<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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)
---------------------
<TABLE>
<S> <C>
NEVADA 87-0404343
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
---------------------
2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
(561) 394-3511
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND
PLACE OF BUSINESS)
Check here whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
July 31, 1999 is 28,124,932.
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<PAGE> 2
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998...................................... 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1999 and 1998........................... 4
Consolidated Statement of Operations for the Six Months
Ended June 30, 1999 and 1998........................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998........................... 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 24
Item 2. Changes in Securities and Use of Proceeds........... 24
Item 5. Other Information................................... 25
Item 6. Exhibits and Reports on Form 8-K.................... 25
SIGNATURES.................................................. 25
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to economic conditions, changes in laws or
regulations, the Company's history of operating losses, demand for products and
services of the Company, newly developing technologies, loss of permits,
conflicts of interest in related party transactions, regulatory matters,
protection of technology, lack of industry standards, raw material commodity
pricing, the ability to receive bid awards, the effects of competition, the
risks and costs associated with the change in the year 2000 and the ability of
the Company to obtain additional financing. Such factors, which are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to consolidated financial statements, could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with undue reliance on any such forward-looking statements, which speak only as
of the date made. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
2
<PAGE> 3
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 3,276,415 $ 2,912,664
Accounts receivable, net.................................... 27,275,887 16,135,446
Inventories................................................. 4,039,973 4,869,006
Prepaid expenses and other assets........................... 1,864,847 1,560,754
------------ -----------
Total current assets.............................. 36,457,122 25,477,870
Property, plant and equipment, net.......................... 66,084,845 19,198,190
Acquired intangibles, net................................... 18,350,258 9,553,642
Other assets................................................ 6,596,463 5,376,403
------------ -----------
Total assets...................................... $127,488,688 $59,606,105
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 10,889,071 $ 6,816,685
Notes and capital leases payable, current portion........... 4,212,571 4,134,362
Accrued expenses............................................ 5,039,248 2,303,081
Restructuring reserve....................................... 1,805,577 --
Other liabilities........................................... 3,835,081 1,457,477
------------ -----------
Total current liabilities......................... 25,781,548 14,711,605
Notes and capital leases payable, net of current portion.... 29,759,488 15,770,624
Notes payable to affiliates................................. 6,500,000 --
Deferred income taxes and other liabilities................. 2,126,100 185,399
Minority interest........................................... 250,165 250,165
Convertible subordinated debentures, net of discount........ 9,833,333 3,555,556
------------ -----------
Total liabilities................................. 74,250,634 34,473,349
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized
5,000,000 shares; issued and outstanding 113,234 shares
and 382,709 shares, respectively (aggregate liquidation
preference of $2,377,914 and $7,808,877, respectively).... 113 383
Common stock par value $.0001, authorized 50,000,000
shares; issued and outstanding 27,600,038 shares and
19,040,528 shares, respectively........................ 2,760 1,904
Additional paid-in capital................................ 56,415,699 24,769,166
Retained earnings (accumulated deficit)................... (3,180,518) 361,303
------------ -----------
Total stockholders' equity........................ 53,238,054 25,132,756
------------ -----------
Total liabilities and stockholders' equity........ $127,488,688 $59,606,105
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues, net............................................... $33,543,360 $20,002,625
Cost of goods sold and services performed................... 24,329,206 16,769,866
----------- -----------
Gross profit...................................... 9,214,154 3,232,759
Selling, general and administrative expenses................ 4,647,335 2,078,824
Merger costs................................................ 595,000 --
----------- -----------
Operating income.................................. 3,971,819 1,153,935
Interest and other income................................... 59,454 54,623
Minority interests.......................................... -- (284,029)
Interest expense............................................ (1,277,241) (244,624)
----------- -----------
Income before income taxes........................ 2,754,032 679,905
Provision for income taxes.................................. (214,000) (172,832)
----------- -----------
Net income........................................ 2,540,032 507,073
Preferred stock dividends earned............................ (105,188) (109,793)
----------- -----------
Net income attributable to common stockholders.... $ 2,434,844 $ 397,280
=========== ===========
Net income per share:
Basic............................................. $ .09 $ .02
=========== ===========
Diluted........................................... $ .09 $ .02
=========== ===========
Weighted average common shares outstanding:
Basic............................................. 25,841,393 17,587,833
=========== ===========
Diluted........................................... 27,933,219 18,817,041
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues, net............................................... $56,137,417 $29,796,896
Cost of goods sold and services performed................... 41,144,818 24,973,846
Restructuring charge and asset impairment................... 2,025,000 --
----------- -----------
Gross profit...................................... 12,967,599 4,823,050
Selling, general and administrative expenses................ 8,777,951 3,961,260
Merger costs................................................ 595,000 --
Restructuring charge and asset impairment................... 3,720,000 --
----------- -----------
Operating income (loss)........................... (125,352) 861,790
Interest and other income................................... 134,240 207,480
Minority interests.......................................... -- (284,029)
Interest expense............................................ (2,926,088) (390,237)
----------- -----------
Income (loss) before income taxes................. (2,917,200) 395,004
Provision for income taxes.................................. (214,000) (61,193)
----------- -----------
Net income (loss)................................. (3,131,200) 333,811
Preferred stock dividends earned............................ (274,800) (217,948)
----------- -----------
Net income (loss) attributable to common
stockholders.................................... $(3,406,000) $ 115,863
=========== ===========
Net income (loss) per share:
Basic............................................. $ (.14) $ .01
=========== ===========
Diluted........................................... $ (.14) $ .01
=========== ===========
Weighted average common shares outstanding:
Basic............................................. 24,144,295 17,071,730
=========== ===========
Diluted........................................... 24,144,295 18,208,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (3,131,200) $ 333,811
------------ -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 1,706,418 657,029
Amortization........................................... 434,146 220,793
Amortization of deferred financing and debenture discount
costs..................................................... 1,097,838 120,120
Restructuring and asset impairment charge.............. 4,697,997 --
Income tax provision above (below) taxes paid.......... (163,124) 12,614
Gain on sale of assets and minority interests.......... -- 389,617
Expense related to common shares issued to non
employees............................................. 42,947 77,318
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable............................... (8,643,554) (6,020,606)
Inventories....................................... (15,618) (768,686)
Prepaid expenses and other current assets......... 146,203 (698,861)
Other assets...................................... 80,991 (977,383)
Accounts payable.................................. 2,669,142 2,207,145
Other liabilities................................. 456,966 (104,465)
Accrued expenses.................................. (218,238) (367,200)
------------ -----------
Total adjustments............................... 2,292,114 (5,252,565)
------------ -----------
Net cash used in operating activities........... (839,086) (4,918,754)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,954,553) (4,361,972)
Cash paid for acquisitions, net of cash received.......... (14,592,277) (2,760,706)
Advances to Joint Venture................................. -- (512,002)
------------ -----------
Net cash used in investing activities........... (20,546,830) (7,634,680)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options............ 479,504 2,291,193
Proceeds from sale of common stock........................ 9,249,090 --
Proceeds from sale of preferred stock..................... -- 4,263,420
Costs of issuing stock.................................... (203,681) (428,007)
Proceeds from notes payable to affiliates................. 6,500,000 443,190
Proceeds from notes payable............................... 11,706,867 5,106,643
Proceeds from issuance of convertible debentures.......... 2,500,000 --
Payment of deferred financing costs....................... (509,192) --
Payments of notes payable................................. (7,972,921) (733,450)
------------ -----------
Net cash provided by financing activities....... 21,749,667 10,942,989
------------ -----------
Net change in cash and cash equivalents..................... 363,751 (1,610,445)
Cash and cash equivalents, beginning of period.............. 2,912,664 4,603,908
------------ -----------
Cash and cash equivalents, end of period.................... $ 3,276,415 $ 2,993,463
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
U.S. Plastic Lumber Corp. and its subsidiaries (the "Company") are engaged
in the manufacturing of plastic lumber from recycled plastic waste and
environmental services including the recycling of soils which have been exposed
to hydrocarbons. The Company's plastic lumber customers are located throughout
the United States. The Company's environmental services' customers are located
primarily in the Northeastern United States.
The Company's unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and the regulations of the Securities and Exchange
Commission ("SEC") for quarterly reporting. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
the statements include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and a majority owned
joint venture. All significant inter-company balances and transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period. See also note 2 for the restatement of all
prior periods for the acquisition of Barbella Environmental Technology, Inc.
("BET") that was accounted for as a pooling of interests.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss)
less preferred stock dividends earned by the weighted average number of shares
actually outstanding. Diluted income (loss) per share further considers the
impact of common stock equivalents to the extent that they are dilutive. The
Company's basic and diluted loss per share are equivalent for the six months
ended June 30, 1999 because the common stock equivalents are anti dilutive. The
inclusion of dilutive common stock equivalents in each of the three months ended
June 30, 1999 and 1998 and the six months ended June 30, 1998 did not change the
net income (loss) per share reported. The income (loss) per share and the shares
outstanding for each period presented for 1998 have been restated to include the
acquisition of BET as if it had occurred on January 1, 1998.
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
Interest paid totaled $1,359,569 and $114,232 in the six months ended June
30, 1999 and 1998, respectively. Federal and state income taxes paid totaled
$377,124 and $176,619 in the six months ended June 30, 1999 and 1998,
respectively. See Notes 3 and 7 for information regarding common shares,
warrants, options and debt issued for acquisitions and warrants issued to secure
additional financing.
7
<PAGE> 8
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
1998 ACQUISITIONS
In January 1998, the Company acquired 100% of the stock of 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.
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.
Effective June 30, 1998 the Company purchased substantially all of the
assets of Trimax of Long Island, Inc. and Polymerix, Inc. (collectively
"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 S&W is located in northern New Jersey.
The $8,517,273 total purchase price 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 and 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 $8,517,273 aggregate purchase price of
the 1998 acquisitions to the net assets acquired follows:
<TABLE>
<S> <C>
Working capital (deficit)................................... $ (846,926)
Long-term assets............................................ 7,101,976
Long-term debt.............................................. (1,535,609)
Net deferred tax assets..................................... 333,303
Acquired intangibles........................................ 3,464,529
-----------
Aggregate purchase price.................................... $ 8,517,273
===========
</TABLE>
1999 ACQUISITIONS
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. AWI provides environmental services. 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 and entitling the Company to all net profits or losses after
January 4, 1999. The Company finalized the transaction with Brass on March 23,
1999.
8
<PAGE> 9
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 28, 1999, the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. (collectively "Eaglebrook"), a
plastic recycling and plastic lumber manufacturing company located in Chicago,
IL. The Company is leasing the 300,000 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 Company intends to purchase the Chicago
facility and has recorded the appraised value of the land and building in
property and equipment and the applicable lease payments and the option price in
notes and capital leases payable.
On April 1, 1999, the Company signed a Management Contract with Brigadoon
Industries, Inc., ("Brigadoon") taking over all responsibility for day-to-day
management and financial control as of that date and entitling the Company to
all net profits or losses after April 1, 1999. Brigadoon manufactures corner
boards from recycled plastic for use by fresh produce shippers. The Company
acquired 100% of the stock of Brigadoon on June 30, 1999. The Company also
purchased a 140,000 sq. ft. facility situated on approximately 39 acres in
Ocala, Florida. The Ocala plant will house expanded operations of Brigadoon plus
a large number of new extruders to manufacture other products for the plastic
lumber division.
On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("BET"), an environmental remediation and
construction service company located in Somerville, New Jersey. The Company
incurred merger costs totaling $595,000 in the BET transaction. The Company has
accounted for the BET transaction as a pooling of interests. Accordingly, the
1998 and 1999 financial statements have been restated to include the applicable
amounts for BET as if the acquisition had taken place on January 1, 1998.
Following is a summary of the BET amounts included in the accompanying restated
income statements:
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................... $6,318,505 $4,987,105 $9,100,331 $7,122,115
Net income.............................. 439,652 254,073 143,207 95,271
Income per share after merger costs..... $ .02 $ .01 $ .01 $ .01
</TABLE>
The $10,965,833 total purchase price for all of the 1999 acquisitions
consisted of 4,244,525 shares of the Company's common stock valued at an
aggregate of $19,343,714, cash payments of $14,800,000 and issuance of debt
totaling $5,763,494, costs totaling $838,733 and $1,219,892 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 $41,965,833 aggregate purchase price of the 1999 acquisitions
to the net assets acquired follows:
<TABLE>
<S> <C>
Working capital (deficit)................................... $(10,133,224)
Long-term assets............................................ 43,914,823
Deferred tax liabilities.................................... (673,579)
Acquired intangibles........................................ 8,857,813
------------
Aggregate purchase price.................................... $ 41,965,833
============
</TABLE>
All of the acquisitions in 1998 and 1999 have been accounted for as
purchases except for BET, which is being accounted for as a pooling of
interests. Accordingly, the results of operations of the purchased companies are
included in the condensed 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 in all of the
acquisitions has been recorded as acquired intangibles. The acquired intangibles
are being amortized on a straight-line basis over a period of twenty to forty
years.
9
<PAGE> 10
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro-forma combined results of operations of the Company, and
all of its subsidiaries, as if the "purchase" acquisitions were made on January
1, 1998, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
----------- ------------
1999 1998
----------- ------------
<S> <C> <C>
Net sales.................................................. $58,993,908 $109,472,087
Net income (loss).......................................... (2,925,964) 1,235,798
Net income (loss) attributable to common shareholders...... (3,200,764) 558,720
Diluted income (loss) per share............................ $ (.13) $ .02
Weighted average shares used in computation................ 24,694,764 22,415,011
</TABLE>
The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill and depreciation on revalued property and equipment
and for interest on cash paid and debt issued. Per share amounts are calculated
after preferred dividends are subtracted from net income. They do not purport to
be indicative of the results of operations which actually would have resulted
had the acquisitions occurred at the beginning of the period presented, or of
future results of operations of the consolidated entities.
3. CAPITAL STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
Late in 1996, the Company initiated an offering of up to 250,000 shares of
the Company's Series A Preferred Stock. The shares are non-voting and have a 10%
cumulative stock dividend payable semi-annually. Each share is convertible into
seven shares of the Company's common stock at the option of the stockholder. In
the event of any liquidation, after payment of debts and other liabilities, the
holders of Series A Preferred Stock will be entitled to receive, before the
holder of any of the Common Stock, the stated value of $20.00 per share plus any
unpaid dividends. The Series A Preferred Stock can be redeemed at any time at
the sole option of the Company for $25.00 per share.
In the first quarter of 1999, 1,050 Series A shares were converted into
7,350 shares of Common Stock. A 5% stock dividend of 11,351 Series A shares was
declared as of March 31, 1999 to shareholders of record on March 1, 1999.
In the second quarter of 1999, the Company notified all Series A Preferred
shareholders of its intent to redeem the Series A Preferred Shares at the $25
per share redemption price unless the shareholder elected to convert the shares
to Common Stock prior to the redemption date set by the Company. Every Series A
Preferred shareholder elected to convert to Common Stock. A dividend for the pro
rata period from April 1, 1999 to the redemption date totaling 2,285 Series A
preferred shares was paid to shareholders and immediately converted into common
shares. A total of 1,584,187 common shares were issued in the second quarter on
conversion of all outstanding Series A Preferred shares. At June 30, 1999 there
were no Series A Preferred shares outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
In the summer of 1998, the Company issued 211,020 shares of the Company's
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.
In the first quarter of 1999, 48,113 Series B shares were converted into
336,790 common shares. A 5% stock dividend of 6,565 Series B shares was declared
effective March 31, 1999 to shareholders of record on March 1, 1999.
In July 1999, the Company notified all Series B Preferred shareholders of
its intent to redeem the Series B Preferred Shares at the $25 per share
redemption price, unless the Series B Preferred shareholders
10
<PAGE> 11
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
elect to convert their Series B Preferred Shares to Common Stock prior to the
redemption date set by the Company. A dividend for the pro rata period from
April 1, 1999 to the August 31, 1999 redemption date totaling 4,747 Series B
preferred shares will be paid to shareholders regardless of whether or not they
convert. Approximately 113,234 Series B shares were outstanding as of June 30,
1999. Based on the current market price of the Common Stock, management believes
there is a high likelihood that all Series B shareholders will convert. In that
event, approximately 825,864 shares of additional Common Stock will be issued
during the third quarter of 1999. As of July 31, 1999, 70,223 Series B preferred
shares were already converted into 491,561 shares of Common Stock.
EMPLOYEE STOCK OPTIONS
The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and is
generally tied to the market price of the Company's freely trading shares. The
term for exercising the stock options is generally ten years. Stock options
granted under the Company's stock option incentive plan generally vest ratably
over a period of three years. Employee stock option activity in 1999 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF
WEIGHTED AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING
---------------- -----------
<S> <C> <C>
Outstanding at December 31, 1998........................... $3.46 1,671,000
Granted.................................................... 6.22 1,901,750
Exercised.................................................. 4.33 (39,999)
Canceled................................................... 3.69 (108,000)
----- ---------
Outstanding at June 30, 1999............................... $4.98 3,424,751
===== =========
Options exercisable at June 30,1999........................ $3.46 1,365,583
===== =========
</TABLE>
NON-EMPLOYEE STOCK OPTIONS AND WARRANTS
Magellan Finance Corporation ("Magellan"), a stockholder, held an option to
purchase up to 117,894 shares of the Company's common stock at $1.77 per share.
This option was exercised on June 30, 1999.
Warrants to purchase 62,500 common shares at $7.22 per share were issued to
the purchasers of $2,500,000 of convertible subordinated debentures in January
1999. Another 85,000 and 42,500 warrants to purchase common stock at $5.00 and
$7.50, respectively, were also issued in conjunction with the sale of the
$2,500,000 convertible subordinated debentures in 1999. The Company issued
500,000 warrants at $6.00 to the shareholders of Brass Investment Co. as part of
the acquisition consideration.
Nonemployee stock option and warrant activity in 1999 is summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER
EXERCISE PRICE OUTSTANDING
---------------- -----------
<S> <C> <C>
Outstanding at December 31, 1998........................... $3.15 620,394
Issued..................................................... 6.10 915,000
Exercised.................................................. 2.13 (147,894)
Canceled................................................... 5.46 (125,000)
----- ---------
Outstanding at June 30, 1999............................... $5.13 1,262,500
===== =========
Stock options exercisable at June 30, 1999................. $5.12 1,242,500
===== =========
</TABLE>
11
<PAGE> 12
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK RESERVED
At June 30, 1999, common stock was reserved for the following:
<TABLE>
<S> <C>
Shares contingently issuable to USPL and CEI shareholders
(see Note 5).............................................. 4,573,686
Conversion of Series B Preferred Stock...................... 825,864
Non employee stock options.................................. 417,500
Employee stock options...................................... 3,424,751
Shares contingently issuable under other earnout
provisions................................................ 175,500
Warrants.................................................... 845,000
Convertible Debentures...................................... 1,620,890
----------
11,883,191
==========
</TABLE>
4. NON-RECURRING RESTRUCTURING, MERGER AND FLOW MOLD INVENTORY WRITE-DOWN
CHARGES IN 1999
In conjunction with the significant acquisitions in each division during
the first quarter of 1999, the Company restructured and consolidated its two
operating divisions and facilities. A restructuring and asset impairment charge
totaling $5,745,000 was recorded in the first quarter of 1999 including
$4,365,000 by the plastic lumber division and $1,380,000 by the environmental
recycling division.
In addition to consolidating several plants, the plastic lumber division
discontinued the labor intensive flow mold process and converted entirely to
more efficient continuous extrusion method of manufacturing plastic lumber. Flow
mold equipment has been written down to its estimated resale value and the
inventory of flow mold plastic lumber has been written down to its raw material
value resulting in a flow mold restructuring and asset impairment charge
totaling $2,785,000. The restructuring charge also included severance, lease
termination, idle plant costs during the changeover and equipment relocation
costs totaling $ 1,580,000 for plastic lumber and $765,000 for environmental
recycling. The environmental recycling division also wrote-off $615,000 for
obsolete equipment and site development costs.
During the second quarter of 1999 the company made payments approximating:
$30,000 on abandoned leased space; $150,000 for severance and termination
benefits; and $27,000 for relocation of equipment.
The $1,805,577 remaining reserve for costs to be paid in future periods consists
of the following items:
<TABLE>
<S> <C>
Estimated lease payments required before facilities are
sublet.................................................... $ 273,591
Severance agreements and termination benefits............... 423,804
Estimated loss on termination of contractual commitments.... 161,930
Costs to be incurred to relocate inefficient operations..... 446,252
----------
Total remaining restructuring reserve....................... $1,805,577
==========
</TABLE>
As a result of the June 1999 merger with BET that was accounted for as a
pooling of interests, a $595,000 charge was recorded in the second quarter of
1999 for merger related costs.
5. COMMITMENT AND CONTINGENCIES
EARNOUT AGREEMENT
The Company has reserved for issuance pursuant to earnout agreements,
4,573,686 shares which were related to an earnout provision contained in the
Agreement and Plan of Reorganization entered into by the Company on December 15,
1995. In connection with this transaction, the parties to the Agreement and Plan
of Reorganization agreed that the earnout shares would be paid to certain
shareholders who held the common stock as of the date of the Agreement and Plan
of Reorganization in the event net sales or production of Earth Care Global
Holdings, on a consolidated basis, meet or exceed 2.0 million pounds of plastic
lumber per month for three consecutive months are achieved, subject to certain
limitations contained in the Agreement. Certain
12
<PAGE> 13
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
questions have arisen with respect to the meaning of the production quotas set
forth in these agreements and the Company has appointed a committee of
independent directors who have selected independent counsel to review this
matter.
In the event these sales or production levels are reached, the shareholders
of Earth Care Global Holdings as of March 29, 1996 and Clean Earth, Inc., which
shareholders are referred to as the "Historical Shareholders" would receive
approximately 4.6 million earnout shares. No additional assets or cash would be
received by the Company in the event such sales or production goals were
achieved which would result in dilution from the issuance of additional shares
and, which would directly impact all shareholders who purchased the Company's
common stock subsequent to March 29, 1996 and who still owned the Company's
common stock on the date the earnout shares are issued, assuming the sales or
production goal is met. As of June 30, 1999, net tangible book value was
$34,587,796 , or $1.25 per share of common stock. Net tangible book value per
share represents total assets less acquired intangibles less total liabilities,
divided by the number of shares of common stock outstanding. After making the
accounting adjustments necessary to give effect to the issuance of the 4,573,686
earnout shares, the adjusted net book value as of June 30, 1999 would have been
$1.07 per share which represents an immediate dilution of $.18 per share to
shareholders who are not Historical Shareholders.
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.
6. LINE OF CREDIT AND NEW CREDIT FACILITY
In October 1998 the Company negotiated a five year line of credit for
$30,000,000 with a division of Southern Pacific Bank. 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 and 1.25% over prime on equipment loans. Loans secured by specific
equipment are payable in terms of 4 to 7 years in equal monthly installments
with the unpaid balance due in October, 2003. The total costs of obtaining the
line aggregating approximately $1,255,000 are being amortized over the five year
term of the agreement as interest expense. The total amount available under the
line of credit at June 30, 1999 is approximately $8,955,000.
7. 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
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. The
proceeds of the debentures were used for acquisitions.
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 SEC before August 19, 1999; however, the Company has
registered the shares underlying the debentures
13
<PAGE> 14
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on May 14, 1999 and must 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. 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 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.
On January 27, 1999 the Company issued an additional $2,500,000 of
convertible subordinated debentures to the same debenture holders with the same
terms as the $4,000,000 issued on December 22, 1998. The proceeds were used for
acquisitions.
The Company incurred costs totaling $1,184,235 related to the $6,500,000
debentures including $348,055 assigned to the 162,500 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.
8. SEGMENT REPORTING
The Company's operations are conducted through its plastic lumber division
and its environmental recycling division. A $4,365,000 restructuring charge was
recorded by the plastic lumber division in the first quarter of 1999 and a
$1,380,000 restructuring charge was recorded by the environmental recycling
division. As a result of the June 1999 merger with BET that was accounted for as
a pooling of interests, an $595,000 charge was recorded in the second quarter of
1999 for merger related costs. The operating results of the two segments
excluding the aforementioned non recurring restructuring and merger charges are
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Environmental recycling..................... $20,383 $16,506 $34,628 $23,495
Plastic lumber.............................. 13,160 3,497 21,509 6,302
------- ------- ------- -------
Total Revenues...................... $33,543 $20,003 $56,137 $29,797
======= ======= ======= =======
Operating Income by Segment:
Environmental recycling..................... $ 3,025 $ 1,706 $ 4,228 $ 2,175
Plastic lumber.............................. 2,006 (199) 2,916 (657)
Corporate................................... (464) (353) (929) (656)
------- ------- ------- -------
Total............................... $ 4,567 $ 1,154 $ 6,215 $ 862
======= ======= ======= =======
Depreciation and amortization:
Environmental recycling..................... $ 450 $ 220 $ 1,153 $ 396
Plastic lumber.............................. 661 199 898 393
Corporate................................... 42 41 89 88
------- ------- ------- -------
$ 1,153 $ 460 $ 2,140 $ 877
======= ======= ======= =======
</TABLE>
14
<PAGE> 15
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The identifiable assets of the respective segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Identifiable assets:
Environmental recycling................................... $ 60,374 $34,162
Plastic lumber............................................ 62,708 22,975
Corporate................................................. 4,407 2,469
-------- -------
$127,489 $59,606
======== =======
</TABLE>
The capital expenditures of the respective segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Capital Expenditures:
Environmental recycling......................... $2,534 $1,493 $3,051 $2,833
Plastic lumber.................................. 2,125 778 2,823 1,529
Corporate....................................... 80 -- 80 --
------ ------ ------ ------
$4,739 $2,271 $5,954 $4,362
====== ====== ====== ======
</TABLE>
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for each of the three and
six month periods ended June 30, 1999 and 1998. This discussion should be read
in conjunction with the condensed consolidated financial statements and notes
thereto which are included elsewhere herein.
BUSINESS
The Company has two distinct business lines-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. This division also operates four 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.
ACQUISITIONS COMPLETED DURING THE THREE MONTHS ENDED MARCH 31, 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"). SRP operates
a soil remediation facility in Philadelphia, PA similar to the Company's soil
remediation facility in New Castle, DE. 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 and
entitling the Company to all net profits or losses after January 4, 1999. The
Company finalized its transaction with Brass in March 1999.
On January 28, 1999, the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook"), located in Chicago,
IL. 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.
ACQUISITIONS COMPLETED DURING THE THREE MONTHS ENDED JUNE 30, 1999
On April 1, 1999, the Company signed a Management Contract with Brigadoon
Industries, Inc. (Brigadoon"), taking over all responsibility for day-to-day
management and financial control as of that date and entitling the Company to
all net profits or losses after April 1, 1999. Brigadoon is a plastic recycling
and manufacturing company located in Ocala, Florida. The Company finalized the
transaction with Brigadoon on June 30, 1999, acquiring 100% of the stock of
Brigadoon.
On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("BET"), an environmental remediation and service
company located in New Jersey. The Company has accounted for the BET transaction
as a pooling of interest. Accordingly all of the amounts in the financial
statements, including shares outstanding and earnings per share, have been
restated to include BET for all periods in 1998 and 1999. See Note 2 to the
financial statements for the effect of the pooling with BET on prior periods. A
total of $595,000 of costs related to the BET merger was written off in the
second quarter of 1999.
16
<PAGE> 17
NON-RECURRING RESTRUCTURING, MERGER, EQUIPMENT AND INVENTORY REVALUATION CHARGES
IN 1999
In conjunction with the aforementioned significant acquisitions in each
division, the Company restructured and consolidated its two operating divisions
and facilities. A restructuring charge totaling $5,745,000 was recorded in the
first quarter of 1999 including $4,365,000 by the plastic lumber division and
$1,380,000 by the environmental recycling division. The second quarter includes
a $595,000 charge for non-recurring costs related to the BET merger, accounted
for as a pooling of interests transaction.
In addition to consolidating several plants, the Company has discontinued
utilizing the labor intensive flow mold process and converted entirely to a
continuous extrusion method of manufacturing plastic lumber. This conversion
resulted in a flow mold restructuring and asset impairment charge totaling
$2,785,000. The restructuring charge also included severance, lease termination,
idle plant costs during the changeover and equipment relocation costs totaling $
1,580,000 for plastic lumber and $765,000 for environmental recycling. The
environmental recycling division also wrote-off $615,000 of obsolete equipment
and site development costs.
COMPARISON OF THE SECOND QUARTER ENDED JUNE 30, 1999 AND 1998
The following table sets forth revenue with percentages of total revenue,
and sets forth costs of operations, selling, general and administrative expenses
and operating income with percentages of the applicable segment revenue, for
each of the Company's business segments for the periods indicated. The following
amounts do not include the aforementioned non-recurring restructuring, inventory
and merger charges:
<TABLE>
<CAPTION>
SECOND QUARTER ENDED JUNE 30,
----------------------------------
1999 % 1998 %
------- ------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Plastic Lumber..................................... $13,160 39.2 $ 3,497 17.5
Environmental Recycling............................ 20,383 60.8 16,506 82.5
------- ------ ------- -----
Total revenues............................. 33,543 100.0 20,003 100.0
Cost of Sales and Services Performed:
Plastic Lumber..................................... 8,312 63.2 2,570 73.5
Environmental Recycling............................ 15,116 74.2 13,862 84.0
Depreciation:
Plastic Lumber..................................... 541 4.1 166 4.7
Environmental Recycling............................ 378 1.9 176 1.1
Corporate.......................................... 2 0.0 3 0.1
Selling, General and Administrative:
Plastic Lumber..................................... 2,181 16.6 906 25.9
Environmental Recycling............................ 1,792 8.8 739 4.5
Corporate.......................................... 422 1.3 312 1.6
Amortization:
Plastic Lumber..................................... 120 .9 54 1.5
Environmental Recycling............................ 72 .4 23 0.1
Corporate.......................................... 40 .1 38 0.2
------- ------ ------- -----
Total Operating Expenses................... 28,976 86.4 18,849 94.2
------- ------ ------- -----
Total Operating Income..................... 4,567 13.6 1,154 5.8
Operating Income (Loss) by Segment:
Plastic Lumber..................................... 2,006 15.2 (199) (5.7)
Environmental Recycling............................ 3,025 14.8 1,706 10.3
Corporate.......................................... (464) (1.4) (353) (1.8)
------- ------ ------- -----
Total Operating Income..................... $ 4,567 13.6 $ 1,154 5.8
</TABLE>
17
<PAGE> 18
CONSOLIDATED REVENUES AND OPERATING INCOME
The Company recognized significant increases in both revenues and operating
income for 1999 compared to 1998. Revenues increased 68% to $33,543,000 for 1999
from $20,003,000 in 1998. Although most of the increase was attributable to
acquisitions in 1999, the business units owned in 1998 achieved a 30% growth in
revenue from $11,038,000 in 1998, excluding $3,977,000 of dredging performed in
1998 (none in 1999) to $17,895,000 in 1999. Consolidated operating income
increased by $ 3,413,000 to $4,567,000 for 1999 compared to $1,154,000 in 1998.
The increase in operating income was primarily due to businesses acquired in
1998 and 1999.
REVENUES BY SEGMENT
Plastic lumber division sales increased 276% to $13,160,000 in 1999
compared to $3,497,000 in 1998. Approximately $2,097,000 was internal growth and
the remaining $7,566,000 of the $9,663,000 increase was attributable to
companies acquired in 1999. In June 1999 the independent tests of the Wisconsin
plant required for "BOCA" certification were completed. The Company expects to
be able to start advertising the Carefree Decking and Guardrail Systems as
"Building Code Approved" in the third quarter of 1999.
Environmental recycling division revenues for 1999 were $20,383,000, an
increase of $3,877,000 or 23% over the $16,506,000 for the second quarter of
1998, which was restated to include $4,987,000 of BET revenues. The acquisitions
of S&W, Brass and BET contributed $6,302,000 of the increase in revenues during
the second quarter of 1999. Revenues at the business units in place in 1998
increased by approximately $1,552,000, or 21%, excluding $3,977,000 of dredging
work performed in the second quarter of 1998. The Company does not expect to
commence dredging operations for 1999 until the third quarter.
GROSS PROFIT
Consolidated gross profit excluding depreciation increased $6,544,000 or
183% to $10,115,000 for 1999 as compared to $3,571,000 in 1998. Gross profit as
a percent of sales improved by 12 percentage points from 18% in 1998 to 30% in
1999. The increase in gross profit as a percent of sales was achieved on both
existing and acquired businesses. Business units in both divisions continued to
consolidate and eliminate duplicative operating expenses during 1999.
Plastic lumber acquisitions in 1999 accounted for $2,742,000 or 69% of the
$3,921,000 increase in plastic lumber division gross profit in 1999. Cost of
sales (excluding depreciation) as a percent of plastic lumber sales improved
significantly from 76% in 1998 to 67% in 1999. The improvement was primarily
from acquisitions.
Environmental recycling division acquisitions of S&W, Brass and BET
accounted for $2,578,000, or 98%, of the $2,624,000 increase in gross profit
before depreciation in 1999 over 1998. The CBC facility opened in late June 1998
contributed $535,000 of gross profit, substantially replacing $550,000 of
dredging gross profit in 1998. Environmental recycling division costs excluding
depreciation improved as a percent of revenues, from 84% in 1998 to 74% in 1999.
The improvement was achieved at business units owned in 1998 as well as at
acquired operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
Consolidated SG&A expenses increased $2,438,000 to $4,395,000 for 1999 from
$1,957,000 in 1998. As a percentage of consolidated revenues, SG&A expenses
increased from 10% for 1998 to 13% in 1999 due to a higher percentage of plastic
lumber division sales and an increase in SG & A expenses as a percent of
revenues in the environmental recycling division. The environmental recycling
division's SG&A expenses increased from 5% of revenues in 1998 to 9% in 1999,
whereas the plastic lumber's SG&A expenses as a percent of sales improved
significantly, from 26.% to 17%. The improvement in the plastic lumber
division's SG&A ratio is due to spreading fixed costs over a higher revenue base
at existing business units and lower expense ratios at the acquired companies.
Corporate administrative expenses also improved to 1.3% of revenues in 1999 from
1.6% in 1998.
18
<PAGE> 19
INTEREST EXPENSE
Interest expense increased $1,032,000 to $1,277,000 in 1999 over the
$245,000 in 1998, primarily due to additional borrowings to fund the S&W,
Eaglebrook and Brass acquisitions early in 1999. Interest expense also includes
$178,000 of amortization of deferred financing costs to obtain the credit
agreement with affiliates through PNC bank, the new credit agreement form
Southern Pacific Bank (SPB) in October 1998 and the $6,500,000 of convertible
debentures. Interest expense in the comparable 1998 quarter included $74,000 of
similar costs.
Although interest expense increased as a result of debt service
requirements assumed from businesses acquired during 1998 and 1999, most of the
increase in interest expense is the result of the following additional
borrowings:
- A weighted average outstanding balance of $19,970,000 under the $30
million SPB credit facility;
- Issuing $6,500,000 of convertible debentures in December 1998 and January
1999;
- Issuing $4,000,000 of convertible debentures and a $3,000,000 capitalized
lease to purchase Eaglebrook in January 1999;
- Adding $4,100,000 of debt to affiliates in connection with the Eaglebrook
purchase; and
- Issuing other loans and capitalized leases secured by specific equipment.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased $576,000 or 167% to $921,000 in 1999 from
$345,000 in 1998 reflecting the significant increase in plant and equipment
primarily from acquisitions. Amortization expense increased $117,000 to $232,000
in 1999 from $115,000 in 1998 due to goodwill from the acquisitions completed
after June 30, 1998.
19
<PAGE> 20
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The following table sets forth revenue with percentages of total revenue,
and sets forth costs of operations, selling, general and administrative expenses
and operating income with percentages of the applicable segment revenue, for
each of the Company's business segments for the periods indicated. The following
amounts do not include the aforementioned non-recurring restructuring, merger
and inventory charges.
<TABLE>
<CAPTION>
SECOND QUARTER ENDED JUNE 30,
----------------------------------
1999 % 1998 %
------- ------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Plastic Lumber..................................... $21,509 38.3 $ 6,302 21.1
Environmental Recycling............................ 34,628 61.7 23,495 78.9
------- ------ ------- -----
Total revenues............................. 56,137 100.0 29,797 100.0
Cost of Sales and Services Performed:
Plastic Lumber..................................... 13,571 63.1 4,998 79.3
Environmental Recycling............................ 25,944 74.9 19,325 82.3
Depreciation:
Plastic Lumber..................................... 927 4.3 307 4.9
Environmental Recycling............................ 769 2.2 344 1.5
Corporate.......................................... 10 0.0 6 0.0
Selling, General and Administrative:
Plastic Lumber..................................... 3,869 18.0 1,565 24.8
Environmental Recycling............................ 3,558 10.3 1,602 6.8
Corporate.......................................... 840 1.5 568 1.9
Amortization:
Plastic Lumber..................................... 226 1.1 89 1.4
Environmental Recycling............................ 129 .4 49 0.2
Corporate.......................................... 79 .1 82 0.3
------- ------ ------- -----
Total Operating Expenses................... 49,922 88.9 28,935 97.1
------- ------ ------- -----
Total Operating Income..................... 6,215 11.1 862 2.9
Operating Income (loss) by Segment:
Plastic Lumber..................................... 2,916 13.6 (657) (10.4)
Environmental Recycling............................ 4,228 12.2 2,175 9.3
Corporate.......................................... (929) (1.7) (656) (2.2)
------- ------ ------- -----
Total Operating Income..................... $ 6,215 11.1 $ 862 2.9
</TABLE>
CONSOLIDATED REVENUES AND OPERATING INCOME
The Company recognized significant increases in both revenues and operating
income for 1999 compared to 1998. Revenues increased 88% to $56,137,000 in 1999
from $29,797,000 in 1998. Most of the increase, $23,188,000, was attributable to
acquisitions in 1999. Internal growth totaled $7,129,000, excluding the
$3,977,000 of dredging revenues in 1998. Consolidated operating income increased
by $5,353,000 to $6,215,000 in 1999 compared to $862,000 in 1998. The increase
in operating income was primarily due to businesses acquired in 1998 and 1999
and the majority of the increase, $3,573,000 was in the plastic lumber division.
The Company expects to continue to realize significant efficiencies from the
plant consolidations and restructuring undertaken in the first quarter of 1999.
REVENUES BY SEGMENT
Plastic lumber division sales increased 241% to $21,509,000 in 1999
compared to $6,302,000 in 1998. Approximately $3,999,000 or 26% of the
$15,207,000 increase was from internal growth and $11,207,000 was attributable
to plastic lumber companies acquired in 1999. Environmental recycling division
sales increased 47% to $34,628,000 in 1999 from $23,495,000 in 1998, which
include $7,122,000 of sales for Barbella in 1998.
20
<PAGE> 21
The acquisitions of S&W, Brass and Barbella contributed $11,981,000 of the
increase in environmental recycling division sales and internal growth
contributed $3,130,000 excluding the $3,977,000 of dredging sales in 1998.
GROSS PROFIT
Consolidated gross profit, excluding the restructuring charge and
depreciation, increased $11,148,000 or 204% to $16,622,000 for 1999 as compared
to $5,474,000 in 1998. The gross profit as a percent of revenue improved by 12
percentage points from 18% in 1998 to 30% in 1999. Although most of the increase
in gross profit was attributed to acquisitions in both business segments in
1999, $2,116,000 of the increase in gross profit came from plastic lumber
business units owned in 1998.
Plastic lumber acquisitions in 1999 accounted for $4,519,000 or 68% of the
$6,635,000 increase in plastic lumber division's gross profit before
depreciation and restructuring charges in 1999. The changeover to more efficient
continuous extrusion method and the consolidation of the plastic lumber plants
significantly reduced first quarter 1999 production at existing plants. The
changes were completed in the second quarter and all plastic lumber
manufacturing plants are back at full production.
The environmental recycling division acquisitions of S&W, Brass and BET
accounted for $4,441,000 or 98%, of the $4,514,000 increase in gross profit in
1999 over 1998. The opening of the CBC facility in late June 1998 contributed
$977,000 of gross profit in 1999 completely replacing the $550,000 of dredging
gross profit for 1998 and reduced first quarter gross profit in the other
business units. The combined gross profit of the New Castle Delaware soil
remediation facility and the environmental construction service companies was
$392,000 lower in 1999 due to the renovation of the New Castle facility and to a
higher mix of lower margin government contracts for the construction services
companies. The company expects to commence 1999 dredging operations in the third
quarter and the New Castle Delaware facility is operating with greater capacity.
Gross profit, excluding the restructuring charge and depreciation, as a
percent of plastic lumber sales improved significantly from 21% in 1998 to 37%
in 1999. The improvement was primarily from acquisitions but also included
improvement in the Wisconsin plant's gross profit margin from 33% to 40% of
sales, due to increased plant capacity. The plastic lumber division also
increased its mix of higher margin specialty plastic lumber product sales to
OEM's in 1999.
Environmental recycling division cost of services performed (excluding
depreciation) also improved significantly from 82% of revenues in 1998 to 75% in
1999. The higher gross margins from the BET and S&W acquisitions and the start
up of the CBC facility with a 59% cost of services performed ratio, more than
offset the lower gross profit margins on environmental construction contracts
with governmental units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
Consolidated SG&A expenses increased $4,532,000 to $8,267,000 for 1999 from
$3,735,000 in 1998. The plastic lumber division's percent of SG&A expenses to
sales improved by 7 percentage points, from 25% of sales to 18%. The improvement
to the plastic lumber's SG&A percent is due primarily to increased revenues at
existing plants and lower expenses on companies acquired in 1999. The
environmental recycling division's percent of SG&A expenses to revenues
increased from 7% to 10%, primarily due to recent acquisitions with higher SG&A
expenses and the absence of dredging revenues in the first half of 1999. The
Corporate administrative expense percent improved to 1.5% of revenues in 1999
from 1.9% in 1998.
INTEREST EXPENSE
Interest expense increased $2,536,000 to $2,926,000 in 1999 over the
$390,000 in 1998. $722,000 of the increase is the write-off of the entire
discount assigned to the $6,500,000 convertible debentures proceeds in December
1998 and January 1999. Pursuant to SEC rules, $722,000 was assigned to the
favorable conversion feature of the debentures (see note 7 to the condensed
consolidated financial statements). The $722,000 is included in interest expense
in the first quarter of 1999. There was no similar charge in 1998.
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<PAGE> 22
Interest expense also includes $343,000 of amortization of deferred
financing costs: to increase the line of credit at PNC Bank in February 1998; to
obtain the new credit agreement form Southern Pacific Bank (SPB) in October
1998; and to sell the convertible debentures. Interest expense for the
comparable 1998 period included $118,000 of similar costs.
Most of the increase in interest expense is the result of the following
additional borrowings:
- A weighted average outstanding balance of $17,550,000 under the $30
million SPB credit facility;
- Issuing $6,500,000 of convertible debentures;
- Issuing $4,000,000 of convertible debentures and a $3,000,000 capitalized
lease in the Eaglebrook purchase;
- Issuing $4,100,000 of additional debt to affiliates; and
- Issuing other loans and capitalized leases secured by specific equipment.
Interest expense also increased as a result of debt service requirements
assumed from businesses acquired during 1998 and 1999.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased $1,049,000 or 160% to $1,706,000 in 1999
compared to $657,000 in 1998, reflecting the significant increase in plant and
equipment from both acquisitions and continued capital investments. Amortization
expense increased $214,000 to $434,000 in 1999 over $220,000 in 1998 due to
goodwill from the numerous acquisitions completed after June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,276,000 at June 30, 1999, an increase
of $364,000 from the $2,912,000 at December 31, 1998. Cash used in operating
activities was $839,000 in the six months ended June 30, 1999. The significant
increase in revenues during the first half of 1999 resulted in increases in
accounts receivable.
Cash used in investing activities was primarily for acquisitions and
purchases of equipment. The environmental recycling division made capital
expenditures in 1999 for plant and equipment totaling $3,051,000. The plastic
lumber division made plant and equipment purchases totaling $2,823,000 primarily
to expand capacity at three of the manufacturing facilities and to convert the
Tennessee facility from flow mold of plastic lumber to extrusion of the patented
structural lumber. The Company also used a total of $14,592,000 of cash as part
of the consideration to acquire companies with plant & equipment valued at
$43,900,000.
Cash provided by financing activities totaled $21,750,000 including
$11,707,000 of net additional bank and equipment financings, $2,500,000 of net
proceeds from the issuance of additional 5% convertible subordinated debentures
(see Note 7 to Consolidated Financial Statements) and $6,500,000 net proceeds
from loans from affiliates. In addition, the Company assumed $13,658,000 of debt
owed by acquired companies and incurred $4,800,000 of additional debt to make
the acquisitions.
Proceeds from new bank and capital lease borrowings totaled $11,708,000
including $8,095,000 under the new credit facility with a division of Southern
Pacific Bank ("SPB"), a $1,200,000 real estate loan on the Brass property and
$2,413,000 of various equipment loans and capital leases The $1,255,000 of costs
incurred in 1998 and 1999 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 $3,893,000 of debt assumed on acquisitions and to make $4,080,000 of
scheduled payments on term loans and capital leases.
Equity financing in 1999 consisted of several private placements generating
$9,249,000 which was used to make acquisitions. The company also received
$479,000 from the exercise of stock options granted in prior years. The Company
incurred $204,000 of costs related to stock issuances in 1999.
Equity financings in 1998 included $2,291,000 of proceeds from the exercise
of common stock warrants issued in prior years 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 carries a cumulative 10% stock dividend and each
preferred
22
<PAGE> 23
share is convertible into seven common shares. (See Note 7 to the consolidated
financial statements for the Company's offer to redeem the Series B Preferred
Stock in the third quarter of 1999.) The Company incurred expenses totaling
$428,000 to register the common stock underlying the warrants and the Series B
convertible preferred stock in 1998.
The company has committed to purchase approximately $13,000,000 of plastic
lumber extruders and is negotiating financing to be collateralized by the
extruders. Although, there are no other material commitments for capital
expenditures, the Company also anticipates requiring an additional $2,900,000 to
expand its plastic lumber manufacturing facility in Chicago. The Company will
also require additional working capital for the dredging opportunities being
pursued by the Company and approximately $2,400,000 to purchase equipment for
the environmental recycling operations.
On July 29, 1999, the Company filed a "shelf registration" statement on
Form S-4 with the Securities and Exchange Commission to issue up to a total of
10,000,000 common shares. The Company wants to have the ability to issue
registered shares for acquisitions, for potential equity sales to accredited
investors and/or for other corporate purposes.
SEASONALITY
The Company experiences a seasonal slow down during the winter months
because its environmental operations are located in the Northeast and Central
Atlantic 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. The company has taken steps to even out
the revenue stream by adding business units with sales of specialty plastic
lumber to OEM's (Cycle-Masters in 1998) and to the packaging industry (Brigadoon
in 1999) and sales of recycled plastic resins to industrial users (Eaglebrook
Plastics in 1999). Adding soil remediation facilities to remove utility company
coal tars and beneficially reuse dredge materials should also reduce the
aforementioned affects of the winter season.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). The Company's accounting software is year 2000
compliant at all subsidiaries except one. The Company plans to upgrade that
subsidiary's system to a Year 2000 compliant system in 1999. The Company is in
the process of conducting an internal audit of its non-information technology
systems (e.g. manufacturing equipment imbedded computer systems) and its major
customers and vendors 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
technology systems and those of its major customers and vendors continue to meet
its internal needs. Anticipated costs for system and software modifications, if
any, will be expensed as incurred.
Based on its preliminary review, 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 2000 date change within its
own software. The Company anticipates spending approximately $250,000 to remedy
Year 2000 issues during 1999. An audit of Year 2000 compliance is conducted as
part of the due diligence performed prior to each significant acquisition.
The Company has no control over Year 2000 compliance by the customers and
vendors of the Company. If the Company's customers and vendors are not in Year
2000 compliance, this could provide a material adverse financial impact to the
Company, however the Company believes it is unlikely based on the nature of its
business, customers and vendors. The Company has sent a survey to all of its
major customers and suppliers to gauge their Year 2000 readiness and based upon
the responses received the Company does not foresee any material adverse effect
on its business.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Issuances of unregistered shares during the three months ended June 30,
1999 are listed in the following paragraphs.
On April 15, 1999, 11,667 shares of Common Stock were issued as a result of
the exercise of stock options.
On April 19, 1999, 13,332 shares of Common stock were issued as a result of
the exercise of stock options.
During April and May 1999 1,684,187 shares of Common Stock were issued due
to the conversion of Series A Preferred Stock into Common Stock, inclusive of
payment of the final stock dividends on the Series A Preferred Stock that were
converted into Common Stock.
On May 6, 1999, 3,000 shares of Common Stock were issued in settlement of
employment related litigation.
On May 11, 1999, 10,000 shares of Common Stock were issued as a result of
the exercise of stock options.
On or about May 26, 1999, 45,000 shares were issued relative to certain
acquisitions.
On June 18, 1999, 1,100 shares of Common Stock were issued to an employee
as an employee bonus.
On June 18, 1999, 10,000 shares of Common Stock were issued as a result of
the exercise of stock options.
On June 28, 1999, 810,000 shares of Common Stock were issued as a result of
the acquisition of Barbella Environmental Technology, Inc.
On or about June 28, 1999, 16,000 shares of Common Stock were issued
relative to certain acquisitions.
On June 30, 1999, 532,500 shares of Common Stock were issued as a result of
the acquisition of Brigadoon Industries, Inc.
On June 30, 1999, 117,894 shares of Common Stock were issued as result of
the exercise of stock options.
During the second quarter, an aggregate of 1,990,171 shares of Common Stock
were issued as a result of private placements to raise equity for the Company.
The Common Stock underlying the stock options and the Series A Preferred
Stock was previously registered with the SEC. All of the other transactions were
not registered under the Securities Act of 1933 in reliance on the exemption
from registration in Section 4(2) of the Act, as transactions not involving any
public offering. These offerings were completed without any general or public
solicitation. In each case the offering was made to a very limited number of
officers, directors and shareholders of the companies being acquired or to
independent consultants or employees of the Company. The independent
consultants, officers, directors and shareholders who participated in the
private placements 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. The securities issued in all of the foregoing transactions were
issued as restricted securities and the certificates were stamped with
24
<PAGE> 25
restrictive legends to prevent any resale without registration under the Act or
in compliance with an exemption from registration.
The cash proceeds from the private placements were used primarily to make
acquisitions. All cash proceeds from the exercise of stock options have been
used for general corporate purposes.
ITEM 5. OTHER INFORMATION
In June 1999 the Company moved from the NASDAQ small cap to the NASDAQ
National Market System under the same symbol "USPL".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the six months ended June 30, 1999
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
/s/ MARK S. ALSENTZER
--------------------------------------
Mark S. Alsentzer,
CEO and President
/s/ JOHN W. POLING
--------------------------------------
John W. Poling,
Chief Financial Officer
Date: August 13, 1999
25
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