exhibit 10.1 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
10.2 Duratech Acquisition Agreement (Incorporated by reference
from Exhibit 10.2 to the Company's Registration Statement on
Form SB-2 (File No. 333-22949) filed with the SEC on March
7, 1997)
10.3 Clean Earth Acquisition Agreement (Incorporated by reference
from Exhibit 10.3 to the Company's Registration Statement on
Form SB-2 (File No. 333-22949) filed with the SEC on March
7, 1997)
10.4 RPI Acquisition Agreement (Incorporated by reference from
Exhibit 10.4 to the Company's Registration Statement on Form
SB-2 (File No. 333-22949) filed with the SEC on March 7,
1997)
10.5 ARDT Acquisition Agreement (Incorporated by reference from
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2 (File No. 333-22949) filed with the SEC on March 7,
1997)
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S>
10.6 Employment Agreement -- Mark Alsentzer (Incorporated by
reference from Exhibit 10.6 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
10.7 Employment Agreement -- Harold Gebert (Incorporated by
reference from Exhibit 10.7 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
10.8 Employment Agreement -- David Farrow (Incorporated by
reference from Exhibit 10.8 to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on March 7, 1997)
10.9 Rutgers Licensing Agreement (Incorporated by reference from
Exhibit 10.9 to the Company's Registration Statement on Form
SB-2 (File No. 333-22949) filed with the SEC on March 7,
1997)
10.10 ESP Acquisition Agreement (Incorporated by reference from
Exhibit 10.10 of Amendment One to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on August 26, 1997)
10.11 ITS Acquisition Agreement (Incorporated by reference from
Exhibit 10.11 of Amendment One to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on August 26, 1997)
10.12 EPC Acquisition Agreement (Incorporated by reference from
Exhibit 10.12 of Amendment One to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on August 26, 1997)
10.13 IIC/USPL Joint Venture Agreement (Incorporated by reference
from Exhibit 10.13 of Amendment One to the Company's
Registration Statement on Form SB-2 (File No. 333-22949)
filed with the SEC on August 26, 1997)
10.14 S D & G License and Operating Agreement (Incorporated by
reference from Exhibit 10.14 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.15 Ground Lease Agreement (Carteret Biocycle) (Incorporated by
reference from Exhibit 10.15 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.16 Lease Agreement (Brock Mgt/Earth Care TN) (Incorporated by
reference from Exhibit 10.16 of amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.17 Lease Agreement (APEC/Earth Care Midwest) (Incorporated by
reference from Exhibit 10.17 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.18 Lease Agreement (Plastic Properties LLC/RPI) (Incorporated
by reference from Exhibit 10.18 of amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.19 Lease Agreement (Dalphon Sr./Clean Earth) (Incorporated by
reference from Exhibit 10.10 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.20 Lease Agreement (Glades Twin Plaza/Earth Care) (Incorporated
by reference from Exhibit 10.20 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.21 Lease Agreement (Consol. Realty/EPC) (Incorporated by
reference from Exhibit 10.21 of Amendment One to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on August 26, 1997)
10.22 Lease Agreement (Waste Concepts, Inc.) (Incorporated by
reference from Exhibit 10.22 of Amendment Two to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on January 9, 1998)
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S>
10.23 Lease Agreement (Earth Care Partners of Tennessee)
(Incorporated by reference from Exhibit 10.22 of Amendment
Two to the Company's Registration Statement on Form SB-2
(File No. 333-22949) filed with the SEC on January 9, 1998)
10.24 WCI Acquisition Agreement (Incorporated by reference from
Exhibit 10.22 of Amendment Two to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on January 9, 1998)
10.25 CTI Stock Purchase Agreement (Incorporated by reference from
Exhibit 10.22 of Amendment Two to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on January 9, 1998)
10.26 Employment Agreement -- Steven Sands (Incorporated by
reference from Exhibit 10.22 of Amendment Two to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on January 9, 1998)
10.27 Employment Agreement -- Bruce Rosetto (Incorporated by
reference from Exhibit 10.22 of Amendment Two to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on January 9, 1998)
10.28 ICC/USPL Joint Venture II (Incorporated by reference from
Exhibit 10.22 of Amendment Two to the Company's Registration
Statement on Form SB-2 (File No. 333-22949) filed with the
SEC on January 9, 1998)
10.29 PNC Bank of Delaware -- Promissory Note (Incorporated by
reference from Exhibit 10.22 of Amendment Two to the
Company's Registration Statement on Form SB-2 (File No.
333-22949) filed with the SEC on January 9, 1998)
10.30 Letter Employment Agreement -- Michael D. Schmidt
(Incorporated by reference from Exhibit 10.30 of the Form
10KSB filed on March 31, 1998)
10.31 Eaglebrook Plastics, Inc. Stock Purchase Agreement
(Incorporated by reference from Exhibit 10.31 of the Form 8K
filed on February 10, 1999)
10.32 Eaglebrook Plastics, Inc. Stock Purchase Agreement
(Incorporated by reference from Exhibit 10.32 of the Form 8K
filed on February 10, 1999)
10.33 Coast Business Credit Loan and Security Agreement; Amendment
to Loan and Security Agreement; Second Amendment to Loan and
Security Agreement; Third Amendment to Loan and Security
Agreement; and Fourth Amendment to Loan and Security
Agreement
10.34 Convertible Debenture Purchase Agreements with Halifax Fund,
L.P. and Societe Generale, L.P. dated December 22, 1998
10.35 Convertible Debenture Purchase Agreement with Halifax Fund,
L.P. and Societe Generale, L.P. dated January 26, 1999
10.36 1999 Employee Stock Option Plan
10.37 1999 Non-Employee Director Stock Option Plan
21.1 List of subsidiaries
27 Financial Data Schedule
</TABLE>
65
<PAGE> 67
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: /s/ MARK S. ALSENTZER
------------------------------------
Mark S. Alsentzer, Chairman of the
Board,
Chief Executive Officer and
President
Date: March 26, 1999
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 26, 1999
- -----------------------------------------------------
Mark S. Alsentzer, Chairman of the Board, Chief
Executive Officer and President
/s/ MICHAEL D. SCHMIDT Date: March 26, 1999
- -----------------------------------------------------
Michael D. Schmidt, Chief Financial Officer Treasurer
/s/ AUGUST C. SCHULTES III Date: March 26, 1999
- -----------------------------------------------------
August C. Schultes III, Director
/s/ GARY J. ZIEGLER Date: March 26, 1999
- -----------------------------------------------------
Gary J. Ziegler, Director
/s/ ROGER N. ZITRIN Date: March 26, 1999
- -----------------------------------------------------
Roger N. Zitrin, Director
</TABLE>
66
<PAGE> 1
EXHIBIT 10.33
Ethen
COAST
LOAN AND SECURITY AGREEMENT
Borrower: RPI Acquisition Corporation
Cycle Masters Corporation
EnviroPlastics Corporation
Earth Care Products of Tennessee, Inc.
Chesapeake Plastic Lumber Company, Inc.
Earth Care Products of Midwest, Inc.
Environmental Specialty Products, Inc.
Clean Earth of New Castle, Inc.
Carteret Biocycle Corporation
Consolidated Technologies, Inc.
GCI Acquisition Corporation
Waste Concepts, Inc.
Green Horizon Environmental, Inc.
Integrated Technical Services, Inc.
Address: % 2300 Glades Road, Suite 440 W
Boca Raton, Florida 33431
Date: September ____, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower(s) named above (JOINTLY AND SEVERALLY, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 1 below.
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable or General
Intangible.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"AUDIT" means to inspect, audit and copy Borrower's books and records
and the Collateral.
"BORROWER" has the meaning set forth in the introduction to this
Agreement.
"BORROWER'S ADDRESS" has the meaning set forth in the introduction to
this Agreement.
"BUSINESS DAY" means a day on which Coast is open for business.
"CHANGE OF CONTROL" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body, provided that mergers between
one or more of the Borrowers or with any Guarantor (as defined in the Schedule)
with 30 days prior written notice to Coast shall not be deemed a Change of
Control.
<PAGE> 2
"CLEAN EARTH" shall mean Clean Earth, Inc., Clean Earth of New Castle,
Inc., Carteret Biocycle Corporation, Consolidated Technologies, Inc., GCI
Acquisition Corporation, Waste Concepts, Inc., Green Horizon Environmental,
Inc., Integrated Technical Services, Inc.
"CLOSING DATE" date of the initial funding under this Agreement.
"COAST" has the meaning set forth in the introduction to this
Agreement.
"CODE" means the Uniform Commercial Code as adopted and in effect in
the State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 4 hereof.
"CONSOLIDATED TANGIBLE NET WORTH" means consolidated shareholder's
equity, LESS goodwill, patents, trademarks, copyrights, franchises, formulas,
leasehold interests, leasehold improvements, non-compete agreements, engineering
plans, deferred tax benefits, organization costs, prepaid items and any other
assets of U.S. Plastic Lumber Corporation that would be treated as intangible
assets on U.S. Plastic Lumber Corporation's balance sheet prepared in accordance
with GAAP.
"CREDIT LIMIT" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the
Code.
"DOLLARS or $" means United States dollars.
"EARLY TERMINATION FEE" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EXCESS CASH FLOW" shall mean Operating Cash Flow/Permitted less each
of (i) Total Contractual Debt Service (as defined in the Schedule); and (ii)
cash dividends actually paid, to the extent permitted hereunder.
"ELIGIBLE FOREIGN RECEIVABLES" means Receivables arising from
Borrower's customers located outside the United States which Coast otherwise
approves for borrowing in its sole and absolute discretion. Without limiting the
foregoing, Coast will consider the following in determining the eligibility of
such receivables: (i) whether the Borrower's goods are shipped backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with a Dun & Bradstreet rating
acceptable to Coast in its discretion, or (vi) whether Borrower's goods are
shipped to a company that has credit insurance acceptable to Coast in its
discretion.
"ELIGIBLE INVENTORY" means Inventory which Coast, in its sole judgment,
deems eligible for borrowing, based on such considerations as Coast may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Coast's discretion,
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of raw material or finished
goods, in good, new and salable condition which is not perishable, not obsolete
or unmerchantable, and is not comprised of work in process, packaging materials
or supplies; (ii) meets all applicable governmental standards; (iii) has been
manufactured in compliance with the Fair Labor Standards Act; (iv) conforms in
all respects to the warranties and representations set forth in this Agreement;
(v) is at all times subject to Coast's duly perfected, first priority security
interest; and (vi) is situated at a one of the locations set forth on the
Schedule.
"ELIGIBLE RECEIVABLES" means Receivables and Eligible Foreign
Receivables arising in the ordinary course of Borrower's business from the sale
of goods or rendition of services, which Coast, in its sole judgment, shall deem
eligible for borrowing, based on such considerations as Coast may from time to
time deem appropriate. Eligible Receivables shall not include the following:
<PAGE> 3
(a) Receivables that the Account Debtor has failed to pay
within 90 days (120 days for Clean Earth Receivables and Eligible Foreign
Receivables and 120 days for U.S. government Receivables if there has been
compliance with the Federal Assignment of Claims Act) of invoice date or
Accounts with selling terms of more than 60 days, or with respect to dating
Receivables, subject to a sublimit of $1,500,000 and which are otherwise
acceptable to Coast in its discretion reasonable exercised, Receivables for
which the Account Debtor has failed to pay within 30 days past due date not to
exceed 150 days from invoice date;
(b) Receivables owed by an Account Debtor or its Affiliates
where twenty five percent (25%) or more of all Receivables owed by that Account
Debtor (or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(d) Receivables with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional or Receivables which are subject to bonding;
(e) Receivables, other than Eligible Foreign Receivables, that
are not payable in Dollars or with respect to which the Account Debtor: (i) does
not maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Receivable is supported by an irrevocable letter of credit satisfactory
to Coast (as to form, substance, and issuer or domestic confirming bank) that
has been delivered to Coast and is directly drawable by Coast, or (z) the
Receivable is covered by credit insurance in form and amount, and by an insurer,
satisfactory to Coast;
(f) Receivables with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Coast, with the Assignment of
Claims Act, 31 U.S.C. " 3727), or (ii) any State of the United States
(exclusive, however, of Receivables owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Receivables;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower in the aggregate exceed twenty five percent (25%)
of all Eligible Receivables or owing to any individual Borrower in excess of
thirty percent (30%) of all Eligible Receivables owing to such individual
Borrower, to the extent of the obligations owing by such Account Debtor in
excess of such percentage. In order to exceed the above referenced limits,
Borrower must obtain the prior written approval of Coast, which approval is
subject to the discretion of Coast on an Account Debtor by Account Debtor basis;
(i) Receivables with respect to which the Account Debtor is
subject to any reorganization, bankruptcy, insolvency, arrangement, readjustment
of debt, dissolution or liquidation proceeding, or becomes insolvent, or goes
out of business;
(j) Receivables the collection of which Coast, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(k) Receivables with respect to which the goods giving rise to
such Receivable have not been shipped and billed to the Account Debtor, the
services giving rise to such Receivable have not been performed and accepted by
the Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or
any other state that requires a creditor to file a Business Activity Report or
similar document in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any judicial process of
such state), unless Borrower has qualified to do business in New Jersey,
Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice
of Business Activities Report with the applicable division of taxation, the
department of revenue, or with such other state offices, as appropriate, for the
then-current year, or is exempt from such filing requirement; and
<PAGE> 4
(m) Receivables that represent progress payments or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services unless Coast has obtained a no
offset letter from the account debtor in form and substance acceptable to Coast
in its discretion.
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"EQUIPMENT ACQUISITION LOANS" means the Loans described in Section 2(d)
of the Schedule.
"EVENT OF DEFAULT" means any of the events set forth in Section 10.1 of
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, investment property, inventions, designs,
drawings, blueprints, patents, patent applications, trademarks and the goodwill
of the business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"INVENTORY" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"INVENTORY LOANS" means the Loans described in Section 2(b) of the
Schedule.
"INVESTMENT PROPERTY" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"LOAN DOCUMENTS" means this Agreement, the agreements and documents
listed on Section 5 of the Schedule, and any other agreement, instrument or
document executed in connection herewith or therewith.
"LOANS" has the meaning set forth in Section 2.1 hereof.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
<PAGE> 5
"MATURITY DATE" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"MAXIMUM DOLLAR AMOUNT" has the meaning set forth in Section 2 of the
Schedule.
"MINIMUM MONTHLY INTEREST" has the meaning set forth in Section 3 of
the Schedule.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"OPERATING CASH FLOW/PERMITTED" means, for any period, U.S. Plastic
Lumber Corporation's net income or loss (excluding the effect of any
extraordinary gains or losses), determined in accordance with GAAP, plus or
minus each of the following items, to the extent deducted from or added to the
revenues in the calculation of net income or loss: (i) depreciation; (ii)
amortization and other non-cash charges; (iii) interest expense paid or accrued;
and (iv) total federal and state income tax expense determined as the accrued
liability in respect of such period, regardless of what portion of such expense
has actually been paid during such period, and after deduction for each of (a)
federal and state income taxes, to the extent actually paid during such period;
(b) any non-cash income; and (c) all permitted capital expenditures actually
made during such period and not financed.
"PERMITTED LIENS" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in
writing by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially
concurrently with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers,
or other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by liens of the type described above
in clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase; or
(h) liens in favor of customs and revenue authorities which
secure payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"PERSON" means any individual, sole proprietorship, general
partnership, limited partnership, limited liability partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, government, or any agency or political division
thereof, or any other entity.
<PAGE> 6
"PRIME RATE" means the actual "Reference Rate" or the substitute
therefor of the Bank of America NT & SA whether or not that rate is the lowest
interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal on the first business day of the applicable month, as
the base rate on corporate loans at large U.S. money center commercial banks.
"REAL PROPERTY" means Carteret Biocycle Corporation's facility on
leased land located at 34 Middlesex Ave, Carteret, New Jersey.
"RECEIVABLE LOANS" means the Loans described in Section 2(a) of the
Schedule.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"RENEWAL DATE" shall mean the Maturity Date if this Agreement is
renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that
this Agreement is renewed pursuant to Section 9.1 hereof.
"RENEWAL FEE" means the fee that Borrower must pay Coast upon renewal
of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"SOLVENT" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"TERM LOAN" means the Loans described in Section 2(c) of the Schedule.
"YEAR 2000 PROBLEM" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"OTHER TERMS" All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and in
percentages to be determined by Coast in its good faith discretion, up to the
Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables or Eligible Inventory without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear interest
at the rate shown on the Schedule, except where expressly set forth to the
contrary in this Agreement. Interest shall be payable monthly, on the last day
of the month. Interest may, in Coast's discretion, be charged to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as the
other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Receivable Loans and the Inventory
Loans in the amount set forth on the Schedule.
<PAGE> 7
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which are
in addition to all interest and other sums payable to Coast and are deemed fully
earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when
due, Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the
satisfaction, in the sole discretion of Coast, at or prior to the first advance
of funds hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and unpaid
one hundred twenty (120) days past its due date except for such accounts payable
being contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability immediately
following the initial funding in the amount set forth on the Schedule.
5.3 LANDLORD WAIVER. Coast shall have received duly executed
(a) landlord waivers and access agreements in form and
substance satisfactory to Coast, in Coast's sole and absolute discretion, and,
when deemed appropriate by Coast, in form for recording in the appropriate
recording office, with respect to all leased locations where Borrower maintains
any inventory or equipment.
(b) warehouse waivers in form and substance satisfactory to
Coast, in Coast's sole and absolute discretion, and when deemed appropriate by
Coast, in form for recording in the appropriate recording office, with respect
to all warehouse locations where Borrower maintains any inventory or equipment.
5.4 REAL PROPERTY. Coast shall have received duly executed mortgages and/or
deeds of trust in form and substance satisfactory to Coast, in Coast's sole and
absolute discretion, in form for recording in the appropriate recording office,
with respect to the Real Property.
5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly executed
and in form and substance satisfactory to Coast in its sole and absolute
discretion.
5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion of
Borrower's counsel, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of "of
record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.8 INSURANCE. Coast shall have received copies of the insurance binders or
certificates evidencing Borrower's compliance with Section 8.2 hereof, including
lender's loss payee endorsements.
5.9 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's
articles or certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the Closing
Date, and Coast shall have received Certificates of Foreign Qualification for
Borrower from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.
<PAGE> 8
5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of Borrower's
By-laws and all amendments thereto, and Coast shall have received copies of the
resolutions of the board of directors of Borrower, authorizing the execution and
delivery of this Agreement and the other documents contemplated hereby, and
authorizing the transactions contemplated hereunder and thereunder, and
authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.11 TAXES. Coast shall have received evidence from Borrower that Borrower has
complied with all tax withholding and Internal Revenue Service regulations, in
form and substance satisfactory to Coast in its sole and absolute discretion.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with respect to
Borrower.
5.13 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that Borrower
knows of no facts which would cause Borrower to reasonably believe that the Year
2000 Problem will cause a Material Adverse Effect. Without limiting the
foregoing, Borrower hereby represents that its computer systems, software and
applications will be Year 2000 compliant by April 1, 1999 and that it will
complete its assessments of Year 2000 compatibility of its vendors and
customer's by June 30, 1999.
5.14 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection with
the transactions contemplated hereby, all in form and substance satisfactory to
Coast in Coast's sole and absolute discretion, and in form for filing in the
appropriate filing office, including, but not limited to, those documents listed
in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make
Loans, Borrower represents and warrants to Coast as follows, and Borrower
covenants that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
articles or certificate of incorporation or Borrower's by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading
to this Agreement is its correct name. Listed on the Schedule are all prior
names of Borrower and all of Borrower's present and prior trade names. Borrower
shall give Coast thirty (30) days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule. Any
additional location for which Coast has received notice hereunder shall be
deemed added to the Schedule provide that Coast has a first priority security
interest in the assets at such location.
<PAGE> 9
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times
in the future be, the sole owner of all the Collateral, except for items of
Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Coast now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend Coast and the Collateral against all claims of others. None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by Coast, use its best efforts to cause such third party to execute
and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall specify, so as to ensure that Coast's rights in
the Collateral are, and will continue to be, superior to the rights of any such
third party. Borrower will keep in full force and effect, and will comply with
all the terms of, any lease of real property where any of the Collateral now or
in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Coast in writing of any material loss
or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's
Address complete and accurate books and records, comprising an accounting system
in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or
in the future delivered to Coast have been, and will be, prepared in conformity
with GAAP (except, in the case of unaudited financial statements, for the
absence of footnotes and subject to normal year-end adjustments) and now and in
the future will fairly reflect the financial condition of Borrower, at the times
and for the periods therein stated. Between the last date covered by any such
statement provided to Coast and the date hereof, there has been no Material
Adverse Effect. Borrower is now and will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed,
and will timely file, all tax returns and reports required by foreign, federal,
state and local law, and Borrower has timely paid, and will timely pay, all
foreign, federal, state and local taxes, assessments, deposits and contributions
now or in the future owed by Borrower. Borrower may, however, defer payment of
any contested taxes, provided that Borrower (i) in good faith contests
Borrower's obligation to pay the taxes by appropriate proceedings promptly and
diligently instituted and conducted, (ii) notifies Coast in writing of the
commencement of, and any material development in, the proceedings, and (iii)
posts bonds or takes any other steps required to keep the contested taxes from
becoming a lien upon any of the Collateral. As of the date hereof, Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material
respects, with all provisions of all material foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, the
Fair Labor Standards Act, and those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and
environmental matters.
<PAGE> 10
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit,
litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful
business purposes. Borrower is not purchasing or carrying any "margin stock" (as
defined in Regulation G of the Board of Governors of the Federal Reserve System)
and no part of the proceeds of any Loan will be used to purchase or carry any
"margin stock" or to extend credit to others for the purpose of purchasing or
carrying any "margin stock."
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to
Coast as follows: Each Receivable with respect to which Loans are requested by
Borrower shall, on the date each Loan is requested and made, represent an
undisputed bona fide existing unconditional obligation of the Account Debtor
created by the sale, delivery and acceptance of goods or the rendition of
services in the ordinary course of Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct in all material respects and
all such invoices, instruments and other documents and all of Borrower's books
and records are and shall be genuine and in all respects what they purport to
be. All sales and other transactions underlying or giving rise to each
Receivable shall fully comply with all applicable laws and governmental rules
and regulations. All signatures and indorsements on all documents, instruments,
and agreements relating to all Receivables are and shall be genuine, and all
such documents, instruments and agreements are and shall be legally enforceable
in accordance with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to
Coast via facsimile, unless otherwise directed by Coast, at such locations and
at such intervals as Coast may request, transaction reports and loan requests,
schedules of Receivables, and schedules of collections, all on Coast's standard
forms; provided, however, that Borrower's failure to execute and deliver the
same shall not affect or limit Coast's security interest and other rights in all
of Borrower's Receivables, nor shall Coast's failure to advance or lend against
a specific Receivable affect or limit Coast's security interest and other rights
therein. Loan requests received after 10:30 A.M. Los Angeles, California time,
will not be considered by Coast until the next Business Day. Together with each
such schedule, or later if requested by Coast, Borrower shall furnish Coast with
copies (or, at Coast's request, originals) of all contracts, orders, invoices,
and other similar documents, and all original shipping instructions, delivery
receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to such Receivables, and Borrower
warrants the genuineness of all of the foregoing. Borrower shall also furnish to
Coast an aged accounts receivable trial balance in such form and at such
intervals as Coast shall request. In addition, Borrower shall deliver to Coast
the originals of all instruments, chattel paper, security agreements, guarantees
and other documents and property evidencing or securing any Receivables, upon
receipt thereof and in the same form as received, with all necessary
indorsements, all of which shall be with recourse. Borrower shall also provide
Coast with copies of all credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until an Event of Default has occurred. Borrower shall
hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables, provided in the
absence of the occurrence and continuance of an Event of Default after any cure
period has expired, Coast will give the form of written notice to Borrower which
it proposes to send to any Account Debtor at least two Business Days prior to
such notice actually being sent to such Account Debtor(s). Borrower may give
Coast during such two Business Day period suggestions on the form of such
notice, which suggestion however shall not be binding on Coast.
<PAGE> 11
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any
Collateral shall be delivered to Coast within one (1) Business Day after receipt
by Borrower, in their original form, duly endorsed to Coast, to be applied to
the Obligations in such order as Coast shall determine. Borrower agrees that it
will not commingle proceeds of Collateral with any of Borrower's other funds or
property, but will hold such proceeds separate and apart from such other funds
and property and in an express trust for Coast. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or claims
relating to Receivables in excess of $2,500. Borrower shall not forgive
(completely or partially), compromise or settle any Receivable for less than
payment in full, or agree to do any of the foregoing, except that Borrower may
do so, provided that: (a) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, and in arm's length
transactions, which are reported to Coast on the regular reports provided to
Coast; (b) no Default or Event of Default has occurred and is continuing; and
(c) taking into account all such discounts settlements and forgiveness, the
total outstanding Loans will not exceed the Credit Limit. Coast may, at any time
after the occurrence of an Event of Default, settle or adjust disputes or claims
directly with Account Debtors for amounts and upon terms which Coast considers
advisable in its reasonable credit judgment and, in all cases, Coast shall
credit Borrower's Loan account with only the net amounts received by Coast in
payment of any Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any
Account Debtor returns any Inventory to Borrower in the ordinary course of its
business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the
financial and other covenants set forth in the Schedule.
<PAGE> 12
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal
property Collateral and carry such other business insurance, with insurers
reasonably acceptable to Coast, in such form and amounts as Coast may reasonably
require, and Borrower shall provide evidence of such insurance to Coast, so that
Coast is satisfied that such insurance is, at all times, in full force and
effect. All liability insurance policies of Borrower shall name Coast as an
additional insured, and all property casualty and related insurance policies of
Borrower shall name Coast as a loss payee thereon and Borrower shall cause a
lender's loss payee endorsement in form reasonably acceptable to Coast. Upon
receipt of the proceeds of any such insurance, Coast shall apply such proceeds
in reduction of the Obligations as Coast shall determine in its sole discretion,
except that, provided no Default or Event of Default has occurred and is
continuing, Coast shall release to Borrower insurance proceeds with respect to
Equipment totaling less than the amount set forth in Section 8 of the Schedule,
which shall be utilized by Borrower for the replacement of the Equipment with
respect to which the insurance proceeds were paid. Coast may require reasonable
assurance that the insurance proceeds so released will be so used. If Borrower
fails to provide or pay for any insurance, Coast may, but is not obligated to,
obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast
copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the written
reports set forth in Section 8 of the Schedule, and such other written reports
with respect to Borrower (including budgets, sales projections, operating plans
and other financial documentation), as Coast shall from time to time reasonably
specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not less
frequently than quarterly and on one (1) Business Day's notice, Coast, or its
agents, shall have the right to perform Audits. Coast shall take reasonable
steps to keep confidential all confidential information obtained in any Audit,
but Coast shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower's expense and the charge for the Audits
shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher
amount as shall represent Coast's then current standard charge for the same),
plus reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will on a timely basis, adequately and
completely address the Year 2000 Problem in all material aspects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent (which as to clause (b) below only shall be based on Coast's reasonable
business judgment), do any of the following:
(a) merge or consolidate with another entity, except in a
transaction in which (i) the owners of the Borrower hold at least fifty percent
(50%) of the ownership interest in the surviving entity immediately after such
merger or consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of
business, or (ii) in a transaction or a series of transactions not involving the
payment of an aggregate amount in excess of the amount set forth in Section 8 of
the Schedule;
(c) enter into any other transaction outside the ordinary
course of business;
(d) sell or transfer any Collateral, except for the sale of
finished Inventory in the ordinary course of Borrower's business, and except for
the sale of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any
warehouseman or other third party unless Coast has obtained a waiver in form
satisfactory to Coast;
<PAGE> 13
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i)
advances to customers or suppliers in the ordinary course of business, (ii)
travel advances, employee relocation loans and other employee loans and advances
in the ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business,
which would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity provided that unsecured guaranties by one
individual Borrower of another individual Borrower in which the guaranteed
amount is less than $500,000 shall not be prohibited hereunder and Coast will
consider increases to the $500,000 threshold in its discretion, reasonalby
exercised;
(j) pay or declare any dividends or distributions on the
ownership interests in Borrower (except for dividends or distributions payable
solely in stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which
would have a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default is continuing or would occur as
a result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Coast, to
execute all documents and take all actions, as Coast, may deem reasonably
necessary or useful in order to perfect and maintain Coast's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the Maturity
Date; provided that the Maturity Date shall automatically be extended, and this
Agreement shall automatically and continuously renew, for successive additional
terms of one year each, unless one party gives written notice to the other, not
less than one hundred twenty (120) days prior to the Maturity Date or the next
Renewal Date, that such party elects to terminate this Agreement effective on
the Maturity Date or such next Renewal Date. If this Agreement is renewed under
this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown
in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the
Renewal Date and thereafter shall bear interest at a rate equal to the rate
applicable to the Receivable Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity
Date as follows: (a) by Borrower, effective three (3) Business Days after
written notice of termination is given to Coast; or (b) by Coast at any time
after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Notwithstanding
any termination of this Agreement, all of Coast's security interests in all of
the Collateral and all of the terms and provisions of this Agreement shall
continue in full force and effect until all Obligations have been paid and
performed in full; provided that, without limiting the fact that Loans are
subject to the discretion of Coast, Coast may, in its sole discretion, refuse to
make any further Loans after termination. No termination shall in any way affect
or impair any right or remedy of Coast, nor shall any such termination relieve
Borrower of any Obligation to Coast, until all of the Obligations have been paid
and performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Coast shall promptly deliver to
Borrower termination statements, requests for reconveyances and such other
documents as may be required to fully terminate Coast's security interests.
<PAGE> 14
10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events by any one
or more of the Borrowers shall constitute an "Event of Default" under this
Agreement, and Borrower shall give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or
certificate made or delivered to Coast by Borrower or any of Borrower's
officers, employees or agents, now or in the future, shall be untrue or
misleading and results in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any
interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any
time shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral
to Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants
(if any) set forth in the Schedule or shall fail to perform any other
non-monetary Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within five (5) Business Days after the
date due; or
(g) Any levy, assessment, attachment, seizure, lien or
encumbrance (other than a Permitted Lien) is made on all or any part of the
Collateral which is not cured within fifteen (15) days after the occurrence of
the same; or
(h) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation,
which has or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or
business failure of Borrower or any guarantor of any of the Obligations; or
appointment of a receiver, trustee or custodian, for all or any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within sixty
(60) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes
any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such indebtedness
or obligations terminates or in any way limits his subordination agreement; or
<PAGE> 15
(o) except as permitted under Section 8.5(a), Borrower shall
suffer or experience any Change of Control without Coast's prior written
consent, which consent shall be in the discretion of Coast in the exercise of
its reasonable business judgment; or
(p) Borrower shall generally not pay its debts as they become
due, or Borrower shall conceal, remove or transfer any part of its property,
with intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law; or
(q) there shall be any Material Adverse Effect. Coast may
cease making any Loans or extending any credit hereunder during any of the above
cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance of any Event of
Default, and subsequent to any cure periods, Coast, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following:
(a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations
to be immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever
it may be found, and for that purpose Borrower hereby authorizes Coast without
judicial process to enter onto any of Borrower's premises without interference
to search for, take possession of, keep, store or remove any of the Collateral,
and remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as Coast deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; provided, however, that should Coast seek
to take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating
thereto required by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the
commencement of any suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession
of, and not dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral
and make it available to Coast at places designated by Coast which are
reasonably convenient to Coast and Borrower, and to remove the Collateral to
such locations as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge. Coast is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral,
in its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
<PAGE> 16
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal
and state income tax returns and the books and records utilized in the
preparation thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast (including attorneys' fees and expenses incurred in connection
with bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable:
(a) Notice of the sale is given to Borrower at least five (5)
days prior to the sale, and, in the case of a public sale, notice of the sale is
published at least five (5) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with
or without the Collateral being present if otherwise commercially reasonable to
do so;
(d) The sale commences at any time between 8:00 a.m. and 6:00
p.m. Los Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's
check or wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast
may (but is not obligated to) direct any prospective purchaser to ascertain
directly from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner and , as to clauses (b), (c), (f), (g) and (h), such powers shall only be
exercised after the occurrence and during the continuance of an Event of Default
(and subsequent to any cure periods) or if Coast is then directly collecting the
Receivables;
(a) Execute on behalf of Borrower any documents that Coast
may, in its sole discretion, deem advisable in order to perfect and maintain
Coast's security interest in the Collateral, or in order to exercise a right of
Borrower or Coast, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to
any Receivable, any draft against any Account Debtor and any notice to any
Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items
of payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
<PAGE> 17
(e) Endorse all checks and other forms of remittances received
by Coast;
(f) Pay, contest or settle any lien, charge, encumbrance,
security interest and adverse claim in or to any of the Collateral, or any
judgment based thereon, or otherwise take any action to terminate or discharge
the same;
(g) Grant extensions of time to pay, compromise claims and
settle Receivables and General Intangibles for less than face value and execute
all releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance
claim that relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any
books or records belonging to, or relating to, Borrower to give Coast the same
rights of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower
pursuant to this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability that a
court of competent jurisdiction finally determines to have resulted from the
gross negligence or willful misconduct of such Indemnified Person. This
provision shall survive the termination of this Agreement and the repayment of
the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of
the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
<PAGE> 18
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Coast shall have all the other rights and remedies accorded a
secured party in equity, under the Code, and under all other applicable laws,
and under any other instrument or agreement now or in the future entered into
between Coast and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Coast of one or more of
its rights or remedies shall not be deemed an election, nor bar Coast from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Coast to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been indefeasibly paid and
performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks,
wire transfers and other items of payment received by Coast (including proceeds
of Receivables and payment of the Obligations in full) shall be deemed applied
by Coast on account of the Obligations three (3) Business Days after receipt by
Coast of immediately available funds, and, for purposes of the foregoing, any
such funds received after 10:30 AM Los Angeles, California time, on any day
shall be deemed received on the next Business Day. Coast shall be entitled to
charge Borrower's account for such three (3) Business Days of "clearance" or
"float" at the rate(s) set forth in Section 3 of the Schedule on all checks,
wire transfers and other items received by Coast, regardless of whether such
three (3) Business Days of "clearance" or "float" actually occur, and shall be
deemed to be the equivalent of charging three (3) Business Days of interest on
such collections. This across-the-board three (3) Business Day clearance or
float charge on all collections is acknowledged by the parties to constitute an
integral aspect of the pricing of Coast's financing of Borrower. Coast shall
not, however, be required to credit Borrower's account for the amount of any
item of payment which is unsatisfactory to Coast in its sole discretion, and
Coast may charge Borrower's loan account for the amount of any item of payment
which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all payments with
respect to the Obligations may be applied, and in Coast's sole discretion
reversed and re-applied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrower
pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan
account, in which event they will bear interest from the date due to the date
paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an account
of advances, charges, expenses and payments made pursuant to this Agreement.
Such account shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of payments made and
corrections of errors discovered by Coast), unless Borrower notifies Coast in
writing to the contrary within forty five (45) days after each account is
rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by reputable private delivery service or
by regular first-class mail, facsimile or certified mail return receipt
requested, addressed to Coast or Borrower at the addresses shown in the heading
to this Agreement, or at any other address designated in writing by one party to
the other party. Notices to Coast shall be directed to the Commercial Finance
Division, to the attention of the Division Manager or the Division Credit
Manager. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by any court
of competent jurisdiction to be void or unenforceable, such defect shall not
affect the remainder of this Agreement, which shall continue in full force and
effect.
11.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Coast and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
<PAGE> 19
11.8 WAIVERS. The failure of Coast at any time or times to require Borrower to
strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or
amended, except in a writing executed by Borrower and a duly authorized officer
of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of
each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for all
attorneys' fees (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and all filing, recording, search, title insurance, appraisal,
audit, and other costs incurred by Coast, pursuant to, or in connection with, or
relating to this Agreement (whether or not a lawsuit is filed), including, but
not limited to, any attorneys' fees and costs (including attorneys' fees and
expenses incurred pursuant to bankruptcy) Coast incurs in order to do the
following: prepare and negotiate this Agreement and the documents relating to
this Agreement; obtain legal advice in connection with this Agreement or
Borrower; enforce, or seek to enforce, any of its rights; prosecute actions
against, or defend actions by, Account Debtors; commence, intervene in, or
defend any action or proceeding; initiate any complaint to be relieved of the
automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy
claim, third-party claim, or other claim; examine, audit, copy, and inspect any
of the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce Coast's security interest
in, the Collateral; and otherwise represent Coast in any litigation relating to
Borrower. If either Coast or Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its costs and attorneys' fees (including attorneys'
fees and expenses incurred pursuant to bankruptcy), including (but not limited
to) attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. Borrower shall also pay Coast's
standard charges for returned checks and for wire transfers, in effect from time
to time. All attorneys' fees, costs and charges (including attorneys' fees and
expenses incurred pursuant to bankruptcy) and other fees, costs and charges to
which Coast may be entitled pursuant to this Agreement may be charged by Coast
to Borrower's loan account and shall thereafter bear interest at the same rate
as the Receivable Loans.
<PAGE> 20
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Coast; provided, however, that
Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Coast, and any prohibited assignment shall
be void. No consent by Coast to any assignment shall release Borrower from its
liability for the Obligations. Coast may assign its rights and delegate its
duties hereunder without the consent of Borrower. Cost reserves the right to
syndicate all or a portion of the transaction created herein or sell, assign,
transfer, negotiate, or grant participations in all or any part of, or any
interest in Coast's rights and benefits hereunder. In connection with any such
syndication, assignment or participation, Coast may disclose all documents and
information which Coast now or hereafter may disclose all documents and
information which Coast now or hereafter may have relating to Borrower or
Borrower's business. To the extent that Coast assigns its rights and obligations
hereunder to at third Person, Coast thereafter shall be released from such
assigned obligations to Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this
Agreement for convenience. Borrower and Coast acknowledge that the headings may
not describe completely the subject matter of the applicable paragraph, and the
headings shall not be used in any manner to construe, limit, define or interpret
any term or provision of this Agreement. The term "including", whenever used in
this Agreement, shall mean "including (but not limited to)". This Agreement has
been fully reviewed and negotiated between the parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed strictly
against Coast or Borrower under any rule of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
<PAGE> 21
BORROWER:
RPI Acquisition Corporation Clean Earth, Inc.
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Cycle Masters Corporation Clean Earth of New Castle
By_______________________________ By_____________________________________
President or Vice President President or Vice President
EnviroPlastics Corporation Carteret Biocycle Corporation
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Earth Care Products of Consolidated Technologies, Inc.
Tennessee, Inc.
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Chesapeake Plastic Lumber GCI Acquisition Corporation
Company, Inc.
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Earth Care Products of Waste Concepts, Inc.
Midwest, Inc.
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Environmental Specialty Products, Green Horizon Environmental, Inc.
Inc.
By_______________________________ By_____________________________________
President or Vice President President or Vice President
<PAGE> 22
COAST
Integrated Technical Services, Inc. COAST BUSINESS CREDIT, division of
Southern Pacific
By_______________________________ By_____________________________________
President or Vice President President or Vice President
Title:_________________________________
<PAGE> 23
===============================================================================
COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: RPI ACQUISITION CORPORATION
CYCLE MASTERS CORPORATION
ENVIROPLASTICS CORPORATION
EARTH CARE PRODUCTS OF TENNESSEE, INC.
CHESAPEAKE PLASTIC LUMBER COMPANY, INC.
EARTH CARE PRODUCTS OF MIDWEST, INC.
ENVIRONMENTAL SPECIALTY PRODUCTS, INC.
CLEAN EARTH OF NEW CASTLE, INC.
CARTERET BIOCYCLE CORPORATION
CONSOLIDATED TECHNOLOGIES, INC.
GCI ACQUISITION CORPORATION
WASTE CONCEPTS, INC.
GREEN HORIZON ENVIRONMENTAL
INTEGRATED TECHNICAL SERVICES, INC.
ADDRESS: % 2300 GLADES ROAD, SUITE 440 W
BOCA RATON, FLORIDA 33431
DATE: SEPTEMBER ___, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrower of even date.
===============================================================================
SECTION 2. CREDIT FACILITIES
SECTION 2.1 - CREDIT
LIMIT: Loans in a total amount at any time outstanding to
Borrower in the aggregate not to exceed the lesser of
a total of Thirty Million Dollars ($30,000,000) at
any one time outstanding (the "Maximum Dollar
Amount"), or the sum of (a), (b), (c), (d), (e) and
(f) below:
<PAGE> 24
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
(a) Receivable Loans in an amount not to exceed
80%(1). of the amount of Borrower's Eligible
Receivables (as defined in Section 1 of the
Agreement). Eligible Foreign Receivables shall be
subject to a sublimit of $1,000,000 and dating
Eligible Receivables shall be subject to a
sublimit of $1,500,000, plus
(b) Inventory Loans in an amount not to exceed the
lesser of:
(1) 60% of the value of Borrower's Eligible
Inventory (as defined in Section 1 of the
Agreement) that has been appraised by Hilco
calculated at the lower of cost or market
value and determined on a first in, first out
basis, or
(2) Six Million Dollars ($6,000,000), PLUS
(c) A Term Loan in the original principal amount not
to exceed the lesser of:
(1) Eighty percent (80%) of the appraised
liquidation value of Borrower's existing
Equipment; or
(2) Six Million Five Hundred Thousand Dollars
($6,500,000). The Term Loan will be repayable
in eighty four (84) equal monthly
installments, commencing one (1) month after
the Closing Date, plus
(d) A Bridge Loan in the original principal amount of
up to Two Million Dollars ($2,000,000). Upon
receipt and approval by Coast of an appraisal of
the Real Property from an appraiser acceptable to
Coast (and review of any environmental matters)
and provided no Event of Default has occurred and
is continuing and provided Borrower then has a
Total Debt Service Coverage Ratio of not less
than 1.1:1, up to 65% of the appraised value of
the Real Property may be converted from the
Bridge Loan to a Real Estate Loan repayable over
a 240 month amortization. Prior to conversion,
the Bridge Loan will be repayable in eighteen
(18) equal monthly installments. The Bridge Loan
and the Real Estate Loan shall be subject to an
annual prepayment of 15% of Excess Cash Flow
based on U.S. Plastic Lumber Corp.'s year end
certified financial statements. Such Excess Cash
Flow payment will be due within 90 days of the
end of each fiscal year of U.S. Plastic Lumber
Corp. and shall be applied to the last
installments owing in the inverse order of
maturity of payments. To the extent the appraisal
of the Real Property as described above reflects
that the unpaid balance of the Bridge Loan is in
excess of the appraised value, Borrower agrees
that up to the first $500,000 of any new equity
shall be used as a mandatory prepayment of the
Bridge Loan up to the amount of the deficiency
between the Bridge Loan balance and the appraised
value.
- ----------------
(1) Up to 85% so long as dilution, as reasonably determined by
Coast, is less than 5%
<PAGE> 25
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
"EXCESS CASH FLOW" shall mean the Operating
Cash Flow/Permitted less each of (i) Total Debt
Service and (ii) cash dividends actually paid, to
the extent permitted hereunder.
"TOTAL DEBT SERVICE" shall mean the sum of
all principal, interest and other payments made
or required to be made by U.S. Plastic Lumber
Corp. on indebtedness during the applicable
period.
(e) Equipment Acquisition Loans, to be drawn within
four and one half years from the date hereof, in
minimum advances of One Hundred Thousand Dollars
($100,000) in a total amount not to exceed the
lesser of:
(1) Eighty percent (80%) of the cost of new
Equipment (after subtracting taxes,
engineering and installation charges), or up
to eighty (80%) of the appraised forced
liquidation value of used Equipment acquired
by Borrower (after subtracting taxes,
engineering and installation charges); and
(2) Three Million Dollars ($3,000,000).
The Equipment Acquisition Loans shall be
repayable based on either a 24 month or a 48
month amortization as determined by Coast on the
assets being purchased.
The Equipment Acquisition Loans shall not be
available unless Borrower has achieved and
maintains a Total Debt Service Coverage Ratio of
not less than 1.25:1 measured monthly.
Total Debt Service Coverage Ratio shall mean the
quotient of (x) EBITDA less all capital
expenditures except that portion which is
financed, less taxes paid during such period,
divided by (y) the sum of all principal, interest
and other payments made or required to be made by
Borrower on indebtedness during such period,
including any fees and charges owed by Borrower
in connection with any such indebtedness.
"EBITDA" shall mean, for any period, the net
income for such period of Borrower determined in
accordance with GAAP (excluding any extraordinary
income items, including, without limitation, gain
on sale of assets, income relating to foreign
exchange, swap or other derivative transactions
and changes in GAAP), plus the following items,
to the extent deducted form the revenues of
Borrower in the calculation of net income or
less: (i) depreciation, (ii) amortization of
intangibles and any other non-cash items, (iii)
cash interest expense (excluding any interest
paid-in-kind) and (iv) tax expense.
(f) Asset Acquisition Loans to be funded in the
discretion of Coast in connection with future
acquisitions by Borrower. Potential eligible
collateral includes accounts, inventory,
equipment and real estate of the target company.
Such advances are further subject to appraisal
and audit by Coast and approval by its credit
committee.
<PAGE> 26
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
===============================================================================
SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST A rate equal to the Prime Rate plus the following
RATE: percentage per annum, calculated on the basis of a
360-day year for the actual number of days elapsed:
Loan Percentage Over Prime
---- ---------------------
Receivables and Inventory one (1)
Term and Equipment Acquisition one and one
quarter (1.25)
Real Estate two (2)
Bridge two and one
half (2.5)
The interest rate applicable to all Loans shall be
adjusted monthly as of the first day of each month,
and the interest to be charged for each month shall
be based on the highest Prime Rate in effect during
the prior month, but in no event shall the rate of
interest charged on any Loans in any month be less
than 8.5% per annum.
SECTION 3.1 - MINIMUM
MONTHLY based on $10,000,000 measured on a daily basis.
INTEREST:
SECTION 3.2 - LOAN FEE: 1.25% based on $20,000,000 payable concurrently
herewith plus $125,000 on the first day of the sixth
month following the Closing Date plus .25% on each
anniversary of this Agreement based on the average
outstanding Loans measured on a daily basis for the
then prior 12 months.
SECTION 3.2 - MONITORING $500 per each entity which is a Borrower hereunder
FEE: payable on the first day of each month, provided that
if the number of Borrower's is seven or less, the
total fee shall be $2,500 per month. If any new
borrowers are added hereunder (which is otherwise
subject to Coast's prior written consent), the
Monitoring Fee for such new borrowers shall be $250
per month for each environmental type business and
$500 per month for each non environmental type
business.
SECTION 3.2 - FACILITY $5,000 per quarter payable on the Closing Date
FEE: (prorated for any partial quarter at the beginning
of the term of this Agreement) and continuing on the
first day of each quarter thereafter.
<PAGE> 27
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 9.1 - RENEWAL 0.5% of the Maximum Dollar Amount beginning in year
FEE: 6 of the Agreement.
SECTION 9.2 - EARLY An amount equal to three percent (3%) of the Maximum
TERMINATION Dollar Amount (as defined in the Schedule), if
FEE: termination occurs on or before the first anniversary
of the effective date of this Agreement; two percent
(2%) of the Maximum Dollar Amount, if termination
occurs after the first anniversary and on or before
the second anniversary of the effective date of this
Agreement; one percent (1%) of the Maximum Dollar
Amount, if termination occurs after the second
anniversary and on or before the third anniversary of
the effective date of this Agreement, one half of one
percent (.5%) of the Maximum Dollar Amount, if
termination occurs after the third anniversary and on
or before the fourth anniversary of the effective
date of this Agreement and one quarter of one percent
(.25%) if termination occurs after the fourth
anniversary of the effective date of this Agreement.
Prepayment of the Bridge Loan or the Real Estate Loan
and any mandatory prepayments of such loans shall not
be subject to any prepayment charge provided that
Borrower hereby grants to Coast a right of first
refusal with respect to any refinancing of the Real
Estate Loan by another lender. Borrower agrees to
give Coast 30 days prior written notice of the terms
and conditions of any competing offer and Coast must
commit to the loan, if at all, within the same 30 day
time period. Such commitment shall be on
substantially the same terms and conditions
(including the funding date) as the competing lender.
Prepayments of the Term Loan and Equipment
Acquisition Loans may only be made with the prior
written consent of Coast.
===============================================================================
SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM $1,000,000 at funding
AVAILABILITY:
<PAGE> 28
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 5.14 - OTHER DOCUMENTS 1. Cross Guaranties;
AND
AGREEMENTS: 2. UCC-1 financing statements, fixture
filings and termination statements;
3. Security Agreements (including those
covering copyrights, patents and
trademarks).
4. Mortgage on the Real Property;
5. Secured guaranty from U. S. Plastic
Lumber Corporation, U.S. Plastic
Lumber, Ltd. and Clean Earth, Inc.
(collectively "Guarantor"); and
6. Such other documents as reasonably
requested by Coast.
<PAGE> 29
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 5.15 - OTHER CONDITIONS: 1. All collections shall be a through a
combination of blocked accounts and/or
lockboxes approved by Coast.
2. No accounts payable shall be over 120
days past invoice date.
3. All applicable taxes shall be current.
4. Coast shall have a first priority
security interest in all of the assets
of Borrower and each guarantor
including, without limitation, on all
intellectual property of Borrower and
Guarantor.
5. Subordination of shareholder and
investor debt in form and substance
acceptable to Coast.
6. All facilities to be cross guarantied
and cross collateralized.
7. Upon the closing of the Eaglebrook
acquisition, there shall be a
concurrent capital contribution of not
less than $5,000,000.
8. If applicable, Coast shall have
reviewed and approved of the
acquisition documents for the purchase
of Eaglebrook.
9. Coast shall have received such
assurances as Coast shall require
confirming that Borrower is in
compliance with all environmental laws
and regulations.
10. Coast shall have reviewed and approved
of all contracts of Borrower including,
without limitation, those involving
milestone billings, bonding, the Bio
Carteret facility lease etc.
11. Coast shall have received no offset
agreements acceptable to Coast with
respect to all milestone contracts.
12. Coast shall have reviewed, approved and
received an assignment of the Rutger's
license and royalty agreement in form
and substance acceptable to Coast.
13. Coast shall have reviewed and approved
of the Borrower's environmental
liability insurance and Coast shall be
named as an additional insured of said
policy.
14. Review and approval by Coast and
assignment of the landlord lease and
purchase option for the Bio Carteret
facility and a first mortgage on the
Bio Carteret facility provided that if
the Real Estate Loan is not funded on
the Closing Date, this condition shall
be required to be satisfied within 30
days after the Closing Date or in any
event prior to funding of the Real
Estate Loan..
15. Borrower shall have obtained landlord
waivers and/or Coast shall have created
rent reserves acceptable to Coast.
===============================================================================
<PAGE> 30
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF See Schedule 1 hereto.
BORROWER:
SECTION 6.2 - PRIOR TRADE NAMES See Schedule 1 hereto.
OF BORROWER:
SECTION 6.2 - EXISTING TRADE See Schedule 1 hereto.
NAMES OF BORROWER:
SECTION 6.3 - OTHER LOCATIONS AND See Schedule 1 hereto.
ADDRESSES:
SECTION 6.10 - MATERIAL ADVERSE None.
LITIGATION:
SECTION 6.10 - FUTURE CLAIMS AND Borrower will promptly inform Coast in
LITIGATION: writing of any claim, proceeding,
litigation or investigation in the
future threatened or instituted by or
against Borrower involving any single
claim of Fifty Thousand Dollars
($50,000) or more, or involving One
Hundred Thousand Dollars ($100,000) or
more in the aggregate.
===============================================================================
<PAGE> 31
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS 1. All taxes shall be current at all
AND COVENANTS: times.
2. Subject to the terms of payment of the
Bridge Loan, any equity raised by
Borrower or Guarantor in addition to
the $5,000,000 referenced in the
conditions precedent may be used to pay
shareholder and investor debt so long
no Event of Default has occurred and is
continuing.
3. Borrower and Guarantor shall use its
best efforts to merge the subsidiaries
into the holding companies prior to
January, 1999.
4. Borrower shall maintain job files with
all required supporting documentation.
5. Neither Borrower nor Guarantor shall
pay any dividends except with after tax
profits and so long as no Event of
Default has occurred and is continuing.
6. U. S. Plastics Lumber Corporation shall
at all times maintain a Consolidated
Tangible Net Worth of not less than 80%
of the Consolidated Tangible Net Worth
on the Closing Date.
7. Except with the prior consent of Coast,
which consent shall not be unreasonably
with held, at all times Mark Alsentzer
shall be the CEO of U.S. Plastic Lumber
Corp., Michael Schmidt shall be the CFO
and Bruce Rosetto shall be the general
counsel.
8. Notwithstanding anything to the
contrary herein, for the first six
months from the Closing Date, otherwise
Eligible Receivables for the Clean
Earth portion of the business shall be
eligible for up to 180 days from
invoice date and otherwise Eligible
Receivables for the U.S. Plastic
portion of the business shall be
eligible for up to 120 days from
invoice date. All other terms of
eligibility of the Receivables shall
otherwise continue to apply.
SECTION 8.2 - INSURANCE: Subject to the limitations set forth in
Section 8.2 of the Agreement, Coast shall
release to Borrower insurance proceeds with
respect to Equipment totaling less than
Fifty Thousand Dollars ($50,000).
<PAGE> 32
Coast Business Credit Schedule to Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the
following:
1. Daily changes to the milestone and
affiliate Receivables.
2. Weekly price trends form Plastic News
Journal.
3. Monthly Receivable agings, aged by
invoice date and by customer in
alphabetical order, within five (5)
Business Days after the end of each
month together with a monthly deferred
revenue listing to be sorted by
customer in alphabetical order and a
monthly Receivables collection detail.
4. Monthly accounts payable agings, aged
by invoice date, and outstanding or
held check registers within five (5)
Business Days after the end of each
month.
5. Monthly inventory reports for the
Inventory valued on a first-in,
first-out basis at the lower of cost or
market (in accordance with GAAP) with a
summary of inventory by categories of
type and by entity or such other
inventory reports as are reasonably
requested by Coast, all within five (5)
Business Days after the end of each
month.
6. Monthly internally prepared financial
statements, as soon as available, and
in any event within thirty (30) days
after the end of each month.
7. Monthly collection reports broken down
by type of collection.
8. Quarterly internally prepared financial
statements, as soon as available, and
in any event within forty-five (45)
days after the end of each fiscal
quarter of Borrower.
9. Quarterly customer lists, including
customer name, address, and phone
number.
10. Annual audited financial statements, as
soon as available, and in any event
within ninety (90) days following the
end of Borrower's fiscal year,
containing the unqualified opinion of,
and certified by, an independent
certified public accountant acceptable
to Coast.
SECTION 8.5 - NEGATIVE COVENANTS Fifty Thousand Dollars ($50,000)
(ACQUIRED ASSETS):
================================================================================
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE: the last Business Day of the month five (5)
years from the Closing Date, subject to
automatic renewal as provided in Section
9.1 of the Agreement, and early termination
as provided in Section 9.2 of the
Agreement.
<PAGE> 33
===============================================================================
LOAN AND SECURITY AGREEMENT
by and between
RPI ACQUISITION CORPORATION
CYCLE MASTERS CORPORATION
ENVIROPLASTICS CORPORATION
EARTH CARE PRODUCTS OF TENNESSEE, INC.
CHESAPEAKE PLASTIC LUMBER COMPANY, INC.
EARTH CARE PRODUCTS OF MIDWEST, INC.
ENVIRONMENTAL SPECIALTY PRODUCTS, INC.
CLEAN EARTH OF NEW CASTLE, INC.
CARTERET BIOCYCLE CORPORATION
CONSOLIDATED TECHNOLOGIES, INC.
GCI ACQUISITION CORPORATION
WASTE CONCEPTS, INC.
GREEN HORIZON ENVIRONMENTAL, INC.
INTEGRATED TECHNICAL SERVICES, INC.
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of September ____, 1998
===============================================================================
<PAGE> 34
TABLE OF CONTENTS
(CONTINUED)
TABLE OF CONTENTS
PAGE
----
1. DEFINITIONS.................................................... 1
2. CREDIT FACILITIES.............................................. 7
2.1 Loans................................................. 7
3. INTEREST AND FEES.............................................. 7
3.1 Interest.............................................. 7
3.2 Fees.................................................. 7
4. SECURITY INTEREST.............................................. 7
5. CONDITIONS PRECEDENT........................................... 8
5.1 Status of Accounts at Closing......................... 8
5.2 Minimum Availability.................................. 8
5.3 Landlord Waiver....................................... 8
5.4 Real Property......................................... 8
5.5 Executed Agreement.................................... 8
5.6 Opinion of Borrower's Counsel......................... 8
5.7 Priority of Coast's Liens............................. 8
5.8 Insurance............................................. 8
5.9 Borrower's Existence.................................. 8
5.10 Organizational Documents.............................. 8
5.11 Taxes................................................. 8
5.12 Due Diligence......................................... 9
5.13 Year 2000 Problem Assessment Certificate.............. 9
5.14 Other Documents and Agreements........................ 9
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER...... 9
6.1 Existence and Authority............................... 9
6.2 Name; Trade Names and Styles.......................... 9
6.3 Place of Business; Location of Collateral............. 9
6.4 Title to Collateral; Permitted Liens.................. 9
6.5 Maintenance of Collateral............................. 10
6.6 Books and Records..................................... 10
6.7 Financial Condition, Statements and Reports........... 10
6.8 Tax Returns and Payments; Pension Contributions....... 10
6.9 Compliance with Law................................... 10
6.10 Litigation............................................ 10
6.11 Use of Proceeds....................................... 11
6.12 Year 2000 Compliance.................................. 11
7. RECEIVABLES.................................................... 11
7.1 Representations Relating to Receivables............... 11
7.2 Representations Relating to Documents and Legal
Compliance.......................................... 11
7.3 Schedules and Documents relating to Receivables....... 11
7.4 Collection of Receivables............................. 11
7.5 Remittance of Proceeds................................ 12
7.6 Disputes.............................................. 12
7.7 Returns............................................... 12
7.8 Verification.......................................... 12
7.9 No Liability.......................................... 12
<PAGE> 35
PAGE
----
8. ADDITIONAL DUTIES OF THE BORROWER.............................. 12
8.1 Financial and Other Covenants......................... 12
8.2 Insurance............................................. 13
8.3 Reports............................................... 13
8.4 Access to Collateral, Books and Records............... 13
8.5 Negative Covenants.................................... 13
8.6 Litigation Cooperation................................ 14
8.7 Further Assurances.................................... 14
9. TERM........................................................... 14
9.1 Maturity Date......................................... 14
9.2 Early Termination..................................... 14
9.3 Payment of Obligations................................ 14
10. EVENTS OF DEFAULT AND REMEDIES................................. 15
10.1 Events of Default..................................... 15
10.2 Remedies.............................................. 16
10.3 Standards for Determining Commercial Reasonableness... 17
10.4 Power of Attorney..................................... 18
10.5 Application of Proceeds............................... 19
10.6 Remedies Cumulative................................... 19
11. GENERAL PROVISIONS............................................. 19
11.1 Interest Computation.................................. 19
11.2 Application of Payments............................... 20
11.3 Charges to Accounts................................... 20
11.4 Monthly Accountings................................... 20
11.5 Notices............................................... 20
11.6 Severability.......................................... 20
11.7 Integration........................................... 20
11.8 Waivers............................................... 20
11.9 No Liability for Ordinary Negligence.................. 20
11.10 Amendment............................................. 21
11.11 Time of Essence....................................... 21
11.12 Attorneys Fees, Costs and Charges..................... 21
11.13 Benefit of Agreement.................................. 21
11.14 Publicity............................................. 21
11.15 Paragraph Headings; Construction...................... 21
11.16 Governing Law; Jurisdiction; Venue.................... 22
11.17 Mutual Waiver of Jury Trial........................... 22
<PAGE> 36
AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Amendment is entered into as of this ___ of November,
1998 among RPI ACQUISITION CORPORATION, ENVIROPLASTICS CORPORATION, CYCLE
MASTERS CORPORATION, CHESAPEAKE PLASTIC LUMBER COMPANY, INC., EARTH CARE
PRODUCTS OF TENNESSEE, INC., ENVIRONMENTAL SPECIALTY PRODUCTS, INC., EARTH CARE
PRODUCTS OF MIDWEST, INC., CARTERET BIOCYCLE CORPORATION, CLEAN EARTH OF NEW
CASTLE, GCI ACQUISITION CORPORATION, CONSOLIDATED TECHNOLOGIES, INC., WASTE
CONCEPTS, INC., GREEN HORIZON ENVIRONMENTAL, INC., INTEGRATED TECHNICAL
SERVICES, INC., (collectively, "Borrower") and COAST BUSINESS CREDIT, a division
of Southern Pacific Bank ("Coast") in reference to that certain Loan and
Security Agreement dated September 30,1998 between Borrower and Coast, as
amended and that certain Secured Promissory Note-Term Loan in the face amount of
$6,900,000 ("Secured Note") also dated September 30, 1998.
The parties desire to amend the terms of the Secured Note as
follows:
1. The face amount of the Secured Note is hereby changed from
$6,900,000 to $6,125,000.
2. The monthly payments of principal under the Secured Note
are hereby changed from $82,143 to $72,916.
3.Except as provided herein, the Secured Note remains in full
force and effect in accordance with its terms. This Amendment shall be governed
by the laws of the State of California.
RPI ACQUISITION CORPORATION ENVIROPLASTICS CORPORATON
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
CYCLE MASTERS CORPORATION CHEASAPEAKE PLASTIC LUMBER
COMPANY, INC.
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
<PAGE> 37
EARTH CARE PRODUCTS OF TENNESSEE, INC. ENVIRONMENTAL SPECIALTY
PRODUCTS, INC.
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
EARTH CARE PRODUCTS OF MIDWEST, INC. CARTERET BIOCYCLE CORPORATION
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
CLEAN EARTH OF NEW CASTLE GCI ACQUISITION CORPORATION
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
CONSOLIDATED TECHNOLOGIES, INC. GREEN HORIZON ENVIRONMENTAL, INC.
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
WASTE CONCEPTS, INC. INTEGRATED TECHNICAL
SERVICES, INC.
By By
----------------------------------- ------------------------------
Its Its
---------------------------------- -----------------------------
- ------------------------------------- --------------------------------
COAST BUSINESS CREDIT
By
-----------------------------------
Its
----------------------------------
2
<PAGE> 38
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of this 30th day of December 1998, between Coast Business
Credit, a division of Southern Pacific Bank ("Coast"), RPI Acquisition
Corporation, Cycle Masters Corporation, EnviroPlastics Corporation, Earth Care
Products of Tennessee, Inc., Chesapeake Plastic Lumber, Inc., Earth Care
Products of the Midwest, Inc., Environmental Specialty Products, Inc., Clean
Earth of New Castle, Inc., Carteret Biocycle Corporation, Consolidated
Technologies, Inc., GCI Acquisition Corporation, Waste Concepts, Incorporated,
Green Horizon Environmental, Inc., Integrated Technical Services, Inc. and S&W
Waste, Inc. (jointly and severally, the "Proposed Borrower"), is made in
reference to the following facts:
A. Each Proposed Borrower except S & W Waste, Inc. (jointly
and severally, the "Current Borrower") previously entered into a Loan and
Security Agreement with Coast dated September 30, 1998 (as amended, the "Loan
Agreement").
B. Clean Earth, Inc. has formed a subsidiary corporation under
the laws of the State of New Jersey by the name of S & W Acquisition Corporation
("S & W") for the purpose of merging with S & W Waste, Inc., a New Jersey
corporation, with S & W Acquisition Corporation being the surviving corporation.
Effective upon such merger, S & W Acquisition Corporation will change its name
to "S & W Waste, Inc." In connection with such merger, S & W will purchase
certain real property owned by Melon Leasing Corporation, Inc. commonly known as
115 Jacobus Avenue, South Kearney, New Jersey 07032 (the "Property"). In order
to finance such real property acquisition, S & W plans to execute a secured
promissory note in favor of Melon Leasing Corporation, Inc. in the aggregate
amount of $2,500,000 payable in equal monthly installments of principal over an
eleven year period secured by the Property and guarantied by United States
Plastic Lumber Corp. The transactions described in this Paragraph B shall be
collectively referred to herein as the "S & W Acquisition."
C. Current Borrower has requested that Coast approve the S & W
Acquisition, and to provide financing in connection therewith. Coast is willing
to agree to said requests and to amend the Loan Agreement on the terms and
subject to the conditions set forth in this Amendment.
NOW THEREFORE, in consideration of the foregoing and the terms
and conditions hereof, the parties do hereby agree as follows:
1. DEFINITIONS. Terms used herein, unless otherwise defined
herein, shall have the meanings set forth in the Loan Agreement.
2. S & W ACQUISITION.
(a) Subject to the terms and conditions of this Amendment,
Coast hereby consents to the S & W Acquisition.
(b) Effective upon the consummation of the S & W Acquisition,
the Loan Agreement is hereby amended by adding S & W as a
borrower thereunder. All of the terms and conditions
applicable to each of the borrowers under the Loan
Agreement are fully applicable to and assumed by S & W.
Without limiting the generality of the foregoing, S & W
hereby grants a security interest in its assets to Coast
as more particularly set forth in the Loan Agreement.
<PAGE> 39
3. S & W AVAILABILITY.
(a) Coast hereby agrees to advance an Asset Acquisition Loan
in the amount of $490,000 to S & W. Such Asset Acquisition
Loan shall be amortized on a straight-line basis over 48
months and shall be evidenced by a Secured Promissory Note
in form and substance satisfactory to Coast in its sole
discretion.
(b) Any Receivables of S & W existing on the date that the
conditions to this Amendment are satisfied shall be
ineligible for borrowing purposes under the Loan Agreement
until such Receivables are reviewed and approved by Coast
as Eligible Receivables. Such review shall include,
without limitation, an audit of the Receivables, books and
records of S & W performed at Proposed Borrower's expense
by an auditor and otherwise in form and substance
satisfactory to Coast in its discretion.
4. ASSET ACQUISITION LOAN FEE. In consideration of this
Amendment and the Asset Acquisition Loan granted by Coast to S & W hereunder,
and in addition to all other fees and charges, Proposed Borrower shall pay to
Coast on the date hereof a fee of $4,900, which fee shall be fully earned as of
the date hereof.
5. CONDITIONS PRECEDENT. The effectiveness of this Amendment
is subject to Proposed Borrower's satisfaction of the following conditions:
(a) Proposed Borrower shall provide Coast and its agents with
all financial information, projections, budgets, business
plans, cash flows and availability projections requested
by Coast showing the viability of Proposed Borrower before
and after the S & W Acquisition, all of which shall be
satisfactory to Coast in its sole discretion.
(b) The S & W Acquisition shall have been completed in the
form contemplated by the Agreement and Plan of
Reorganization by and between Clean Earth, Inc., S & W,
U.S. Plastic Lumber Corporation, S & W Waste, Inc., and
William F. Moscatello dated as of November 25, 1998, and
Proposed Borrower shall have provided Coast with the
merger agreements and/or stock purchase agreements for the
S & W Acquisition and any and all documents and
instruments executed or delivered or to be executed or
delivered in connection therewith, all of which shall be
satisfactory to Coast in its sole discretion.
(c) Proposed Borrower shall execute and cause any applicable
third parties to execute any and all security documents,
including without limitation, security agreements,
guaranty agreements, subordination agreements, mortgages,
pledges, UCC financing statements and UCC amendments, as
requested by Coast and in form and substance satisfactory
to Coast in its sole discretion to maintain or establish,
as applicable, the first priority perfected status of
Coast's security interests in the assets of Proposed
Borrower, including, without limitation, an intercreditor
and subordination agreement with Melon Leasing
Corporation, Inc. (if required by Coast).
2
<PAGE> 40
(d) In connection with the addition of S & W as an additional
borrower under the Loan Agreement, S & W shall have
satisfied all of the applicable conditions set forth in
Section 5 of the Loan Agreement, as determined by Coast in
its sole discretion.
(e) Concurrent with Coast's additional advances against the
assets being acquired in connection with the S & W
Acquisition, S & W shall have title to such assets free
and clear of liens except for a first priority lien and
security interest in favor of Coast.
(f) Coast shall have reviewed and found acceptable in its sole
discretion the environmental risks and potential
environmental liabilities to Proposed Borrower involved in
connection with the S & W Acquisition.
(g) Coast shall have received an opinion of borrower's counsel
regarding the S & W Acquisition in form and substance
satisfactory to Coast in its sole discretion, including,
without limitation, an opinion confirming the due
authorization, completion and conformity with applicable
law of the S & W Acquisition.
(h) No Event of Default shall have occurred and be continuing.
6. GUARANTEES. Each Continuing Guaranty executed by the
Current Borrowers in favor of Coast is hereby amended by adding S & W as a
borrower thereunder, and as modified in the preceding sentence remains in full
force and effect.
7. REAFFIRMATION. Except as modified by the terms herein, the
Loan Agreement, the promissory note evidencing the Asset Acquisition Loan
contemplated hereby, and the loan documents executed in connection therewith
remain in full force and effect. If there is any conflict between the terms and
provisions of this Amendment and the terms and provisions of the Loan Agreement
or documents related thereto, the terms and provisions of this Amendment shall
govern.
8. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9. GOVERNING LAW. This Amendment shall be governed by and
construed according to the laws of the State of California.
3
<PAGE> 41
10. ATTORNEYS' FEES; COSTS; JURY TRIAL WAIVER. Proposed
Borrower agrees to pay, on demand and on a joint and several basis, all
attorneys' fees and costs incurred in connection with the negotiation,
documentation and execution of this Amendment. If any legal action or proceeding
shall be commenced at any time by any party to this Amendment in connection with
its interpretation or enforcement, the prevailing party or parties in such
action or proceeding shall be entitled to reimbursement of its reasonable
attorneys' fees and costs in connection therewith, in addition to all other
relief to which the prevailing party or parties may be entitled. Each of Coast
and Proposed Borrower hereby waives its right to a jury trial in any such action
or proceeding.
The foregoing Second Amendment to Loan and Security Agreement is hereby agreed
and accepted:
"Proposed Borrower"
S & W WASTE, INC.
By:__________________________________
President or Vice President
CARTERET BIOCYCLE CORPORATION CLEAN EARTH OF NEW CASTLE, INC.
By:____________________________ By:____________________________
President or Vice President President or Vice President
CONSOLIDATED TECHNOLOGIES, INC. INTEGRATED TECHNICAL SERVICES, INC.
By:____________________________ By:____________________________
President or Vice President President or Vice President
GCI ACQUISITION CORPORATION RPI ACQUISITION CORPORATION
By:____________________________ By:____________________________
President or Vice President President or Vice President
4
<PAGE> 42
EARTH CARE PRODUCTS OF EARTH CARE PRODUCTS OF
TENNESSEE, INC. MIDWEST, INC.
By:____________________________ By:____________________________
President or Vice President President or Vice President
ENVIRONMENTAL SPECIALTY ENVIROPLASTICS CORPORATION
PRODUCTS, INC.
By:____________________________ By:____________________________
President or Vice President President or Vice President
CHESAPEAKE PLASTIC LUMBER, INC. CYCLE MASTERS CORPORATION
By:____________________________ By:____________________________
President or Vice President President or Vice President
WASTE CONCEPTS, INCORPORATED GREEN HORIZON ENVIRONMENTAL, INC.
By:____________________________ By:____________________________
President or Vice President President or Vice President
"Coast"
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank
By:____________________________________
Title:_________________________________
5
<PAGE> 43
Each of the undersigned hereby acknowledges and consents to
the foregoing Amendment, and agrees that the Continuing Guaranty executed by it
in favor of Coast is hereby amended by adding S & W as a borrower thereunder.
Each of the undersigned agrees that its Continuing Guaranty in favor of Coast as
modified in the preceding sentence remains in full force and effect.
U.S. PLASTIC LUMBER CORP. U.S. PLASTIC LUMBER LTD.
By_________________________________ By_______________________________
President or Vice President President or Vice President
CLEAN EARTH, INC.
By_________________________________
President or Vice President
6
<PAGE> 44
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
This THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of the 1st day of February 1999, between Coast Business
Credit, a division of Southern Pacific Bank ("Coast"), U.S. PLASTIC LUMBER LTD.,
CARTERET BIOCYCLE CORPORATION, CLEAN EARTH OF NEW CASTLE, CONSOLIDATED
TECHNOLOGIES, INC., INTEGRATED TECHNICAL SERVICES, INC., S&W WASTE, INC.,
EAGLEBROOK PLASTICS, INC. and EAGLEBROOK PRODUCTS, INC. (jointly and severally,
the "Proposed Borrower"), is made in reference to the following facts:
A. Except for U.S. Plastic Lumber Ltd., Eaglebrook Plastics, Inc., and
Eaglebrook Products, Inc., each Proposed Borrower, RPI Acquisition Corporation,
Earth Care Products of Tennessee, Inc., Earth Care Products of the Midwest,
Inc., Environmental Specialty Products, Inc., EnviroPlastics Corporation,
Chesapeake Plastic Lumber, Inc., Waste Concepts, Incorporated, Green Horizon
Environmental, Inc., GCI Acquisition Corporation and Cycle Masters Corporation
(jointly and severally, the "Current Borrower") previously entered into a Loan
and Security Agreement with Coast dated September 30, 1998 (as amended, the
"Loan Agreement").
B. Current Borrower has restructured its corporate organization as
follows (collectively, the "Corporate Reorganization"):
1. Each of RPI Acquisition Corporation, Earth Care Products of
Tennessee, Inc., Earth Care Products of the Midwest, Inc., Environmental
Specialty Products, Inc., EnviroPlastics Corporation, Chesapeake Plastic Lumber,
Inc., and Cycle Masters Corporation has merged with U.S. Plastic Lumber Ltd.,
with U.S. Plastic Lumber Ltd. being the surviving entity.
2. Each of Waste Concepts, Incorporated, Green Horizon
Environmental, Inc., and GCI Acquisition Corporation has merged with Integrated
Technical Services, Inc., with Integrated Technical Services, Inc. being the
surviving corporation.
3. United States Plastic Lumber Corp. has formed two
subsidiary corporations under the laws of the State of Delaware with the names
of "U.S. Plastic Lumber Finance Corp." and "US Plastic Lumber IP Corp." U.S.
Plastic Lumber Corp. plans to transfer all intellectual property rights
currently owned by it to US Plastic Lumber IP Corp.
C. U.S. Plastic Lumber Ltd. and U.S. Plastic Lumber Corp., on the one
hand, and Andrew Stephens, Robert Thompson and Michael Dahl (collectively, the
"Eaglebrook Products Shareholders"), on the other hand, are parties to that
certain Stock Purchase Agreement dated as of February __ , 1999 pursuant to
which the Eaglebrook Products Shareholders have agreed to sell and U.S. Plastic
Lumber Ltd. has agreed to purchase all of the issued and outstanding capital
stock of Eaglebrook Products, Inc. U.S. Plastic Lumber Ltd. and U.S. Plastic
Lumber Corp., on the one hand, and Andrew Stephens and Robert Thompson
(collectively, the "Eaglebrook Plastics Shareholders"), on the other hand, are
parties to that certain Stock Purchase Agreement dated as of February __ , 1999
pursuant to which the Eaglebrook Plastics Shareholders have agreed to sell and
U.S. Plastic Lumber Ltd. has agreed to purchase all of the issued and
outstanding capital stock of Eaglebrook Plastics, Inc. The transactions
described in this Paragraph B shall be collectively referred to herein as the
"Eaglebrook Acquisition"; the stock purchase agreements described in this
Paragraph B shall be collectively referred to herein as the "Eaglebrook
Agreements"; and Eaglebrook Products, Inc. and Eaglebrook Plastics, Inc. shall
be collectively referred to herein as the "Eaglebrook Companies."
<PAGE> 45
Current Borrower has requested that Coast approve the
Corporate Reorganization, the Eaglebrook Acquisition, and to provide certain
financing in connection with the Eaglebrook Acquisition. Coast is willing to
agree to said requests and to amend the Loan Agreement on the terms and subject
to the conditions set forth in this Amendment.
NOW THEREFORE, in consideration of the foregoing and the terms
and conditions hereof, the parties do hereby agree as follows:
1. DEFINITIONS. Terms used herein, unless otherwise defined
herein, shall have the meanings set forth in the Loan Agreement.
2. CORPORATE REORGANIZATION AND EAGLEBROOK ACQUISITION.
(a) Subject to the terms and conditions of this Amendment,
Coast hereby consents to the Eaglebrook Acquisition and
the Corporate Reorganization.
(b) Effective upon the consummation of the Corporate
Reorganization and the Eaglebrook Acquisition, the Loan
Agreement is hereby amended by adding as borrowers
thereunder each of the Eaglebrook Companies and U.S.
Plastic Lumber Ltd. and by deleting as borrowers
thereunder RPI Acquisition Corporation, Earth Care
Products of Tennessee, Inc., Earth Care Products of the
Midwest, Inc., Environmental Specialty Products, Inc.,
EnviroPlastics Corporation, Chesapeake Plastic Lumber,
Inc., Waste Concepts, Incorporated, Green Horizon
Environmental, Inc., GCI Acquisition Corporation, and
Cycle Masters Corporation. All of the terms, covenants and
conditions applicable to each of the borrowers under the
Loan Agreement are fully applicable to and assumed by each
of the Eaglebrook Companies and U.S. Plastic Lumber Ltd.
Without limiting the generality of the foregoing, each of
the Eaglebrook Companies and U.S. Plastic Lumber Ltd.
hereby grants a security interest in its assets to Coast
as more particularly set forth in the Loan Agreement
3. EAGLEBROOK AVAILABILITY.
(a) Loans based on the Collateral of the Eaglebrook Companies
shall be made to the separate accounts of such companies.
(b) Coast hereby agrees to advance an Asset Acquisition Loan
to the Eaglebrook Companies. Such Asset Acquisition Loan
shall:
(i) be amortized on a straight-line basis over 60
months and bear interest at a rate equal to the Prime Rate
plus 1.25%;
2
<PAGE> 46
(ii) be in an amount not to exceed the lesser of (x)
eighty percent (80%) of the Orderly Liquidation Value--In
Place (6 months) of the machinery and equipment of the
Eaglebrook Companies, as determined by and subject to the
prior completion of an appraisal conducted at the Eaglebrook
Companies' expense by Hilco and otherwise in form and
substance acceptable to Coast in its sole discretion, or (y)
Four Million One Hundred Fifty Thousand Dollars ($4,150,000);
and
(iii) be evidenced by a Secured Promissory Note in
form and substance satisfactory to Coast in its sole
discretion.
(c) The Eaglebrook Companies shall provide Coast with an
appraisal of the Inventory of the Eaglebrook Companies
within 90 days of the date that the Eaglebrook Companies
are added as borrowers under the Loan Agreement pursuant
to the terms hereof (the "Effective Date"), which
appraisal shall be conducted by Hilco at Proposed
Borrower's expense and shall be in form and substance
satisfactory to Coast in its sole discretion. Upon review
of said appraisal and based upon such factors as it
considers appropriate, Coast shall have the right in its
discretion reasonably exercised to reduce the 60% advance
rate against the Eligible Inventory of the Eaglebrook
Companies.
(d) The aggregate outstanding loans owing by the Eaglebrook
Companies to Coast at any one time shall not exceed
$7,000,000, subject to such reserves as Coast may
establish in its discretion as set forth in Section 5
below and in the Loan Agreement.
4. DEFAULTS UNDER MATERIAL CONTRACTS. Any default by the
Proposed Borrowers under the Eaglebrook Agreements or any agreements executed in
connection therewith, including, without limitation, the Convertible Secured
Debenture between U.S. Plastic Lumber Ltd., on the one hand, and Andrew
Stephens, Michael Dahl and Robert Thompson, on the other hand, dated as of
February __ , 1999 (the "Debenture"), shall constitute an Event of Default under
the Loan Agreement.
5. RESERVES. Coast shall have the right in its discretion to
establish the following reserves:
(a) A reserve against the borrowing availability of the
Eaglebrook Companies in an amount up to six months' rent
for the leased locations of the Eaglebrook Companies.
(b) A reserve against the borrowing availability of US Plastic
Lumber Ltd. for future payments required under the
Debenture.
6. MONITORING FEE. Under the terms of the Loan Agreement, the
Monitoring Fee is calculated based on the number of borrowers thereunder. If,
however, Proposed Borrower has not consolidated its monthly accounts receivables
agings so that the number of such agings is equal to or less than the number of
borrowers under the Loan Agreement no later than 6 months after the Effective
Date, the Section of the Schedule entitled "Section 3.2 -- Monitoring Fee" shall
at such time be automatically amended to provide that the Monitoring Fee shall
be based on the number of monthly accounts receivable agings or the number of
borrowers, whichever is greater, provided however, that the initial shift, if
any, to a Monitoring Fee based on the number of monthly accounts receivable
agings rather than borrowers 6 months after the Effective Date shall be
implemented incrementally over a three month period so that, by way of example,
if Proposed Borrower has not consolidated its accounts receivable agings as set
forth above, for the first month after the 6 month grace period the Monitoring
Fee shall equal the sum of (i) a fee based on the number of borrowers plus (ii)
one-third of the difference between the fee based on the number of accounts
receivable agings and the fee based on the number of borrowers.
3
<PAGE> 47
7. CONSOLIDATED TANGIBLE NET WORTH. Paragraph 6 of the Section
of the Schedule entitled "Section 8.1 - Other Provisions and Covenants" is
hereby amended and restated as follows:
"U. S. Plastics Lumber Corporation shall at all times maintain
a Consolidated Tangible Net Worth as follows:
(a) At all times up to and including February 27, 1999 -- not
less than 80% of the Consolidated Tangible Net Worth on
the Closing Date.
(b) On February 28, 1999 and at all times thereafter - not
less than 80% of the Consolidated Tangible Net Worth on
February 28, 1999."
8. CONDITIONS PRECEDENT. The effectiveness of this Amendment
is subject to Proposed Borrower's satisfaction of the following conditions:
(a) Proposed Borrower shall provide Coast and its
agents with all financial information, projections, audits,
budgets, business plans, cash flows and availability
projections requested by Coast showing the viability of
Proposed Borrower before and after the Eaglebrook Acquisition
and the Corporate Reorganization, all of which shall be
satisfactory to Coast in its sole discretion.
(b) The Eaglebrook Acquisition shall have been
completed in the form contemplated by the Eaglebrook
Agreements, and Proposed Borrower shall have provided Coast
with the Eaglebrook Agreements and any and all documents and
instruments executed or delivered or to be executed or
delivered in connection therewith, all of which shall be
satisfactory to Coast in its sole discretion.
(c) The Corporate Reorganization shall have been
completed in accordance with law and the articles of
incorporation and by-laws of the participating entities, and
Proposed Borrower shall have provided Coast with the merger
agreements, asset acquisition agreements, and/or stock
purchase agreements for the Corporate Reorganization and any
and all documents and instruments executed or delivered or to
be executed or delivered in connection therewith, all of which
shall be satisfactory to Coast in its sole discretion.
(d) Proposed Borrower shall execute and cause any
applicable third parties to execute any and all security
documents, including without limitation, security agreements,
guaranty agreements, subordination agreements, mortgages,
pledges, UCC financing statements, UCC amendments, and related
documents as requested by Coast and in form and substance
satisfactory to Coast in its sole discretion to maintain or
establish, as applicable, the first priority perfected status
of Coast's security interests in the assets of Proposed
Borrower. Without limiting the generality of the foregoing,
Coast shall have received duly executed Collateral
Intercreditor Agreements from the Eaglebrook Plastics
Shareholders and the Eaglebrook Products Shareholders in form
and substance satisfactory to Coast in its discretion (the
"Collateral Intercreditor Agreement"), including provisions,
without limitation, wherein (i) such shareholders agree to
subordinate their respective liens and security interests to
Coast's security interest in the assets of the Eaglebrook
Companies; and (ii) such shareholders agree to forbear from
exercising any rights under any security agreement or stock
pledge with respect to the assets or stock of the Eaglebrook
Companies for a period of no less than ninety (90) days after
notice to Coast.
4
<PAGE> 48
(e) Coast shall have received duly executed landlord
waivers for the facility premises of the Eaglebrook Companies
in form and substance satisfactory to Coast in its sole
discretion including, without limitation, provision that the
personal property of the Eaglebrook Companies may remain on
such premises and Coast may occupy such premises for up to six
months after any foreclosure or other exercise of rights by
Coast under or pursuant to the Loan Agreement.
(f) Proposed Borrower shall have caused the
establishment of such lockbox or blocked accounts as are
required by Coast in its sole discretion for the deposit by
the Eaglebrook Companies of all Collateral proceeds.
(g) In connection with the addition of the Eaglebrook
Companies and U.S. Plastic Lumber Ltd. as additional borrowers
under the Loan Agreement, each of the Eaglebrook Companies and
U.S. Plastic Lumber Ltd. shall have satisfied all of the
applicable conditions set forth in Section 5 of the Loan
Agreement, as determined by Coast in its sole discretion.
(h) Concurrent with Coast's additional advances
against the assets being acquired in connection with the
Eaglebrook Acquisition, the Eaglebrook Companies shall have
title to such assets free and clear of liens except for a
first priority lien and security interest in favor of Coast
and, subject to the Collateral Intercreditor Agreement, the
liens and security interests of the Eaglebrook Products
Shareholders and the Eaglebrook Plastics Shareholders.
(i) Coast shall have received a secured continuing
corporate guaranty by U.S. Plastic Lumber Finance Corp.
(j) Coast shall have received a continuing limited
personal guaranty in favor of Coast by Mark Alsentzer.
(i) The liability of the guarantor under the
guaranty shall be limited to an amount equal to the
outstanding Loans advanced to the Eaglebrook
Companies by Coast.
(ii) The guaranty shall terminate
automatically upon Coast's receipt of certified UCC
searches that demonstrate that Coast has a first
priority, perfected lien on all of the personal
property assets of the Eaglebrook Companies.
5
<PAGE> 49
(k) Coast shall have received a warrant in form and
substance satisfactory to Coast for 55,000 shares of common
stock of US Plastic Lumber Corp. with an exercise price of $5
per share and a exercise period of 2 years.
(l) Coast shall have received an opinion of
borrower's counsel regarding the Eaglebrook Acquisition and
the Corporate Reorganization in form and substance
satisfactory to Coast in its sole discretion, including,
without limitation, an opinion confirming the due
authorization, completion and conformity with applicable law
of the Eaglebrook Acquisition and the Corporate
Reorganization.
(m) No Event of Default shall have occurred and be
continuing.
9. MISCELLANEOUS. Each of the Loan Documents previously
executed by US Plastic Lumber IP Corp. or US Plastic Lumber Finance Corp. and
dated as of December __ , 1998 is hereby amended (i) to provide that it is dated
as of even date herewith and (ii) to the extent applicable, to include and
identify the Eaglebrook Companies as Borrowers under the Loan Agreement.
10. REAFFIRMATION. Except as modified by the terms herein, the
Loan Agreement and the other Loan Documents remain in full force and effect. If
there is any conflict between the terms and provisions of this Amendment and the
terms and provisions of the Loan Agreement or documents related thereto, the
terms and provisions of this Amendment shall govern.
11. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
12. GOVERNING LAW. This Amendment shall be governed by and
construed according to the laws of the State of California.
13. ATTORNEYS' FEES; COSTS; JURY TRIAL WAIVER. Proposed
Borrower agrees to pay, on demand and on a joint and several basis, all
attorneys' fees and costs incurred in connection with the negotiation,
documentation and execution of this Amendment. If any legal action or proceeding
shall be commenced at any time by any party to this Amendment in connection with
its interpretation or enforcement, the prevailing party or parties in such
action or proceeding shall be entitled to reimbursement of its reasonable
attorneys' fees and costs in connection therewith, in addition to all other
relief to which the prevailing party or parties may be entitled. Each of Coast
and Proposed Borrower hereby waives its right to a jury trial in any such action
or proceeding.
6
<PAGE> 50
The foregoing Third Amendment to Loan and Security Agreement
is hereby agreed and accepted:
EAGLEBROOK PLASTICS, INC. EAGLEBROOK PRODUCTS, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CARTERET BIOCYCLE CORPORATION CLEAN EARTH OF NEW CASTLE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CONSOLIDATED TECHNOLOGIES, INC. INTEGRATED TECHNICAL SERVICES, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
U.S. PLASTIC LUMBER FINANCE CORP. U.S. PLASTIC LUMBER IP CORP.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
U.S. PLASTIC LUMBER LTD. S&W WASTE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
7
<PAGE> 51
"Coast"
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank
By:_________________________________
Title:______________________________
Each of the undersigned hereby acknowledges and consents to
the foregoing Amendment, and agrees that the Continuing Guaranty executed by it
in favor of Coast is hereby amended by adding as borrowers thereunder the
Eaglebrook Companies and U.S. Plastic Lumber Ltd. and by deleting as borrowers
thereunder RPI Acquisition Corporation, Earth Care Products of Tennessee, Inc.,
Earth Care Products of the Midwest, Inc., Environmental Specialty Products,
Inc., EnviroPlastics Corporation, Chesapeake Plastic Lumber, Inc., Waste
Concepts, Incorporated, Green Horizon Environmental, Inc., GCI Acquisition
Corporation and Cycle Masters Corporation. Each of the undersigned agrees and
acknowledges that the Continuing Guaranty executed by it in favor of Coast as
modified in the preceding sentence remains in full force and effect.
EAGLEBROOK PLASTICS, INC. EAGLEBROOK PRODUCTS, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CARTERET BIOCYCLE CORPORATION CLEAN EARTH OF NEW CASTLE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CONSOLIDATED TECHNOLOGIES, INC. INTEGRATED TECHNICAL SERVICES, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
8
<PAGE> 52
U.S. PLASTIC LUMBER LTD. S&W WASTE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CLEAN EARTH, INC. U.S. PLASTIC LUMBER CORP.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
9
<PAGE> 53
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of the 26th day of February 1999, between Coast Business
Credit, a division of Southern Pacific Bank ("Coast"), U.S. Plastic Lumber Ltd.,
Carteret Biocycle Corporation, Clean Earth of New Castle, Inc., Consolidated
Technologies, Inc., Integrated Technical Services, Inc., S&W Waste, Inc.,
Eaglebrook Plastics, Inc. and Eaglebrook Products, Inc. (jointly and severally,
the "Borrower"), is made in reference to the following facts:
A. Borrower and Coast are parties to that certain Loan and Security
Agreement dated as of September 30, 1998, as amended (the "Loan Agreement");
B. Borrower and Coast have entered into that certain Third Amendment to
Loan and Security Agreement dated as of February 1, 1999 (the "Third Amendment";
the Third Amendment and all of the Loan Documents executed in connection
therewith are collectively referred to as the "Third Amendment Loan Documents").
NOW THEREFORE, in consideration of the foregoing and the terms
and conditions hereof, the parties do hereby agree as follows:
1. DEFINITIONS. Terms used herein, unless otherwise defined
herein, shall have the meanings given to them in the Loan Agreement.
2. GUARANTOR INDEBTEDNESS. The Loan Agreement is hereby
amended to provide that it shall be an Event of Default under the Loan Agreement
if:
(a) any Guarantor, as defined in the Loan Agreement, of any of
the Obligations, defaults under any instrument for
indebtedness now existing or hereafter arising; and
(b) such default has not been cured within the time period, if
any, permitted by the holder of the instrument and the
holder is permitted as a result of such default to
accelerate the indebtedness owed to it by such guarantor
in an amount in excess of $1,000,000, and
(c) the Borrower or the Guarantor have not cured the Default
on such indebtedness within 10 business days from its
Default
3. CONDITIONS PRECEDENT. The effectiveness of this Amendment
is subject to Borrower's satisfaction of the following conditions:
(a) Borrower shall have provided Coast with a subordination
agreement in form and substance acceptable to Coast in its
discretion reasonably exercised from each existing and
future creditor (excluding trade creditors, landlords,
lessors of leased equipment and lenders whose proceeds are
used to purchase equipment or to finance real estate) of
any guarantor of any of the Obligations, provided that no
subordination agreement shall be required from any such
creditor if the amount of all debt which has not been
subordinated to Coast (in form approved by Coast) is less
than $1,500,000 in the aggregate for all such creditors of
a specific guarantor. Without limiting the foregoing,
Coast shall have received (i) a subordination agreement in
form and substance acceptable to Coast in its discretion
with regard to those certain Convertible Debenture
Purchase Agreements dated December 22, 1998 and January
26, 1999 between US Plastic Lumber Corp., Halifax Fund
L.P., and Societe General; and (ii) an amendment to
intercreditor and subordination agreement in form and
substance acceptable to Coast in its discretion with
regard to the New Note in favor of Schultes.
<PAGE> 54
(b) No Event of Default shall have occurred and be continuing.
4. MISCELLANEOUS. Each reference in the Third Amendment Loan
Documents to the date of the Eaglebrook Agreements (as such term is defined in
the Third Amendment) is hereby amended to state the date of January 28, 1999.
Coast is hereby authorized to modify the Third Amendment Loan Documents, where
applicable, to reflect such amendment.
5. REAFFIRMATION. Except as modified by the terms herein, the
Loan Agreement and the other Loan Documents remain in full force and effect. If
there is any conflict between the terms and provisions of this Amendment and the
terms and provisions of the Loan Agreement or documents related thereto, the
terms and provisions of this Amendment shall govern.
6. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
7. GOVERNING LAW. This Amendment shall be governed by and
construed according to the laws of the State of California.
8. ATTORNEYS' FEES; COSTS; JURY TRIAL WAIVER. Borrower agrees
to pay, on demand and on a joint and several basis, all attorneys' fees and
costs incurred in connection with the negotiation, documentation and execution
of this Amendment. If any legal action or proceeding shall be commenced at any
time by any party to this Amendment in connection with its interpretation or
enforcement, the prevailing party or parties in such action or proceeding shall
be entitled to reimbursement of its reasonable attorneys' fees and costs in
connection therewith, in addition to all other relief to which the prevailing
party or parties may be entitled. Each of Coast and Borrower hereby waives its
right to a jury trial in any such action or proceeding.
The foregoing Fourth Amendment to Loan and Security Agreement
is hereby agreed and accepted:
EAGLEBROOK PLASTICS, INC. EAGLEBROOK PRODUCTS, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CARTERET BIOCYCLE CORPORATION CLEAN EARTH OF NEW CASTLE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
2
<PAGE> 55
CONSOLIDATED TECHNOLOGIES, INC. INTEGRATED TECHNICAL SERVICES, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
U.S. PLASTIC LUMBER LTD. S&W WASTE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
"Coast"
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank
By:_________________________________
Title:______________________________
Each of the undersigned hereby acknowledges and consents to
the foregoing Amendment, and agrees that the Continuing Guaranty executed by it
in favor of Coast remains in full force and effect.
EAGLEBROOK PLASTICS, INC. EAGLEBROOK PRODUCTS, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
U.S. PLASTIC LUMBER FINANCE CORP. U.S. PLASTIC LUMBER IP CORP.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
3
<PAGE> 56
CONSOLIDATED TECHNOLOGIES, INC. INTEGRATED TECHNICAL SERVICES, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
U.S. PLASTIC LUMBER LTD. S&W WASTE, INC.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
CLEAN EARTH, INC. U.S. PLASTIC LUMBER CORP.
By:_________________________________ By:________________________________
President or Vice President President or Vice President
4
<PAGE> 1
EXHIBIT 10.34
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("AGREEMENT") dated as of
December 22, 1998 between U.S. Plastic Lumber Corporation, a Nevada corporation
(the "COMPANY"), and each person or entity listed as an investor on SCHEDULE I
attached to this Agreement (each individually an "INVESTOR" and collectively
the "INVESTORS").
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors, and
the Investors wish to purchase from the Company, 5% Convertible Debentures due
December 22, 2003 (the "DEBENTURES"), in the aggregate principal amount of
$4,000,000 at an aggregate price of $4,000,000, having the rights and
privileges set forth in the Debentures in the form of EXHIBIT 1.1A attached
hereto (the "INITIAL ISSUANCE"), on the terms and conditions set forth herein;
and
WHEREAS, the Debentures will be convertible into shares ("COMMON
SHARES") of common stock, par value $.0001 of the Company ("COMMON STOCK"),
pursuant to the terms of the Debentures, and the Investors will have
registration rights with respect to such Common Shares and the Warrant Shares
(as defined herein), pursuant to the terms of that certain Registration Rights
Agreement to be entered into between the Company and the Investors
substantially in the form of EXHIBIT 4.2(f) hereto ("REGISTRATION RIGHTS
AGREEMENT"); and
WHEREAS, to induce the Investors to purchase the Debentures, the
Company has agreed to issue to the Investors warrants exercisable for 100,000
shares of Common Stock in the form attached as EXHIBIT 1.1B (the "WARRANTS";
and, together with the Debentures, the "SECURITIES");
WHEREAS, the Investors may elect or be required (by the Company) to
purchase from the Company additional Debentures (the "OPTION DEBENTURES") in
the aggregate principal amount of up to $4,000,000, pro rata to their
investments in the Initial Issuance, as further described herein;
WHEREAS, upon the issuance of the Option Debentures, the Company has
agreed to issue additional warrants exercisable for shares of Common Stock (the
"OPTION WARRANTS"; and together with the Option Debentures, the "OPTION
SECURITIES"), as further described herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE> 2
ARTICLE I
PURCHASE AND SALE OF DEBENTURES AND WARRANTS
Section 1.1 ISSUANCE OF DEBENTURES AND WARRANTS.
(a) INITIAL ISSUANCE. Upon the following terms and
conditions, the Company shall issue and sell to each Investor severally, and
each Investor severally shall purchase from the Company, the outstanding
principal amount of Debentures and the number of Warrants indicated next to
such Investor's name on SCHEDULE I attached hereto.
(b) PURCHASE PRICE. The purchase price for the Debentures to
be acquired by each Investor (the "PURCHASE PRICE") shall be the Purchase Price
set forth next to such Investor's name on SCHEDULE I.
(c) THE CLOSING.
(i) The closing of the purchase and sale of the
Debentures and the Warrants (the "CLOSING") in the Initial
Issuance, shall take place at the offices of Kleinberg,
Kaplan, Wolff & Cohen, P.C. ("INVESTORS' COUNSEL") or at such
other place as is mutually agreeable, at 10:00 am., local
time on the later of the following: (x) the date on which the
last to be fulfilled or waived of the conditions set forth in
Article IV hereof and applicable to the Closing shall be
fulfilled or waived in accordance herewith, or (y) such other
time and place and/or on such other date as the Investors and
the Company may agree. The date on which the Closing occurs
is referred to herein as the "CLOSING DATE".
(ii) On the Closing Date, the Company shall deliver to
each Investor (x) certificates (with the number of and
outstanding principal amount of such certificates requested
by such Investor) representing the Debentures purchased
hereunder by such Investor at the Closing registered in the
name of such Investor or its nominee and (y) the Warrants
registered in the name of Investor or its nominee in such
denominations as reasonably requested by such Investor, and
such Investor shall deliver to the Company the Purchase Price
for the Debentures purchased by such Investor hereunder by
wire transfer in immediately available funds to an account
designated in writing by the Company. The delivery of payment
by each Investor of the Purchase Price applicable to it as
set forth in this paragraph shall constitute a payment
delivered to the Company in
2
<PAGE> 3
satisfaction of such Investor's obligation to pay the
Purchase Price hereunder. In addition, each party shall
deliver all documents, instruments and writings required to
be delivered by such party pursuant to this Agreement at or
prior to the applicable Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to each of the
Investors as of the date hereof and on each Closing Date:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT.
The Company is a corporation duly incorporated and existing in good standing
under the laws of the State of Nevada and has the requisite corporate power to
own its properties and to carry on its business as now being conducted. The
Company does not have any direct or indirect subsidiaries other than the
subsidiaries listed on SCHEDULE 2.1(a) attached hereto. Except where
specifically indicated to the contrary, all references in this Agreement to
subsidiaries shall be deemed to refer to all direct and indirect subsidiaries
of the Company. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary other than those in which the failure so
to qualify would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT"
means any adverse effect on the business, operations, properties, prospects, or
financial condition of the entity with respect to which such term is used and
which is (either alone or together with all other adverse effects) material to
such entity and other entities controlling or controlled by such entity taken
as a whole, and any material adverse effect on the transactions contemplated
under this Agreement, the Registration Rights Agreement or any other agreement
or document contemplated hereby or thereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Warrants and the Registration Rights Agreement and to issue the
Debentures and Warrants in accordance with the terms hereof and thereof, (ii)
the execution and delivery of this Agreement, the Warrants and the Registration
Rights Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including the issuance of the Debentures, the
Common Shares and the Warrant Shares, have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Company or its Board of Directors (or any committee or subcommittee thereof) or
stockholders is required, (iii) this Agreement, the Warrants, the Debentures
and the Registration Rights Agreement have been duly executed and delivered by
the Company, and (iv) this Agreement, the Warrants, the Debentures and the
Registration Rights Agreement constitute valid and binding obligations of the
Company enforceable against the Company in accordance with
3
<PAGE> 4
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application.
(c) CAPITALIZATION. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock and 5,000,000 shares of
preferred stock; as of November 30, 1998 there were 17,802,649 shares of Common
Stock and 382,794 shares of preferred stock issued and outstanding; and
9,723,138 shares of Common Stock and no shares of preferred stock were reserved
for issuance to persons other than the Investors. All of the outstanding shares
of the Company's Common Stock and preferred stock have been validly issued and
are fully paid and nonassessable. Except as set forth in SCHEDULE 2.1(c), no
shares of capital stock are entitled to preemptive rights; and there are as of
November 30, 1998 outstanding options for 2,078,895 shares of Common Stock and
no outstanding warrants for shares of Common Stock (excluding the Warrants).
The Company's issued and outstanding preferred stock is, and will be, in all
respects junior to the Debentures. Except as set forth in SCHEDULE 2.1(c),
there are no other scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights exchangeable for or
convertible into, any shares of capital stock of the Company, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock of the Company or
options, warrants, scrip, rights to subscribe to, or commitments to purchase or
acquire, any shares, or securities or rights convertible or exchangeable into
shares, of capital stock of the Company. Except where such information has been
clearly set forth in the SEC Documents (as defined below), the Company agrees
to update the information contained in the preceding sentences of this Section
2.1(c) and in SCHEDULE 2.1(c) in a certificate delivered to each Investor on a
quarterly basis. Attached hereto as EXHIBIT 2.1(c)(i) is a true and correct
copy of the Company's Certificate of Incorporation (the "CHARTER"), as in
effect on the date hereof, and attached hereto as EXHIBIT 2.1(c)(ii) is a true
and correct copy of the Company's By-Laws, as in effect on the date hereof (the
"BY-LAWS").
(d) ISSUANCE OF COMMON SHARES. The Common Shares and the
shares of Common Stock issuable upon the exercise of the Warrants (the "WARRANT
SHARES") are duly authorized and reserved for issuance and, upon such
conversion in accordance with the Debentures and/or exercise in accordance with
the Warrants such Common Shares and Warrant Shares will be validly issued,
fully paid and non-assessable, free and clear of any and all liens, claims and
encumbrances, and entitled to be traded on the Nasdaq Small Cap Market ("NASDAQ
SCM") (or the American Stock Exchange, the New York Stock Exchange or the
Nasdaq National Market System, collectively with the Nasdaq SCM, the "APPROVED
MARKETS"), and the holders of such Common Shares and Warrant Shares shall be
entitled to all rights and preferences accorded to a holder of Common Stock.
The outstanding shares of Common Stock are currently listed on the Nasdaq SCM.
(e) NO CONFLICTS. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement and the Warrants by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby and the
4
<PAGE> 5
issuance of the Debentures and the Warrants do not and will not (i) result in a
violation of the Company's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which the Company or any of its subsidiaries is
a party (collectively, "COMPANY AGREEMENTS"), or (iii) result in a violation of
any federal, state, local or foreign law, rule, regulation, order, judgment or
decree (including Federal and state securities laws and regulations) applicable
to the Company or any of its subsidiaries or by which any property or asset of
the Company or any of its subsidiaries is bound or affected. The business of
the Company and its direct and indirect subsidiaries is being conducted in
material compliance with (i) its charter and bylaws, (ii) all Company
Agreements and (iii) all applicable laws, ordinances or regulations of any
governmental entity. The Company is not required under Federal, state, local or
foreign law, rule or regulation to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency
in order for it to execute, deliver or perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Debentures and the
Warrants or issue and sell the Debentures in accordance with the terms hereof
and issue the Common Shares upon conversion thereof and issue the Warrant
Shares on exercise of the Warrants and for the registration provisions provided
in the Registration Rights Agreement.
(f) SEC DOCUMENTS; NO NON-PUBLIC INFORMATION; FINANCIAL
STATEMENTS. The Common Stock of the Company is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
and the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange
Commission ("SEC") pursuant to the reporting requirements of the Exchange Act,
including material filed pursuant to Section 13(a) or 15(d), in addition to one
or more registration statements and amendments thereto heretofore filed by the
Company with the SEC (all of the foregoing including filings incorporated by
reference therein being referred to herein as the "SEC DOCUMENTS"). The Company
has delivered or made available to the Investors true and complete copies of
all SEC Documents (including, without limitation, proxy information and
solicitation materials and registration statements) filed with the SEC since
December 31, 1997. The Company has not directly or indirectly provided to the
Investors any material non-public information or any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The SEC Documents contain all material information concerning
the Company, and no event or circumstance has occurred which would require the
Company to disclose such event or circumstance in order to make the statements
in the SEC Documents not misleading on the date hereof or on the Closing Date
but which has not been so disclosed. The financial
5
<PAGE> 6
statements of the Company included in the SEC Documents comply as to form and
substance in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) PRINCIPAL EXCHANGE/MARKET. The principal market on which
the Common Stock is currently traded is the Nasdaq SCM.
(h) NO MATERIAL ADVERSE CHANGE. Since December 31, 1997, no
Material Adverse Effect has occurred or exists, and no event or circumstance
has occurred that with notice or the passage of time or both is reasonably
likely to result in a Material Adverse Effect with respect to the Company or
its subsidiaries.
(i) NO UNDISCLOSED LIABILITIES. The Company and its
subsidiaries have no liabilities or obligations not disclosed in the
Pre-Agreement SEC Documents (as defined below), other than those liabilities
incurred in the ordinary course of the Company's or its subsidiaries'
respective businesses since December 31, 1997, which liabilities, individually
or in the aggregate, do not or would not have a Material Adverse Effect on the
Company or its direct or indirect subsidiaries.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. To the best
knowledge of the Company, no material event or circumstance has occurred or
exists with respect to the Company or its direct or indirect subsidiaries or
their respective businesses, properties, prospects, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(k) NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, or, to its knowledge, any person acting on its or their behalf
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Securities Act of 1933, as amended (the
"ACT")) in connection with the offer or sale of the Debentures or Common
Shares.
(l) NO INTEGRATED OFFERING. Neither the Company, nor any of
its affiliates, nor to its knowledge any person acting on its or their behalf
has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Debentures, the Warrants or the Common Shares or
Warrant Shares under the Act.
6
<PAGE> 7
The issuance of the Debentures, Warrants, Common Shares, or
Warrant Shares to the Investors will not be integrated with any other issuance
of the Company's securities (past, current or future) which requires
stockholder approval under the rules of the Nasdaq SCM.
(m) FORM SB-2. The Company is eligible to file the
Registration Statement (as defined in the Registration Rights Agreement) on
Form SB-2 under the Act and rules promulgated thereunder, and Form SB-2 is
permitted to be used for the transactions contemplated hereby under the Act and
rules promulgated thereunder.
(n) INTELLECTUAL PROPERTY. The Company (and/or its
wholly-owned subsidiaries) owns or has licenses to use certain patents,
copyrights and trademarks ("INTELLECTUAL PROPERTY") associated with its
business. The Company and its subsidiaries have all intellectual property
rights which are needed to conduct the business of the Company and its
subsidiaries as it is now being conducted or as proposed to be conducted as
disclosed in the SEC Documents. The Company and its subsidiaries have no reason
to believe that the intellectual property rights which it owns are invalid or
unenforceable or that the use of such intellectual property by the Company or
its subsidiaries infringes upon or conflicts with any right of any third party,
and neither the Company nor any of its subsidiaries has received notice of any
such infringement or conflict. The Company and its subsidiaries have no
knowledge of any infringement of its intellectual property by any third party.
(o) SHAREHOLDER RIGHTS PLAN. None of the acquisition of
Debentures, Warrants, Common Shares or Warrant Shares nor the deemed beneficial
ownership of shares of Common Stock prior to, or the acquisition of such shares
pursuant to, the conversion of Debentures or the exercise of the Warrants will
in any event under any circumstance trigger the poison pill provisions of any
stockholders' rights or similar agreements, or a substantially similar
occurrence under any successor or similar plan.
(p) NO LITIGATION. Except as set forth in the Pre-Agreement
SEC Documents (as defined in Section 2.2(c) (i) below), no litigation or claim
(including those for unpaid taxes) against the Company or any of its
subsidiaries is pending or, to the Company's knowledge, threatened, and no
other event has occurred, which if determined adversely could reasonably be
expected to have a Material Adverse Effect on the Company or could reasonably
be expected to materially and adversely effect the transactions contemplated
hereby. The legal proceedings described in the Pre-Agreement SEC Documents will
not have an effect on the transactions contemplated hereby, and will not have a
Material Adverse Effect on the Company.
(q) BROKERS. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company or any Investor relating to this Agreement or
the transactions contemplated hereby, except for amounts owing to Ananda
Capital Management, which amounts shall be paid exclusively by the Company at
closing, pursuant to a separate agreement.
7
<PAGE> 8
(r) ACKNOWLEDGEMENT OF DILUTION. The number of shares of
Common Stock constituting Common Shares or Warrant Shares may increase
substantially in certain circumstances, including the circumstance where the
trading price of the Common Stock declines. The Company acknowledges that its
obligation to issue Common Shares upon conversion of Debentures and Warrant
Shares upon exercise of the Warrants is absolute and unconditional, regardless
of the dilution that such issuance may have on other shareholders of the
Company.
(s) OTHER INVESTORS. Except as set forth on SCHEDULE 2.1(s),
there are no outstanding securities issued by the Company that are entitled to
registration rights under the Act. Except as set forth in SCHEDULE 2.1(s),
there are no outstanding securities issued by the Company that are directly or
indirectly convertible into, exercisable into, or exchangeable for, shares of
Common Stock of the Company, or that have anti-dilution or similar rights that
would be affected by the issuance of the Debentures, the Common Shares, the
Warrants or the Warrant Shares.
(t) CERTAIN TRANSACTIONS. Except as disclosed in the
Pre-Agreement SEC Documents, none of the officers, directors, or employees of
the Company is presently a party to any transaction with the Company or any of
its subsidiaries (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
(u) PERMITS; COMPLIANCE. The Company and each of its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "COMPANY
PERMITS"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits
except for such Company Permits the failure of which to possess, or the
cancellation or suspension of which, would not, individually or in the
aggregate, have a material effect on the Company. To the best of its knowledge,
neither the Company nor any of its subsidiaries is in material conflict with,
or in material default or material violation of, any of the Company Permits.
The Company currently expects to, and knows of no reason why it should not,
receive a Beneficial Use Approval Order from the Pennsylvania Department of
Environmental Protection for the use of dredge material and municipal waste
incinerator ash mixed with pozzolanic grout ingredients for restoration of mine
site highwalls upon completion of its demonstration project with the
Pennsylvania Department of Environmental Protection. The contract between the
Company and Lehigh Coal and Navigation Company, dated April 30, 1998, is in
full force and effect and there are no breaches by either party thereof. Since
December 31, 1997, neither the Company nor any of its subsidiaries has received
any notification with respect to possible material conflicts, material defaults
or material violations of applicable laws.
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(v) INSURANCE. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its direct and
indirect subsidiaries are engaged. Neither the Company nor any such subsidiary
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
without a significant increase in cost.
(w) INTERNAL ACCOUNTING CONTROLS. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(x) ENVIRONMENTAL MATTERS. Except as otherwise disclosed in
the Pre-Agreement SEC Documents, the Company and each of its subsidiaries is in
compliance in all material respects with all applicable state and federal
environmental laws and no event or condition has occurred that may interfere
with the compliance by the Company or any of its subsidiaries with any
environmental law or that may give rise to any liability under any
environmental law that, individually or in the aggregate, would have a Material
Adverse Effect.
(y) SOLVENCY.
(i) Based on the financial condition of the Company as
of the Closing Date, the Company's fair saleable value of its
assets exceeds the amount that will be required to be paid on
or in respect of the Company's existing debts and other
liabilities (including contingent liabilities) as they
mature.
(ii) Based on the financial condition of the Company as
of the Closing Date, the Company's assets do not constitute
unreasonably small capital to carry out its business as now
conducted and as proposed to be conducted including the
Company's capital needs taking into account the particular
capital requirements of the business conducted by the
Company, and projected capital requirements and capital
availability thereof.
(iii) The Company does not intend to incur debts beyond
its ability to pay such debts as they mature (taking into
account the timing and amounts
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of cash to be payable on or in respect of its debt). Based on
the financial condition of the Company as of the Closing
Date, the current cash flow of the Company, together with the
proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses
of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be
paid.
(iv) The Company does not intend, and does not believe,
that final judgments against the Company in actions for money
damages will be rendered at a time when, or in an amount such
that, the Company will be unable to satisfy any such
judgments promptly in accordance with their terms (taking
into account the maximum reasonable amount of such judgments
in any such actions and the earliest reasonable time at which
such judgments might be rendered). The Company's cash flow,
after taking into account all other anticipated uses of the
cash (including the payments on or in respect of debt
referred to in paragraph (iii) above), will at all times be
sufficient to pay all such judgments promptly in accordance
with their terms.
(v) Neither the Company nor any of its subsidiaries is
subject to any bankruptcy, insolvency or similar proceeding.
(z) TAXES. All federal, state, city and other tax returns,
reports and declarations required to be filed by or on behalf of the Company
and each of its subsidiaries have been filed and such returns are complete and
accurate and disclose all taxes (whether based upon income, operations,
purchases, sales, payroll, licenses, compensation, business, capital,
properties or assets or otherwise) required to be paid in the periods covered
thereby. Copies of all such returns have been provided to the Investors. All
taxes shown on such returns and any deficiency assessments, penalties and
interest have been paid. All taxes required to be withheld by or on behalf of
the Company or any such subsidiary in connection with amounts paid or owing to
any employees, independent contractor, creditor or other party have been
withheld, and such withheld taxes have either been duly and timely paid to the
proper governmental authorities or set aside in accounts for such purposes.
(aa) TITLE TO PROPERTIES; ENCUMBRANCES. SCHEDULE 2.1(aa)
contains a complete and accurate list of all real property, leaseholds, or
other interests therein owned by the Company and its subsidiaries. Each of the
Company and its subsidiaries owns (with good and marketable title in the case
of real property) all the properties and assets (whether real, personal, or
mixed and whether tangible or intangible) that it purports to own. All material
properties and assets listed on SCHEDULE 2.1(aa) are free and clear of all
encumbrances and are not, in the case of real property, subject to any rights
of way, building use restrictions, exceptions, variances, reservations or
limitations of any nature, except, with respect to all such properties and
assets, (a) mortgages or security interests shown on SCHEDULE 2.1(aa) as
securing specified liabilities or obligations, with respect to which no default
(or event that, with notice or lapse of time or both, would constitute a
default) exists, (b) liens for current taxes not yet due, and (c) with respect
to real property, (i) minor imperfections of title, if any, none of which is
substantial in amount, materially detracts
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from the value or impairs the use of the property subject thereto, or impairs
the operations the Company or any of its subsidiaries, and (ii) zoning laws and
other land use restrictions (including, but not limited to, easments of
records) that do not impair the present or anticipated use of the property
subject thereto. All buildings, plans, and structures owned by the Company or
any of its subsidiaries lie wholly within the boundaries of the real property
owned by the Company or such subsidiaries, and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
person.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of
the Investors, severally (as to itself) and not jointly, hereby makes the
following representations and warranties to the Company as of the date hereof
and on the Closing Date:
(a) AUTHORIZATION; ENFORCEMENT. (i) Such Investor has the
requisite power and authority to enter into and perform this Agreement and the
Registration Rights Agreement and to purchase the Debentures being sold
hereunder and to acquire the Warrant, (ii) the execution and delivery of this
Agreement and the Registration Rights Agreement by such Investor and the
consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate or partnership action, and
(iii) this Agreement and the Registration Rights Agreement constitute valid and
binding obligations of such Investor enforceable against such Investor in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of creditors'
rights and remedies or by other equitable principles of general application.
(b) NO CONFLICTS. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement and the performance under
the Debentures and Warrants and the consummation by such Investor of the
transactions contemplated hereby and thereby do not and will not (i) result in
a violation of such Investor's organizational documents, or (ii) conflict with
any agreement, indenture or instrument to which such Investor is a party, or
(iii) result in a material violation of any law, rule, or regulation, or any
order, judgment or decree of any court or governmental agency applicable to
such Investor. Such Investor is not required to obtain any consent or
authorization of any governmental agency in order for it to perform its
obligations under this Agreement, the Registration Rights Agreement, the
Warrants or the Debentures.
(c) INVESTMENT REPRESENTATIONS.
(i) INFORMATION. The Company has furnished such
Investor with its annual report on Form 10-K for its fiscal
year ended December 31, 1997 (the "FISCAL YEAR END"), its
quarterly reports on Form 10-Q for the fiscal quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998, and all
other reports or documents filed by the Company pursuant to
Section 13(a) or 15(d) of the Exchange Act prior to the
Closing Date (the "PRE-AGREEMENT SEC DOCUMENTS").
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(ii) ACCESS TO OTHER INFORMATION. Such Investor
acknowledges that the Company has made available to such
Investor the opportunity to examine such additional documents
from the Company and to ask questions of, and receive full
answers from, the Company concerning, among other things, the
Company, its financial condition, its management, its prior
activities and any other information which such Investor
considers relevant or appropriate in connection with entering
into this Agreement.
(iii) RISKS OF INVESTMENT. Such Investor acknowledges
that the Debentures have not been registered under the Act.
Such Investor is familiar with the provisions of Rule 144 and
understands that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration
under the Act or some other exemption from the registration
requirements of the Act will be required in order to dispose
of the Debentures, and that such Investor may be required to
hold its Debentures received under this Agreement for a
significant period of time prior to reselling them, subject
to the Company successfully registering the Common Shares
pursuant to the Registration Rights Agreement. Such Investor
is capable of assessing the risks of an investment in the
Debentures and is fully aware of the economic risks thereof.
Such Investor acknowledges that the Company's operating
results have in the past and may in the current period and in
future periods not meet the expectations of securities
analysts and that failure to meet such expectations would be
likely to have a material adverse effect on the trading price
and salability of the Common Shares.
(iv) INVESTMENT REPRESENTATION. Such Investor is
purchasing the Debentures and the Warrants for its own
account and not with a view to distribution in violation of
any securities laws. Such Investor has no present intention
to sell the Debentures, Warrants, Common Shares, or Warrant
Shares in violation of federal or state securities laws and
such Investor has no present arrangement (whether or not
legally binding) to sell the Debentures, Warrants, Common
Shares or Warrant Shares to or through any person or entity;
PROVIDED, however, that by making the representations herein,
such Investor does not agree to hold the Debentures,
Warrants, Common Shares or Warrant Shares for any minimum or
other specific term and reserves the right to dispose of the
Debentures, Warrants, Common Shares or Warrant Shares at any
time in accordance with federal and state securities laws
applicable to such disposition.
(v) RESTRICTED SECURITIES. It acknowledges and
understands that the terms of Initial Issuance have not been
reviewed by the SEC or by any state securities authorities
and that the Debentures have been issued in reliance on the
certain exemptions for non-public offerings under the Act,
which exemptions depend upon, among other things, the
representations made and information furnished by such
Investor, including the bona fide nature of such Investor's
investment intent as expressed above.
(vi) ACCURACY OF INFORMATION. All information that such
Investor provides to the Company hereunder is correct and
complete as of the date set forth above.
(vii) ABILITY TO BEAR ECONOMIC RISK. It is an
"accredited" investor, and that it (i) is able to bear the
economic risk of its investment in the Debentures, (ii) is
able
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to hold the Debentures for an indefinite period of time,
(iii) can afford a complete loss of its investment in the
Debentures and (iv) has adequate means of providing for its
current needs.
(viii) NO PUBLIC SOLICITATION. At no time was such
Investor presented with or solicited by any general mailing,
leaflet, public promotional meeting, newspaper or magazine
article, radio or television advertisement, or any other form
of general advertising or general solicitation in connection
with the Initial Issuance.
(ix) RELIANCE BY THE COMPANY. Such Investor understands
that the Debentures and Warrant are being offered and sold in
reliance on a transactional exemptions from the registration
requirements of federal and state securities laws and that
the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of such Investor set forth herein in order to
determine the applicability of such exemptions and the
suitability of such Investor to acquire the Debentures and
Warrants.
(d) BROKERS. Such Investor has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees
or similar payments by the Company relating to this Agreement or the
transactions contemplated hereby.
ARTICLE III
COVENANTS
Section 3.1 REGISTRATION AND LISTING; EFFECTIVE REGISTRATION. Until
the second anniversary of the issuance of the Debentures and the Warrants (or,
if applicable, the second anniversary of the issuance of Option Securities),
the Company will cause the Common Stock issuable upon the exercise of the
Securities and the Option Securities to continue at all times to be registered
under Section 12(g) of the Exchange Act, will comply in all respects with its
reporting and filing obligations under the Exchange Act, and will not take any
action or file any document (whether or not permitted by the Exchange Act or
the rules thereunder) to terminate or suspend such reporting and filing
obligations. Until such time as no Debentures or Warrants (or, if applicable,
the Option Securities) are outstanding, the Company shall continue the listing
or trading of the Common Stock on the Nasdaq SCM or one of the other Approved
Markets and comply in all respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the Approved Market on which the
Common Stock is listed. The Company shall cause the Common Stock to be listed
on the Nasdaq SCM no later than the registration of the Common Stock under the
Act, and at all times shall continue such listing(s) on one of the Approved
Markets. As used herein and in the Registration Rights Agreement, the Debenture
and the Warrants, the term "EFFECTIVE Registration" shall mean that all
registration obligations of the Company pursuant to the Registration Rights
Agreement and this Agreement have been satisfied, such registration is not
subject to any suspension or stop order, the prospectus for the Common Stock
issuable upon conversion and/or exercise of the Securities and the Option
Securities is current and such shares of Common Stock are listed for trading on
one of the Approved
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Markets and such trading has not been suspended for any reason, none of the
Company or any direct or indirect subsidiary of the Company is subject to any
bankruptcy, insolvency or similar proceeding, and no Interfering Event (as
defined in Section 2(b) of the Registration Rights Agreement) exists.
Section 3.2 DEBENTURES ON CONVERSION AND WARRANTS ON EXERCISE.
(a) Upon any conversion by an Investor (or then holder of
Debentures) of the Debentures pursuant to the terms thereof, the Company shall
issue and deliver to such Investor (or holder) within three (3) Trading Days
(as such term is defined in the Debenture) of the Conversion Date (as defined
in the Debenture), a new certificate or certificates for the number of
Debentures which such Investor (or holder) has not yet elected to convert but
which are evidenced in part by the certificate(s) submitted to the Company in
connection with such conversion (with the number of and denomination of such
new certificate(s) designated by such Investor or holder).
(b) Upon any partial exercise by an Investor (or then holder
of the Warrants) of the Warrants, the Company shall issue and deliver to such
Investor (or holder) within three (3) days of the date on which such Warrants
are exercised, a new Warrant or Warrants representing the number of adjusted
Warrant Shares, in accordance with the terms of Section 2 of the Warrants.
Section 3.3 REPLACEMENT DEBENTURES AND WARRANTS.
(a) The certificate(s) representing the Debentures held by
any Investor (or then holder) may be exchanged by such Investor (or such
holder) at any time and from time to time for certificates with different
denominations representing an equal aggregate number of Debentures, as
requested by such Investor (or such holder) upon surrendering the same. No
service charge will be made for such registration or transfer or exchange.
(b) The Warrants will be exchangeable at the option of the
Investor (or then holder of the Warrants) at the office of the Company for
other Warrants of different denominations entitling the holder thereof to
purchase in the aggregate the same number of Warrant Shares as are purchasable
under such Warrants. No service charge will be made for such transfer or
exchange.
Section 3.4 EXPENSES. The Company shall pay in immediately available
funds, at the Closing and promptly upon receipt of any further invoices
relating to same, all reasonable due diligence fees and expenses and attorneys'
fees and expenses of the Investors' Counsel, incurred by the Investors in
connection with the preparation, negotiation, execution and delivery of this
Agreement, the Registration Rights Agreement, the Debentures, the Warrants and
the related agreements and documents and the transactions contemplated
hereunder and thereunder. At Closing, the Company shall pay the amount due for
such fees and expenses (which may include fees and expenses estimated to be
incurred for completion of the transaction including post-closing matters). In
the event such amount is ultimately less than the actual fees and expenses, the
Company shall promptly pay such deficiency
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upon receipt of an invoice regarding same. In the event the Company issues
Option Securities pursuant to the exercise of the Company Put Option or the
Investor Call Option, the Company shall pay in immediately available funds all
of the fees and expenses of Investors' Counsel related to such issuance in
accordance with all of the same terms and conditions in this paragraph relating
to the issuance of the Securities in the Initial Issuance.
Section 3.5 SECURITIES COMPLIANCE. The Company shall notify the SEC
and the Nasdaq SCM, in accordance with their requirements, of the transactions
contemplated by this Agreement, the Debenture, the Registration Rights
Agreement and the Warrants, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Debentures hereunder, the
Common Shares issuable upon conversion thereof, the Warrants and the Warrant
Shares issuable upon exercise of the Warrants.
Section 3.6 DIVIDENDS OR DISTRIBUTIONS; PURCHASES OF EQUITY
SECURITIES. So long as any Debentures or Warrants remain outstanding, the
Company agrees that it shall not (a) declare or pay any dividends or make any
distributions to any holder or holders of Common Stock, or (b) purchase or
otherwise acquire for value, directly or indirectly, any shares of Common Stock
or other equity security of the Company; PROVIDED that the Company may purchase
or acquire shares of Common Stock so long as the Company (i) purchases or
acquires such shares on the open market or pursuant to a tender offer directed
to all of the Company's shareholders and (ii) does not utilize the proceeds of
the issuances of the Debentures and/or the Option Debentures for such purpose.
Section 3.7 NOTICES. The Company agrees to provide all holders of
Debentures and Warrants with copies of all notices and information, including
without limitation notices and proxy statements in connection with any
meetings, that are provided to the holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
Common Stock holders.
Section 3.8 USE OF PROCEEDS. The Company agrees that the proceeds
received by the Company from the sale of the Debentures hereunder shall be used
for working capital purposes.
Section 3.9 NOTIFICATION OF ADDITIONAL FINANCINGS; ADJUSTMENTS.
(a) Until the expiration of twelve (12) months from the
Closing Date, the Company shall provide reasonable advance notice to the
Investors of its intentions to pursue any transaction, the purpose of which is
to provide capital to the Company, in consideration of which the Company will
sell or otherwise issue or deliver or dispose of any shares of Common Stock or
other equity securities or any securities which are convertible into or
exchangeable for shares of its Common Stock or other equity securities or any
convertible or exchangeable security, or any warrants or other rights to
subscribe for or to purchase or any options for the purchase of shares of
Common Stock or other equity securities (such transactions are referred to as
"APPLICABLE FINANCING TRANSACTIONS"). The Company
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agrees to use reasonable efforts to provide the Investors with the opportunity
to provide the financing in such Applicable Financing Transactions.
(b) If at any time within twelve (12) months from the Closing
Date the Company issues Common Stock (or securities or rights exercisable or
exchangeable for, or convertible into, Common Stock) in a private placement at
a discount greater (or in the Investor's judgment more favorable to the
purchaser thereof) than the discount specified in Section 5(c) of the
Debentures or at a ceiling price less than the Conversion Price (as defined in
the Debentures and as adjusted pursuant to the terms thereof), then the
Debentures will automatically (at the Investor's request) be adjusted to
provide for such greater discount or lower or more favorable Conversion Price,
as applicable.
Section 3.10 RESERVATION OF STOCK ISSUABLE UPON CONVERSION AND UPON
EXERCISE OF THE WARRANTS. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the Debentures and the exercise of
the Warrants, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Debentures and
the full exercise of the Warrants and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all the then outstanding Debentures and the full exercise of the
Warrants, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including without limitation engaging in best efforts to obtain the requisite
shareholder approval. Without in any way limiting the foregoing, the Company
agrees to reserve and at all times keep available solely for purposes of
conversion of Debentures and the exercise of the Warrants such number of
authorized but unissued shares of Common Stock that is at least equal to 200%
of the aggregate shares issuable upon conversion of Debentures, and 200% of the
aggregate shares issuable on exercise of Warrants, which number may be reduced
by the number of Common Shares or Warrant Shares actually delivered pursuant to
conversion of Debentures or exercise of the Warrants and shall be appropriately
adjusted for any stock split, reverse split, stock dividend or reclassification
of the Common Stock. If the Company falls below the reserves specified in the
immediately preceding sentence and does not cure such non-compliance within 30
days of its start, then the Investors will be entitled to the discount
adjustments specified in Section 2(b)(i) of the Registration Rights Agreement.
If at any time the number of authorized but unissued shares of Common Stock is
not sufficient to effect the conversion of all the then outstanding Debentures
or the full exercise of the Warrants, the Investors shall be entitled to, INTER
ALIA, the premium price redemption rights provided in the Registration Rights
Agreement.
Section 3.11 BEST EFFORTS. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article IV of this
Agreement.
Section 3.12 FORM D; BLUE SKY LAWS. The Company agrees to file a Form
D with respect to the Debentures, Warrants, Common Shares and Warrant Shares,
as required under Regulation D and to provide a copy thereof to each Investor
promptly after such filing.
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The Company shall, on or before each Closing Date, take such action as the
Company shall have reasonably determined is necessary to qualify the
Debentures, Warrants, Common Shares and Warrant Shares for sale to the
Investors at the applicable Closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Investor on or prior to the Closing Date.
Section 3.13 NO SENIOR INDEBTEDNESS; LIMITATION ON ISSUANCE OF EQUITY.
(a) Until the six month anniversary of the Closing Date, the
Company agrees that neither the Company nor any direct or indirect subsidiary
of the Company shall create, incur, assume, guarantee, secure or in any manner
become liable in respect of any indebtedness, or permit any liens, claims or
encumbrances to exist against the Company or any direct or indirect subsidiary
of the Company or any of their assets, unless junior to the Debentures in all
respects, except for (i) trade payables incurred in the ordinary course of
business consistent with past practices, (ii) indebtedness incurred in
connection with the acquisition by the Company of another entity (or any assets
of such entity), and (iii) except for a working capital facility which shall
not exceed $40.0 million.
(b) Until the Registration Statement (as defined in the
Registration Rights Agreement) has been declared effective by the SEC and the
Common Shares and the Warrant Shares are subject to Effective Registration,
neither the Company nor any of its subsidiaries will issue any equity
securities or instruments or rights convertible into or exchangeable or
exercisable for any equity securities.
Section 3.14 DELISTING; BEST EFFORTS. If a conversion of a Debenture
for Common Shares by an Investor could result in the Company being delisted
from the Nasdaq SCM for issuing in excess of 20% of its outstanding Common
Stock to the Investors without the approval of the Company's shareholders, then
the Company must redeem any and all Debentures covered by the applicable
Conversion Notice (as defined in the Debentures) and any and all Debentures
that would, if a Conversion Notice for all Debentures were then delivered,
result in the Company being subject to such delisting, at a price equal to 130%
of the Outstanding Principal Amount (as defined in the Debentures) plus accrued
but unpaid interest and default payments in effect at that time. The Company
will use its best efforts to obtain promptly shareholder approval pursuant to
NASD Rule 4460(i) authorizing the issuance of all Common Shares and Warrant
Shares issuable upon the conversion of any Debentures or the exercise of any
Warrants, including by calling a special meeting of such shareholders and
having the Company's Board of Directors recommend such approval in a proxy
statement.
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Section 3.15 ADDITIONAL ISSUANCE.
(a) In the event that (unless any of the following conditions
shall have been waived by the Investors):
(i) the closing bid price of a share of Common Stock on
the principal Approved Market has been 130% of the Initial
Price (as such term is defined in the Debentures; such
Initial Price being subject to the same adjustments as may
from time to time be made to the Conversion Price in the
Debentures) or more for the 10 consecutive Trading Days
preceding the date of the notice referred to below; and
(ii) there is, and has been for each of the preceding
60 Trading Days, Effective Registration; and
(iii) there are not, and have not been in any of the
preceding 60 Trading Days, any Interfering Events (as such
term is defined in the Registration Rights Agreement); and
(iv) no Event of Default (as defined in the Debentures)
shall have occurred, be likely to occur or be threatened; and
(v) the average of the aggregate market value of all
the shares of Common Stock trading on the principal Approved
Market for each of the 60 preceding Trading Days (exclusive
of "block trades", which shall mean trades in excess of
20,000 shares of Common Stock) shall be in excess of
$375,000; and
(vi) the Company shall have a net worth (as defined
under U.S. Generally Accepted Accounting Principles) of at
least $20.0 million, as certified in writing to the Investors
by the chief financial officer of the Company; and
(vii) there have been no breaches by the Company that
have not been fully cured under this Agreement, the
Registration Rights Agreement, the Debentures or the
Warrants; and
(viii) all the Company's representations and warranties
contained in this Agreement, the Registration Rights
Agreement, the Debentures and the Warrants shall continue to
be true (in all material respects), and all the Company's
covenants contained in this Agreement, the Registration
Rights Agreement, the Debentures and the Warrants shall have
been performed when and as required, all as certified in
writing by the chief financial officer of the Company; and
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(ix) the issuance of all Common Shares issuable upon
conversion of the Debentures (including the Debentures
issuable pursuant to this Section 3.15) and Warrant Shares
issuable upon exercise of the Warrants (including the Option
Warrants) have been approved by the shareholders of the
Company pursuant to NASD Rule 4460(i) (where such rule is
applicable);
THEN (x) the Investors shall have a right to purchase (the "INVESTOR CALL
OPTION") up to $4.0 million of Option Debentures, or (y) the Company may compel
the Investors to purchase (the "COMPANY PUT OPTION") up to $3.0 million of
Option Debentures, in each case, upon written notice, for immediately available
funds, in accordance with the procedures described below; PROVIDED that neither
the Company nor the Investors may exercise the options referred to in this
paragraph, if such exercise would result in the issuance of an aggregate
principal amount of Option Debentures in excess of $4.0 million. Upon the
issuance of Option Debentures pursuant to the exercise of the Investor Call
Option or the Company Put Option, the Company shall issue to the Investors (pro
rata in accordance with the percentages of total Option Debentures each
Investor shall have purchased) Option Warrants for the purchase of 25,000
shares of Common Stock (such number of shares to be subject to adjustment in a
manner consistent with the provisions adjusting the number of shares issuable
under the Warrant upon the occurrence of certain events) per $1.0 million
principal amount of Option Debentures issued to the Investors.
(b) The Investors may exercise the Investor Call Option under
Paragraph (a) of this Section 3.15 on only one occasion and only during the
period beginning on the Closing Date and expiring on the day after the second
anniversary of the Closing Date. In connection with the exercise of the
Investor Call Option, the Investors may waive any or all of the conditions set
forth in paragraph (a). Upon receipt by the Company of written notice from an
Investor exercising its right to purchase additional Debentures, the Company
shall issue to such Investor within five (5) days such additional Debentures.
Each Investor shall only be entitled to purchase a percentage of the total
Option Debentures subject to the Investor Call Option (which is equal to $4.0
million) equal to the percentage it purchased of the total principal amount of
the Debentures purchased in the Initial Issuance; PROVIDED that each Investor
may assign its right to purchase Option Debentures to any other Investor
without the consent of the Company or any other Investor.
(c) The Company may exercise the Company Put Option on only
one occasion and only during the period (i) beginning on the later of (x) the
six month anniversary of the Closing Date and (y) 60 Trading Days after the
Registration Statement (as defined in the Registration Rights Agreement) shall
have first become effective and (ii) expiring on the day after the first
anniversary of the Closing Date. Upon receipt by the Investors of written
notice of the Company exercising its right to compel Investors to purchase
additional Debentures, the Investors shall use best efforts to purchase the
additional Debentures within 10 Business Days; PROVIDED that the Investors
shall not be obligated to purchase additional Debentures if the closing bid
price of a share of Common Stock for any Trading Day during the period between
the Investors' receipt of such notice and the scheduled closing of such
purchase fails to reach 130% of the Initial Price. If the
19
<PAGE> 20
Company shall exercise the Company Put Option for $3.0 million of Option
Debentures, the Investors may elect to purchase an additional $1.0 million of
Option Debentures at the time of the issuance of such Option Debentures. Option
Debentures shall be purchased by the Investors in proportion to their purchases
of the Debentures at the Closing. The obligations of the Investors to purchase
Debentures under Paragraphs (a) and (c) of this Section 3.15 shall be in all
respects several and not joint.
(d) The Option Securities issued pursuant to the exercise of
the rights set forth in this Section 3.15 shall be issued pursuant to
documentation (including, without limitation, a Purchase Agreement and a
Registration Rights Agreement) that is the same in all material respects as the
documentation pursuant to which the Debentures and Warrants are issued. In
addition, the Option Securities shall be subject to the same terms as the
Securities issued on the Closing Date; PROVIDED that (i) the conversion price
applicable to the Option Debentures shall be the lesser of (x) 110% of the
lowest sales price of a share of Common Stock during the five (5) Trading Days
prior to the date of the issuance of the Option Debentures and (y) 90% of the
lowest trading price of the Common Stock on the principal trading market for
such Common Stock during the four (4) Trading Days prior to but not including
the conversion date of such Debentures and (ii) the maturity date of the Option
Debentures shall be the fifth anniversary of the issuance of such Debentures.
Section 3.16 INVESTOR'S OPTION TO COMPEL REPURCHASE OF A PORTION OF
ITS DEBENTURES. Beginning on the six month anniversary of the Closing Date,
Halifax Fund, L.P. (or any assignee thereof in accordance with the terms of
this Agreement and the Debentures; each such entity is referred to herein as a
"PALLADIN INVESTOR") shall have the right in its sole discretion to sell to the
Company its Debentures or Option Debentures at a price in immediately available
funds (the "PREMIUM REDEMPTION PRICE") equal to 1.1 times (i.e., 110% of) the
outstanding principal amount of such Debentures, plus any accrued but unpaid or
unrecognized interest or default payments; PROVIDED that the Company shall not
be required to repurchase more than an aggregate of $1.0 million principal
amount of Debentures pursuant to this Section. Payment of such amount shall be
due and payable within five days of demand therefor, which demand shall be
revocable by the relevant Palladin Investor at any time prior to its actual
receipt of the Premium Redemption Price.
ARTICLE IV
CONDITIONS TO CLOSINGS
Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
SELL THE DEBENTURES. The obligation hereunder of the Company to issue and/or
sell the Debentures to the Investors at the Closing (unless otherwise
specified) is subject to the satisfaction, at or before the Closing, of each of
the applicable conditions set forth below. These conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion.
20
<PAGE> 21
(a) ACCURACY OF THE INVESTORS' REPRESENTATIONS AND
WARRANTIES. The representations and warranties of each Investor will be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties as of an earlier date, which will be true and correct in all
material respects as of such date).
(b) PERFORMANCE BY THE INVESTORS. Each Investor shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by such Investor at or prior to the Closing.
(c) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement or the
Debentures or the Warrants.
Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTORS TO
PURCHASE THE DEBENTURES. The obligation hereunder of each Investor to acquire
and pay for the Debentures at the Closing (unless otherwise specified) is
subject to the satisfaction, at or before the Closing, of each of the
applicable conditions set forth below. These conditions are for each Investor's
benefit and may be waived by each Investor at any time in its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties as of an
earlier date, which shall be true and correct in all material respects as of
such date).
(b) PERFORMANCE BY THE COMPANY. The Company shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Company at or prior to the Closing.
(c) NASDAQ SCM. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the SEC
or the Nasdaq SCM (or other Approved Market), and trading in securities
generally as reported by the Nasdaq SCM (or other Approved Market) shall not
have been suspended or limited, and the Common Stock shall not have been
delisted from the Nasdaq SCM (or any other Approved Market where they are
currently listed), and the market value of the outstanding Common Stock shall
not have decreased below $4.00 per share.
(d) NO INJUNCTION. No statute, rule, regulation, executive,
judicial or administrative order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any of
the transactions contemplated by this Agreement or the Registration Rights
Agreement or the Debenture or the Warrants.
21
<PAGE> 22
(e) OPINION OF COUNSEL. At the Closing, the Investors shall
have received an opinion of the general counsel of the Company, Bruce C.
Rosetto, in the form attached hereto as EXHIBIT 4.2(E) and such other opinions,
certificates and documents as the Investors or their counsel shall reasonably
require incident to the Closing.
(f) REGISTRATION RIGHTS AGREEMENT. The Company and the
Investors shall have executed and delivered the Registration Rights Agreement
in the form and substance of EXHIBIT 4.2(F) attached hereto.
(g) ADVERSE CHANGES. Except as otherwise disclosed in the
Pre-Agreement SEC Documents, since December 31, 1997, no event which had or is
likely to have, in the reasonable judgment of the Investors, a Material Adverse
Effect on the Company or any of its direct or indirect subsidiaries shall have
occurred.
(h) OFFICER'S CERTIFICATE. The Company shall have delivered
to the Investors a certificate in form and substance satisfactory to the
Investors and the Investors' Counsel, executed by an officer of the Company,
certifying as to satisfaction of closing conditions, incumbency of signing
officers, and the true, correct and complete nature of the Charter, By-Laws,
good standing and authorizing resolutions of the Company.
(i) DEBENTURES AND WARRANTS. The Investors shall have
received certificates representing the Debentures and Warrants in the form and
substance of EXHIBIT 1.1A and EXHIBIT 1.1B hereto.
(j) DUE DILIGENCE. Each Investor shall have completed its
financial, accounting, operational and legal due diligence in a manner
satisfactory to such Investor in its sole discretion.
ARTICLE V
LEGEND AND STOCK
The Company will issue one or more certificates representing the
Debentures and the Warrants in the name of the Investor and in such
denominations to be specified by the Investor prior to (or from time to time
subsequent to) Closing. Each certificate representing the Debentures and the
Warrants and any shares of Common Stock issued upon conversion or exercise
thereof initially shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
22
<PAGE> 23
The Company agrees to reissue Debentures and Warrants without the
legend set forth above at such time as (i) the holder thereof is permitted to
dispose of such Debentures and/or Warrants and Common Stock issuable upon
conversion or exercise thereof pursuant to Rule 144(k) under the Act, or (ii)
such Debentures and/or Warrants are sold to a purchaser or purchasers who (in
the opinion of counsel to the seller or such purchaser(s), in form and
substance reasonably satisfactory to the Company and its counsel) are able to
dispose of such shares publicly without registration under the Act.
Prior to the Registration Statement (as defined in the Registration
Rights Agreement) being declared effective, any Common Shares issued pursuant
to conversion of Debentures or Warrant Shares issued upon exercise of the
Warrants shall bear a legend in the same form as the legend indicated above.
Upon such Registration Statement becoming effective, the Company agrees to
promptly, but no later than three (3) business days thereafter, issue new
certificates representing such Common Shares and Warrant Shares without such
legend. Any Common Shares issued pursuant to conversion of Debentures or
Warrant Shares issued upon exercise of the Warrants after the Registration
Statement has become effective shall be free and clear of any legends, transfer
restrictions and stop orders. Notwithstanding the removal of such legend, each
Investor agrees to sell the Common Shares and Warrant Shares represented by the
new certificates in accordance with the applicable prospectus delivery
requirements (if copies of a current prospectus are provided to such Investor
by the Company) or in accordance with an exception from the registration
requirements of the Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement.
ARTICLE VI
MISCELLANEOUS
Section 6.1 STAMP TAXES. The Company shall pay all stamp and other
taxes and duties levied in connection with the issuance of the Debentures and
Warrants pursuant hereto, the Common Shares issued upon conversion thereof, and
the Warrant Shares issued upon exercise of the Warrants.
Section 6.2 SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; JURY TRIAL.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions
of this Agreement and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which any of them may be entitled
by law or equity.
(b) THE COMPANY AND EACH OF THE INVESTORS (I) HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT
COURT, THE
23
<PAGE> 24
NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING IN NEW YORK
COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES NOT TO
ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND EACH OF THE INVESTORS
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT
UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH
SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY APPLICABLE LAW.
(c) THE COMPANY AND EACH INVESTOR HEREBY WAIVES ALL RIGHTS TO
A TRIAL BY JURY.
Section 6.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with
the Registration Rights Agreement, the Warrants, the Debentures and the
agreements and documents executed in connection herewith and therewith,
contains the entire understanding of the parties with respect to the matters
covered hereby and thereby and, except as specifically set forth herein or
therein, neither the Company nor any Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by a written instrument
signed by the party against whom enforcement of any such amendment or waiver is
sought.
Section 6.4 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing by mail, facsimile or
personal delivery and shall be effective upon actual receipt of such notice.
The addresses for such communications shall be:
to the Company:
U.S. Plastic Lumber Corporation
2300 Glades Road
Suite 440 West
Boca Raton, Florida 33431
Attention: Bruce Rosetto
Facsimile: (561) 394-5335
to the Investors:
To each Investor at the address and/or fax
number set forth on SCHEDULE I of this
Agreement.
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
Attention: Stephen M. Schultz, Esq.
Facsimile: (212) 986-8866
24
<PAGE> 25
Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, New York 10022
Attention: J. Eric Maki, Esq.
Facsimile: (212) 755-7306
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other parties
hereto.
Section 6.5 INDEMNITY. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach
of any representation, warranty, covenant or agreement in this Agreement.
Section 6.6 WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 6.7 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 6.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may
amend this Agreement without notice to or the consent of any third party. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of all Investors (which consent may be
withheld for any reason in their sole discretion), except that the Company may
assign this Agreement in connection with the sale of all or substantially all
of its assets provided that the Company is not released from any of its
obligations hereunder, such assignee assumes all obligations of the Company
hereunder, and appropriate adjustment of the provisions contained in this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants
is made, in form and substance satisfactory to the Investors, to place the
Investors in the same position as they would have been but for such assignment,
in accordance with the terms of the Debentures and the Warrants. No Investor
may assign this Agreement (in whole or in part) or any rights or obligations
hereunder without the consent of the Company (which shall not be unreasonably
withheld).
Section 6.9 NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 6.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE.
Section 6.11 SURVIVAL. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein
shall survive the Closing.
25
<PAGE> 26
Section 6.12 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 6.13 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of any Investor
without the express written agreement of such Investor, unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. The Company agrees that it will deliver a copy of
any public announcement regarding the matters covered by this Agreement or any
agreement and document executed herewith to each Investor and any public
announcement including the name of an Investor to such Investor, reasonably in
advance of the release of such announcements.
Section 6.14 SEVERABILITY. The parties acknowledge and agree that the
Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors
hereunder are several and not joint, that no Investor shall have any
responsibility or liability for the representations, warrants, agreements, acts
or omissions of any other Investor, and that any rights granted to "Investors"
hereunder shall be enforceable by each Investor hereunder.
Section 6.15 LIKE TREATMENT OF HOLDERS; REDEMPTION. Neither the
Company nor any of its affiliates shall, directly or indirectly, pay or cause
to be paid any consideration (immediate or contingent), whether by way of
interest, fee, payment for the redemption or conversion of Debentures or
exercise of the Warrants, or otherwise, to any holder of Debentures or
Warrants, for or as an inducement to, or in connection with the solicitation
of, any consent, waiver or amendment of any terms or provisions of the
Debenture or this Agreement or the Registration Rights Agreement or the
Warrants, unless such consideration is required to be paid to all holders of
Debentures and Warrants bound by such consent, waiver or amendment whether or
not such holders so consent, waive or agree to amend and whether or not such
holders tender their Debentures or Warrants for redemption, conversion or
exercise. Except as set forth in Section 3.16, the Company shall not, directly
or indirectly, redeem any Debentures unless such offer of redemption is made
pro rata to all holders of Debentures on identical terms.
Section 6.16 NO STRICT CONSTRUCTION. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.
[SIGNATURE PAGE FOLLOWS]
26
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
U.S. PLASTIC LUMBER CORPORATION
By: _____________________________
Name:
Title:
INVESTORS:
HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By: ____________________________
Name:
Title:
SOCIETE GENERALE
By: ____________________________
Name:
Title:
[SIGNATURE PAGE TO U.S. PLASTIC LUMBER CORPORATION DEBENTURE PURCHASE AGREEMENT]
27
<PAGE> 28
EXHIBITS AND SCHEDULES
Schedule I List of Investors
Exhibit 1.1A Form of Debenture
Exhibit 1.1B Form of Warrant
Schedule 2.1(a) List of Subsidiaries
Schedule 2.1(c) Capitalization; Preemptive Rights
Exhibit 2.1(c)(i) Certificate of Incorporation of the Company
Exhibit 2.1(c)(ii) By-Laws of the Company
Schedule 2.1(s) Outstanding Securities Subject to Registration Rights, ETC.
Schedule 2.1(aa) Real Property
Exhibit 4.2(e) Opinion of Company Counsel
Exhibit 4.2(f) Registration Rights Agreement
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Outstanding Number Restricted
Principal Amount of Ownership
Investor of Debentures Warrants Purchase Price Percentage
- -------- --------------- -------- -------------- ----------
<S> <C> <C> <C> <C>
HALIFAX FUND, LP $2,500,000 50,000 $2,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Robert Chender
Tax I.D. No.: ___________
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
SOCIETE GENERAL $1,500,000 50,000 $1,500,000 4.9%
1211 Avenue of the Americas
New York, New York 10020
Attn: Guillame Pollet
Tax I.D. No.: ____________
Telephone: (212) 278-5260
Facsimile: (212) 278-5467
---------- -------- ----------
TOTAL $4,000,000 100,000 $4,000,000
========== ======== ==========
</TABLE>
<PAGE> 30
SCHEDULE 2.1(a)
List of Subsidiaries
--------------------
<PAGE> 31
SCHEDULE 2.1(c)
Capitalization; Preemptive Rights
---------------------------------
<PAGE> 32
SCHEDULE 2.1(s)
Outstanding Securities Subject to Registration Rights, Etc.
-----------------------------------------------------------
<PAGE> 33
SCHEDULE 2.1 (aa)
Real Property, Leaseholds and Certain Other Interest, Etc.
----------------------------------------------------------
<PAGE> 34
SCHEDULE 2.1(bb)
Real Property
-------------
<PAGE> 1
EXHIBIT 10.35
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("Agreement") dated as of
January 26, 1999 between U.S. Plastic Lumber Corporation, a Nevada corporation
(the "Company"), and each person or entity listed as an investor on Schedule I
attached to this Agreement (each individually an "Investor" and collectively the
"Investors").
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors, and
the Investors wish to purchase from the Company, 5% Convertible Debentures due
January 26, 2004 (the "Debentures"), in the aggregate principal amount of
$2,500,000 at an aggregate price of $2,500,000, having the rights and privileges
set forth in the Debentures in the form of Exhibit 1.1A attached hereto (the
"Issuance"), on the terms and conditions set forth herein; and
WHEREAS, the Debentures will be convertible into shares ("Common
Shares") of common stock, par value $.0001 of the Company ("Common Stock"),
pursuant to the terms of the Debentures, and the Investors will have
registration rights with respect to such Common Shares and the Warrant Shares
(as defined herein), pursuant to the terms of that certain Registration Rights
Agreement to be entered into between the Company and the Investors substantially
in the form of Exhibit 4.2(f) hereto ("Registration Rights Agreement"); and
WHEREAS, to induce the Investors to purchase the Debentures, the
Company has agreed to issue to the Investors warrants exercisable for 62,500
shares of Common Stock in the form attached as Exhibit 1.1B (the "Warrants";
and, together with the Debentures, the "Securities");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
Purchase and Sale of Debentures and Warrants
Section 1.1 Issuance of Debentures and Warrants.
(a) Issuance. Upon the following terms and conditions, the
Company shall issue and sell to each Investor severally, and each Investor
severally shall purchase from the
<PAGE> 2
Company, the outstanding principal amount of Debentures and the number of
Warrants indicated next to such Investor's name on Schedule I attached hereto.
(b) Purchase Price. The purchase price for the Debentures to
be acquired by each Investor (the "Purchase Price") shall be the Purchase Price
set forth next to such Investor's name on Schedule I.
(c) The Closing.
(i) The closing of the purchase and sale of the
Debentures and the Warrants (the "Closing") in the Issuance,
shall take place at the offices of Kleinberg, Kaplan, Wolff &
Cohen, P.C. ("Investors' Counsel") or at such other place as
is mutually agreeable, at 10:00 am., local time on the later
of the following: (x) the date on which the last to be
fulfilled or waived of the conditions set forth in Article IV
hereof and applicable to the Closing shall be fulfilled or
waived in accordance herewith, or (y) such other time and
place and/or on such other date as the Investors and the
Company may agree. The date on which the Closing occurs is
referred to herein as the "Closing Date".
(ii) On the Closing Date, the Company shall deliver
to each Investor (x) certificates (with the number of and
outstanding principal amount of such certificates requested by
such Investor) representing the Debentures purchased hereunder
by such Investor at the Closing registered in the name of such
Investor or its nominee and (y) the Warrants registered in the
name of Investor or its nominee in such denominations as
reasonably requested by such Investor, and such Investor shall
deliver to the Company the Purchase Price for the Debentures
purchased by such Investor hereunder by wire transfer in
immediately available funds to an account designated in
writing by the Company. The delivery of payment by each
Investor of the Purchase Price applicable to it as set forth
in this paragraph shall constitute a payment delivered to the
Company in satisfaction of such Investor's obligation to pay
the Purchase Price hereunder. In addition, each party shall
deliver all documents, instruments and writings required to be
delivered by such party pursuant to this Agreement at or prior
to the applicable Closing.
2
<PAGE> 3
ARTICLE II
Representations and Warranties
Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to each of the
Investors as of the date hereof and on each Closing Date:
(a) Organization and Qualification; Material Adverse Effect.
The Company is a corporation duly incorporated and existing in good standing
under the laws of the State of Nevada and has the requisite corporate power to
own its properties and to carry on its business as now being conducted. The
Company does not have any direct or indirect subsidiaries other than the
subsidiaries listed on Schedule 2.1(a) attached hereto. Except where
specifically indicated to the contrary, all references in this Agreement to
subsidiaries shall be deemed to refer to all direct and indirect subsidiaries of
the Company. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
adverse effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
(either alone or together with all other adverse effects) material to such
entity and other entities controlling or controlled by such entity taken as a
whole, and any material adverse effect on the transactions contemplated under
this Agreement, the Registration Rights Agreement or any other agreement or
document contemplated hereby or thereby.
(b) Authorization; Enforcement. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Warrants and the Registration Rights Agreement and to issue the
Debentures and Warrants in accordance with the terms hereof and thereof, (ii)
the execution and delivery of this Agreement, the Warrants and the Registration
Rights Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including the issuance of the Debentures, the
Common Shares and the Warrant Shares, have been duly authorized by all necessary
corporate action, and no further consent or authorization of the Company or its
Board of Directors (or any committee or subcommittee thereof) or stockholders is
required, (iii) this Agreement, the Warrants, the Debentures and the
Registration Rights Agreement have been duly executed and delivered by the
Company, and (iv) this Agreement, the Warrants, the Debentures and the
Registration Rights Agreement constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(c) Capitalization. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock and 5,000,000 shares of
preferred stock; as of
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November 30, 1998 there were 17,802,649 shares of Common Stock and 382,794
shares of preferred stock issued and outstanding; and 9,723,138 shares of Common
Stock and no shares of preferred stock were reserved for issuance to persons
other than the Investors. All of the outstanding shares of the Company's Common
Stock and preferred stock have been validly issued and are fully paid and
nonassessable. Except as set forth in Schedule 2.1(c), no shares of capital
stock are entitled to preemptive rights; and there are as of November 30, 1998
outstanding options for 2,078,895 shares of Common Stock and no outstanding
warrants for shares of Common Stock (excluding the Warrants). The Company's
issued and outstanding preferred stock is, and will be, in all respects junior
to the Debentures. Except as set forth in Schedule 2.1(c), there are no other
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights exchangeable for or convertible into, any
shares of capital stock of the Company, or contracts, commitments,
understandings, or arrangements by which the Company is or may become bound to
issue additional shares of capital stock of the Company or options, warrants,
scrip, rights to subscribe to, or commitments to purchase or acquire, any
shares, or securities or rights convertible or exchangeable into shares, of
capital stock of the Company. Except where such information has been clearly set
forth in the SEC Documents (as defined below), the Company agrees to update the
information contained in the preceding sentences of this Section 2.1(c) and in
Schedule 2.1(c) in a certificate delivered to each Investor on a quarterly
basis. Attached hereto as Exhibit 2.1(c)(i) is a true and correct copy of the
Company's Certificate of Incorporation (the "Charter"), as in effect on the date
hereof, and attached hereto as Exhibit 2.1(c)(ii) is a true and correct copy of
the Company's By-Laws, as in effect on the date hereof (the "By-Laws").
(d) Issuance of Common Shares. The Common Shares and the
shares of Common Stock issuable upon the exercise of the Warrants (the "Warrant
Shares") are duly authorized and reserved for issuance and, upon such conversion
in accordance with the Debentures and/or exercise in accordance with the
Warrants such Common Shares and Warrant Shares will be validly issued, fully
paid and non-assessable, free and clear of any and all liens, claims and
encumbrances, and entitled to be traded on the Nasdaq Small Cap Market ("Nasdaq
SCM") (or the American Stock Exchange, the New York Stock Exchange or the Nasdaq
National Market System, collectively with the Nasdaq SCM, the "Approved
Markets"), and the holders of such Common Shares and Warrant Shares shall be
entitled to all rights and preferences accorded to a holder of Common Stock. The
outstanding shares of Common Stock are currently listed on the Nasdaq SCM.
(e) No Conflicts. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement and the Warrants by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby and the issuance of the Debentures and the Warrants do not
and will not (i) result in a violation of the Company's Charter or By-Laws or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the Company
or any of its subsidiaries is a party (collectively, "Company Agreements"), or
(iii) result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree
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(including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected. The business of the
Company and its direct and indirect subsidiaries is being conducted in material
compliance with (i) its charter and bylaws, (ii) all Company Agreements and
(iii) all applicable laws, ordinances or regulations of any governmental entity.
The Company is not required under Federal, state, local or foreign law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants or issue and sell
the Debentures in accordance with the terms hereof and issue the Common Shares
upon conversion thereof and issue the Warrant Shares on exercise of the Warrants
and for the registration provisions provided in the Registration Rights
Agreement.
(f) SEC Documents; No Non-Public Information; Financial
Statements. The Common Stock of the Company is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange Commission
("SEC") pursuant to the reporting requirements of the Exchange Act, including
material filed pursuant to Section 13(a) or 15(d), in addition to one or more
registration statements and amendments thereto heretofore filed by the Company
with the SEC (all of the foregoing including filings incorporated by reference
therein being referred to herein as the "SEC Documents"). The Company has
delivered or made available to the Investors true and complete copies of all SEC
Documents (including, without limitation, proxy information and solicitation
materials and registration statements) filed with the SEC since December 31,
1997. The Company has not directly or indirectly provided to the Investors any
material non-public information or any information which, according to
applicable law, rule or regulation, should have been disclosed publicly by the
Company but which has not been so disclosed. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated thereunder and
other federal, state and local laws, rules and regulations applicable to such
SEC Documents, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The SEC Documents
contain all material information concerning the Company, and no event or
circumstance has occurred which would require the Company to disclose such event
or circumstance in order to make the statements in the SEC Documents not
misleading on the date hereof or on the Closing Date but which has not been so
disclosed. The financial statements of the Company included in the SEC Documents
comply as to form and substance in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include
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footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) Principal Exchange/Market. The principal market on which
the Common Stock is currently traded is the Nasdaq SCM.
(h) No Material Adverse Change. Since December 31, 1997, no
Material Adverse Effect has occurred or exists, and no event or circumstance has
occurred that with notice or the passage of time or both is reasonably likely to
result in a Material Adverse Effect with respect to the Company or its
subsidiaries.
(i) No Undisclosed Liabilities. The Company and its
subsidiaries have no liabilities or obligations not disclosed in the
Pre-Agreement SEC Documents (as defined below), other than those liabilities
incurred in the ordinary course of the Company's or its subsidiaries' respective
businesses since December 31, 1997, which liabilities, individually or in the
aggregate, do not or would not have a Material Adverse Effect on the Company or
its direct or indirect subsidiaries.
(j) No Undisclosed Events or Circumstances. To the best
knowledge of the Company, no material event or circumstance has occurred or
exists with respect to the Company or its direct or indirect subsidiaries or
their respective businesses, properties, prospects, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(k) No General Solicitation. Neither the Company, nor any of
its affiliates, or, to its knowledge, any person acting on its or their behalf
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Securities Act of 1933, as amended (the
"Act")) in connection with the offer or sale of the Debentures or Common Shares.
(l) No Integrated Offering. Neither the Company, nor any of
its affiliates, nor to its knowledge any person acting on its or their behalf
has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would require
registration of the Debentures, the Warrants or the Common Shares or Warrant
Shares under the Act.
The issuance of the Debentures, Warrants, Common Shares, or
Warrant Shares to the Investors will not be integrated with any other issuance
of the Company's securities (past, current or future) which requires stockholder
approval under the rules of the Nasdaq SCM.
(m) Form SB-2. The Company is eligible to file the
Registration Statement (as defined in the Registration Rights Agreement) on Form
SB-2 under the Act and rules
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promulgated thereunder, and Form SB-2 is permitted to be used for the
transactions contemplated hereby under the Act and rules promulgated thereunder.
(n) Intellectual Property. The Company (and/or its
wholly-owned subsidiaries) owns or has licenses to use certain patents,
copyrights and trademarks ("intellectual property") associated with its
business. The Company and its subsidiaries have all intellectual property rights
which are needed to conduct the business of the Company and its subsidiaries as
it is now being conducted or as proposed to be conducted as disclosed in the SEC
Documents. The Company and its subsidiaries have no reason to believe that the
intellectual property rights which it owns are invalid or unenforceable or that
the use of such intellectual property by the Company or its subsidiaries
infringes upon or conflicts with any right of any third party, and neither the
Company nor any of its subsidiaries has received notice of any such infringement
or conflict. The Company and its subsidiaries have no knowledge of any
infringement of its intellectual property by any third party.
(o) Shareholder Rights Plan. None of the acquisition of
Debentures, Warrants, Common Shares or Warrant Shares nor the deemed beneficial
ownership of shares of Common Stock prior to, or the acquisition of such shares
pursuant to, the conversion of Debentures or the exercise of the Warrants will
in any event under any circumstance trigger the poison pill provisions of any
stockholders' rights or similar agreements, or a substantially similar
occurrence under any successor or similar plan.
(p) No Litigation. Except as set forth in the Pre-Agreement
SEC Documents (as defined in Section 2.2(c) (i) below), no litigation or claim
(including those for unpaid taxes) against the Company or any of its
subsidiaries is pending or, to the Company's knowledge, threatened, and no other
event has occurred, which if determined adversely could reasonably be expected
to have a Material Adverse Effect on the Company or could reasonably be expected
to materially and adversely effect the transactions contemplated hereby. The
legal proceedings described in the Pre-Agreement SEC Documents will not have an
effect on the transactions contemplated hereby, and will not have a Material
Adverse Effect on the Company.
(q) Brokers. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company or any Investor relating to this Agreement or
the transactions contemplated hereby, except for amounts owing to Ananda Capital
Management, which amounts shall be paid exclusively by the Company at closing,
pursuant to a separate agreement.
(r) Acknowledgement of Dilution. The number of shares of
Common Stock constituting Common Shares or Warrant Shares may increase
substantially in certain circumstances, including the circumstance where the
trading price of the Common Stock declines. The Company acknowledges that its
obligation to issue Common Shares upon conversion of Debentures and Warrant
Shares upon exercise of the Warrants is absolute and unconditional, regardless
of the dilution that such issuance may have on other shareholders of the
Company.
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(s) Other Investors. Except as set forth on Schedule 2.1(s),
there are no outstanding securities issued by the Company that are entitled to
registration rights under the Act. Except as set forth in Schedule 2.1(s), there
are no outstanding securities issued by the Company that are directly or
indirectly convertible into, exercisable into, or exchangeable for, shares of
Common Stock of the Company, or that have anti-dilution or similar rights that
would be affected by the issuance of the Debentures, the Common Shares, the
Warrants or the Warrant Shares.
(t) Certain Transactions. Except as disclosed in the
Pre-Agreement SEC Documents, none of the officers, directors, or employees of
the Company is presently a party to any transaction with the Company or any of
its subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
(u) Permits; Compliance. The Company and each of its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits
except for such Company Permits the failure of which to possess, or the
cancellation or suspension of which, would not, individually or in the
aggregate, have a material effect on the Company. To the best of its knowledge,
neither the Company nor any of its subsidiaries is in material conflict with, or
in material default or material violation of, any of the Company Permits. The
Company currently expects to, and knows of no reason why it should not, receive
a Beneficial Use Approval Order from the Pennsylvania Department of
Environmental Protection for the use of dredge material and municipal waste
incinerator ash mixed with pozzolanic grout ingredients for restoration of mine
site highwalls upon completion of its demonstration project with the
Pennsylvania Department of Environmental Protection. The contract between the
Company and Lehigh Coal and Navigation Company, dated April 30, 1998, is in full
force and effect and there are no breaches by either party thereof. Since
December 31, 1997, neither the Company nor any of its subsidiaries has received
any notification with respect to possible material conflicts, material defaults
or material violations of applicable laws.
(v) Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its direct and
indirect subsidiaries are engaged. Neither the Company nor any such subsidiary
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
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similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
(w) Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(x) Environmental Matters. Except as otherwise disclosed in
the Pre- Agreement SEC Documents, the Company and each of its subsidiaries is in
compliance in all material respects with all applicable state and federal
environmental laws and no event or condition has occurred that may interfere
with the compliance by the Company or any of its subsidiaries with any
environmental law or that may give rise to any liability under any environmental
law that, individually or in the aggregate, would have a Material Adverse
Effect.
(y) Solvency.
(i) Based on the financial condition of the Company
as of the Closing Date, the Company's fair saleable value of
its assets exceeds the amount that will be required to be paid
on or in respect of the Company's existing debts and other
liabilities (including contingent liabilities) as they mature.
(ii) Based on the financial condition of the Company
as of the Closing Date, the Company's assets do not constitute
unreasonably small capital to carry out its business as now
conducted and as proposed to be conducted including the
Company's capital needs taking into account the particular
capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability
thereof.
(iii) The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be payable on
or in respect of its debt). Based on the financial condition
of the Company as of the Closing Date, the current cash flow
of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking
into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid.
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(iv) The Company does not intend, and does not
believe, that final judgments against the Company in actions
for money damages will be rendered at a time when, or in an
amount such that, the Company will be unable to satisfy any
such judgments promptly in accordance with their terms (taking
into account the maximum reasonable amount of such judgments
in any such actions and the earliest reasonable time at which
such judgments might be rendered). The Company's cash flow,
after taking into account all other anticipated uses of the
cash (including the payments on or in respect of debt referred
to in paragraph (iii) above), will at all times be sufficient
to pay all such judgments promptly in accordance with their
terms.
(v) Neither the Company nor any of its subsidiaries
is subject to any bankruptcy, insolvency or similar
proceeding.
(z) Taxes. All federal, state, city and other tax returns,
reports and declarations required to be filed by or on behalf of the Company and
each of its subsidiaries have been filed and such returns are complete and
accurate and disclose all taxes (whether based upon income, operations,
purchases, sales, payroll, licenses, compensation, business, capital, properties
or assets or otherwise) required to be paid in the periods covered thereby.
Copies of all such returns have been provided to the Investors. All taxes shown
on such returns and any deficiency assessments, penalties and interest have been
paid. All taxes required to be withheld by or on behalf of the Company or any
such subsidiary in connection with amounts paid or owing to any employees,
independent contractor, creditor or other party have been withheld, and such
withheld taxes have either been duly and timely paid to the proper governmental
authorities or set aside in accounts for such purposes.
(aa) Title to Properties; Encumbrances. Schedule 2.1(aa)
contains a complete and accurate list of all real property, leaseholds, or other
interests therein owned by the Company and its subsidiaries. Each of the Company
and its subsidiaries owns (with good and marketable title in the case of real
property) all the properties and assets (whether real, personal, or mixed and
whether tangible or intangible) that it purports to own. All material properties
and assets listed on Schedule 2.1(aa) are free and clear of all encumbrances and
are not, in the case of real property, subject to any rights of way, building
use restrictions, exceptions, variances, reservations or limitations of any
nature, except, with respect to all such properties and assets, (a) mortgages or
security interests shown on Schedule 2.1(aa) as securing specified liabilities
or obligations, with respect to which no default (or event that, with notice or
lapse of time or both, would constitute a default) exists, (b) liens for current
taxes not yet due, and (c) with respect to real property, (i) minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations the Company or any of its subsidiaries, and
(ii) zoning laws and other land use restrictions (including, but not limited to,
easements of records) that do not impair the present or anticipated use of the
property subject thereto. All buildings, plans, and structures owned by the
Company or any of its subsidiaries lie wholly within the boundaries of the real
property owned by the Company or such subsidiaries, and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
person.
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Section 2.2 Representations and Warranties of the Investors. Each of
the Investors, severally (as to itself) and not jointly, hereby makes the
following representations and warranties to the Company as of the date hereof
and on the Closing Date:
(a) Authorization; Enforcement. (i) Such Investor has the
requisite power and authority to enter into and perform this Agreement and the
Registration Rights Agreement and to purchase the Debentures and to acquire the
Warrants being sold to it hereunder, (ii) the execution and delivery of this
Agreement and the Registration Rights Agreement by such Investor and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and (iii) this
Agreement and the Registration Rights Agreement constitute valid and binding
obligations of such Investor enforceable against such Investor in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application.
(b) No Conflicts. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement and the performance under
the Debentures and Warrants and the consummation by such Investor of the
transactions contemplated hereby and thereby do not and will not (i) result in a
violation of such Investor's organizational documents, or (ii) conflict with any
agreement, indenture or instrument to which such Investor is a party, or (iii)
result in a material violation of any law, rule, or regulation, or any order,
judgment or decree of any court or governmental agency applicable to such
Investor. Such Investor is not required to obtain any consent or authorization
of any governmental agency in order for it to perform its obligations under this
Agreement, the Registration Rights Agreement, the Warrants or the Debentures.
(c) Investment Representations.
(i) Information. The Company has furnished such
Investor with its annual report on Form 10-K for its fiscal year ended December
31, 1997 (the "Fiscal Year End"), its quarterly reports on Form 10-Q for the
fiscal quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, and
all other reports or documents filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act prior to the Closing Date (the "Pre-Agreement SEC
Documents").
(ii) Access to Other Information. Such Investor
acknowledges that the Company has made available to such Investor the
opportunity to examine such additional documents from the Company and to ask
questions of, and receive full answers from, the Company concerning, among other
things, the Company, its financial condition, its management, its prior
activities and any other information which such Investor considers relevant or
appropriate in connection with entering into this Agreement.
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(iii) Risks of Investment. Such Investor acknowledges
that the Debentures have not been registered under the Act. Such Investor is
familiar with the provisions of Rule 144 and understands that in the event all
of the applicable requirements of Rule 144 are not satisfied, registration under
the Act or some other exemption from the registration requirements of the Act
will be required in order to dispose of the Debentures, and that such Investor
may be required to hold its Debentures received under this Agreement for a
significant period of time prior to reselling them, subject to the Company
successfully registering the Common Shares pursuant to the Registration Rights
Agreement. Such Investor is capable of assessing the risks of an investment in
the Debentures and is fully aware of the economic risks thereof. Such Investor
acknowledges that the Company's operating results have in the past and may in
the current period and in future periods not meet the expectations of securities
analysts and that failure to meet such expectations would be likely to have a
material adverse effect on the trading price and salability of the Common
Shares.
(iv) Investment Representation. Such Investor is
purchasing the Debentures and the Warrants for its own account and not with a
view to distribution in violation of any securities laws. Such Investor has no
present intention to sell the Debentures, Warrants, Common Shares, or Warrant
Shares in violation of federal or state securities laws and such Investor has no
present arrangement (whether or not legally binding) to sell the Debentures,
Warrants, Common Shares or Warrant Shares to or through any person or entity;
provided, however, that by making the representations herein, such Investor does
not agree to hold the Debentures, Warrants, Common Shares or Warrant Shares for
any minimum or other specific term and reserves the right to dispose of the
Debentures, Warrants, Common Shares or Warrant Shares at any time in accordance
with federal and state securities laws applicable to such disposition.
(v) Restricted Securities. It acknowledges and
understands that the terms of Issuance have not been reviewed by the SEC or by
any state securities authorities and that the Debentures have been issued in
reliance on the certain exemptions for non-public offerings under the Act, which
exemptions depend upon, among other things, the representations made and
information furnished by such Investor, including the bona fide nature of such
Investor's investment intent as expressed above.
(vi) Accuracy of Information. All information that
such Investor provides to the Company hereunder is correct and complete as of
the date set forth above.
(vii) Ability to Bear Economic Risk. It is an
"accredited" investor, and that it (i) is able to bear the economic risk of its
investment in the Debentures, (ii) is able to hold the Debentures for an
indefinite period of time, (iii) can afford a complete loss of its investment in
the Debentures and (iv) has adequate means of providing for its current needs.
(viii) No Public Solicitation. At no time was such
Investor presented with or solicited by any general mailing, leaflet, public
promotional meeting, newspaper or magazine article, radio or television
advertisement, or any other form of general advertising or general solicitation
in connection with the Issuance.
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(ix) Reliance by the Company. Such Investor
understands that the Debentures and Warrant are being offered and sold in
reliance on a transactional exemptions from the registration requirements of
federal and state securities laws and that the Company is relying upon the truth
and accuracy of the representations, warranties, agreements, acknowledgments and
understandings of such Investor set forth herein in order to determine the
applicability of such exemptions and the suitability of such Investor to acquire
the Debentures and Warrants.
(d) Brokers. Such Investor has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby.
ARTICLE III
Covenants
Section 3.1 Registration and Listing; Effective Registration. Until the
second anniversary of the issuance of the Debentures and the Warrants, the
Company will cause the Common Stock issuable upon the exercise of the Securities
to continue at all times to be registered under Section 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by the Exchange Act or the rules thereunder) to terminate or
suspend such reporting and filing obligations. Until such time as no Debentures
or Warrants are outstanding, the Company shall continue the listing or trading
of the Common Stock on the Nasdaq SCM or one of the other Approved Markets and
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Approved Market on which the Common
Stock is listed. The Company shall cause the Common Stock to be listed on the
Nasdaq SCM no later than the registration of the Common Stock under the Act, and
at all times shall continue such listing(s) on one of the Approved Markets. As
used herein and in the Registration Rights Agreement, the Debenture and the
Warrants, the term "Effective Registration" shall mean that all registration
obligations of the Company pursuant to the Registration Rights Agreement and
this Agreement have been satisfied, such registration is not subject to any
suspension or stop order, the prospectus for the Common Stock issuable upon
conversion and/or exercise of the Securities is current and such shares of
Common Stock are listed for trading on one of the Approved Markets and such
trading has not been suspended for any reason, none of the Company or any direct
or indirect subsidiary of the Company is subject to any bankruptcy, insolvency
or similar proceeding, and no Interfering Event (as defined in Section 2(b) of
the Registration Rights Agreement) exists.
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Section 3.2 Debentures on Conversion and Warrants on Exercise.
(a) Upon any conversion by an Investor (or then holder of
Debentures) of the Debentures pursuant to the terms thereof, the Company shall
issue and deliver to such Investor (or holder) within three (3) Trading Days (as
such term is defined in the Debenture) of the Conversion Date (as defined in the
Debenture), a new certificate or certificates for the principal amount of
Debentures which such Investor (or holder) has not yet elected to convert but
which is evidenced in part by the certificate(s) submitted to the Company in
connection with such conversion (with the number of and denomination of such new
certificate(s) designated by such Investor or holder).
(b) Upon any partial exercise by an Investor (or then holder
of the Warrants) of the Warrants, the Company shall issue and deliver to such
Investor (or holder) within three (3) days of the date on which such Warrants
are exercised, a new Warrant or Warrants representing the number of adjusted
Warrant Shares, in accordance with the terms of Section 2 of the Warrants.
Section 3.3 Replacement Debentures and Warrants.
(a) The certificate(s) representing the Debentures held by any
Investor (or then holder) may be exchanged by such Investor (or such holder) at
any time and from time to time for certificates with different denominations
representing an equal aggregate number of Debentures, as requested by such
Investor (or such holder) upon surrendering the same. No service charge will be
made for such registration or transfer or exchange.
(b) The Warrants will be exchangeable at the option of the
Investor (or then holder of the Warrants) at the office of the Company for other
Warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of Warrant Shares as are purchasable under such
Warrants. No service charge will be made for such transfer or exchange.
Section 3.4 Expenses. The Company shall pay in immediately available
funds, at the Closing and promptly upon receipt of any further invoices relating
to same, all reasonable due diligence fees and expenses and attorneys' fees and
expenses of the Investors' Counsel, incurred by the Investors in connection with
the preparation, negotiation, execution and delivery of this Agreement, the
Registration Rights Agreement, the Debentures, the Warrants and the related
agreements and documents and the transactions contemplated hereunder and
thereunder. At Closing, the Company shall pay the amount due for such fees and
expenses (which may include fees and expenses estimated to be incurred for
completion of the transaction including post-closing matters). In the event such
amount is ultimately less than the actual fees and expenses, the Company shall
promptly pay such deficiency upon receipt of an invoice regarding same.
Section 3.5 Securities Compliance. The Company shall notify the SEC and
the Nasdaq SCM, in accordance with their requirements, of the transactions
contemplated by this Agreement, the Debenture, the Registration Rights Agreement
and the Warrants, and
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<PAGE> 15
shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Debentures hereunder, the Common Shares issuable upon conversion
thereof, the Warrants and the Warrant Shares issuable upon exercise of the
Warrants.
Section 3.6 Dividends or Distributions; Purchases of Equity Securities.
So long as any Debentures or Warrants remain outstanding, the Company agrees
that it shall not (a) declare or pay any dividends or make any distributions to
any holder or holders of Common Stock, or (b) purchase or otherwise acquire for
value, directly or indirectly, any shares of Common Stock or other equity
security of the Company; provided that the Company may purchase or acquire
shares of Common Stock so long as the Company (i) purchases or acquires such
shares on the open market or pursuant to a tender offer directed to all of the
Company's shareholders and (ii) does not utilize the proceeds of the issuances
of the Debentures for such purpose.
Section 3.7 Notices. The Company agrees to provide all holders of
Debentures and Warrants with copies of all notices and information, including
without limitation notices and proxy statements in connection with any meetings,
that are provided to the holders of shares of Common Stock, contemporaneously
with the delivery of such notices or information to such Common Stock holders.
Section 3.8 Use of Proceeds. The Company agrees that the proceeds
received by the Company from the sale of the Debentures hereunder shall be used
for the acquisition by the Company of 100% of the common stock of Brass
Investment Company, Inc.
Section 3.9 Notification of Additional Financings; Adjustments.
(a) Until the expiration of twelve (12) months from the
Closing Date, the Company shall provide reasonable advance notice to the
Investors of its intentions to pursue any transaction, the purpose of which is
to provide capital to the Company, in consideration of which the Company will
sell or otherwise issue or deliver or dispose of any shares of Common Stock or
other equity securities or any securities which are convertible into or
exchangeable for shares of its Common Stock or other equity securities or any
convertible or exchangeable security, or any warrants or other rights to
subscribe for or to purchase or any options for the purchase of shares of Common
Stock or other equity securities (such transactions are referred to as
"Applicable Financing Transactions"). The Company agrees to use reasonable
efforts to provide the Investors with the opportunity to provide the financing
in such Applicable Financing Transactions.
(b) If at any time within twelve (12) months from the Closing
Date the Company issues Common Stock (or securities or rights exercisable or
exchangeable for, or convertible into, Common Stock) in a private placement at a
discount greater (or in the Investor's judgment more favorable to the purchaser
thereof) than the discount specified in Section 5(c) of the Debentures or at a
ceiling price less than the Conversion Price (as defined in the Debentures and
as adjusted pursuant to the terms thereof), then the
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<PAGE> 16
Debentures will automatically (at the Investor's request) be adjusted to provide
for such greater discount or lower or more favorable Conversion Price, as
applicable.
Section 3.10 Reservation of Stock Issuable Upon Conversion and Upon
Exercise of the Warrants. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the Debentures and the exercise of
the Warrants, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Debentures and
the full exercise of the Warrants and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all the then outstanding Debentures and the full exercise of the
Warrants, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including without limitation engaging in best efforts to obtain the requisite
shareholder approval. Without in any way limiting the foregoing, the Company
agrees to reserve and at all times keep available solely for purposes of
conversion of Debentures and the exercise of the Warrants such number of
authorized but unissued shares of Common Stock that is at least equal to 200% of
the aggregate shares issuable upon conversion of Debentures, and 200% of the
aggregate shares issuable on exercise of Warrants, which number may be reduced
by the number of Common Shares or Warrant Shares actually delivered pursuant to
conversion of Debentures or exercise of the Warrants and shall be appropriately
adjusted for any stock split, reverse split, stock dividend or reclassification
of the Common Stock. If the Company falls below the reserves specified in the
immediately preceding sentence and does not cure such non-compliance within 30
days of its start, then the Investors will be entitled to the discount
adjustments specified in Section 2(b)(i) of the Registration Rights Agreement.
If at any time the number of authorized but unissued shares of Common Stock is
not sufficient to effect the conversion of all the then outstanding Debentures
or the full exercise of the Warrants, the Investors shall be entitled to, inter
alia, the premium price redemption rights provided in the Registration Rights
Agreement.
Section 3.11 Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article IV of this Agreement.
Section 3.12 Form D; Blue Sky Laws. The Company agrees to file a Form D
with respect to the Debentures, Warrants, Common Shares and Warrant Shares, as
required under Regulation D and to provide a copy thereof to each Investor
promptly after such filing. The Company shall, on or before each Closing Date,
take such action as the Company shall have reasonably determined is necessary to
qualify the Debentures, Warrants, Common Shares and Warrant Shares for sale to
the Investors at the Closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Investor on or prior to the Closing Date.
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<PAGE> 17
Section 3.13 No Senior Indebtedness; Limitation on Issuance of Equity.
(a) Until the six month anniversary of the Closing Date, the
Company agrees that neither the Company nor any direct or indirect subsidiary of
the Company shall create, incur, assume, guarantee, secure or in any manner
become liable in respect of any indebtedness, or permit any liens, claims or
encumbrances to exist against the Company or any direct or indirect subsidiary
of the Company or any of their assets, unless junior to the Debentures in all
respects, except for (i) trade payables incurred in the ordinary course of
business consistent with past practices, (ii) indebtedness incurred in
connection with the acquisition by the Company of another entity (or any assets
of such entity), and (iii) except for a working capital facility which shall not
exceed $40.0 million. The Company agrees that it shall at all times between the
Closing Date and April 1, 2000 maintain at least $2.5 million of available
credit under the facility described in clause (iii) of the preceding sentence.
(b) Until the later of (i) December 31, 1999 or (ii) 210 days
after the date that the Registration Statement (as defined in the Registration
Rights Agreement) has been declared effective by the SEC and the Common Shares
and the Warrant Shares are subject to Effective Registration, neither the
Company nor any of its subsidiaries will issue any equity securities or
instruments or rights convertible into or exchangeable or exercisable for any
equity securities; provided that the Company shall be permitted on one occasion
to issue not less than $10.0 million of publicly trading shares of Common Stock
in a firm commitment underwriting during this period.
Section 3.14 Delisting; Best Efforts. If a conversion of a Debenture
for Common Shares by an Investor could result in the Company being delisted from
the Nasdaq SCM for issuing in excess of 20% of its outstanding Common Stock to
the Investors without the approval of the Company's shareholders, then the
Company must redeem any and all Debentures covered by the applicable Conversion
Notice (as defined in the Debentures) and any and all Debentures that would, if
a Conversion Notice for all Debentures were then delivered, result in the
Company being subject to such delisting, at a price equal to 130% of the
Outstanding Principal Amount (as defined in the Debentures) plus accrued but
unpaid interest and default payments in effect at that time. The Company will
use its best efforts to obtain promptly shareholder approval pursuant to NASD
Rule 4460(i) authorizing the issuance of all Common Shares and Warrant Shares
issuable upon the conversion of any Debentures or the exercise of any Warrants,
including by calling a special meeting of such shareholders and having the
Company's Board of Directors recommend such approval in a proxy statement.
Section 3.15 Investor's Option to Compel Repurchase of Its Debentures.
Between January 1, 2000 and March 31, 2000 (the "Investor Put Expiration Date"),
each of the Investors shall have the right in its sole discretion to sell to the
Company all of its Debentures at a price in immediately available funds (the
"Premium Redemption Price") equal to 1.1 times (i.e., 110% of) the outstanding
principal amount of such Debentures, plus any accrued but unpaid or unrecognized
interest or default payments thereon; provided that the Investor Put Expiration
Date shall be extended by 1.5 Business Days for each Business
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<PAGE> 18
Day that the Common Shares and/or Warrants Shares are not subject to Effective
Registration after the date such shares are initially required to be subject to
Effective Registration under the Registration Rights Agreement. Payment of such
amount shall be due and payable within five days of demand therefor, which
demand shall be revocable by the relevant Investor at any time prior to its
actual receipt of the Premium Redemption Price. Notwithstanding anything to the
contrary herein, in the event an Investor converts any of its Debentures
pursuant to this Agreement, such Investor shall lose its option to compel
repurchase of its Debentures pursuant to this Section 3.15.
ARTICLE IV
Conditions to Closings
Section 4.1 Conditions Precedent to the Obligation of the Company to
Sell the Debentures. The obligation hereunder of the Company to issue and/or
sell the Debentures to the Investors at the Closing (unless otherwise specified)
is subject to the satisfaction, at or before the Closing, of each of the
applicable conditions set forth below. These conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) Accuracy of the Investors' Representations and Warranties.
The representations and warranties of each Investor will be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties as of an
earlier date, which will be true and correct in all material respects as of such
date).
(b) Performance by the Investors. Each Investor shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by such Investor at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement or the
Debentures or the Warrants.
Section 4.2 Conditions Precedent to the Obligation of the Investors to
Purchase the Debentures. The obligation hereunder of each Investor to acquire
and pay for the Debentures at the Closing (unless otherwise specified) is
subject to the satisfaction, at or before the Closing, of each of the applicable
conditions set forth below. These conditions are for each Investor's benefit and
may be waived by each Investor at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company shall be true and correct in
all material
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respects as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties as of an earlier date,
which shall be true and correct in all material respects as of such date).
(b) Performance by the Company. The Company shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Company at or prior to the Closing.
(c) Nasdaq SCM. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the SEC
or the Nasdaq SCM (or other Approved Market), and trading in securities
generally as reported by the Nasdaq SCM (or other Approved Market) shall not
have been suspended or limited, and the Common Stock shall not have been
delisted from the Nasdaq SCM (or any other Approved Market where they are
currently listed), and the market value of the outstanding Common Stock shall
not have decreased below $4.00 per share.
(d) No Injunction. No statute, rule, regulation, executive,
judicial or administrative order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental authority
of competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debenture or the Warrants.
(e) Opinion of Counsel. At the Closing, the Investors shall
have received an opinion of the general counsel of the Company, Bruce C.
Rosetto, in the form attached hereto as Exhibit 4.2(e) and such other opinions,
certificates and documents as the Investors or their counsel shall reasonably
require incident to the Closing.
(f) Registration Rights Agreement. The Company and the
Investors shall have executed and delivered the Registration Rights Agreement in
the form and substance of Exhibit 4.2(f) attached hereto.
(g) Adverse Changes. Except as otherwise disclosed in the
Pre-Agreement SEC Documents, since December 31, 1997, no event which had or is
likely to have, in the reasonable judgment of the Investors, a Material Adverse
Effect on the Company or any of its direct or indirect subsidiaries shall have
occurred.
(h) Officer's Certificate. The Company shall have delivered to
the Investors a certificate in form and substance satisfactory to the Investors
and the Investors' Counsel, executed by an officer of the Company, certifying as
to satisfaction of closing conditions, incumbency of signing officers, and the
true, correct and complete nature of the Charter, By-Laws, good standing and
authorizing resolutions of the Company.
(i) Debentures and Warrants. The Investors shall have received
certificates representing the Debentures and Warrants in the form and substance
of Exhibit 1.1A and Exhibit 1.1B hereto.
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(j) Due Diligence. Each Investor shall have completed its
financial, accounting, operational and legal due diligence in a manner
satisfactory to such Investor in its sole discretion.
ARTICLE V
Legend and Stock
The Company will issue one or more certificates representing the
Debentures and the Warrants in the name of the Investor and in such
denominations to be specified by the Investor prior to (or from time to time
subsequent to) Closing. Each certificate representing the Debentures and the
Warrants and any shares of Common Stock issued upon conversion or exercise
thereof initially shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
The Company agrees to reissue Debentures and Warrants without the
legend set forth above at such time as (i) the holder thereof is permitted to
dispose of such Debentures and/or Warrants and Common Stock issuable upon
conversion or exercise thereof pursuant to Rule 144(k) under the Act, or (ii)
such Debentures and/or Warrants are sold to a purchaser or purchasers who (in
the opinion of counsel to the seller or such purchaser(s), in form and substance
reasonably satisfactory to the Company and its counsel) are able to dispose of
such shares publicly without registration under the Act.
Prior to the Registration Statement (as defined in the Registration
Rights Agreement) being declared effective, any Common Shares issued pursuant to
conversion of Debentures or Warrant Shares issued upon exercise of the Warrants
shall bear a legend in the same form as the legend indicated above. Upon such
Registration Statement becoming effective, the Company agrees to promptly, but
no later than three (3) business days thereafter, issue new certificates
representing such Common Shares and Warrant Shares without such legend. Any
Common Shares issued pursuant to conversion of Debentures or Warrant Shares
issued upon exercise of the Warrants after the Registration Statement has become
effective shall be free and clear of any legends, transfer restrictions and stop
orders. Notwithstanding the removal of such legend, each Investor agrees to sell
the Common Shares and Warrant Shares represented by the new certificates in
accordance with the applicable prospectus delivery requirements (if copies of a
current prospectus are provided to such Investor by the Company) or in
accordance with an exception from the registration requirements of the Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement.
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ARTICLE VI
Miscellaneous
Section 6.1 Stamp Taxes. The Company shall pay all stamp and other
taxes and duties levied in connection with the issuance of the Debentures and
Warrants pursuant hereto, the Common Shares issued upon conversion thereof, and
the Warrant Shares issued upon exercise of the Warrants.
Section 6.2 Specific Performance; Consent to Jurisdiction; Jury Trial.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
(b) THE COMPANY AND EACH OF THE INVESTORS (I) HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT
COURT, THE NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING
IN NEW YORK COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES
NOT TO ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND EACH OF THE INVESTORS CONSENTS
TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY
THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS
AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR
LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE
LAW.
(c) THE COMPANY AND EACH INVESTOR HEREBY WAIVES ALL RIGHTS TO
A TRIAL BY JURY.
Section 6.3 Entire Agreement; Amendment. This Agreement, together with
the Registration Rights Agreement, the Warrants, the Debentures and the
agreements and documents executed in connection herewith and therewith, contains
the entire understanding of the parties with respect to the matters covered
hereby and thereby and, except as specifically set forth herein or therein,
neither the Company nor any Investor makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by a written instrument signed by
the party against whom enforcement of any such amendment or waiver is sought.
Section 6.4 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing by mail, facsimile or
personal delivery and shall be effective upon actual receipt of such notice. The
addresses for such communications shall be:
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to the Company:
U.S. Plastic Lumber Corporation
2300 Glades Road
Suite 440 West
Boca Raton, Florida 33431
Attention: Bruce Rosetto
Facsimile: (561) 394-5335
to the Investors:
To each Investor at the address and/or fax number set forth on
Schedule I of this Agreement.
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
Attention: Stephen M. Schultz, Esq.
Facsimile: (212) 986-8866
Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, New York 10022
Attention: J. Eric Maki, Esq.
Facsimile: (212) 755-7306
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other parties
hereto.
Section 6.5 Indemnity. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach of
any representation, warranty, covenant or agreement in this Agreement.
Section 6.6 Waivers. No waiver by any party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
Section 6.7 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 6.8 Successors and Assigns. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may amend
this Agreement without notice to or the consent of any third party. The Company
may not assign this Agreement or any rights
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or obligations hereunder without the prior written consent of all Investors
(which consent may be withheld for any reason in their sole discretion), except
that the Company may assign this Agreement in connection with the sale of all or
substantially all of its assets provided that the Company is not released from
any of its obligations hereunder, such assignee assumes all obligations of the
Company hereunder, and appropriate adjustment of the provisions contained in
this Agreement, the Registration Rights Agreement, the Debentures and the
Warrants is made, in form and substance satisfactory to the Investors, to place
the Investors in the same position as they would have been but for such
assignment, in accordance with the terms of the Debentures and the Warrants. No
Investor may assign this Agreement (in whole or in part) or any rights or
obligations hereunder without the consent of the Company (which shall not be
unreasonably withheld).
Section 6.9 No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 6.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE.
Section 6.11 Survival. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein shall
survive the Closing.
Section 6.12 Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 6.13 Publicity. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of any Investor
without the express written agreement of such Investor, unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. The Company agrees that it will deliver a copy of
any public announcement regarding the matters covered by this Agreement or any
agreement and document executed herewith to each Investor and any public
announcement including the name of an Investor to such Investor, reasonably in
advance of the release of such announcements.
Section 6.14 Severability. The parties acknowledge and agree that the
Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors hereunder
are several and not joint, that no Investor shall have any responsibility or
liability for the representations, warrants, agreements, acts or omissions of
any other Investor, and that any rights granted to "Investors" hereunder shall
be enforceable by each Investor hereunder.
Section 6.15 Like Treatment of Holders; Redemption. Neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be paid
any consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption or conversion of Debentures or exercise of the
Warrants, or otherwise, to any holder of Debentures or Warrants, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Debenture or this Agreement or the
Registration Rights Agreement or the Warrants, unless such consideration is
required to be paid to all holders of Debentures and Warrants bound by such
consent, waiver or amendment whether or not such holders so consent,
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waive or agree to amend and whether or not such holders tender their Debentures
or Warrants for redemption, conversion or exercise. The Company shall not,
directly or indirectly, redeem any Debentures unless such offer of redemption is
made pro rata to all holders of Debentures on identical terms.
Section 6.16 No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
U.S. PLASTIC LUMBER CORPORATION
By:
-----------------------------------
Name:
Title:
INVESTORS:
HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
-----------------------------------
Name:
Title:
SOCIETE GENERALE
By:
-----------------------------------
Name:
Title:
[Signature page to U.S. Plastic Lumber Corporation Debenture Purchase Agreement]
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EXHIBITS AND SCHEDULES
Schedule I List of Investors
Exhibit 1.1A Form of Debenture
Exhibit 1.1B Form of Warrant
Schedule 2.1(a) List of Subsidiaries
Schedule 2.1(c) Capitalization; Preemptive Rights
Exhibit 2.1(c)(i) Certificate of Incorporation of the Company
Exhibit 2.1(c)(ii) By-Laws of the Company
Schedule 2.1(s) Outstanding Securities Subject to Registration
Rights, etc.
Schedule 2.1(aa) Real Property
Exhibit 4.2(e) Opinion of Company Counsel
Exhibit 4.2(f) Registration Rights Agreement
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
Outstanding Number Restricted
Principal Amount of Ownership
Investor of Debentures Warrants Purchase Price Percentage
- -------- ---------------- -------- -------------- ----------
<S> <C> <C> <C> <C>
HALIFAX FUND, LP $1,500,000 37,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Robert Chender
Tax I.D. No.:____________
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
SOCIETE GENERALE $1,000,000 25,000 $1,500,000 4.9%
Tour Societe Generale
17, Cours Valmy
92987 Paris La Defense Cedex
France
c/o
Societe Generale
1221 Avenue of the Americas
New York, New York 10020
Attn: Guillaume Pollet
Tax I.D. No.:_____________
Telephone: (212) 278-5260
Facsimile: (212) 278-5467
---------- ------ ----------
TOTAL $2,500,000 62,500 $2,500,000
========== ====== ==========
</TABLE>
<PAGE> 28
SCHEDULE 2.1(a)
List of Subsidiaries
<PAGE> 29
SCHEDULE 2.1(c)
Capitalization; Preemptive Rights
<PAGE> 30
SCHEDULE 2.1(s)
Outstanding Securities Subject to Registration Rights, etc.
<PAGE> 31
SCHEDULE 2.1(aa)
Real Property, Leaseholds and Certain Other Interest, etc.
<PAGE> 32
SCHEDULE 2.1(bb)
Real Property
<PAGE> 1
Exhibit 10.36
1999 EMPLOYEE STOCK OPTION PLAN
U.S. Plastic Lumber Corporation and ("USPL") hereby adopts this 1999
Employee Stock Option Plan (the "Plan") the terms of which shall be as follows:
1. PURPOSE
The Plan is intended to advance the interests of USPL by providing
eligible individuals (as designated pursuant to section 4 below) with an
opportunity to acquire or increase a proprietary interest in USPL, which thereby
will create a stronger incentive to expend maximum effort for the growth and
success of USPL and its subsidiaries, and will encourage such eligible
individuals to remain in the employ of USPL or one or more of its subsidiaries
and to attract and retain officers, key employees and key independent
contractors. Each stock option granted under the plan (an "Option") shall be an
option that is not intended to constitute an "incentive stock option"
("Incentive Stock Option") within the meaning of section 422 of the Internal
Revenue Code of 1986, or the corresponding provision of any subsequently enacted
tax statute, as amended from time to time (the "Code") unless such Option is
granted to an employee of USPL or a "subsidiary corporation" (a "Subsidiary")
thereof within the meaning of Section 424(f) of the Code and is specifically
designated at the time of grant as being an Incentive Stock Option. Any Option
so designated shall constitute an Incentive Stock Option only to the extent that
it does not exceed the limitations set forth in Section 7 below.
2. ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee of the
Board of Directors of USPL (the "Committee"), which shall have the full power
and authority to take all actions, and to make all determinations required or
provided for under the Plan or in the Option granted or Option Agreement (as
defined in section 8 below) entered into under the Plan and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Committee to be necessary or appropriate to
the administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Committee present at a meeting at which
any issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Committee executed in accordance with USPL's
Certificate of Incorporation and Bylaws, and with applicable law. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted or Option Agreement entered into hereunder shall be final
and conclusive.
(b) The Board may from time to time appoint a Compensation Committee
(the "Committee") consisting of not less than two members of the Board, none of
whom shall be an officer or other salaried employee of USPL or any Subsidiary.
The Board may remove members, add members, and fill vacancies on the Committee
from time to time, all in accordance with USPL's Certificate of Incorporation
and Bylaws, and Nevada applicable law. The majority vote of the Committee, or
acts reduced to or approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee.
1
<PAGE> 2
(c) NO LIABILITY. No member of the Board or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Option granted or Option Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of common stock, $.0001 par value, of USPL (the "Stock"), which
shares may be treasury shares or authorized but unissued shares. The number of
shares of Stock that may be issued pursuant to Options granted under the Plan
shall not exceed in the aggregate 1,800,000 shares, subject to adjustment as
provided in Section 17 below. If any Option expires, terminates, or is
terminated or canceled for any reason prior to exercise in full, the shares of
Stock that were subject to the unexercised portion of such Option shall be
available for future Options granted under the Plan.
4. ELIGIBILITY
(a) EMPLOYEES. Options may be granted under the Plan to any employee of
USPL, a Subsidiary or any other entity of which on the relevant date at least a
majority of the securities or other ownership interest having ordinary voting
power (absolutely or contingently) for the election of directors or other
persons performing similar functions ("Voting Securities") are at the time owned
directly or indirectly by USPL or any Subsidiary (an "Affiliate"), including any
such employee who is an officer or director of USPL, a Subsidiary or an
Affiliate, as the Board shall determine and designate from time to time prior to
expiration or termination of the Plan. The maximum number of shares of Stock
subject to Options that may be granted during any calendar year under the Plan
to any executive officer or other employee of USPL or any Subsidiary or
Affiliate whose compensation is or may be subject to Code Section 162(m) is 95%
of the shares available for issuance under the Plan (subject to adjustment as
provided in section 17 hereof).
(b) INDEPENDENT CONTRACTORS. Options may be granted to independent
contractors, who are individuals or companies, performing services for USPL or
any Subsidiary or Affiliate as determined by the Board from time to time on the
basis of their importance to the business of USPL or such Subsidiary or
Affiliate. Independent contractors shall not be eligible to receive options
intended to constitute Incentive Stock Options. Non-employee directors of USPL
shall not be eligible to receive options under the Plan.
(c) MULTIPLE GRANTS. An individual may hold more than one Option,
subject to such restrictions as are provided herein.
2
<PAGE> 3
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE. The Plan shall be effective as of the date of
adoption by the Board, March 10, 1999, subject to approval of the Plan, within
one year of such effective date, by the stockholders of USPL by a majority of
votes present and entitled to vote at a duly held meeting of the stockholders at
which a quorum representing a majority of all outstanding voting stock is
present, either in person or by proxy or by written consent in accordance with
USPL's Certificate of Incorporation and Bylaws; provided, however, that upon
approval of the Plan by the stockholders of USPL set forth above, all Options
granted under the Plan on or after the effective date shall be fully effective
as if the stockholders of USPL approved the Plan on the effective date. If the
stockholders fail to approve the Plan within one year of such effective date,
any options granted hereunder shall be null and void and of no effect.
(b) TERM. The Plan shall terminate when all options awarded under the
Plan have been exercised, provided that no options may be granted under the Plan
more than 10 years from the earlier of the date the Plan is adopted by the
Company or initially approved by the shareholders of the Company.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Committee may, at
any time and from time to time, prior to the date of termination of the Plan,
grant to such eligible individuals as the Committee may determine ("Optionees"),
Options to purchase such number of shares of the Stock on such terms and
conditions as the Committee may determine. The date on which the Committee
approved the grant of an Option (or such later date as specified by the
Committee) shall be considered the date on which such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option intended to constitute an Incentive Stock Option (and so
designated at the time of grant) shall qualify as an Incentive Stock Option only
to the extent that the aggregate fair market value (determined at the time the
option is granted) of the stock with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under the Plan and all other plans of the Optionee's employer corporation and
its parent and subsidiary corporation's within the meaning of Section 422(d) of
the Code) does not exceed $100,000. This limitation shall be applied by taking
Options into account in the order in which they were granted.
3
<PAGE> 4
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by USPL and by the Optionee, in
such form or forms as the Committee shall from time to time determine. Option
Agreements covering Options granted from time to time or at the same time need
not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option (the
"Option Price") shall be fixed by the Board and stated in each Option Agreement,
and shall be not less than 100 percent of the closing price of a share of the
Stock, as reported on NASDAQ or other exchange on which the Company's stock
normally trades or if the Company's stock is not traded on the NASDAQ or other
exchange, as determined in good faith by the Board of Directors, on the date the
Option is granted; provided, however, then in the event the Optionee would
otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock
ownership of more than 10 percent), the Option Price of an Option that is
intended to be an Incentive Stock Option shall be not less than 110 percent of
the fair market value of a share of Stock at the time such Option is granted.
10. TERM AND EXERCISE OF OPTIONS
(a) OPTION PERIOD. Each Option granted under the Plan shall terminate
and all rights to purchase shares thereunder shall cease upon the expiration of
ten years from the date such Option is granted, or on such date prior thereto as
may be fixed by the Board and stated in the Option Agreement relating to such
Option; provided, however, that in the event the Optionee would otherwise be
ineligible to receive an Incentive Stock Option by reason of the provisions of
Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of
more than 10 percent), an Option granted to such Optionee that is intended to be
an Incentive Stock Option shall in no event be exercisable after the expiration
of five years from the date it is granted.
(b) VESTING AND LIMITATION ON EXERCISE. Except as otherwise provided
herein, each Option shall become exercisable with respect to 33 1/3 percent of
the total number of shares subject to the Option one year after the date of its
grant (the "Vesting Date") and with respect to an additional 33 1/3 percent of
the number of such shares on each of the next two succeeding anniversaries of
the Vesting Date; provided, however, that the Board may in its discretion
provide that an Option may be exercised, in whole or in part, at any time from
time to time, over a period commencing on or after the date of grant and ending
upon the expiration or termination of the Option, as the Board shall determine
and set forth in the Option Agreement relating to such Option.
4
<PAGE> 5
Without limiting the foregoing, the Board, subject to the terms and conditions
of the Plan, may in its sole discretion provide that an Option may be exercised
immediately upon grant or that it may not be exercised in whole or in part for
any period or periods of time during which such Option is outstanding; provided,
however, that any vesting requirements or other such limitation on the exercise
of an Option may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the date of grant of such
Option, so as to accelerate the time at which the Option may be exercised.
(c) METHOD OF EXERCISE. An Option that is exercisable hereunder may be
exercised by delivery to USPL on any business day, at its principal office,
addressed to the attention of the Vice President and General Counsel, of written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being exercised, and shall be accompanied by payment in
full of the Option Price of the shares for which the Option is being exercised,
except as provided below. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made
(i) in cash or in cash equivalents; (ii) through the tender to USPL of shares of
Stock, which shares shall be valued, for purposes of determining the extent to
which the Option Price has been paid thereby, at their fair market value
(determined in the manner described in Section 9 above) on the date of exercise;
(iii) by delivering a written direction to USPL that the Option be exercised
pursuant to a "cashless" exercise/sale procedure (pursuant to which funds to pay
for exercise of the Option are delivered to USPL by a broker upon receipt of
stock certificates from USPL) or a cashless exercise/loan procedure (pursuant to
which the Optionees would obtain a margin loan from a broker to fund the
exercise) through a licensed broker acceptable to USPL whereby the stock
certificate or certificates for the shares of Stock for which the Option is
exercised will be delivered to such broker as the agent for the individual
exercising the Option and the broker will deliver to USPL cash (or cash
equivalent acceptable to USPL) equal to the Option Price for the shares of Stock
purchased pursuant to the exercise of the Option plus the amount (if any) of
federal and other taxes that USPL, may, in its sole judgment, be required to
withhold with respect to the exercise of the Option; (iv) to the extent
permitted by applicable law and under the terms of the Option Agreement with
respect to such Option, by the delivery of a promissory note of the Optionee to
USPL on such terms as shall be set out in such Option Agreement and acceptable
to the Company in its sole discretion; or (v) by combination of methods
described in (i), (ii), (iii) and (iv). Payment in full of the Option Price need
not accompany the written notice of exercise if the Option is exercised pursuant
to the cashless exercise/sale procedure described above. An attempt to exercise
any Option granted hereunder other than as set forth above shall be invalid and
of no force and effect. Promptly after the exercise of an Option, the individual
exercising the Option shall be entitled to the issuance of the Stock certificate
or certificates evidencing his ownership of such shares. A separate Stock
certificate or certificates shall be issued for any shares purchased pursuant to
the exercise of an Option that is intended to be an Incentive Stock Option,
which certificate or certificates shall not include any shares purchased
pursuant to the exercise of an Option
5
<PAGE> 6
that is not an Incentive Stock Option. An individual holding or exercising an
Option shall have none of the rights of a shareholder until the shares of Stock
covered thereby are fully paid and issued to him and, except as provided in
Section 18 below, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance.
(d) CHANGE IN CONTROL. In the event of a Change in Control (as defined
below), except as the Board shall otherwise provide in an Option Agreement with
respect to an Option granted under the Plan, all outstanding Options shall
become immediately exercisable in full. For purposes of the Plan, a "Change in
Control" shall be deemed to occur (a)) if any person, other than the Stout
Partnership, shall acquire direct or indirect beneficial ownership of more than
40% of the total combined voting power with respect to the election of directors
of the issued and outstanding stock of USPL (except that no Change in Control
shall be deemed to have occurred if the persons who are stockholders of USPL
immediately before such acquisition own all or substantially all of the voting
stock or other interests of such person immediately after such transaction), or
(b) have the power (whether as result of stock ownership, revocable or
irrevocable proxies, contract or otherwise) or ability to elect or cause the
election of directors consisting at the time of such election of the majority of
the Board. A "person" for this purpose shall mean any person, corporation,
partnership, joint venture or other entity or any group (as such term is defined
for purposes of Section 13(d) of the Exchange Act) and a person shall be deemed
to be a beneficial owner as that term is used in Rule 13d-3 under the Exchange
Act. The amount payable under this Section 10(d) shall be remitted by USPL in
cash or by certified or bank check, reduced by applicable tax withholding.
(e) Notwithstanding any other provision of the Plan, no Option granted
to an Optionee under the Plan shall be exercisable in whole or in part prior to
the date the Plan is approved by the stockholders of USPL has provided in
section 5 above.
11. TRANSFERABILITY OF OPTIONS
Non-Qualified Stock Options granted under the Plan may be transferred
only by gift or qualified domestic relations order to a family member (as
defined below) of a director of the Company. The term "family member" includes
any child, stepchild, grandchild, parent, step parent, grandparent, spouse,
former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing the employee's household (other than a tenant
or employee), a trust which these persons have more than 50 percent of the
beneficial interest, a foundation which these persons (or the employee) control
management of assets, and any other entity in which these persons (or the
employee) own more than 50 percent of the voting interest.
Incentive Stock Options granted under the Plan are not assignable or
transferable, otherwise than by will or by the laws of descent and distribution.
Except in the event of death or disability, all Incentive Stock Options granted
under the Plan are exercisable, during the lifetime of an optionee, and are
exercisable only by such optionee.
6
<PAGE> 7
12. TERMINATION OF EMPLOYMENT OR SERVICE
(a) GENERAL. Except as otherwise provided herein, upon the termination
of employment or other service of an Optionee with USPL, a Subsidiary, or an
Affiliate, or the death or "permanent and total disability" (within the meaning
of Section 22(e)(3) of the Code) of such Optionee, any Option granted to an
Optionee pursuant to the Plan shall terminate upon the expiration of thirty days
from the date of such termination of employment or service and such Optionee
shall have no further right to purchase shares of Stock pursuant to such Option.
Notwithstanding the foregoing provisions of this Section 12, the Board may
provide, in its discretion, that following the termination of employment or
service of an Optionee with USPL, a Subsidiary, or Affiliate, an Optionee may
exercise an Option, in whole or in part, at any time subsequent to such
termination of employment or service and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
vesting or other limitations on exercise imposed pursuant to Section 10(b)
above.
(b) Whether a leave of absence or lien on military or government
service shall constitute a termination of employment of service for purposes of
the Plan shall be determined by the Board, which determination shall be final
and conclusive. For purposes of the Plan, the termination of employment or
service with USPL, a Subsidiary, or Affiliate shall not be deemed to occur if
the Optionee is immediately thereafter employed by or otherwise providing
services to USPL, any Subsidiary or Affiliate.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) DEATH. If an Optionee dies while in the employ or service of USPL,
a Subsidiary or Affiliate or within the period following termination of
employment or service for which the Option is exercisable under Section 12 above
or Section 13(b) below, all Options held by such Optionee prior to death shall
become immediately exercisable in full and the executors or administrators or
legatees or distributees of such Optionee's estate shall have the right, at any
time within twelve months after the date of such Optionee's death and prior to
termination of the Option pursuant to Section 10(a) above, to exercise any
Option held by such Optionee at the date of such Optionee's death; provided,
however, that the Board may provide, in its discretion, that following the death
of an Optionee, the executors or administrators or legatees or distributees of
such Optionee's estate may exercise an Option, in whole or in part, at any time
subsequent to such Optionee's death and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
vesting or other limitation on exercise imposed pursuant to Section 10(b)
above.
7
<PAGE> 8
(b) DISABILITY. If an Optionee terminates employment or service with
USPL, a Subsidiary or Affiliate by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then all Options held by such Optionee shall become immediately
exercisable in full and the Optionee shall have the right, at any time within
twelve months after such termination of employment or service and prior to
termination of the Option pursuant to Section 10(a) above, to exercise, in
whole or in part, any Option held by such Optionee at the date of such
termination of employment or service; provided, however, that the Board may
provide, in its discretion, that an Optionee may, in the event of the
termination of employment or service of the Optionee with USPL, the Subsidiary
or Affiliate by reason of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option
in whole or in part, at any time subsequent to such termination of employment or
service and prior to termination of the Option pursuant to Section 10(a) above,
either subject to or without regard to any vesting or other limitation on
exercise imposed pursuant to Section 10(b) above. Whether a termination of
employment or service is to be considered by reason of "permanent and total
disability" for purposes of this Plan shall be determined by the Board, which
termination shall be final and conclusive.
14. REQUIREMENTS OF LAW
(a) VIOLATIONS OF LAW. USPL shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the individual exercising the Option or USPL of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations. Any
determination in this connection by the Board shall be final, binding, and
conclusive. USPL shall not be obligated to take any affirmative action in order
to cause the exercise of an Option or the issuance of shares pursuant thereto to
comply with any law or regulation of any governmental authority. As to any
jurisdiction that expressly imposes the requirement that an Option shall not be
exercisable unless and until the shares of Stock covered by such Option are
registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
(b) COMPLIANCE WITH RULE 16b-3. The intent of this Plan is to qualify
for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent
any provision of the Plan does not comply with the requirements of Rule 16b-3,
it shall be deemed inoperative to the extent permitted by law and deemed
advisable by the Board and shall not affect the validity of the Plan. In the
event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on
behalf of the Board, may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
(c) COMPLIANCE WITH SECURITIES ACT OF 1933. The following two paragraphs
shall be applicable if, on the date of exercise of this option, the Common Stock
to be purchased pursuant to such exercise has not been registered under the
Securities Act of 1933, as
8
<PAGE> 9
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
(i) The Optionee hereby agrees, warrants and represents that he
will acquire the Common Stock to be issued hereunder for his own account
for investment purposes only, and not with a view to, or in connection
with, any resale or other distribution of any of such shares, except as
hereafter permitted. The Optionee further agrees that he will not at any
time make any offer, sale, transfer pledge or other disposition of such
Common Stock to be issued hereunder without an effective registration
statement under the Securities Act of 1933, as amended, and under any
applicable state securities laws or an opinion of counsel acceptable to
the Company to the effect that the proposed transaction will be exempt
from such registration. The Optionee shall execute such instruments,
representations, acknowledgments and agreements as the Company may, in
its sole discretion, deem advisable to avoid any violation of federal,
state, local, or securities exchange rule, regulation or law.
(ii) The certificates for Common Stock to be issued to the
Optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or under applicable state securities
laws. The shares have been acquired for investment and may not be offered, sold,
transferred, pledged or otherwise disposed of without an effective registration
statement under the Securities Act of 1933, as amended, and under any applicable
state securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended
shares under the Securities Act of 1933, as amended, and under any applicable
state laws or upon receipt of an opinion of counsel acceptable to the Company
that said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
approval by a majority of the votes present and entitled to vote at a duly held
meeting of the stockholders of USPL at which a quorum representing a majority of
all outstanding voting stock is, either in person or by proxy, present and
voting on the amendment, or by written consent in
9
<PAGE> 10
accordance with applicable state law and the Certificate of Incorporation and
Bylaws of USPL, change the requirements as to eligibility to receive Options
that are intended to qualify as Incentive Stock Options, increased maximum
number of shares of Stock in the aggregate that may be sold pursuant to Options
that are intended to qualify as Incentive Stock Options granted under the Plan
(except as permitted under Section 17 hereof) or modify the Plan so that Options
granted under the Plan cannot satisfy the applicable requirements of Code
Section 162(m). Except as permitted under Section 17 hereof, no amendment,
suspension or termination of the Plan shall, without the consent of the holder
of the Option, alter or impair rights or obligations under any Option
theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) RECAPITALIZATION. If the outstanding shares of Stock are increased
or decreased or changed into or exchanged for a different number or kind of
shares or other securities of USPL by reason of any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in capital stock, or other
increase or decrease in such shares effected without receipt of consideration by
USPL, occurring after the effective date of the Plan, the number and kinds of
shares for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by USPL. In addition, the number and
kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the holder
of the Option immediately following such event, to the extent practicable, be
the same as immediately prior to such event. Any such adjustment in outstanding
Options shall not change the aggregate Option Price payable with respect to
shares subject to the unexercised portion of the Option outstanding and shall
include a corresponding proportionate adjustment in the Option Price per share.
If there is a distribution payable in the capital stock of a subsidiary
corporation (a "Spin-off Corporation") of USPL ("Spin-off Shares"), to the
extent consistent with Treasury Regulation Section 1.425-1(a)(6) or the
corresponding provision of any subsequent regulation, each outstanding Option
shall thereafter additionally pertain to the number of Spin-off Shares that
would have been received in such distribution by a shareholder of USPL who owns
a number of shares of Common Stock equal to the number of shares that are
subject to the Option at the time of such distribution, the aggregate Option
Price of the Option shall be allocated between the Spin-off Shares and the
Common Stock in proportion to the relative fair market values of a Spin-off
Share and a share of Common Stock immediately after the distribution of Spin-off
Shares, and the Option shall be exercisable separately as to the shares of
Common Stock and Spin-off Shares covered thereby.
(b) REORGANIZATION IN WHICH USPL IS THE SURVIVING CORPORATION. Subject
to the discretion of the Compensation Committee of the Board of Directors, if
USPL shall be the surviving corporation in any reorganization, merger, or
consolidation of USPL with one or more other corporations, any Option
theretofore granted pursuant to the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to such
Option would have been entitled immediately following such reorganization,
merger or consolidation, with a corresponding proportionate adjustment
10
<PAGE> 11
of the Option Price per share so that the aggregate Option Price thereafter
shall be the same as the aggregate Option Price of the shares remaining subject
to the Option immediately prior to such reorganization, merger or consolidation.
(c) DISSOLUTION OR LIQUIDATION; REORGANIZATION IN WHICH USPL IS NOT THE
SURVIVING CORPORATION OR SALE OF ASSETS OR STOCK. Upon the dissolution or
liquidation of USPL, the Plan and all Options outstanding hereunder shall
terminate. In the event of any termination of the Plan under this Section 17
(c), each individual holding an Option shall have the right, immediately prior
to the occurrence of such termination and during such reasonable period as the
Board in its sole discretion shall determine and designate, to exercise such
Option in whole or in part, whether or not such Option was otherwise exercisable
at the time such termination occurs and without regard to any vesting or other
limitation on exercise imposed pursuant to Section 10(b) above. In connection
with a merger, consolidation, reorganization or other business combination of
USPL with one or more other entities in which USPL is not the surviving entity,
or upon a sale of all or substantially all of the assets of USPL to another
entity, or upon any transaction (including, without limitation, a merger or
reorganization in which USPL is surviving corporation) that results in any
person or entity (or persons or entities acting as a group or otherwise in
concert) owning more than 40 percent of the combined voting power of all classes
of stock of USPL, USPL and the acquiring or surviving entity shall provide for
the continuation of the Plan and the assumption of the Options theretofore
granted, or for the substitution for such Options with new options covering the
stock of a successor entity, or a parent or subsidiaries thereof, with
appropriate adjustments as to the number and kinds of shares and exercise
prices. The Board shall send prior written notice of the occurrence of an event
described in this Section 17(c) to all individuals who hold Options not later
than the time at which USPL gives notice to of stockholders left such event is
proposed.
(d) ADJUSTMENTS. Adjustments under this Section 17 related to Stock or
securities of USPL shall be made by the Board, whose determination in that
respect shall be final, binding, and conclusive. No fractional shares of Stock
or units of other securities shall be issued pursuant to any such adjustment,
and any fractions resulting from any such adjustment shall be eliminated in each
case by rounding downward to the nearest whole share or unit.
(e) NO LIMITATION ON CORPORATION. The grant of an Option pursuant to
the Plan shall not affect or limit in anyway the right of or power of USPL to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge, consolidate, dissolve liquidate, were to sell
or transferable or any part of its business or assets.
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18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confirm upon any
individual the right to remain in the employ of USPL, any Subsidiary, any
Spin-off Corporation or Affiliate, or to interfere in any way with the right and
authority of USPL, any Subsidiary, any Spin-off Corporation or Affiliate either
to increase or decrease the compensation of any individual at any time, or to
terminate any employment or other relationship between any individual and USPL,
any Subsidiary, any Spin-off Corporation or Affiliate.
19. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of USPL for approval shall be construed as creating any limitations
upon the right and authority of the Board to adopt such other incentive
compensation arrangements (which arrangements may be applicable either generally
to a class or classes of individuals or specifically to a particular individual
or individuals) as the Board in its discretion determines desirable, including,
without limitation, the granting of stock options or stock appreciation rights
otherwise than under the Plan.
This Plan was duly adopted and approved by be Board of Directors of
USPL effective as of the 10th day of March, 1999, subject to approval and
adoption by the stockholders of USPL.
----------------------------------
Bruce C. Rosetto, Secretary
This Plan was duly approved and adopted by the stockholders of USPL at
a meeting held the 5th day of May, 1999.
----------------------------------
Bruce C. Rosetto, Secretary
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Exhibit 10.37
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
U.S. Plastic Lumber Corporation and ("USPL") hereby adopts this 1999
Non-Employee Director Stock Option Plan (the "Plan") the terms of which shall be
as follows:
1. PURPOSE
The Plan is intended to advance the interests of USPL by providing
eligible individuals (as designated pursuant to section 4 below) with an
opportunity to acquire or increase a proprietary interest in USPL, which thereby
will create a stronger incentive to expend maximum effort for the growth and
success of USPL, and will encourage such eligible individuals to remain in the
service of USPL. Each stock option granted under the plan (an "Option") shall be
an option that is not intended to constitute an "incentive stock option"
("Incentive Stock Option") within the meaning of section 422 of the Internal
Revenue Code of 1986, or the corresponding provision of any subsequently enacted
tax statute, as amended from time to time (the "Code").
2. ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee of the
Board of Directors of USPL (the "Committee"), which shall have the full power
and authority to take all actions, and to make all determinations required or
provided for under the Plan or in the Option granted or Option Agreement (as
defined in section 8 below) entered into under the Plan and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Committee to be necessary or appropriate to
the administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Committee present at a meeting at which
any issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Committee executed in accordance with USPL's
Certificate of Incorporation and Bylaws, and with applicable law. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted or Option Agreement entered into hereunder shall be final
and conclusive.
(b) The Board may from time to time appoint a Compensation Committee
(the "Committee") consisting of not less than two members of the Board, none of
whom shall be an officer or other salaried employee of USPL or any
Subsidiary. The Board may remove members, add members, and fill vacancies on the
Committee from time to time, all in accordance with USPL's Certificate of
Incorporation and Bylaws, and Nevada applicable law. The majority vote of the
Committee, or acts reduced to or approved in writing by a majority of the
members of the Committee, shall be the valid acts of the Committee.
(c) NO LIABILITY. No member of the Board or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Option granted or Option Agreement entered into hereunder.
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3. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of common stock, $.0001 par value, of USPL (the "Stock"), which
shares may be treasury shares or authorized but unissued shares. The number of
shares of Stock that may be issued pursuant to Options granted under the Plan
shall not exceed in the aggregate 150,000 shares, subject to adjustment as
provided in Section 17 below. If any Option expires, terminates, or is
terminated or canceled for any reason prior to exercise in full, the shares of
Stock that were subject to the unexercised portion of such Option shall be
available for future Options granted under the Plan.
4. ELIGIBILITY
(a) DIRECTORS. Options may be granted under the Plan to any
non-employee director of USPL or any other entity of which on the relevant date
at least a majority of the securities or other ownership interest having
ordinary voting power (absolutely or contingently) for the election of directors
or other persons performing similar functions ("Voting Securities") are at the
time owned directly or indirectly by USPL, as the Board shall determine and
designate from time to time prior to expiration or termination of the Plan.
(b) MULTIPLE GRANTS. And individual may hold more than one Option,
subject to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE. The Plan shall be effective as of the date of
adoption by the Board, which date is March 10, 1999, subject to approval of the
Plan, within one year of such effective date, by the stockholders of USPL by a
majority of votes present and entitled to vote at a duly held meeting of the
stockholders at which a quorum representing a majority of all outstanding voting
stock is present, either in person or by proxy or by written consent in
accordance with USPL's Certificate of Incorporation and Bylaws; provided,
however, that upon approval of the Plan by the stockholders of USPL set forth
above, all Options granted under the Plan on or after the effective date shall
be fully effective as if the stockholders of USPL approved the Plan on the
effective date. If the stockholders fail to approve the Plan within one year of
such effective date, any options granted hereunder shall be null and void and of
no effect.
(b) TERM. The Plan shall terminate when all options awarded under the
Plan have been exercised, provided that no options may be granted under the Plan
more than 10 years from the earlier of the date the Plan is adopted by the
Company or initially approved by the shareholders of the Company.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Committee may, at
any time and from time to time, prior to the date of termination of the Plan,
grant to such eligible individuals as the Committee may determine ("Optionees"),
Options to purchase such
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number of shares of the Stock on such terms and conditions as the Committee may
determine. The date on which the Committee approved the grant of an Option (or
such later date as specified by the Committee) shall be considered the date on
which such Option is granted.
7. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by USPL and by the Optionee, in
such form or forms as the Committee shall from time to time determine. Option
Agreements covering Options granted from time to time or at the same time need
not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
8. OPTION PRICE
The purchase price of each share of the Stock subject to an Option (the
"Option Price") shall be fixed by the Board and stated in each Option Agreement,
and shall be not less than 100 percent of the closing price of a share of the
Stock, as reported on NASDAQ or other exchange on which the Company's stock
normally trades or if the Company's stock is not traded on the NASDAQ or other
exchange, as determined in good faith by the Board of Directors, on the date the
Option is granted.
9. TERM AND EXERCISE OF OPTIONS
(a) OPTION PERIOD. Each Option granted under the Plan shall terminate
and all rights to purchase shares thereunder shall cease upon the expiration of
ten years from the date such Option is granted, or on such date prior thereto as
may be fixed by the Board and stated in the Option Agreement relating to such
Option.
(b) VESTING AND LIMITATION ON EXERCISE. Except as otherwise provided
herein, each Option shall become exercisable with respect to 100 percent of the
total number of shares subject to the Option on the date of its grant (the
"Vesting Date"); provided, however, that the Board may in its discretion provide
that an Option may be exercised, in whole or in part, at any time from time to
time, over a period commencing on or after the date of grant and ending upon the
expiration or termination of the Option, as the Board shall determine and set
forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may be exercised immediately upon
grant or that it may not be exercised in whole or in part for any period or
periods of time during which such Option is outstanding; provided, however, that
any vesting requirements or other such limitation on the exercise of an Option
may be rescinded, modified or waived by the Board, in its sole discretion, at
any time and from time to time after the date of grant of such Option, so as to
accelerate the time at which the Option may be exercised.
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(c) METHOD OF EXERCISE. An Option that is exercisable hereunder may be
exercised by delivery to USPL on any business day, at its principal office,
addressed to the attention of the Vice President and General Counsel, of written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being exercised, and shall be accompanied by payment in
full of the Option Price of the shares for which the Option is being exercised,
except as provided below. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made
(i) in cash or in cash equivalents; (ii) through the tender to USPL of shares of
Stock, which shares shall be valued, for purposes of determining the extent to
which the Option Price has been paid thereby, at their fair market value
(determined in the manner described in Section 9 above) on the date of exercise;
(iii) by delivering a written direction to USPL that the Option be exercised
pursuant to a "cashless" exercise/sale procedure (pursuant to which funds to pay
for exercise of the Option are delivered to USPL by a broker upon receipt of
stock certificates from USPL) or a cashless exercise/loan procedure (pursuant to
which the Optionees would obtain a margin loan from a broker to fund the
exercise) through a licensed broker acceptable to USPL whereby the stock
certificate or certificates for the shares of Stock for which the Option is
exercised will be delivered to such broker as the agent for the individual
exercising the Option and the broker will deliver to USPL cash (or cash
equivalent acceptable to USPL) equal to the Option Price for the shares of Stock
purchased pursuant to the exercise of the Option plus the amount (if any) of
federal and other taxes that USPL, may, in its sole judgment, be required to
withhold with respect to the exercise of the Option; (iv) to the extent
permitted by applicable law and under the terms of the Option Agreement with
respect to such Option, by the delivery of a promissory note of the Optionee to
USPL on such terms as shall be set out in such Option Agreement and as shall be
acceptable to the Company in its sole discretion; or (v) by combination of
methods described in (i), (ii), (iii) and (iv). Payment in full of the Option
Price need not accompany the written notice of exercise if the Option is
exercised pursuant to the cashless exercise/sale procedure described above. An
attempt to exercise any Option granted hereunder other than as set forth above
shall be invalid and of no force and effect. Promptly after the exercise of an
Option, the individual exercising the Option shall be entitled to the issuance
of the Stock certificate or certificates evidencing his ownership of such
shares. A separate Stock certificate or certificates shall be issued for any
shares purchased pursuant to the exercise of an Option that is intended to be an
Incentive Stock Option, which certificate or certificates shall not include any
shares purchased pursuant to the exercise of an Option that is not an Incentive
Stock Option. An individual holding or exercising an Option shall have none of
the rights of a shareholder until the shares of Stock covered thereby are fully
paid and issued to him and, except as provided in Section 18 below, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date of such issuance.
(d) CHANGE IN CONTROL. In the event of a Change in Control (as defined
below), except as the Board shall otherwise provided in an Option Agreement with
respect to an Option granted under the Plan, all outstanding Options shall
become
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immediately exercisable in full, without regard to any limitation on exercise
imposed pursuant to Section 10(b) above. For purposes of the Plan, a "Change in
Control" shall be deemed to occur (a) if any person, other than Stout
Partnership, shall acquire direct or indirect beneficial ownership of more than
40% of the total combined voting power with respect to the election of directors
of the issued and outstanding stock of USPL (except that no Change in Control
shall be deemed to have occurred if the persons who are stockholders of USPL
immediately before such acquisition own all or substantially all of the voting
stock or other interests of such person immediately after such transaction), or
(b) have the power (whether as result of stock ownership, revocable or
irrevocable proxies, contract or otherwise) or ability to elect or cause the
election of directors consisting at the time of such election of the majority of
the Board. A "person" for this purpose shall mean any person, corporation,
partnership, joint venture or other entity or any group (as such term is defined
for purposes of Section 13(d) of the Exchange Act) and a person shall be deemed
to be a beneficial owner as that term is used in Rule 13d-3 under the Exchange
Act. The amount payable under this Section 10(d) shall be remitted by USPL in
cash or by certified or bank check, reduced by applicable tax withholding.
(e) Notwithstanding any other provision of the Plan, no Option granted
to an Optionee under the Plan shall be exercisable in whole or in part prior to
the date the Plan is approved by the stockholders of USPL has provided in
section 5 above.
9. TRANSFERABILITY OF OPTIONS
Non-Qualified Stock Options granted under the Non-Employee Director
Plan may be transferred only by gift or qualified domestic relations order to a
family member (as defined below) of a director of the Company. The term "family
member" includes any child, stepchild, grandchild, parent, step parent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships, any person sharing the employee's household
(other than a tenant or employee), a trust which these persons have more than 50
percent of the beneficial interest, a foundation which these persons (or the
employee) control management of assets, and any other entity in which these
persons (or the employee) own more than 50 percent of the voting interest.
10. TERMINATION OF SERVICE
(a) GENERAL. Except as otherwise provided herein, upon the termination
of service of an Optionee with USPL or the death or "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, any Option granted to an Optionee pursuant to the Plan shall terminate
upon the expiration of ninety days from the date of such termination of service
and such Optionee shall have no further right to purchase shares of Stock
pursuant to such Option. Notwithstanding the foregoing provisions of this
Section 12, the Board may provide, in its discretion, that following the
termination of service of an Optionee with USPL, an Optionee may exercise an
Option, in whole or in part, at any time subsequent to such termination of
service and prior to termination of the Option pursuant to Section 10 (a) above,
either subject to or without regard to any vesting or other limitations on
exercise imposed pursuant to Section 10(b) above.
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(b) Whether a leave of absence or lien on military or government
service shall constitute a termination of employment of service for purposes of
the Plan shall be determined by the Board, which determination shall be final
and conclusive.
11. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) DEATH. If an Optionee dies while in the employ or service of USPL
within the period following termination of service for which the Option is
exercisable under Section 12 above or Section 13(b) below, all Options held by
such Optionee prior to death shall become immediately exercisable in full and
the executors or administrators or legatees or distributees of such Optionee's
estate shall have the right, at any time within twelve months after the date of
such Optionee's death and prior to termination of the Option pursuant to Section
10(a) above, to exercise any Option held by such Optionee at the date of such
Optionee's death; provided, however, that the Board may provide, in its
discretion, that following the death of an Optionee, the executors or
administrators or legatees or distributees of such Optionee's estate may
exercise an Option, in whole or in part, at any time subsequent to such
Optionee's death and prior to termination of the Option pursuant to Section 10
(a) above, either subject to or without regard to any vesting or other
limitation on exercise imposed pursuant to Section 10(b) above.
(b) DISABILITY. If an Optionee terminates service with USPL by reason
of the "permanent and total disability" (within the meaning of Section 22(e)(3)
of the Code) of such Optionee, then all Options held by such Optionee shall
become immediately exercisable in full and the Optionee shall have the right, at
any time within twelve months after such termination of service and prior to
termination of the Option pursuant to Section 10(a) above, to exercise, in
whole or in part, any Option held by such Optionee at the date of such
termination of service; provided, however, that the Board may provide, in its
discretion, that an Optionee may, in the event of the termination of service of
the Optionee with USPL by reason of the "permanent and total disability" (within
the meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an
Option in whole or in part, at any time subsequent to such termination of
service and prior to termination of the Option pursuant to Section 10(a) above,
either subject to or without regard to any vesting or other limitation on
exercise imposed pursuant to Section 10(b) above. Whether a termination of
service is to be considered by reason of "permanent and total disability" for
purposes of this Plan shall be determined by the Board, which termination shall
be final and conclusive.
12. REQUIREMENTS OF LAW
(a) VIOLATIONS OF LAW. USPL shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the individual exercising the Option or USPL of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations. Any
determination in this connection by the Board shall be final, binding, and
conclusive. USPL shall not be obligated to take any affirmative action in order
to cause the exercise of an Option or the issuance of shares
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pursuant thereto to comply with any law or regulation of any governmental
authority. As to any jurisdiction that expressly imposes the requirement that an
Option shall not be exercisable unless and until the shares of Stock covered by
such Option are registered or are subject to an available exemption from
registration, the exercise of such Option (under circumstances in which the laws
of such jurisdiction apply) shall be deemed conditioned upon the effectiveness
of such registration or the availability of such an exemption.
(b) COMPLIANCE WITH RULE 16b-3. The intent of this Plan is to qualify
for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent
any provision of the Plan does not comply with the requirements of Rule 16b-3,
it shall be deemed inoperative to the extent permitted by law and deemed
advisable by the Board and shall not affect the validity of the Plan. In the
event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on
behalf of the Board, may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
(c) COMPLIANCE WITH SECURITIES ACT OF 1933. The following two paragraphs
shall be applicable if, on the date of exercise of this option, the Common Stock
to be purchased pursuant to such exercise has not been registered under the
Securities Act of 1933, as amended, and under applicable state securities laws,
and shall continue to be applicable for so long as such registration has not
occurred:
(i) The Optionee hereby agrees, warrants and represents that he
will acquire the Common Stock to be issued hereunder for his own account
for investment purposes only, and not with a view to, or in connection
with, any resale or other distribution of any of such shares, except as
hereafter permitted. The Optionee further agrees that he will not at any
time make any offer, sale, transfer pledge or other disposition of such
Common Stock to be issued hereunder without an effective registration
statement under the Securities Act of 1933, as amended, and under any
applicable state securities laws or an opinion of counsel acceptable to
the Company to the effect that the proposed transaction will be exempt
from such registration. The Optionee shall execute such instruments,
representations, acknowledgments and agreements as the Company may, in
its sole discretion, deem advisable to avoid any violation of federal,
state, local, or securities exchange rule, regulation or law.
(ii) The certificates for Common Stock to be issued to the
Optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or under applicable state securities
laws. The shares have been acquired for investment and may not be offered, sold,
transferred, pledged or otherwise disposed of without an effective registration
statement under the Securities Act of 1933, as amended, and under any applicable
state securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
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The foregoing legend shall be removed upon registration of the legended
shares under the Securities Act of 1933, as amended, and under any applicable
state laws or upon receipt of an opinion of counsel acceptable to the Company
that said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
13. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
approval by a majority of the votes present and entitled to vote at a duly held
meeting of the stockholders of USPL at which a quorum representing a majority of
all outstanding voting stock is, either in person or by proxy, present and
voting on the amendment, or by written consent in accordance with applicable
state law and the Certificate of Incorporation and Bylaws of USPL, change the
requirements as to eligibility to receive Options, increase the maximum number
of shares of Stock in the aggregate that may be sold pursuant to Options granted
under the Plan (except as permitted under Section 17 hereof). Except as
permitted under Section 17 hereof, no amendment, suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or impair
rights or obligations under any Option theretofore granted under the Plan.
14. EFFECT OF CHANGES IN CAPITALIZATION
(a) RECAPITALIZATION. If the outstanding shares of Stock are increased
or decreased or changed into or exchanged for a different number or kind of
shares or other securities of USPL by reason of any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in capital stock, or other
increase or decrease in such shares effected without receipt of consideration by
USPL, occurring after the effective date of the Plan, the number and kinds of
shares for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by USPL. In addition, the number and
kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the holder
of the Option immediately following such event, to the extent practicable, be
the same as immediately prior to such event. Any such adjustment in outstanding
Options shall not change the aggregate
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Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding and shall include a corresponding proportionate
adjustment in the Option Price per share. If there is a distribution payable in
the capital stock of a subsidiary corporation (a "Spin-off Corporation") of USPL
("Spin-off Shares"), to the extent consistent with Treasury Regulation Section
1.425-1(a)(6) or the corresponding provision of any subsequent regulation, each
outstanding Option shall thereafter additionally pertain to the number of
Spin-off Shares that would have been received in such distribution by a
shareholder of USPL who owns a number of shares of Common Stock equal to the
number of shares that are subject to the Option at the time of such
distribution, the aggregate Option Price of the Option shall be allocated
between the Spin-off Shares and the Common Stock in proportion to the relative
fair market values of a Spin-off Share and a share of Common Stock immediately
after the distribution of Spin-off Shares, and the Option shall be exercisable
separately as to the shares of Common Stock and Spin-off Shares covered thereby.
(b) REORGANIZATION IN WHICH USPL IS THE SURVIVING CORPORATION. Subject
to the discretion of the Compensation Committee of the Board of Directors, if
USPL shall be the surviving corporation in any reorganization, merger, or
consolidation of USPL with one or more other corporations, any Option
theretofore granted pursuant to the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to such
Option would have been entitled immediately following such reorganization,
merger or consolidation, with a corresponding proportionate adjustment of the
Option Price per share so that the aggregate Option Price thereafter shall be
the same as the aggregate Option Price of the shares remaining subject to the
Option immediately prior to such reorganization, merger or consolidation.
(c) DISSOLUTION OR LIQUIDATION; REORGANIZATION IN WHICH USPL IS NOT THE
SURVIVING CORPORATION OR SALE OF ASSETS OR STOCK. Upon the dissolution or
liquidation of USPL, the Plan and all Options outstanding hereunder shall
terminate. In the event of any termination of the Plan under this Section 17
(c), each individual holding an Option shall have the right, immediately prior
to the occurrence of such termination and during such reasonable period as the
Board in its sole discretion shall determine and designate, to exercise such
Option in whole or in part, whether or not such Option was otherwise exercisable
at the time such termination occurs and without regard to any vesting or other
limitation on exercise imposed pursuant to Section 10(b) above. In connection
with a merger, consolidation, reorganization or other business combination of
USPL with one or more other entities in which USPL is not the surviving entity,
or upon a sale of all or substantially all of the assets of USPL to another
entity, or upon any transaction (including, without limitation, a merger or
reorganization in which USPL is surviving corporation) that results in any
person or entity (or persons or entities acting as a group or otherwise in
concert) owning more than 40 percent of the combined voting power of all classes
of stock of USPL, USPL and the acquiring or surviving entity shall provide for
the continuation of the Plan and the assumption of the Options theretofore
granted, or for the substitution for such Options with new options covering the
stock of a successor entity, or a parent or subsidiaries thereof, with
appropriate adjustments as to the number and kinds of shares and exercise
prices. The Board shall send prior written notice of the
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occurrence of an event described in this Section 17(c) to all individuals who
hold Options not later than the time at which USPL gives notice to of
stockholders left such event is proposed.
(d) ADJUSTMENTS. Adjustments under this Section 17 related to Stock or
securities of USPL shall be made by the Board, whose determination in that
respect shall be final, binding, and conclusive. No fractional shares of Stock
or units of other securities shall be issued pursuant to any such adjustment,
and any fractions resulting from any such adjustment shall be eliminated in each
case by rounding downward to the nearest whole share or unit.
(e) NO LIMITATION ON CORPORATION. The grant of an Option pursuant to
the Plan shall not affect or limit in anyway the right of or power of USPL to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge, consolidate, dissolve liquidate, were to sell
or transferable or any part of its business or assets.
15. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confirm upon any
individual the right to remain in the employ of USPL or to interfere in any way
with the right and authority of USPL either to increase or decrease the
compensation of any individual at any time, or to terminate any relationship
between any individual and USPL.
16. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of USPL for approval shall be construed as creating any limitations
upon the right and authority of the Board to adopt such other incentive
compensation arrangements (which arrangements may be applicable either generally
to a class or classes of individuals or specifically to a particular individual
or individuals) as the Board in its discretion determines desirable, including,
without limitation, the granting of stock options or stock appreciation rights
otherwise than under the Plan.
This Plan was duly adopted and approved by be Board of Directors of
USPL effective as of the 10th day of March, 1999, subject to approval and
adoption by the stockholders of USPL.
------------------------------------
Bruce C. Rosetto, Secretary
This Plan was duly approved and adopted by the stockholders of USPL at
a meeting held the 5th day of May, 1999.
------------------------------------
Bruce C. Rosetto, Secretary
10
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF U.S. PLASTIC LUMBER CORPORATION
SUBSIDIARY - DOING BUSINESS AS STATE OF INCORPORATION
U.S. PLASTIC LUMBER LTD. Delaware
Eaglebrook Plastics, Inc. Illinois
Eaglebrook Products, Inc. Illinois
CLEAN EARTH, INC. Delaware
Clean Earth of New Castle, Inc. Delaware
Consolidated Technologies, Inc. Pennsylvania
Integrated Technical Services, Inc. New Jersey
S & W Waste, Inc. New Jersey
Soil Remediation of Philadelphia, Inc. Delaware
Allied Waste Services, Inc. Delaware
U.S. PLASTIC LUMBER FINANCE CORP. Delaware
U.S. Plastic Lumber IP Corp. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 901,970
<SECURITIES> 0
<RECEIVABLES> 12,795,808
<ALLOWANCES> 460,905
<INVENTORY> 4,869,006
<CURRENT-ASSETS> 19,384,281
<PP&E> 23,164,850
<DEPRECIATION> 5,274,214
<TOTAL-ASSETS> 52,204,962
<CURRENT-LIABILITIES> 10,527,928
<BONDS> 18,224,660
0
383
<COMMON> 1,823
<OTHER-SE> 23,069,673
<TOTAL-LIABILITY-AND-EQUITY> 52,204,962
<SALES> 15,719,505
<TOTAL-REVENUES> 45,704,940
<CGS> 11,776,344
<TOTAL-COSTS> 44,267,714
<OTHER-EXPENSES> 116,270
<LOSS-PROVISION> 100,769
<INTEREST-EXPENSE> 1,225,158
<INCOME-PRETAX> 95,798
<INCOME-TAX> 0
<INCOME-CONTINUING> 95,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,798
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
