<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 SEPTEMBER 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
October 31, 1999 is 31,717,149 shares.
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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 September 30, 1999 and
December 31, 1998...................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1999
and 1998............................................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1999
and 1998............................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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................................... 25
Item 2. Changes in Securities and Use of Proceeds........... 25
Item 6. Exhibits and Reports on Form 8-K.................... 26
SIGNATURES.................................................. 26
</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>
SEPTEMBER 30, 1999 DEC. 31, 1998
------------------ --------------------
(RESTATED --
NOTE 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 5,850,331 $ 3,033,645
Accounts receivable, net.................................... 31,914,002 17,096,490
Inventories................................................. 5,566,909 5,021,385
Prepaid expenses and other assets........................... 2,532,672 1,532,794
------------ -----------
Total current assets.............................. 45,863,914 26,684,314
Property, plant and equipment, net.......................... 76,864,970 19,789,861
Acquired intangibles, net................................... 23,931,215 9,553,642
Other assets................................................ 5,768,101 5,403,236
------------ -----------
Total assets...................................... $152,428,200 $61,431,053
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 13,777,827 $ 7,321,178
Notes and capital leases payable, current portion........... 3,827,534 4,289,420
Accrued expenses............................................ 4,181,749 2,329,392
Restructuring reserve....................................... 1,171,589 --
Other liabilities........................................... 5,360,890 2,252,414
------------ -----------
Total current liabilities......................... 28,319,589 16,192,404
Notes and capital leases payable, net of current portion.... 30,768,248 17,051,908
Notes payable to affiliates................................. 4,500,000 --
Deferred income taxes and other liabilities................. 2,812,948 498,602
Minority interest........................................... 250,165 250,165
Convertible subordinated debentures, net of discount........ 6,500,000 3,555,556
------------ -----------
Total liabilities................................. 73,150,950 37,548,635
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized
5,000,000 shares; issued and outstanding 0 shares and
382,709 shares, respectively (aggregate liquidation
preference of $0 and $7,808,877, respectively)............ -- 383
Common stock par value $.0001, authorized 50,000,000 shares;
issued and outstanding 32,460,200 shares and 19,669,128
shares, respectively...................................... 3,246 1,967
Additional paid-in capital.................................. 80,433,578 25,121,824
Accumulated deficit......................................... (1,159,574) (1,241,756)
------------ -----------
Total stockholders' equity........................ 79,277,250 23,882,418
------------ -----------
Total liabilities and stockholders' equity........ $152,428,200 $61,431,053
============ ===========
</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 -- (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- --------------------
(RESTATED --
NOTE 2)
<S> <C> <C>
Revenues, net............................................... $39,626,411 $16,118,992
Cost of goods sold and services performed................... 28,861,254 12,833,417
----------- -----------
Gross profit...................................... 10,765,157 3,285,575
Selling, general and administrative expenses................ 4,537,842 3,231,784
Merger costs................................................ 810,000 --
----------- -----------
Operating income.................................. 5,415,315 53,791
Interest and other income (expense)......................... (60,269) 75,117
Minority interests.......................................... -- 2,176
Interest expense............................................ (1,353,353) (379,839)
----------- -----------
Income (loss) before income taxes................. 4,001,693 (248,755)
Benefit from (provision for) income taxes................... (697,200) 157,228
----------- -----------
Net income (loss)................................. 3,304,493 (91,527)
Preferred stock dividends earned............................ (41,982) (263,862)
----------- -----------
Net income (loss) attributable to common
stockholders.................................... $ 3,262,511 $ (355,389)
=========== ===========
Net income (loss) per share:
Basic............................................. $ .11 $ (.02)
=========== ===========
Diluted........................................... $ .10 $ (.02)
=========== ===========
Weighted average common shares outstanding:
Basic............................................. 29,608,212 18,629,571
=========== ===========
Diluted........................................... 31,522,226 18,629,571
=========== ===========
</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)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- --------------------
(RESTATED --
NOTE 2)
<S> <C> <C>
Revenues, net............................................... $98,827,057 $48,690,039
Cost of goods sold and services performed................... 72,003,337 40,156,430
Restructuring charge and asset impairment................... 2,025,000 --
----------- -----------
Gross profit......................................... 24,798,720 8,533,609
Selling, general and administrative expenses................ 13,892,103 7,730,436
Merger costs................................................ 1,405,000 --
Restructuring charge and asset impairment................... 3,720,000 --
----------- -----------
Operating income..................................... 5,781,617 803,173
Interest and other income................................... 74,337 286,523
Minority interests.......................................... -- (841,217)
Interest expense............................................ (4,349,722) (281,853)
----------- -----------
Income (loss) before income taxes.................... 1,506,232 (33,374)
Benefit from (provision for) income taxes................... (912,000) 95,235
----------- -----------
Net income........................................... 594,232 61,861
Preferred stock dividends earned............................ (316,782) (481,810)
----------- -----------
Net income (loss) attributable to common
stockholders...................................... $ 277,450 $ (419,919)
=========== ===========
Net income (loss) per share:
Basic................................................ $ .01 $ (.02)
=========== ===========
Diluted.............................................. $ .01 $ (.02)
=========== ===========
Weighted average common shares outstanding:
Basic................................................ 26,402,496 18,008,061
=========== ===========
Diluted.............................................. 27,916,146 18,008,061
=========== ===========
</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)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ --------------------
(RESTATED --
NOTE 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 594,231 $ 61,861
------------ -----------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 2,791,392 1,223,073
Amortization........................................... 651,017 414,138
Amortization of deferred financing and debenture
discount costs....................................... 1,286,464 178,227
Restructuring, merger and asset impairment charges..... 5,472,182 --
Income tax provision above (below) taxes paid.......... 524,526 (542,334)
Minority interests and gain on sale of assets.......... -- 387,441
Expense related to common shares issued to non
employees............................................ 42,947 94,868
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. (13,131,750) (4,873,178)
Inventories.......................................... (1,390,175) (1,241,693)
Prepaid expenses and other current assets............ (503,069) (2,311,041)
Other assets......................................... 443,350 (1,382,932)
Accounts payable..................................... 4,907,404 1,700,389
Other liabilities.................................... (311,646) 54,741
Accrued expenses..................................... (251,903) (1,238,801)
------------ -----------
Total adjustments................................. 530,739 (7,537,102)
------------ -----------
Net cash provided by (used in) operating
activities...................................... 1,124,970 (7,475,241)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (16,376,652) (6,759,992)
Cash paid for acquisitions, net of cash received.......... (14,592,277) (2,760,706)
------------ -----------
Net cash used in investing activities............. (30,968,929) (9,520,698)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options............ 1,833,050 2,303,693
Proceeds from sale of common stock........................ 26,574,090 --
Proceeds from sale of preferred stock..................... -- 4,431,420
Costs of issuing stock.................................... (1,308,344) (483,788)
Proceeds from notes payable to affiliates, net of
repayments............................................. 4,500,000 366,481
Proceeds from notes payable............................... 14,753,582 8,957,599
Proceeds from issuance of convertible debentures.......... 2,500,000 --
Payment of deferred financing costs....................... (509,192) (206,758)
Payments of notes payable................................. (15,682,541) (2,035,736)
------------ -----------
Net cash provided by financing activities......... 32,660,645 13,332,911
------------ -----------
Net change in cash and cash equivalents..................... 2,816,686 (3,663,028)
Cash and cash equivalents, beginning of period.............. 3,033,645 4,687,585
------------ -----------
Cash and cash equivalents, end of period.................... $ 5,850,331 $ 1,024,557
============ ===========
</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 nine month periods ended September 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 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 acquisitions of Barbella Environmental Technology, Inc.
("BET"), Ecosource Corporation ("Ecosource") and Eureka Plastics of California,
Inc. ("Eureka") which were accounted for under the pooling of interests method
of accounting.
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
issuable or actually outstanding. Diluted income (loss) per share further
considers the impact of common stock equivalents to the extent that they are
dilutive. For the three and nine months ended September 30, 1998 the common
stock equivalents are anti dilutive. The income (loss) per share and the shares
outstanding for each period presented for 1998 have been restated to include the
acquisitions of BET, Ecosource and Eureka as if they had occurred on January 1,
1998.
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
Interest paid totaled $2,970,419 and $625,711 in the nine months ended
September 30, 1999 and 1998, respectively. Federal and state income taxes paid
totaled $387,474 and $446,294 in the nine months ended September 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
PURCHASE TRANSACTIONS
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 the packaging industry. 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.
The $41,965,833 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 the above acquisitions in 1999 have
been accounted for as purchases. Accordingly, the results of operations of the
purchased 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 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.
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>
NINE MONTHS YEAR
1999 1998
------------ ------------
<S> <C> <C>
Net sales................................................. $101,683,548 $115,002,089
Net income................................................ 589,919 1,036,717
Net income attributable to common shareholders............ 273,137 359,639
Diluted income per share.................................. $ .01 $ .02
Weighted average shares used in computation............... 28,281,342 23,935,174
</TABLE>
The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill and depreciation on revalued property and equipment
and interest expense on debt issued to acquire the companies. Per share amounts
are calculated after preferred dividends are subtracted from net income. The
proforma amounts do not purport to be indicative of the results of operations
which actually would have
9
<PAGE> 10
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulted had the acquisitions occurred at the beginning of the period presented,
or of future results of operations of the consolidated entities.
POOLING OF INTERESTS TRANSACTIONS
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 that were written
off in the second quarter of 1999.
On September 28, 1999, the Company acquired 100% of the stock of Eureka
Plastics of California, Inc. ("Eureka"), and Ecosource Corporation
("Ecosource"), in unrelated transactions. Both of these companies recycle and
process plastics in Southern California. The Company incurred $ 810,000 of costs
related to these mergers that were written off in the third quarter of 1999.
The Company issued a total of 1,438,600 shares of stock to acquire these
three companies and has utilized the pooling of interests method to account for
the acquisitions. Accordingly all of the amounts in the financial statements,
including shares outstanding and earnings per share, have been restated to
include BET, Eureka and Ecosource for all periods in 1998 and 1999 as if these
companies had always been owned by the Company. The ($1,108,598) accumulated
deficit of the Company as of December 31, 1997 was restated to include the
$899,099 of combined retained earnings of the pooled companies at that date.
Following is a summary of the BET, Ecosource and Eureka amounts included in
the accompanying income statements:
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
----------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................. $8,785,426 $5,405,088 $20,948,986 $15,301,354
Net income (loss)..................... 204,892 (312,270) 740,037 (397,423)
Income (loss) per share -- diluted.... $ .01 $ (.02) $ .03 $ (.02)
</TABLE>
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 were non-voting and earned a
10% cumulative stock dividend payable semi-annually. Each share was 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 were 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 were redeemable 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. A dividend for
the pro rata period from Apri1 1, 1999 to the redemption date totaling 2,285
Series A preferred shares was paid to shareholders. Every Series A Preferred
shareholder elected to convert to Common Stock. A total of 1,584,187 common
shares were issued in the second quarter on conversion of all outstanding Series
A Preferred shares. At September 30, 1999 there were no Series A Preferred
shares outstanding.
10
<PAGE> 11
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 elected 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 Apri1 1, 1999 to the
August 31, 1999 redemption date totaling 4,747 Series B preferred shares was
paid to shareholders of record July 1, 1999. All Series B shareholders elected
to convert and, as a result, 825,865 shares of common stock were issued in the
third quarter of 1999. As of September 30, 1999 there were no Series B Preferred
shares outstanding.
PRIVATE PLACEMENTS OF COMMON STOCK
The Company has received gross proceeds of $26,574,000 from a series of
private placements of 4,090,171 shares of common stock in 1999. The Company
incurred approximately $1,308,000 of expenses related to these private
placements.
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.................................................. 6.50 2,436,750
Exercised................................................ 2.88 (333,332)
Canceled................................................. 4.64 (318,000)
----- ---------
Outstanding at September 30, 1999.......................... $5.55 3,456,418
===== =========
Options exercisable at September 30,1999................... $3.95 1,214,751
===== =========
</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 to purchase
11
<PAGE> 12
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's common stock at $6.00 per share 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..................................................... 6.04 915,000
Exercised.................................................. 2.19 (402,894)
Canceled................................................... 6.00 (135,000)
---------------- ---------
Outstanding at September 30, 1999.......................... $ 5.81 997,500
================ =========
Exercisable at September 30, 1999.......................... $ 5.81 977,500
================ =========
</TABLE>
STOCK RESERVED
At September 30, 1999, common stock was reserved for the following:
<TABLE>
<S> <C>
Shares contingently issuable to USPL and CEI shareholders
(see Note 5)................................................ 55,000
Non employee stock options.................................. 152,500
Employee stock options...................................... 3,456,418
Shares contingently issuable under other earnout
provisions................................................ 175,500
Warrants.................................................... 845,000
Convertible Debentures...................................... 1,228,733
---------
5,913,151
=========
</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 the
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 of
obsolete equipment and site development costs.
During the second and third quarters of 1999, the Company made payments
approximating: $80,000 on abandoned leased space; $556,000 for severance and
termination benefits; $133,000 for loss on termination of
12
<PAGE> 13
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contractual commitments; and $73,000 for relocation of equipment. The $1,171,589
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...................................................... $ 223,760
Severance agreements and termination benefits............... 517,906
Estimated loss on termination of contractual commitments.... 29,519
Costs to be incurred to relocate inefficient operations..... 400,404
----------
Total remaining restructuring reserve............. $1,171,589
==========
</TABLE>
As a result of the June 1999 merger with BET and the September 1999 mergers
with Ecosource and Eureka, that were accounted for as poolings of interests, a
$595,000 charge was recorded in the second quarter of 1999 and an $810,000
charge was recorded in the third quarter of 1999, respectively, for merger
related costs.
5. COMMITMENT AND CONTINGENCIES
EARNOUT AGREEMENT
The Company had previously reserved 4,609,386 shares for issuance pursuant
to earnout provisions in the Agreement and Plan of Reorganization entered into
by the Company on December 15, 1995 and subsequently in an Earn Out Rights
Agreement dated October, 1997. The parties to the agreement specified that the
shares would be paid to certain shareholders (Historical Shareholders), who held
the common stock as of the date of the Agreement and Plan of Reorganization,
when 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, subject to certain limitations contained in the Agreement.
Certain questions arose with respect to the meaning of the production
quotas set forth in these agreements and the Company appointed a committee of
independent directors who selected independent counsel to review this matter.
The independent committee has reported back to the Board of Directors.
Thereupon, the Company sought to resolve the matter with the Historical
Shareholders.
As of November 4, 1999 the Company entered into Settlement Agreements with
approximately 99% of the Historical Shareholders (representing 4,553,606 shares
of the total 4,609,386 earn out shares) whereby each Historical Shareholder
agreed to accept 15% of the original earnout shares. If the remaining 1% of the
Historical Shareholders do not accept the settlement offer, the Company will
continue to have exposure to issue approximately 55,000 additional earnout
shares under the original formula.
If 100% of the Historical Shareholders accept the Settlement Agreement the
Company will issue 691,408 shares on or about January 5, 2000. The Company has
included the $5,600,000 value of the shares to be issued in acquired intangibles
and additional paid in capital on the balance sheet as of September 30, 1999.
Starting in the fourth quarter of 1999, the $5,600,000 will be amortized over 17
years as additional cost of the merger of the Company with Clean Earth, Inc. in
December 1996.
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
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
13
<PAGE> 14
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in equal monthly installments over
terms of four to seven years 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 September 30, 1999 is
approximately $8,440,000.
7. CONVERTIBLE SUBORDINATED DEBENTURES
On December 22, 1998 the Company issued $4,000,000 and on January 27, 1999
the Company issued an additional $2,500,000 of 5% convertible debentures to the
same debenture holders. The proceeds were used for acquisitions. The Company
issued the debenture holders warrants to purchase 162,500 shares of common stock
for $7.215 per share at any time before December 22, 2003.
The debentures are 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 Company
registered the shares underlying the debentures and is required to keep the
registration statement effective until December 22, 2001. The debenture interest
is payable 1.25% per quarter starting April 1, 1999.
The debentures mature on December 22, 2003, however 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). 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. The Company must issue
additional warrants in the same proportion (2.5%) as any additional debentures
are issued.
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 and a $1,380,000 restructuring charge
was recorded by the environmental recycling division in the first quarter of
1999. Merger costs totaling $595,000 and $810,000 were written off in the second
and third quarters of 1999, respectively.
14
<PAGE> 15
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Environmental recycling......................... $25,612 $ 9,717 $60,240 $33,212
Plastic lumber.................................. 14,014 6,402 38,587 15,478
------- ------- ------- -------
Total Revenues.......................... $39,626 $16,119 $98,827 $48,690
======= ======= ======= =======
Operating Income (Loss) by Segment:
Environmental recycling......................... $ 4,074 $ 96 $ 8,302 $ 2,271
Plastic lumber.................................. 2,646 346 6,054 (424)
Corporate....................................... (495) (388) (1,424) (1,044)
------- ------- ------- -------
Total................................... $ 6,225 $ 54 $12,932 $ 803
======= ======= ======= =======
Depreciation and amortization:
Environmental recycling......................... $ 499 $ 269 $ 1,397 $ 662
Plastic lumber.................................. 578 383 1,897 907
Corporate....................................... 60 44 149 132
------- ------- ------- -------
$ 1,137 $ 696 $ 3,443 $ 1,701
======= ======= ======= =======
</TABLE>
The identifiable assets of the respective segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Identifiable assets:
Environmental recycling................................... $ 66,232 $34,754
Plastic lumber............................................ 78,982 24,208
Corporate................................................. 7,214 2,469
-------- -------
$152,428 $61,431
======== =======
</TABLE>
The capital expenditures of the respective segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Capital Expenditures:
Environmental recycling....................... $ 2,310 $1,466 $ 5,361 $4,298
Plastic lumber................................ 8,398 930 10,904 2,459
Corporate..................................... 32 3 112 3
------- ------ ------- ------
$10,740 $2,399 $16,377 $6,760
======= ====== ======= ======
</TABLE>
15
<PAGE> 16
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
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
nine month periods ended September 30, 1999 and 1998. This discussion should be
read in conjunction with the 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
affiliated 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 Somerville, 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
16
<PAGE> 17
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
on prior periods. A total of $595,000 of costs related to the BET merger was
written off in the second quarter of 1999.
ACQUISITIONS COMPLETED DURING THE THREE MONTHS ENDED SEPTEMBER 30, 1999
On September 28, 1999, the Company acquired 100% of the stock of Eureka
Plastics of California, Inc. ("Eureka"), and Ecosource Corporation
("Ecosource"), in unrelated transactions. Both of these companies recycle and
process plastics in Southern California. The Company has accounted for both
acquisitions as poolings of interests. Accordingly all of the amounts in the
financial statements, including shares outstanding and earnings per share, have
been restated to include Eureka and Ecosource for all periods presented in 1998
and 1999. See Note 2 to the financial statements for the effect on prior periods
of pooling Eureka and Ecosource. A total of $ 810,000 of costs related to these
mergers were written off in the third quarter of 1999.
NON-RECURRING RESTRUCTURING, EQUIPMENT AND INVENTORY REVALUATION CHARGES IN 1999
In conjunction with the aforementioned significant acquisitions in each
division in the first quarter of 1999, 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.
In addition to consolidating several plants, the Company discontinued 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.
17
<PAGE> 18
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
COMPARISON OF THE THIRD QUARTER ENDED SEPTEMBER 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 merger charges:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED SEPTEMBER 30,
------------------------------------
1999 % 1998 %
-------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Plastic Lumber....................................... $14,014 35.4 $6,402 39.7
Environmental Recycling.............................. 25,612 64.6 9,717 60.3
------- ----- ------ -----
Total revenues............................... 39,626 100.0 16,119 100.0
Cost of Sales and Services Performed:
Plastic Lumber....................................... 8,640 61.7 4,182 65.3
Environmental Recycling.............................. 19,342 75.5 8,185 84.2
------- ----- ------ -----
Total cost of sales and services performed... 27,982 70.6 12,367 76.7
------- ----- ------ -----
Gross profit (before depreciation):
Plastic Lumber....................................... 5,374 38.3 2,220 34.7
Environmental Recycling.............................. 6,270 24.5 1,532 15.8
------- ----- ------ -----
Total gross profit (before depreciation)..... 11,644 29.4 3,752 23.3
Depreciation:
Plastic Lumber....................................... 481 3.4 292 4.6
Environmental Recycling.............................. 432 1.7 242 2.5
Corporate............................................ 7 0.0 3 0.0
Selling, General and Administrative:
Plastic Lumber....................................... 2,150 15.3 1,491 23.3
Environmental Recycling.............................. 1,697 6.6 1,167 12.0
Corporate............................................ 435 1.1 344 2.1
Amortization:
Plastic Lumber....................................... 97 .7 91 1.4
Environmental Recycling.............................. 67 .3 27 0.3
Corporate............................................ 53 .1 41 0.3
------- ----- ------ -----
Operating Income (Loss) by Segment:
Plastic Lumber....................................... 2,646 18.9 346 5.4
Environmental Recycling.............................. 4,074 15.9 96 1.0
Corporate............................................ (495) (1.2) (388) (2.4)
------- ----- ------ -----
Total Operating Income (Loss)................ $ 6,225 15.7 $ 54 .3
</TABLE>
CONSOLIDATED REVENUES AND OPERATING INCOME
The Company recognized significant increases in both revenues and operating
income in 1999 compared to 1998. Revenues increased 146% to $39,626,000 in 1999
from $16,119,000 in 1998. Although most of the increase was attributable to
acquisitions in 1999, the business units owned or pooled in 1998 achieved a
$10,257,000 or 64% growth in revenue from $16,119,000 in 1998 to $26,376,000 in
1999. Consolidated operating income increased by $ 6,171,000 to $6,225,000 from
$54,000 in 1998. Approximately 52% of the increase in operating income came from
business units owned or pooled in 1998 and 48% from companies purchased in 1999.
18
<PAGE> 19
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
REVENUES BY SEGMENT
Plastic lumber division revenues increased 119% to $14,014,000 in 1999
compared to $6,402,000 in 1998 . All of the increase came from companies
purchased in 1999.
Environmental recycling division revenues increased $15,895,000, or 163%,
to 25,612,000 for 1999 compared to $9,717,000 in the third quarter of 1998,
which was restated to include $4,148,000 of BET revenues. Revenues at the
business units in place in 1998 increased by $10,139,000, or 104%, including
$3,533,000 from dredging work performed in the third quarter of 1999. The
acquisitions of S&W and Brass contributed $5,756,000 of the increase in revenues
the third quarter of 1999 over the comparable 1998 period.
GROSS PROFIT
Consolidated gross profit before depreciation increased $7,892,000 or 210%
to $11,644,000 for 1999 compared to $3,752,000 in 1998. Gross profit as a
percent of revenues improved by 6 percentage points from 23% in 1998 to 29% in
1999. The improvement in gross profit 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 all of the $3,154,000
increase in plastic lumber division gross profit in 1999. Cost of sales
(excluding depreciation) as a percent of plastic lumber revenues improved from
65% in 1998 to 62% in 1999. The improvement was primarily from acquisitions and
eliminating flow mold processing in 1999.
In the environmental recycling division, gross profit before depreciation
at business units pooled or in place in 1998 increased by $4,152,000 or 271%,
including $793,000 from dredging work performed in the third quarter of 1999.
The acquisitions of S&W and Brass contributed $2,118,000 of the increase in
gross profit for the third quarter of 1999. Environmental recycling division
costs excluding depreciation improved as a percent of revenues, from 84% in 1998
to 76% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
Consolidated SG&A expenses increased $1,028,000 to $4,282,000 in 1999 from
$3,002,000 in 1998. As a percentage of consolidated revenues, SG&A expenses
improved from 19% in 1998 to 11% in 1999 due to improvements in both divisions.
The environmental recycling division's SG&A expenses improved from 12% of
revenues in 1998 to 7% in 1999 and the plastic lumber division's SG&A expenses
as a percent of sales improved from 23% to 15%. Corporate administrative
expenses also improved to 1% of revenues in 1999 from 2% in 1998. The economies
of scale of consolidating administrative functions, increased purchasing power
with vendors and spreading fixed expenses over a larger revenue base as a result
of the numerous acquisitions since September 30, 1998 continue to benefit the
entire Company.
INTEREST EXPENSE
Interest expense increased $973,000 to $1,353,000 in 1999 over the $380,000
in 1998, primarily due to additional borrowings to fund the S&W, Eaglebrook and
Brass acquisitions early in 1999. Interest expense also includes $188,000 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 $75,000 of similar amortization
costs.
19
<PAGE> 20
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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 $19,900,000 under the $30
million SPB credit facility for the third quarter of 1999;
- 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 $383,000 or 71% to $920,000 in 1999 from
$537,000 in 1998 reflecting the significant increase in plant and equipment
primarily from acquisitions. Amortization expense increased $58,000 to $217,000
in 1999 from $159,000 in 1998 due to goodwill from the acquisitions completed
after September 30, 1998.
20
<PAGE> 21
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The following table sets forth revenues with percentages of total revenues,
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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 % 1998 %
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Plastic Lumber...................................... $38,587 39.0 $15,478 31.8
Environmental Recycling............................. 60,240 61.0 33,212 68.2
------- ----- ------- -----
Total revenues.............................. 98,827 100.0 48,690 100.0
Cost of Sales and Services Performed:
Plastic Lumber...................................... 24,049 62.3 11,425 73.8
Environmental Recycling............................. 45,286 75.2 27,510 82.8
------- ----- ------- -----
Total cost of sales and services
performed................................. 69,335 70.2 38,935 80.0
------- ----- ------- -----
Gross profit (before depreciation):
Plastic Lumber...................................... 14,538 37.7 4,053 26.2
Environmental Recycling............................. 14,954 24.8 5,702 17.2
------- ----- ------- -----
Total gross profit (before depreciation).... 29,492 29.8 9,755 20.0
Depreciation:
Plastic Lumber...................................... 1,574 4.1 727 4.7
Environmental Recycling............................. 1,201 2.0 586 1.8
Corporate........................................... 17 0.0 9 0.0
Selling, General and Administrative:
Plastic Lumber...................................... 6,587 17.1 3,570 23.1
Environmental Recycling............................. 5,255 8.7 2,769 8.3
Corporate........................................... 1,275 1.3 912 1.9
Amortization:
Plastic Lumber...................................... 323 .8 180 1.2
Environmental Recycling............................. 196 .3 76 0.2
Corporate........................................... 132 .1 123 0.3
------- ----- ------- -----
Operating Income (Loss) by Segment:
Plastic Lumber...................................... 6,054 15.7 (424) (2.7)
Environmental Recycling............................. 8,302 13.8 2,271 6.8
Corporate........................................... (1,424) (1.4) (1,044) (2.1)
------- ----- ------- -----
Total Operating Income...................... $12,932 13.1 $ 803 1.6
</TABLE>
CONSOLIDATED REVENUES AND OPERATING INCOME
The Company recognized significant increases in both revenues and operating
income for 1999 compared to 1998. Revenues increased 103% to $98,827,000 in 1999
from $48,690,000 in 1998. Approximately $15,702,000 of the increase resulted
from internal growth and $34,435,000 of the increase was attributable to
companies purchased in 1999. Consolidated operating income increased by
$12,129,000 to $12,932,000 in 1999 compared to $803,000 in 1998. Approximately
$5,613,000 of the increase in operating income came from business units pooled
or owned in 1998 and $6,516,000 came from businesses purchased in 1999. The
21
<PAGE> 22
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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 revenues increased 149% to $38,587,000 in 1999
compared to $15,475,000 in 1998. Approximately $4,425,000 or 20% of the
$23,109,000 increase was from internal growth and $18,684,000 was attributable
to plastic lumber companies purchased in 1999. Environmental recycling division
revenues increased 81% to $60,240,000 in 1999 from $33,212,000 in 1998. The
purchases of S&W and Brass contributed $15,752,000 of the increase in
environmental recycling division revenues and internal growth contributed
$11,277,000.
GROSS PROFIT
Consolidated gross profit, excluding the restructuring charge and
depreciation, increased $19,737,000 or 200% to $29,492,000 for 1999 as compared
to $9,755,000 in 1998. The gross profit as a percent of revenue improved by 10
percentage points from 20% in 1998 to 30% in 1999. Approximately $7,129,000 of
the increase in gross profit came from business units owned or pooled in 1998
and $12,608,000 of the increase was attributed to purchases of companies in both
business segments in 1999.
Plastic lumber acquisitions in 1999 accounted for $7,205,000 or 69% of the
$10,485,000 increase in plastic lumber division's gross profit before
depreciation and restructuring charges in 1999. Approximately $3,280,000 of the
increase came from business units owned or pooled in 1998. Internal growth
contributed approximately $3,850,000 of the $9,252,000 increase in gross profit
in the environmental recycling division and $5,402,000 of the increase in gross
profit came from the purchases of S&W and Brass.
Gross profit, excluding the restructuring charge and depreciation, as a
percent of plastic lumber revenues improved significantly from 26% in 1998 to
38% in 1999. The improvement was primarily from acquisitions, however, the
increased mix of higher margin sales of specialty plastic lumber products to
OEM's in 1999 also contributed.
The environmental recycling division's gross profit margin also improved
significantly from 17% of revenues in 1998 to 25% in 1999. The higher gross
margins from the S&W acquisition and the start up of the CBC facility with a 45%
gross profit margin, 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 $5,866,000 to $13,117,000 in 1999 from
$7,251,000 in 1998. The plastic lumber division's SG&A expenses as a percent of
sales improved by 6 percentage points, from 23% of sales to 17%. The
environmental recycling division's SG&A expenses as a percent of revenues was
essentially unchanged at 8% for both nine month periods. The Corporate
administrative expense percent improved to 1.3% of revenues in 1999 from 1.9% in
1998. The economies of scale of consolidating administrative functions,
increased purchasing power with vendors and spreading fixed expenses over a
larger revenue base as a result of the numerous acquisitions in the past two
years continue to benefit the entire Company.
INTEREST EXPENSE
Interest expense increased $3,509,000 to $4,350,000 in 1999 over the
$841,000 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 consolidated
financial statements). The $722,000 is included in interest expense in the first
quarter of 1999. There was no similar charge in 1998.
22
<PAGE> 23
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Interest expense also includes $532,000 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 only $193,000 of similar amortization expense.
Most of the increase in interest expense is the result of the following
additional borrowings:
- A weighted average outstanding balance of $18,145,000 under the $30
million SPB credit facility in the first nine months of 1999;
- 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 $1,470,000 or 111% to $2,792,000 in 1999
compared to $1,322,000 in 1998, reflecting the significant increase in plant and
equipment from both acquisitions and continued capital investments. Amortization
expense increased $272,000 to $651,000 in 1999 from $379,000 in 1998 due to
goodwill from the numerous acquisitions completed during 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $5,850,000 at September 30, 1999, an
increase of $2,817,000 from the $3,033,000 at December 31, 1998. Cash provided
by operating activities was $531,000 in the nine months ended September 30,
1999. The significant increase in revenues during the first three quarters of
1999 resulted in a much greater increase in accounts receivable than the
increase in accounts payable.
Cash used in investing activities was entirely for acquisitions and
purchases of equipment. The environmental recycling division made capital
expenditures in 1999 for plant and equipment totaling $5,361,000. The plastic
lumber division made plant and equipment purchases totaling $10,904,000
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 property, plant &
equipment valued at $44,605,000.
Cash provided by financing activities included $14,754,000 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 of the
Notes to Consolidated Financial Statements) and $4,500,000 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 included $11,976,000
under the new credit facility with a division of Southern Pacific Bank ("SPB"),
a $1,200,000 real estate loan on the Brass property, $705,000 of insurance
premium financing and $873,000 of 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 $5,300,000 of the
proceeds of the SPB loans were used to pay off debt assumed on
23
<PAGE> 24
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
acquisitions and the remaining $6,665,000 was used to purchase equipment and to
make scheduled payments on term loans and capital leases.
Equity financing in 1999 consisted of several private placements generating
a total of $26,574,000. The Company also received $1,833,000 from the exercise
of stock options granted in prior years. The Company incurred $1,308,000 of
costs related to stock issuances in 1999. The net proceeds of the equity
financings were used to make acquisitions, to purchase equipment and to pay off
$4,000,000 of debt issued to acquire Eaglebrook.
Equity financings in 1998 included $2,304,000 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 share was convertible into seven common shares. All of the Series B
Preferred stock was converted into common shares in 1999. The Company incurred
expenses totaling $484,000 to register the common stock underlying the warrants
and the convertible preferred stock in 1998.
The company has committed to purchase approximately $13,700,000 of plastic
lumber extruders and related processing equipment. The Company is negotiating
financing to be collateralized by the extruders and processing equipment.
Although, there are no other material commitments for capital expenditures, the
Company also anticipates requiring an additional $4,000,000 to expand its
plastic lumber manufacturing facilities in Chicago and California. The Company
will also require additional working capital for the dredging opportunities
being pursued by the Company and approximately $2,000,000 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 sales stream by adding business units with sales of specialty plastic lumber
to OEM's (Cycle-Masters in 1998) and to the packaging industry (Eaglebrook
Products and Brigadoon in 1999) and sales of recycled plastic resins to
industrial users (Eaglebrook Plastics, Ecosource and Eureka in 1999). Adding
soil remediation facilities to treat 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. The Company has conducted 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. The Company has evaluated the scope of issues, related costs, and
available remedies to insure the Company's
24
<PAGE> 25
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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 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.
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 common shares during the three months ended September 30, 1999
are listed in the following paragraphs.
659,232 shares of Common Stock were issued as a result of acquisitions.
548,333 shares of Common Stock were issued as a result of the exercise of
stock options.
525,000 shares of Common Stock were reserved as a result of issuances of
additional stock options.
661,732 shares are being reserved for issuance to the Historical
Shareholders pursuant to the Settlement Agreements discussed in Note 5 of the
Consolidated Financial Statements.
2,135,000 shares of Common Stock were issued as a result of a private
placement in August 1999 to raise equity for the Company.
825,865 shares of Common Stock were issued as a result of the conversion of
Series B Preferred Stock and the payment of a final dividend thereon during July
and August 1999.
The Common Stock underlying the stock options was previously registered
with the SEC. Some of the stock issued as a result of the acquisitions was
previously registered on a Form 4 filed with the SEC that was declared effective
on September 3, 1999. The Common Stock issued pursuant to the August 1999
private placement has been registered through the filing of a Form S-3A that was
deemed effective by the SEC on October 18, 1999.
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
25
<PAGE> 26
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
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
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, pay down debt and for working capital. All cash proceeds from the
exercise of stock options have been used for general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended September 30,
1999
(b) Reports on Form 8-K
Historical Shareholders' Settlement
1998 Restatement of Financial Statements to include pro forma results
with Barbella Environmental Technology, Inc.
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: November 12, 1999
26
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,850,331
<SECURITIES> 0
<RECEIVABLES> 32,591,228
<ALLOWANCES> 677,226
<INVENTORY> 5,566,909
<CURRENT-ASSETS> 45,863,913
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<DEPRECIATION> 9,423,656
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<COMMON> 3,246
<OTHER-SE> 79,274,005
<TOTAL-LIABILITY-AND-EQUITY> 152,428,200
<SALES> 38,586,664
<TOTAL-REVENUES> 98,827,057
<CGS> 27,584,333
<TOTAL-COSTS> 74,280,337
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