<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) October 7, 1999
U.S. PLASTIC LUMBER CORPORATION
(Exact Name of Registrant as Specified in its Charter)
--------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Nevada 3080 87-0404343
(State of incorporation (Primary Standard Industrial (I.R.S. Employer
/organization) Classification Code Number) Identification No.)
</TABLE>
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2300 W. Glades Road, Suite 440 W, Boca Raton, Florida 33431
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 561-394-3511
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective June 25, 1999 the Registrant acquired 100% of the outstanding
voting stock of Barbella Environmental Technology, Inc. ("Barbella"). The
acquisition has been accounted for as a pooling of interests. Although
Barbella is not a significant subsidiary, the Registrant is including the
acquisition in this 8-K to update the proforma financial information
previously filed in the 8-K/A for the acquisition of Brass Investment Co.
The audited financial statements of Barbella are filed herewith.
Barbella is an environmental remediation and service company located in
Somerville, New Jersey. The consideration under the Stock Purchase
Agreement was 810,000 shares of non-registered common stock, par value
$.0001, of U.S. Plastic Lumber Corporation.
The amount of consideration was determined by a number of factors,
including but not limited to, an appraisal of the business value of
Barbella utilizing traditional business valuation formulas, the vertical
integration aspects the Registrant believes will be derived from this
merger, the skill and expertise of the management team being acquired,
and the customer base being acquired. All negotiations relative to all
transactions hereunder were accomplished in an arms length manner.
The shareholders of Barbella were Frank Barbella, Carmen Renda and
Michael Renda as custodian for Ernest Renda and Michelle Renda. None of
the individuals had any relationship with the Registrant prior to this
merger, other than as a competitor of the Registrant.
The Registrant intends to continue to devote the assets for the purposes
currently used by Barbella.
ITEM 5. OTHER EVENTS
REPORTING OF CERTAIN FINANCIAL AND OTHER INFORMATION FOR REGISTRATION AND
OTHER PURPOSES
The Registrant is filing herewith audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations which have been restated to account for the
acquisition of Barbella Environmental Technology, Inc. ("Barbella")
effective June 25, 1999 as a pooling of interests. The aforementioned
financial information is hereby incorporated by reference into the
Registrant's Registration statements on Form S-3, file number 333-86533
and 333-76845; on Form S-4, file number 333-84047; and on Form S-8, file
number 333-76277.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
U.S PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
PAGE
HISTORICAL FINANCIAL INFORMATION:
Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
Report of Independent Certified Public Accountants 12
Audited Consolidated Balance Sheets as of December 31, 1998
and 1997 13
Audited Consolidated Statements of Operations for the year ended
December 31, 1998 and 1997 14
Audited Consolidated Statements of Shareholders' Equity for the
year ended December 31, 1998 and 1997 15
Audited Statements of Cash Flows for the years ended
December 31, 1998 and 1997 16
Notes to Consolidated Financial Statements for the years ended
December 31, 1998 and 1997 17
PRO FORMA FINANCIAL INFORMATION:
Description of Pro Forma Financial Information and Companies
Included 34
Unaudited Pro Forma Consolidated Balance Sheet as of December 31,
1998 36
Pro forma Adjustments to Consolidated Pro Forma Balance Sheet
as of December 31, 1998 37
Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1998 38
Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1997 39
Notes to Pro Forma Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 41
2
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PAGE
BARBELLA ENVIRONMENTAL TECHNOLOGY, INC.
Report of Independent Auditors 42
Audited Balance Sheets as of December 31, 1998 and 1997 43
Audited Statements of Operations and Retained Earnings for
the years ended December 31, 1998 and 1997 44
Audited Statements of Cash Flows for the years ended
December 31, 1998 and 1997 45
Notes to Consolidated Financial Statements for the years
ended December 31, 1998 and 1997 47
EXHIBITS.
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Independent Certified Public Accountants
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on
its behalf by the undersigned hereunto duly authorized.
U.S. Plastic Lumber Corporation
(Registrant)
Date: October 8, 1999 By: /s/ Bruce C.Rosetto
------------------- --------------------------------
Bruce C. Rosetto, Vice President
and General Counsel/Secretary
3
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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 the years ended
December 31, 1998 and 1997. This discussion should be read in conjunction with
consolidated financial statements and notes thereto included elsewhere herein.
BUSINESS SEGMENTS
The Company has two distinct business segments-manufacturing plastic lumber and
environmental recycling. The Plastic Lumber Division manufactures structural and
non-structural plastic lumber, sheets, corner board, OEM products and a variety
of accessory products such as park and site amenities, made from 100% recycled
high density polyethylene. The structural plastic lumber is manufactured under
processes that are protected by patents.
The Environmental Recycling Division provides environmental recycling services
including environmental construction services, upland disposal of dredge
materials, beneficial re-use of industrial wastes, and on-site recycling
services. The Division also operates two plants providing thermal desorption
and bioremediation of soil brought to the plants by third parties as well as
its sister environmental service companies.
BUSINESS COMBINATIONS
The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. See Note 2 to the consolidated
financial statements for summaries of the business combinations completed in
1998 and 1997. See acquisitions in 1999 of Eaglebrook, Brass and Barbella below.
The acquisition of Barbella was accounted for as a pooling of interests.
Accordingly, all amounts in the financial statements and related notes for 1998
and 1997 have been restated to include the accounts of Barbella. The Eaglebrook
and Brass acquisitions will be accounted for as purchases in 1999.
The Company continues to seek acquisition candidates that can be vertically
integrated into either the recycled plastic lumber or environmental recycling
operations. In the recycled plastic lumber operation, targeted companies
include manufacturers and distributors of recycled plastic products as well as
raw material regrind operations. In the environmental recycling operation,
targeted companies include soil recycling companies and construction companies
involved in on-site clean up and companies with specialized technologies for
beneficial reuse of dredge material, ash and biosolids.
SEASONALITY
The Company experiences a seasonal slow down during the winter months because
its environmental operations are located in the Northeast United States where
adverse weather and normal ground freezing can impact the Company's
performance. Additionally, sales of certain plastic lumber products slow
significantly in the winter months.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth revenue, with percentages of total revenue, and
costs of sales, depreciation, selling, general and administrative expenses and
amortization, along with percentages of the applicable segment revenue, for
each of the Company's two business segments.
<TABLE>
<CAPTION>
1998 % 1997 %
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Sales:
Plastic Lumber $ 15,720 24.7 $ 8,130 19.0
Environmental Recycling 48,000 75.3 34,633 81.0
------ ---- ------ ----
Total revenue 63,720 100.0 42,763 100.0
Cost of Sales:
Plastic Lumber 10,943 69.6 7,110 87.5
Environmental Recycling 39,256 81.8 27,872 80.5
Depreciation:
Plastic Lumber 851 5.4 288 3.5
Environmental Recycling 913 1.9 403 1.2
Corporate 12 0.0 12 0.0
Selling, General and Administrative:
Plastic Lumber 4,258 27.1 1,661 20.4
Environmental Recycling 4,760 9.9 3,546 10.2
Corporate 1,339 2.1 1,440 3.4
Amortization:
Plastic Lumber 264 1.7 104 1.3
Environmental Recycling 188 0.4 17 0.0
Corporate 162 0.3 148 0.3
------ ---- ------ ----
Total Operating Expenses 62,946 98.8 42,601 99.6
Total Operating Income 774 1.2 162 .4
Operating Income (Loss) by Segment
Plastic Lumber (596) (3.8) (1,033) (12.7)
Environmental Recycling 2,883 6.0 2,795 8.1
Corporate (1,513) (2.4) (1,600) (3.7)
------ ---- ------ ----
Total Operating Income $ 774 1.2 $ 162 .4
</TABLE>
CONSOLIDATED SALES AND OPERATING INCOME
The Company recognized significant increases in both sales and operating income
for 1998 compared to 1997. Sales increased 49% for 1998 to $63,720,000 from
$42,763,000 in 1997. Of the $20,957,000 increase in consolidated revenues,
approximately $11,480,000 was attributable to acquisitions completed after
June 30, 1997, $4,555,000 to the start up of dredging operations in 1998,
$1,803,000 to the start up of the CBC facility July 1, 1998 and the remaining
$3,119,000 to internal growth.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Consolidated operating income increased by $611,000 to $774,000 for 1998
compared to $163,000 in 1997. The increase in operating income was primarily
due to businesses acquired in 1998, the entrance into the beneficial reuse of
dredge material market in the second quarter of 1998 and improved Plastic
Lumber plant utilization. The operating income of Barbella decreased by
$1,165,000 in 1998 due to lower profit margin contracts in 1998.
SALES BY SEGMENT
Plastic Lumber Division sales increased by $7,590,000 or 93% to $15,720,000 in
1998 compared to $8,130,000 in 1997. Sales by the original plastic lumber
companies and companies acquired before January 31, 1997 increased $1,759,000
to $9,889,000 for 1998 from $8,130,000 for 1997. This 22% increase in "same
plant" sales is attributable to establishing a network of "stocking"
distributors and selling to the mass merchant market in 1998. The remaining
$5,831,000 of the increase in Plastic Lumber sales was due to the 1998
acquisitions of CPL, CMI and the assets of Trimax and the July 1, 1997
acquisition of EPC.
Environmental Recycling Division sales for 1998 were $48,000,000, an increase
of $13,367,000 or 39% over the $34,633,000 for 1997. The acquisitions of WCI,
GHE and Geocore, Inc., which the Company acquired after November of 1997,
contributed approximately $5,649,000 or 42% of the total increase. The recently
constructed CBC facility, which began treating contaminated soils
bio-organically in June 1998, added sales of $1,803,000 or 14% of the increase.
The entrance of CTI and the Company's Joint Venture into the beneficial reuse
of dredge material market during the second quarter of 1998 generated
$4,555,000 or 34% of the increase. The remaining $1,360,000 or 10% of the sales
increase came from internal growth due to the vertical integration of newly
acquired companies. At December 31, 1998 the Environmental Recycling Division
had a $24 million backlog of contracts signed for which the work has not been
performed.
GROSS PROFIT
Consolidated gross profit increased $4,674,000 or 66% to $11,764,000 for 1998
compared to $7,090,000 in 1997. The gross profit as a percent of revenue
improved by 1.9 percentage points from 16.6% in 1997 to 18.5% in 1998. The
increase was attributed to acquisitions in both business segments subsequent to
June 30, 1997 and to the start up of dredging operations in 1998. Business
units in both Divisions continued to eliminate and consolidate duplicative
operating expenses during 1998, however, 1998 results include certain
non-recurring expenses associated with the unit combinations.
Plastic Lumber Division acquisitions in 1998 accounted for $1,670,000 or 52% of
the $3,211,000 increase in Plastic Lumber Division gross profit in 1998.
Approximately $618,000 or 19% of the increase in gross profit came from
including a full year for EPC compared with only 6 months of EPC operations
included in 1997. The remaining $923,000 or 29% of the increase came from the
original Plastic Lumber operations and expanded plant capacity at these
facilities.
Environmental Recycling Division acquisitions (including Barbella) after
November 30, 1997 accounted for $194,000 of the $1,463,000 increase in gross
profit in 1998 over 1997. The opening of the CBC facility in late June 1998
contributed $1,049,000 of gross profit and the new dredging operations
contributed $648,000 to gross profit for 1998. The soil remediation and
environmental construction service companies' gross profit was $428,000 lower
in 1998 due to delays in the commencement dates of certain contracts in the $10
million backlog of environmental construction service contracts. The gross
profit of Barbella was $1,053,000 lower in 1998 than in 1997 due to lower gross
margin contracts.
Cost of sales (excluding depreciation) as a percent of Plastic Lumber sales
improved significantly from 88% in 1997 to 70% in 1998. Profitability improved
at all of the Lumber plants as a result of implementing manufacturing
efficiencies in the Tennessee flow mold facility and tripling the capacity of
the Wisconsin facility. The Plastic Lumber Division expects continued
improvement in gross profit margins in 1999 from several sources: the
Eaglebrook acquisition in January 1999: the national distribution network for
residential products; the anticipated "BOCA certification" of the CareFree
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
decking product ("BOCA certification" provides automatic approval by local
building inspectors); the expansion into industrial products; the addition of
patented structural lumber to the product offerings; and the further
development of railroad ties.
Environmental Recycling Division cost of sales (excluding depreciation and
amortization of site development costs) increased slightly as a percent of
sales from 81% in 1997 to 82% in 1998. The higher gross margins from
Environmental Recycling Division acquisitions was more than offset by the lower
gross profit margins on environmental construction contracts. The Environmental
Recycling Division expects to improve gross profit levels in environmental
construction services and an even greater gross margin contribution from a full
year's operations from the CBC facility in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A")
Consolidated SG&A expenses increased $4,063,000 or 72% to $10,990,000 for 1998
from $6,927,000 in 1997. As a percentage of consolidated sales, SG&A expenses
increased from 16% for 1997 to 17% in 1998. Efficiencies in the Environmental
Recycling Division only partially offset Plastic Lumber costs incurred to
establish a national sales distribution network. Corporate administrative
expenses improved to 2.1% of sales in 1998 from 3.4% in 1997 despite making
several acquisitions in 1998.
Plastic Lumber SG&A expenses increased $2,597,000 or 156% in 1998 compared to
$1,661,000 in 1997. Acquisitions made since the beginning of 1997 accounted for
$605,000 or 23% of the Plastic Lumber increase. Plastic Lumber SG&A as a
percent of sales increased from 20% in 1997 to 27% in 1998. The Plastic Lumber
Division incurred significant expenses developing and maintaining a national
sales distribution network and a centralized customer service center. These
expenses included adding a Vice President of Sales, regional sales and product
line managers as well as personnel for customer service. The Plastic Lumber
Division also incurred significant trade show and travel expenses to increase
the Company's sales coverage and to integrate acquired manufacturing operations
with existing manufacturing plants. The Plastic Lumber Division also continued
to invest in research and engineering to commercialize the structural lumber
and railroad tie product lines.
Environmental Recycling Division SG&A expenses were unchanged at 10% of related
revenue in 1997 and 1998.
INTEREST EXPENSE
Interest expense increased $935,000 to $1,243,000 in 1998 over the $308,000 in
1997. The increase is the result of increased borrowings from the bank lines of
credit for working capital and to finance acquisitions, the start up of
dredging operations and additional Plastic Lumber plant capacity. It also
includes debt service assumed from businesses acquired during 1997 and 1998 and
$272,000 of amortization of deferred financing costs of increasing the line of
credit at PNC Bank in December of 1997 and obtaining the new credit agreement
with a division of Southern Pacific Bank in October 1998.
Total notes payable and capital leases increased by $14,726,000 or 284% from
$5,179,000 at December 31, 1997 to $19,905,000 at December 31, 1998. Excluding
the $272,000 amortization of deferred financing costs, interest expense
increased by $663,000 or 216%. Interest expense did not increase in the same
proportion as the debt increase because a disproportionate share of the total
debt increase came in the second half of 1998.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased $1,070,000 or 153% in 1998 compared to 1997
reflecting the significant increase in plant and equipment from both
acquisitions and continued capital investments. Amortization expense increased
$345,000 in 1998 over 1997 due to goodwill from the numerous acquisitions
completed in the second half of 1997 and first half of 1998 and due to dredge
site development costs.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2,913,000 at December 31, 1998 a decrease of
$1,691,000 from the $4,604,000 at December 31, 1997. Cash used in operating
activities was $8,235,000. The significant increase in revenues during the
second half of 1998 resulted in a significant increase in accounts receivable
and Plastic Lumber inventories. The Company used its revolving credit
agreements to finance the increase in accounts receivable and inventories and
to pay down accounts payable and accrued expenses of acquired companies.
Cash used in investing activities was primarily for capital expenditures. The
Environmental Recycling Division made capital expenditures in 1998 for
property, plant and equipment totaling $5,425,000 including $2,503,000 for the
Carteret Biocycle facility, $689,000 for dredge material handling and mixing
equipment, $1,590,000 for environmental construction service equipment and
$586,000 to improve its Delaware soil remediation plant and soil handling
equipment. The Plastic Lumber Division made machinery and equipment purchases
totaling $2,831,000 primarily to expand capacity at the Maryland Wisconsin,
Indiana and Tennessee manufacturing facilities, to provide recycled plastic
washing facilities in its Massachusetts plant and to establish structural
lumber and railroad tie production lines in its Tennessee facility. The Company
also used a total of $3,885,000 to acquire companies with plant & equipment
valued at $6,387,000. The Company used its credit agreements to fund $2,045,000
of permitting and development of the dredge soil reclamation site and
$1,230,000 of working capital needed to start up the dredging operations of
both Consolidated Technologies and the Joint Venture.
Cash provided by financing activities totaled $20,754,000, including
$10,438,000 of net additional bank and equipment financings, $3,956,000 of net
proceeds from the issuance of 5% convertible subordinated debentures (see Note
6 to Consolidated Financial Statements) and $6,472,000 net proceeds from equity
financings. In addition, the Company assumed $2,774,000 of debt owed by 7
acquired companies and incurred $955,000 of additional debt to make the
acquisitions.
Proceeds from new bank and capital lease equipment borrowings totaled
$17,847,000 including $13,499,000 under the new credit facility with a division
of Southern Pacific Bank ("SPB"). The $672,000 of costs paid out to obtain the
SPB credit agreement is being amortized over the agreement's 5 year term. The
proceeds of the SPB loans were used to pay off $8,300,000 outstanding under the
PNC Bank revolving credit agreement and approximately $770,000 of various
equipment loans. During the first ten months of 1998 the Company had borrowed
an additional $7,270,000 under its revolving credit agreement with PNC Bank.
During 1998 the Company also borrowed $778,000 from an equipment leasing
company, $736,000 from an insurance premium financing company, $550,000 from a
state of Pennsylvania development commission and $2,071,000 from various
equipment financing companies at favorable interest rates. Repayments of
various non-affiliated notes payable, capital leases and credit agreements
totaled $12,273,000, including $8,300,000 to PNC Bank, $2,173,000 on other
loans outstanding at December 31, 1997, $552,000 on the new bridge and term
loans with SPB, $362,000 on the Premium finance loan and $710,000 on debt
assumed in acquisitions. The Company also paid back the entire $1,956,810 it
owed to affiliates at December 31, 1997.
Equity financings in 1998 included $2,291,000 of proceeds from the exercise of
Series A warrants, $234,000 from the exercise of stock options and $4,431,000
from a Private Placement of 211,020 shares of Series B Preferred Stock for $21
per share. The Series B Preferred Stock has a cumulative 10% stock dividend and
each preferred share was convertible into seven common shares. (See Note 7 to
the consolidated financial statements.) The Company incurred expenses totaling
$484,000 to register the common stock underlying the warrants and the Series B
convertible preferred stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
In January 1998, the Company obtained a $4,000,000 increase in its line of
credit from PNC Bank to $5,500,000 with repayment originally due on June 30,
1999. The line was secured by certain assets of the Company and the personal
guarantees of members of the Stout Partnership (See Certain Transactions). In
the second and third quarters of 1998 the PNC line was increased to $8,400,000
and the term was extended to September 30, 1999. As of October 9, 1998, the
Company had borrowed a total of $8,300,000 against the PNC line of credit when
it was paid off with proceeds from the SPB credit facility.
In October 1998 the Company completed negotiations on a $30 million credit
facility with a division of Southern Pacific Bank (See Note 5 to the
consolidated financial statements). In October 1998 the Company used this line
to payoff the aforementioned PNC Bank line and $690,000 of notes payable
secured by equipment at six subsidiary locations. In addition the Company drew
down a $2,000,000 bridge loan payable over 18 months. On March 1, 1999 the
$1,440,000 balance on the bridge loan was converted into a real estate loan
with payments of $6,000 per month and a balloon payment due October 10, 2003.
On December 31, 1998 the Company executed a $490,000 term loan with SDPB to
repay certain loans owed by S&W Waste, Inc. As of December 31, 1998 the Company
had loans totaling $12,946,683 outstanding under the SPB agreement.
The additional unused portion of the SPB line will be used to expand existing
operations, increase working capital and to finance acquisitions. An additional
$175,000 of financing cost is due on June 9, 1999 to make the full $30 million
available to borrow against eligible assets pursuant to the terms of the SPB
agreement.
The Company will require additional working capital for the environmental
recycling operations, especially for the dredging opportunities being pursued
by the Company. Although, there are no material commitments in place currently
for capital expenditures, the Company also anticipates requiring additional
working capital to expand and upgrade its plastic lumber manufacturing
facilities as sales levels increase and as the structural lumber and railroad
tie products begin to take hold within their markets. The Company also
anticipates using working capital to fund research and development costs with
respect to its new products.
PRIVATE PLACEMENTS OF COMMON STOCK IN 1999
The Company has received gross proceeds of $26,574,000 from a series of private
placements of common stock in 1999. The Company incurred approximately
$1,225,000 of expenses related to these private placements.
ACQUISITION OF BRASS IN 1999
On January 7, 1999, the Company executed a contract to acquire all of the stock
of Brass Investment Co. ("Brass"), which owns all the stock of Soil Remediation
of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). The Company signed a
Management Contract taking over all responsibility for day to day management
and financial control of SRP and AWI on January 7, 1999. Unaudited sales of SRP
and AWI, prior to intercompany eliminations, for the year ended December 31,
1998 were $14,922,000 with unaudited operating income of $2,025,000. The
Company purchased Brass for cash plus 1,000,000 shares of restricted common
stock and granted 1,500,000 warrants to Louis Paolino, Jr. to purchase
restricted common stock. The real estate and accounts receivable of Brass will
secure loans to fund the cash portion of the purchase price.
ACQUISITION OF EAGLEBROOK IN 1999
On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook") located in Chicago,
Illinois. The Company purchased Eaglebrook for cash plus 1,668,025 shares of
restricted common stock, $4,000,000 of convertible secured debentures and
150,000 options to purchase Company stock. The unaudited sales of Eaglebrook
were $22,145,000 before $1,706,000 of intercompany eliminations and the
unaudited combined operating income was $1,325,000 for the year ended
December 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
ACQUISITION OF BARBELLA IN 1999 ACCOUNTED FOR AS A "POOLING OF INTERESTS"
On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("Barbella"), for 810,000 shares of restricted
common stock. Barbella is an environmental remediation and construction service
company located in Somerville, New Jersey. The Company has accounted for the
Barbella transaction as a pooling of interests. Accordingly, the 1998 and 1997
financial statements have been restated to include all of the accounts of
Barbella and shares issued to acquire Barbella as if the acquisition had taken
place on January 1, 1997.
ISSUANCE OF ADDITIONAL CONVERTIBLE SUBORDINATED DEBENTURES IN 1999
On January 27, 1999 the Company issued an additional $2,500,000 of Convertible
Subordinated debentures to the same debenture holders with substantially the
same terms as the $4,000,000 issued on December 22, 1998 (See Notes 6 and 13 to
the Financial Statements). The proceeds were used in the purchase of
Eaglebrook.
LOANS FROM RELATED PARTIES
On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan to
the Company. The loan bears interest at 10% and matures in 12 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership
borrowed the $5,000,000 from PNC Bank and the individual partners have
personally guaranteed the loan.
In January 1999 the Company borrowed $1,500,000 from a company owned by one of
the directors and his family. The loan bears interest at 1% over prime and
matures in 18 months. The proceeds were used in the Eaglebrook acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 SFAS 133 was issued by the Financial Accounting Standards Board
establishing accounting and reporting standards for derivative instruments and
hedging activities. The Company does not have any derivative instruments or use
any hedging activities. Accordingly, adoption of this standard will not affect
the company's financial position or results of operations.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 (the
"Year 2000 Issue"). The accounting software used by the Company is Year 2000
compliant (meaning it recognizes dates in the Year 2000 and beyond) at most
subsidiary operations. The Company anticipates upgrading the accounting
software in those remaining subsidiaries in mid 1999. The Company does not
anticipate a material financial impact as a result of the Year 2000 Issue nor
does it anticipate any material financial expenditure to remedy the Year 2000
date change within its own software. In fact, the Company expenditures to date
on investigating and remedying Year 2000 issues has been insignificant.
The Company has completed an internal audit of its computer systems and software
to determine what issues, if any, exist. The Company has evaluated the full
scope of issues, related costs, and available remedies to insure the Company's
systems continue to meet its internal needs. Anticipated costs for system and
software modifications will be expensed as incurred. The Company has also
completed an internal audit of its non-information technology systems (e.g.
manufacturing equipment embedded computer systems) to determine what issues
existed in those systems.
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<PAGE> 11
However, the Company has no control over Year 2000 compliance by the customers
and vendors of the Company. If the Company's customers and vendors are not in
Year 2000 compliance, this could provide a material adverse financial impact to
the Company. The Company has made inquiry to all of its major customers and
suppliers in an attempt to assess the Year 2000 readiness of its major
customers and suppliers. The results of this inquiry have not revealed any
issues that the Company believes can have a material adverse effect on the
financial condition of the Company.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To U.S. Plastic Lumber Corp.:
We have audited the accompanying consolidated balance sheets
(restated) of U.S. Plastic Lumber Corp. (a Nevada Corporation) and subsidiaries
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows (restated) for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Barbella Environmental Technology, Inc., a company acquired during 1999 in a
transaction accounted for as a pooling of interests, as discussed in Note 13.
Such statements are included in the consolidated financial statements of U.S.
Plastic Lumber Corporation and subsidiaries and reflect total assets and total
sales, net of 13% and 28% in 1998, respectively, and 23% and 42% in 1997,
respectively, of the related consolidated totals. These statements were audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to amounts included for Barbella Environmental Technology, Inc.,
is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of U.S. Plastic Lumber Corp. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 8, 1999.
12
<PAGE> 13
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (RESTATED)
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,912,664 $ 4,603,908
Accounts receivable, net 16,773,147 9,306,519
Inventories 4,869,006 1,502,658
Prepaid expenses and other assets 1,514,241 621,234
----------- -----------
Total current assets 26,069,058 16,034,319
Property, plant and equipment, net 19,198,190 6,306,359
Acquired intangibles, net 9,553,642 7,009,244
Other assets 5,376,403 552,914
----------- -----------
Total assets $60,197,293 $29,902,836
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,816,685 $ 5,935,896
Notes payable and capital leases, current portion 4,134,362 2,404,607
Notes payable, affiliates -- 1,956,810
Accrued expenses 2,303,081 2,524,628
Other current liabilities 1,735,463 1,807,652
----------- -----------
Total current liabilities 14,989,591 14,629,593
Notes payable and capital leases, net of current portion 15,770,624 817,011
Deferred income taxes 498,602 628,884
Minority interest 250,164 --
Convertible subordinated debentures, net of discount 3,555,556 --
----------- -----------
Total liabilities 35,064,537 16,075,488
----------- -----------
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized 5,000,000 shares;
issued and outstanding 382,709 shares and 208,930 shares, respectively
(aggregate liquidation preference of $7,808,877 and $4,178,600, respectively) 383 209
Common stock par value $.0001, authorized 50,000,000 shares; issued and
outstanding 19,040,528 shares and 16,431,599 shares, respectively 1,904 1,643
Additional paid-in capital 24,769,166 12,672,945
Retained earnings 361,303 1,152,551
----------- -----------
Total stockholders' equity 25,132,756 13,827,348
----------- -----------
Total liabilities and stockholders' equity $60,197,293 $29,902,836
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE> 14
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Sales, net $ 63,719,824 $ 42,763,604
Cost of goods sold 51,956,096 35,673,201
------------ ------------
Gross profit 11,763,728 7,090,403
Selling, general and administrative expenses 10,989,523 6,927,406
------------ ------------
Operating income 774,205 162,997
Interest income 228,752 105,489
Interest expense (1,243,244) (307,636)
Minority interest in joint venture and subsidiary (262,659) (131,897)
Gain on sale of assets 105,588 --
------------ ------------
Loss before income taxes (397,358) (171,047)
Income taxes (benefit) (192,884) 230,602
------------ ------------
Net loss (204,474) (401,649)
Preferred stock dividends earned (677,078) (409,705)
------------ ------------
Net loss attributable to common stockholders $ (881,552) $ (811,354)
============ ============
Loss per share-basic and diluted $ (.05) $ (.05)
============ ============
Weighted average common shares outstanding-basic and diluted 17,686,651 14,863,862
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE> 15
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
----------------- -------------------- Paid-In- Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 74,970 $ 75 12,482,349 $1,248 $ 4,536,677 $ 1,858,940 $ 6,396,940
Sale of Series A preferred stock 119,000 119 -- -- 2,379,881 -- 2,380,000
Preferred stock dividends 14,960 15 -- -- 304,725 (304,740) --
Business acquisitions -- -- 2,190,150 219 2,277,262 -- 2,277,481
Sale of common stock -- -- 1,111,111 111 2,499,889 -- 2,500,000
Common stock issued under
earnout agreements -- -- 28,500 3 63,087 -- 63,090
Exercise of nonemployee
stock options -- -- 202,589 20 358,565 -- 358,585
Licensing agreement -- -- 187,500 19 93,731 -- 93,750
Noncompete agreements -- -- 72,572 7 80,681 -- 80,688
Dura Tech agreement -- -- 150,500 15 75,235 -- 75,250
Other issuances -- -- 6,328 1 3,212 -- 3,213
Net loss -- -- -- -- -- (401,649) (401,649)
------- ----- ---------- ------ ------------ ----------- ------------
Balance at December 31, 1997 208,930 209 16,431,599 1,643 12,672,945 1,152,551 13,827,348
Business acquisitions and
earnout agreements -- -- 952,875 96 3,455,857 -- 3,455,953
Sale of Series B preferred
Stock 211,020 211 -- -- 4,431,209 -- 4,431,420
Exercise of options and
warrants -- -- 1,044,372 105 2,524,762 -- 2,524,867
Costs of issuing common and
preferred shares -- -- -- -- (483,788) -- (483,788)
Shares and value of options
issued to directors and
Stout Partnership -- -- 4,400 -- 512,685 -- 512,685
Shares, warrants and options
issued in connection with
convertible debentures -- -- 114,800 11 548,949 -- 548,960
Debenture proceeds allocated
to 10% conversion discount -- -- -- -- 444,444 -- 444,444
Other issuances -- -- 29,030 3 75,338 -- 75,341
Conversion of Preferred
to Common (66,207) (66) 463,452 46 20 -- --
Preferred stock dividends 28,966 29 -- -- 586,745 (586,774) --
Net loss -- -- -- -- -- (204,474) (204,474)
------- ----- ---------- ------ ------------ ----------- ------------
Balance at December 31, 1998 382,709 $ 383 19,040,528 $1,904 $ 24,769,166 $ 361,303 $ 25,132,756
======== ===== ========== ====== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
15
<PAGE> 16
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (204,474) $ (401,649)
------------ -----------
Adjustments reconciling net loss to net cash provided by (used in) operating
activities:
Depreciation 1,774,873 703,507
Amortization of all intangibles and dredge site development costs 614,829 268,279
Amortization of deferred financing costs 272,366 --
Income tax provision above (below) taxes paid (801,864) (87,279)
Minority interest in Joint Venture and subsidiary 262,659 131,897
Provision for doubtful accounts 101,594 219,053
Gain on sale of assets 105,588 1,749
Compensation expense related to common shares issued 170,678 63,090
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (5,177,649) (1,425,848)
Inventories (2,632,092) (575,126)
Prepaid expenses and other current assets (1,056,074) (3,371)
Other assets (404,491) (373,466)
Accounts payable (514,337) 267,728
Other liabilities 579,097 413,825
Accrued expenses (1,325,688) 1,000,022
------------ -----------
Total adjustments (8,030,511) 604,060
------------ -----------
Net cash provided by (used in) operating activities (8,234,985) 202,411
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (8,279,679) (2,815,879)
Capital expenditures for dredge disposal site permits and costs (2,045,436) --
Cash paid for acquisitions, net of cash received (3,885,197) (1,595,000)
------------ -----------
Net cash used in investing activities (14,210,312) (4,410,879)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock -- 2,503,213
Proceeds from exercise of warrants 2,291,193 --
Proceeds from sales of preferred stock 4,431,420 2,380,000
Costs of issuing warrants and preferred stock (483,788) --
Proceeds from issuance of convertible debentures 4,000,000 --
Proceeds from stock option exercises 233,674 358,585
Advances (repayment of) due to affiliates, net (1,956,810) 1,521,778
Proceeds from notes payable and capital leases 25,227,300 1,379,987
Payment of deferred financing and convertible debenture issue costs (715,946) --
Payments of notes payable and capital leases (12,272,990) (1,331,671)
------------ -----------
Net cash provided by financing activities 20,754,053 6,811,892
------------ -----------
Net change in cash and cash equivalents (1,691,244) 2,603,424
Cash and cash equivalents, beginning of period 4,603,908 2,000,484
------------ -----------
Cash and cash equivalents, end of period $ 2,912,664 $ 4,603,908
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
16
<PAGE> 17
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company") are
engaged in the manufacturing of recycled plastic lumber and other products and
environmental remediation services, including recycling of soils which have
been exposed to hydrocarbons and the beneficial reuse of dredge materials. The
Company's plastic lumber customers are located throughout the United States.
The Company's environmental remediation, dredge and soil recycling customers
are located primarily in the Northeastern United States.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of U.S.
Plastic Lumber Corp. and its wholly-owned subsidiaries U.S. Plastic Lumber, LTD,
Clean Earth, Inc., Carteret Biocycle Corp. ("CBC"), Clean Earth of New Castle,
Consolidated Technologies, Inc. ("CTI"), Integrated Technical Services, Inc.
("ITS") and S&W Waste, Inc. (See subsidiary mergers effective December 31, 1998
in Note 2 and see Note 13 for restatement of accompanying 1998 and 1997
financial statements for acquisition of Barbella in June, 1999). All significant
intercompany balances and transactions have been eliminated in consolidation.
In July 1997, the Company and Interstate Industrial Corp. ("IIC") formed a
50/50 joint venture dredging business. The joint venture had minor operations
in 1997 incurring a loss of $263,794. The Company manages the day to day
dredging operations and has consolidated 100% of the assets, liabilities and
results of operations of the joint venture after the Company obtained majority
control effective April 1, 1998. A summary of the 1998 operations of the Joint
Venture follows:
Revenues $ 3,062,903
Operating costs and expenses 2,298,779
-----------
Operating income 764,124
Minority interest (382,062)
-----------
Company's portion of income before income taxes $ 382,062
===========
The Company provided 100% of the funds to finance the joint venture's
operations and all of its cash advances will be returned before any funds are
distributed to IIC. The IIC minority interest in the net income of the joint
venture since inception totaling $250,164 is shown as minority interest in the
accompanying consolidated balance sheet at December 31, 1998. The $119,403
minority interest in the CTI losses prior to June 30, 1998 are combined with
the $382,062 minority interest in the IIC joint venture in the statement of
Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities and disclosure
of contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
17
<PAGE> 18
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined by
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed for
financial statement purposes by the use of the straight-line method over the
estimated useful lives of the assets. Accelerated methods of computing
depreciation are used for tax purposes. Upon sale or retirement, the cost and
related accumulated depreciation of such assets are removed from the accounts
and any resulting gain or loss realized is credited or charged to income during
the period. Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals, improvements and betterments are capitalized.
ACQUIRED INTANGIBLES
The excess of cost over the fair value of net assets of businesses acquired is
amortized on a straight-line basis over a period of twenty years. Amortization
expense for acquired intangibles was $468,449 in 1998 and $268,279 in 1997.
Accumulated amortization of acquired intangibles excluding the Trimax patents
was $716,039 at December 31, 1998 and $268,279 at December 31, 1997.
It is the Company's policy to evaluate the excess of cost over the net assets
of businesses acquired based on an evaluation of such factors as the occurrence
of a significant adverse event or change in the environment in which the
business operates or if the expected undiscounted future net cash flows are
less than the carrying amount of the asset. An impairment loss would be
recorded in the period such determination is made.
OTHER ASSETS
The Company incurred $2,045,436 of costs in 1997 and 1998 to permit and develop
dredge material disposal sites in strip mines in Pennsylvania. The costs are
being amortized over the total number of yards currently permitted for disposal
including $71,071 of amortization in 1998. The $358,478 value assigned to the
Trimax patents acquired in 1998 is being amortized over 15 years including
$25,000 of amortization in 1998. Other assets are summarized as follows at
December 31, 1998:
Dredge disposal permits and site development, net $1,974,365
Deferred credit agreement financing costs, net 799,425
Deferred convertible debenture costs, net 686,280
Deposits 392,223
Patents, net 333,478
Other 1,190,632
----------
$5,376,403
==========
REVENUE RECOGNITION
Revenues from the Company's plastic lumber division are recognized at the date
the products are shipped. Revenues from the environmental recycling division are
recognized on the percentage of completion method when services are performed or
upon treatment and certification for disposal of contaminated soil. Under the
percentage of completion method, contract revenue is recognized in the ratio of
contract costs incurred to date to the estimated total costs to complete the
project. Contract costs include all direct and indirect labor, material and
equipment depreciation required to complete each contract. A liability is
recorded for estimated losses, if any, on uncompleted contracts.
Billings in excess of costs incurred and estimated profit recognized at December
31, 1998 are included in other liabilities. Costs incurred and profits
recognized in excess of billings on applicable contracts are included in
accounts receivable.
The following is a summary of the costs and estimated earnings on uncompleted
contracts at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............................ $11,912,140 $18,716,710
Estimated profit................................................... 521,604 2,312,825
----------- -----------
Total included in sales....................................... 12,433,744 21,029,535
Less billings to date.............................................. 13,071,445 (20,838,508)
----------- -----------
Billings under (over) costs and estimated profit................... $ (637,701) $ 191,027
=========== ===========
</TABLE>
18
<PAGE> 19
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
The Company provides for estimated losses on doubtful accounts. The following
is a summary of activity of the Company's allowance accounts:
1998 1997
--------- ---------
Balance, beginning of year $ 475,030 $ 148,744
Provision for doubtful accounts 101,594 219,053
Write-offs (265,725) (47,662)
Allowance of acquired entities 150,808 154,895
--------- ---------
Balance, end of year $ 461,707 $ 475,030
========= =========
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." In accounting for stock-based
transactions with nonemployees, the Company records compensation expense when
these types of options are issued. As permitted by SFAS No. 123, the Company
accounts for stock-based compensation granted to employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to be settled or realized.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred and were approximately
$113,151 and $87,706 in 1998 and 1997, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and trade receivables. The Company maintains its cash and cash equivalents with
various financial institutions which are primarily located in the Eastern
United States. At December 31, 1998, the Company had bank balances of
approximately $1,270,000 (including issued but not cleared checks) in excess of
amounts insured by federal deposit insurance. Trade receivables are
concentrated primarily in the Northeastern United States. The Company does not
require collateral from its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, receivables, accounts
payable, due to affiliates, notes payable and convertible subordinated
debentures. The carrying amounts reported in the consolidated balance sheet for
these financial instruments approximate their fair value.
19
<PAGE> 20
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
LOSS PER SHARE
Basic income or loss per share is computed by dividing net income or loss less
preferred stock dividends by the weighted average number of shares actually
outstanding. Diluted income or loss per share attributable to common
stockholders further considers the impact of common stock equivalents to the
extent that they are dilutive. The Company's basic and diluted loss per share
are the same for both 1998 and 1997 because the common stock equivalents are
anti dilutive. See Notes 6 and 7 for potentially dilutive securities.
COMPREHENSIVE INCOME
During the years ended December 31, 1998 and 1997 the Company did not have any
changes in its stockholders equity resulting from non-owner sources.
Accordingly, comprehensive income as set forth in SFAS NO. 130 was equal to the
net loss amounts presented in the statements of operations.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year totaled $867,671 and $302,305 for interest in the
years ended December 31, 1998 and 1997, respectively, and $ 608,980 and
$322,210 for income taxes in 1998 and 1997, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
See Notes 2, 5, 6, 7, 11 and 13 for information regarding common shares, stock
options, stock warrants and debt issued for acquisitions, non compete
agreements, licensing agreement, earnout agreements, the convertible
subordinated debentures and loan guarantees by the Stout partners.
2. ACQUISITIONS
1997 ACQUISITIONS
The Company acquired three companies in the plastic lumber business and three
companies in the environmental services business in 1997. The $3,872,481 total
purchase price for all six acquisitions consisted of 2,190,150 shares of common
stock valued at an aggregate of $2,277,481 and cash payments totaling
$1,595,000. Several of the acquisitions include non compete agreements and
earnout provisions based on achieving specified profitability levels for key
employees and former owners.
A summary of the allocation of the $3,872,481 aggregate purchase price of the
1997 acquisitions to net assets acquired follows:
Working capital (deficit) $ (675,752)
Long-term assets 2,813,281
Long-term debt assumed (1,965,040)
Deferred tax liabilities (815,885)
Acquired intangibles 4,515,877
-----------
Aggregate purchase price $ 3,872,481
===========
1998 ACQUISITIONS
In January 1998 the Company acquired Green Horizon Environmental, Inc. ("GHE"),
an environmental services company located in Norristown, Pennsylvania.
20
<PAGE> 21
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
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. The
$119,403 minority interest in the CTI losses prior to June 30, 1998 are
combined with the minority interest in the joint venture with IIC in the
statement of Operations.
Effective June 30, 1998 the Company purchased substantially all of the assets of
Trimax of Long Island, Inc. and Polymerix, Inc. ("Trimax") through the U.S.
Bankruptcy Court. The Trimax purchase includes two patents for the manufacture
of structural plastic lumber.
On December 30, 1998 the Company acquired 100% of S&W Waste, Inc. ("S&W"), a
RCRA facility that recycles and beneficially re-uses industrial wastes and
disposes of contaminated materials, located in northern New Jersey.
The total purchase price of $8,517,273 for all of the 1998 acquisitions
consisted of 952,875 shares of USPL common stock valued at an aggregate of
$3,535,660, cash payments of $3,705,000, issuance of debt totaling $954,952,
costs totaling $303,868 and $17,793 assigned to options granted to a former
owner. Several of the acquisitions include non compete agreements, stock
options and earnout provisions based on achieving specified profitability
levels for key employees and former owners.
A summary of the allocation of the aggregate purchase price of the 1998
acquisitions follows:
Working capital (deficit) $ (846,926)
Long-term assets 7,101,976
Net deferred tax assets 333,303
Long-term debt (1,535,609)
Acquired intangibles 3,464,529
-----------
Aggregate purchase price $ 8,517,273
===========
All of the acquisitions in 1997 and 1998 have been accounted for as purchases.
Accordingly, the results of operations of the acquired companies are included
in the Consolidated Financial Statements for periods subsequent to the date of
acquisition. The excess of the aggregate purchase price over the estimated fair
value of the net assets acquired has been recorded as acquired intangibles and
is being amortized on a straight-line basis over a period of twenty years from
the effective date of each acquisition (15 years for the $358,478 assigned to
the Trimax patents).
Effective December 31, 1998 all of the companies in the Plastic Lumber division
were merged into U.S. Plastic Lumber, LTD and Waste Concepts, Inc., GHE and GCI
were merged into ITS.
21
<PAGE> 22
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
The unaudited pro forma combined results of operations of the Company and all
of its subsidiaries for the years ended December 31, 1998 and 1997, after giving
effect to certain pro forma adjustments as if the acquisitions had taken place
on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 72,295,278 $ 62,775,933
============== ============
Net loss $ (2,820) $ (1,505,480)
============== ============
Net loss attributable to common stockholders $ (679,898) $ (1,915,185)
============== ============
Net loss per share-basic and diluted $ (.04) $ (.12)
============== ============
Weighted average shares used in computation 18,215,486 16,340,628
============== ============
</TABLE>
The foregoing unaudited pro forma results of operations reflect adjustments for
amortization of goodwill, depreciation on re-valued buildings and equipment and
interest on cash paid to the sellers. Per share amounts are calculated after
preferred dividends are subtracted from net income. They do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions occurred at January 1, 1997 or of future results of operations
of the consolidated entities.
3. INVENTORIES
Inventories consist of the following at December 31, 1998 and 1997:
1998 1997
---------- ----------
Raw materials $1,046,926 $ 574,463
Finished goods 3,822,080 928,195
---------- ----------
$4,869,006 $1,502,658
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
USEFUL LIVES 1998 1997
-------------- ------------ -----------
<S> <C> <C> <C>
Land $ 2,600,000 $ --
Buildings 30 to 40 years 3,515,923 1,146,948
Machinery and equipment 7 to 20 years 17,972,150 8,861,768
Leasehold improvements Life of lease 360,365 134,063
Furniture and office equipment 5 to 7 years 726,059 426,191
------------ -----------
25,174,497 10,568,970
Less - accumulated depreciation (5,976,307) (4,262,611)
------------ -----------
$ 19,198,190 $ 6,306,359
============ ===========
</TABLE>
Depreciation expense was $1,774,873 and $703,507 for the years ended
December 31, 1998 and 1997, respectively.
22
<PAGE> 23
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
5. NOTES PAYABLE AND CAPITAL LEASES
LINE OF CREDIT AND NEW CREDIT FACILITY
In January 1998, the Company obtained a $4,000,000 increase in its revolving
line of credit bringing the total line of credit to $5,500,000. To obtain this
increase the Stout Partners, consisting of the Company's Chairman and two
directors, pledged assets and guaranteed the line. In exchange for this
guarantee the Company granted 320,000 non-employee stock options, exercisable
at $2.25 per share, to the Stout Partnership. The $400,000 value of such
options is being amortized as interest over the original 18 month term of the
line of credit. On August 13, 1998 the Bank added $2,000,000 to the line,
bringing the total line to $7,500,000, and extended the maturity date to
September 30, 1999. The line was increased to $8,400,000 in October before it
was repaid from proceeds of the new credit agreement. (See Note 13 for
continuing loan from Stout Partnership.)
In October 1998 the Company negotiated a five year line of credit for
$30,000,000 with a division of Southern Pacific Bank ("SPB"). The draws on the
line are collateralized by specific equipment and/or inventory and eligible
accounts receivable. The line bears interest at 1% over prime on inventory and
receivable loans, 1.25% over prime on equipment loans and 2% over prime on real
estate loans. The prime rate was 7.75% on December 31, 1998. Loans secured by
specific equipment are payable over terms up to 7 years in equal monthly
installments with the unpaid balance due in October 2003. The total costs of
obtaining the line aggregating approximately $850,000 are being amortized over
the five year term of the agreement as interest expense.
In the fall of 1998 the Company made net draws of $13,008,766 including
$4,883,766 secured by accounts receivable and inventory, $6,125,000 secured by
specific equipment and a $2,000,000 bridge loan which, subsequent to year end,
converted to a real estate loan. The proceeds were used to payoff the PNC Bank
line and approximately $770,000 of loans secured by specific equipment at six
subsidiary locations. Certain equipment loans were left in place for various
business reasons. On December 30, 1998 an additional $490,000 equipment loan
was taken out in connection with the purchase of S&W.
Notes payable and capital leases consist of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Line of credit, bearing interest at 9% due December 31,
paid in October 1998 $ -- $600,000
Non interest bearing money purchase mortgage note
payable in monthly installments of $18,939 through
December 31, 2009 including interest imputed at
8.5%, collateralized by the S&W facility 1,620,637 --
Premium finance agreement payable in monthly
installments of $63,383 through May 31, 1999
including interest at 7.12%, 311,352 --
Bridge loan converted to Real Estate Loan under the loan
agreement with SPB on March 1, 1999 payable in monthly
installments of $6,000 with a balloon payment due October 10,
2003, bearing interest at 2% over prime, collateralized by
the CBC facility 1,666,667 --
Equipment term loans under loan agreement with SPB,
due in monthly installments of $78,750 and a balloon payment due
October 9, 2003, bearing interest at prime plus 1.25%,
collateralized by equipment of certain subsidiaries of the Company 6,396,250 --
</TABLE>
23
<PAGE> 24
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
<TABLE>
<S> <C>
Capital lease payable in monthly installments of $15,470 through
July 24, 2003 including interest at 8.58%,
collateralized by certain plastic lumber equipment 717,462 --
Note payable in monthly installments through April 1,
2002, bearing interest at 7.565%, collateralized by
all assets at the Auburn, MA facility 318,382 387,772
Notes payable to government agency, payable in monthly
installments totaling $9,505, including interest
at 5% to 5.5%, 486,184 --
Non interest bearing note with customer, payable at $.01 per pound of
plastic shipped to the customer
(approximately 700,000 pounds per month) 239,663 300,000
Receivables and Inventory loans under loan agreement
with SPB, interest payments due monthly at prime plus 1%,
collateralized by substantially all accounts receivable and
$1,667,000 of inventories of subsidiaries of the Company 4,883,766 --
Other notes payable, bearing interest ranging from 7.5%
to 10.5%, repaid in 1998 -- 1,869,635
Note payable to sellers of CMI, bearing interest at 8.5%,
due on May 31, 1999 436,605 --
Note payable to seller of S&W, bearing interest at prime,
plus 1%, repaid on February 2, 1999 500,000 --
Other notes and capital leases payable monthly, maturing
from November 8, 2000 to October 9, 2003, with interest ranging
from 6% to 11.75%, collateralized
by various equipment of subsidiaries of the Company 2,328,018 64,211
------------ -----------
Total notes payable and capital leases 19,904,986 3,221,618
Less current portion (4,134,362) (2,404,607)
------------ -----------
Long-term portion $ 15,770,624 $ 817,011
============ ===========
</TABLE>
Notes payable and capital leases mature as follows:
YEAR ENDING AMOUNTS
----------- -----------
1999 $ 4,134,362
2000 2,190,688
2001 2,055,803
2002 1,650,388
2003 8,797,126
2004 and later 1,076,619
-----------
$19,904,986
===========
6. CONVERTIBLE SUBORDINATED DEBENTURES
On December 22, 1998 the Company issued $4,000,000 of subordinated debentures
convertible into common stock at the lower of $5.29 or 90% of the lowest
trading price in the four days preceding the conversion date. The $444,444
allocated to the 10% discount on conversion was recorded as additional
paid-in-capital and will accrete to the debentures
24
<PAGE> 25
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
outstanding as additional interest expense over the period to the earliest
conversion date. The conversion price is adjustable downward if, in the one year
period ending December 22, 1999, the Company issues convertible securities or
common stock at a more favorable price than the debenture conversion price. The
5% per annum debenture interest is payable 1.25% per quarter starting April 1,
1999. The Company issued the debenture holders warrants to purchase 100,000
shares of common stock for $7.215 per share at any time before December 22,
2003. See Note 13 for issuance of additional $2,500,000 debentures subsequent to
yearend.
The debentures mature on December 22, 2003, however, beginning on June 22, 1999
the debenture holders have the right to force the Company to redeem up to
$1,000,000 of debentures at a 10% premium (i.e. $1,100,000 for $1,000,000 of
debentures). In addition the debenture holders can require the Company to
redeem 100% of the debentures at a 30% premium if the Company fails to register
the underlying shares with the Securities and Exchange Commission before
August 19, 1999. The Company intends to register the shares underlying the
debentures before August 19, 1999 and keep the registration statement effective
until December 22, 2001 as required by the debenture agreement.
The debenture holders can force the Company to issue up to $1,500,000 of
debentures on the same terms at any time until December 22, 2001. This "Call"
right is in addition to the $2,500,000 of debentures issued in January 1999
(See Note 13). The Company can compel the debenture holders to purchase an
additional $500,000 of debentures between June 22, 1999 and December 22, 1999.
However, the maximum total debentures that can be issued is $8,000,000. The
Company must issue additional warrants in the same proportion (2.5%) as any
additional debentures are issued.
The Company incurred costs totaling $688,116 related to the $4,000,000
debentures including $197,600 assigned to the 100,000 warrants. These costs are
being amortized as additional interest expense over the five year term of the
debentures. The unamortized balance is included in other assets. If the
debentures are converted into common stock the unamortized balance will be
charged to additional paid-in-capital.
7. CAPITAL STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
In 1996 and 1997 the Company sold 193,970 shares of the Company's Series A
Preferred Stock for total gross proceeds of $3,879,400. The shares are
nonvoting and have a 10% cumulative stock dividend payable semiannually. The
dividend is payable only in Series A Preferred Stock. No cash dividends will be
paid. Each share is convertible into seven shares of the Company's Common Stock
at the option of the stockholder or mandatorily on the date a registration
statement, which would yield the Company $10 million in proceeds, is declared
effective by the Securities and Exchange Commission ("SEC"). In the event of
any liquidation, after payment of debts and other liabilities, the holders of
Series A Preferred Stock will be entitled to receive, before the holder of any
of the Common Stock, the stated value of $20 per share plus any unpaid
dividends. The Series A Preferred Stock can be redeemed at any time at the sole
option of the Company for $25 per share. In 1998 approximately 2,431 Series A
shares were converted into 17,017 common shares.
Semi annual 5% stock dividends were declared as of March 31 and September 30
each year for a total of 21,511 and 14,960 Series A shares in 1998 and 1997,
respectively. At December 31, 1998 approximately 228,012 Series A shares are
outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
In the summer of 1998 the Company issued 211,020 shares of Series B Preferred
Stock to accredited investors. The Series B shares have substantially the same
rights and features as the Series A Preferred shares except that the stated and
liquidation value of the Series B shares is $21.00 per share. A 5% stock
dividend of 7,455 Series B shares was declared as of September 30, 1998 for the
pro rata portion of the six month period that the Series B preferred shares
were outstanding. In 1998 approximately 63,776 Series B shares were converted
into 446,432 common shares. At December 31, 1998 approximately 154,697 Series B
shares are outstanding.
25
<PAGE> 26
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
EMPLOYEE STOCK OPTIONS
The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and
is generally tied to the market price of the Company's freely trading shares.
The term for exercising the stock options is generally ten years. Stock options
granted by the Company generally vest ratably over a period of three years.
Employee stock option activity in 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average Number of Options
Exercise Price Outstanding
---------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1996 $4.26 307,000
Granted 3.47 1,220,000
Exercised -- --
Canceled 4.33 (177,000)
----- ----------
Outstanding at December 31, 1997 $3.54 1,350,000
Granted 3.65 536,000
Exercised -- --
Canceled 4.43 (215,000)
----- ----------
Outstanding at December 31, 1998 $3.46 1,671,000
===== ==========
Options exercisable at December 31, 1998 $3.41 1,207,334
===== ==========
</TABLE>
Additional information regarding options outstanding at December 31,
1998 follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------- -----------------------
Range of Weighted Weighted
Exercise Prices Average Average
------------------ Exercise Exercise
Low High Number Price Number Price
----- ----- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C>
$2.25 $4.00 1,533,500 $3.30 1,109,833 $3.23
4.50 7.22 137,500 5.24 97,501 5.42
----- ----- --------- ----- --------- -----
$2.25 $7.22 1,671,000 $3.46 1,207,334 $3.41
===== ===== ========= ===== ========= =====
</TABLE>
The following table summarizes the pro forma consolidated results of operations
of the Company as though the fair value based accounting method in SFAS 123 had
been used in accounting for employee stock options for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------ ---------
As reported results of operations:
<S> <C> <C>
Net loss $ (204,474) $(401,649)
============ =========
Net loss attributable to common stockholders $ (881,552) $(811,354)
============ =========
Net loss per share basic and diluted $ (.05) $ (.05)
============ =========
Pro forma results of operations:
Net loss $ (401,094) $(455,578)
============ =========
Net loss attributable to common stockholders $ (1,078,172) $(865,283)
============ =========
Net loss per share basic and diluted $ (.06) $ (.06)
============ =========
</TABLE>
26
<PAGE> 27
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
For purposes of the above disclosure, the determination of the fair value of
stock options granted in 1998 and 1997 was based on the following: (i) a risk
free interest rate of 7.5%; (ii) expected option lives of seven years; (iii)
expected volatility in the market price of the Company's common stock of 75%;
and (iv) no expected dividends on the underlying common stock.
NONEMPLOYEE STOCK OPTIONS
Magellan Finance Corporation ("Magellan"), a stockholder, was originally
granted options to purchase up to 353,684 shares of the Company's common stock
at $1.77 per share. Magellan exercised 117,895 of the options in 1997 and
another 117,895 options in September 1998. The remaining 117,894 options expire
on June 30, 1999. If Magellan does not exercise its option to purchase the
shares, then the Company is obligated to issue the shares to certain USPL
stockholders at no cost.
The Stout Partnership was granted 320,000 options at $2.25 per share in January
1998 in exchange for enabling the Company to obtain a line of credit by
providing guarantees (see Notes 5 and 13). In 1998 options for a total of
37,500 shares at a $3.50 exercise price were granted to outside directors. A
total of $100,000 was recorded as compensation expense and added to additional
paid-in-capital for these nonemployee director options. Options for 20,000
shares with a $5 exercise price were also granted in one of the 1998
acquisitions and options for 10,000 shares with a $3.50 price were granted in
connection with the convertible debentures.
Nonemployee stock option activity in 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Number of
Weighted Average Options
Exercise Price Outstanding
---------------- -----------
<S> <C> <C>
Outstanding at December 31, 1996 $1.81 463,379
Granted -- --
Exercised 1.77 (202,589)
Canceled 2.50 (5,000)
----- --------
Outstanding at December 31, 1997 $1.83 255,790
Granted 2.55 387,500
Exercised 1.80 (122,895)
Canceled -- --
----- --------
Outstanding at December 31, 1998 $2.37 520,395
===== ========
Stock options exercisable $2.54 402,500
===== ========
</TABLE>
STOCK WARRANTS
The Company previously issued 950,000 of Series A and 950,000 Series B warrants
to purchase the Company's common stock at $2.50 and $4.50 per share,
respectively. The Company received $2,291,193 from the exercise of 916,477
Series A warrants in 1998. The 33,523 unexercised Series A warrants expired on
June 30, 1998. None of the Series B warrants were exercised and all 950,000 of
the Series B warrants expired in the third quarter of 1998.
The Company issued the debenture holders warrants to purchase 100,000 shares of
common stock for $7.215 per share at any time before December 22, 2003.
Warrants to purchase 62,500 shares for $7.215 per share will be issued in 1999
as a result of the issuance of $2,500,000 of convertible debentures in January
1999 (see Notes 6 and 13).
27
<PAGE> 28
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
EARNOUT AGREEMENT
The Company has earnout agreements with certain shareholders that provide for
4,609,386 shares of the Company's Common Stock to be reserved for issuance if
certain sales/production goals for plastic lumber product are achieved prior to
December 31, 2000 as set forth in the March 29, 1996 Agreement and Plan of
Reorganization between Earth Care Global Holdings, Inc. and Educational
Storybooks International, Inc. The additional shares, if any, will be issued at
their then current fair value and allocated to acquired intangibles as an
additional cost of the reverse merger of Earth Care Global Holdings, Inc. with
USPL and the subsequent reverse merger of USPL with Clean Earth Inc. ("CEI") in
1996. See note 13 for 15% settlement offer.
STOCK RESERVED
At December 31, 1998, common stock was reserved for the following:
<TABLE>
<S> <C>
Shares contingently issuable to USPL and CEI shareholders 4,609,386
Conversion of Series A and B Preferred Stock 2,678,963
Non employee stock options 520,395
Employee stock options 1,671,000
Shares contingently issuable under other earnout provisions 175,500
Warrants issued to convertible debenture holders 100,000
Convertible debentures 756,001
----------
10,511,245
==========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has defined contribution 401(k) and profit sharing plans that cover
substantially all employees who have met the eligibility requirements. Employees
may contribute up to the maximum allowable under current regulations to the
401(k). There are no employee contributions to the profit sharing plan. The
Company's contribution to each plan is at the discretion of the Company. The
Company contributed $14,808 to plans of two of its subsidiaries during 1998
(none in 1997).
9. INCOME TAXES
The provision for income taxes includes federal and state taxes currently
payable and those deferred because of temporary differences between financial
statement and tax basis of assets and liabilities. The components of the
provision for income taxes (benefit) included in the consolidated statements of
operations is as follows:
1998 1997
--------- ---------
Current:
Federal $ 411,087 $ 128,777
State 257,773 202,382
--------- ---------
668,860 331,159
--------- ---------
Deferred:
Federal (563,758) (38,202)
State (297,986) (62,355)
--------- ---------
(861,744) (100,557)
--------- ---------
$(192,884) $ 230,602
========= =========
28
<PAGE> 29
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
The provision for income taxes differed from the amount obtained by applying
the federal statutory income tax rate to pre-tax accounting income (loss), as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Tax at statutory rate of 34% $(135,102) $ (58,156)
State taxes, net of Federal benefit (26,441) 99,992
Nondeductible goodwill 155,601 88,720
Increases (decreases) in valuation reserves (169,252) 124,788
Other (17,690) (24,742)
--------- ---------
Income tax benefit $(192,884) $ 230,602
========= =========
</TABLE>
Deferred taxes primarily represent the impact of businesses acquired in 1998
and 1997 that formerly accounted for Federal income taxes on a cash basis and
differences between the fair market value and tax basis of equipment owned by
acquired companies. At December 31, 1998 the Company had Federal and state net
operating loss carryforwards of approximately $6,000,000 and $4,300,000,
respectively, that expire in 2002 through 2012. For financial reporting
purposes a valuation allowance of $2,300,000 has been established to offset the
net deferred tax assets related to these carryforwards. If realized in the
future, most of the benefit of these carryforwards will be recorded as a
reduction of acquired intangible assets.
In 1998 the Company reduced the valuation reserves on deferred tax assets of
Companies acquired in 1996 and 1997. Accordingly, net deferred tax liabilities
and the related acquired intangibles were reduced by $150,000. Deferred tax
assets of acquisitions in 1998 also reduced the net deferred tax liability.
10. RELATED PARTY TRANSACTIONS
In 1997 and 1998, the Company borrowed up to $2,400,000 under a $2,500,000 line
of credit agreement from a company controlled by a member of the Board of
Directors and his family. The line of credit bears interest at prime plus 1%
and expires on June 30, 1999. No balance was outstanding at December 31, 1998
(See Note 13) and $1,956,810 was outstanding at December 31, 1997. The Company
paid $171,849 and $90,938 in interest on this line in 1998 and 1997,
respectively.
11. COMMITMENT AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, equipment, manufacturing facilities, and land
under non-cancelable operating leases that expire at various dates through
2028. Future minimum payments are as follows for the years ending December 31:
TOTAL
-----------
1999 $ 1,976,000
2000 1,248,000
2001 829,000
2002 710,000
2003 589,000
Thereafter 5,501,000
-----------
Total $10,853,000
===========
29
<PAGE> 30
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
The Company leases approximately 7.5 acres of land at its soil recycling
facility at a rental of $1.00 per ton of soil received with a minimum rental of
$50,000 per year. Rent expense under this lease was $219,986 and $192,223 in
1998 and 1997, respectively. The lease was renewed for five years in 1998 and
contains two five-year renewal options. The lessor has the right and option at
the time of renewal to require the Company to purchase the property at a
purchase price of $100,000 per acre subject to annual escalation based on the
Consumer Price Index from inception of the lease.
The Company currently leases approximately 5 acres of land under the CBC
facility. The lease term is 30 years with two renewal options Rent expense for
all operating leases for the years ended December 31, 1998 and 1997 was
approximately $1,013,000 and $563,000, respectively.
EMPLOYMENT AGREEMENTS
At December 31, 1998, the Company had employment agreements with certain
officers and key employees. Salaries and benefits expense recorded under the
Agreements totaled approximately $1,714,000 and $792,000 during years ended
December 31, 1998 and 1997, respectively. Future minimum payments under these
employment agreements are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ------
<S> <C>
1999 $1,864,000
2000 1,659,000
2001 1,053,000
2002 303,000
2003 46,000
----------
$4,925,000
==========
</TABLE>
COVENANT NOT TO COMPETE
The Company had a covenant not to compete agreement requiring payments of $2.00
per ton of soil received for processing. Payments under the covenant not to
compete totaled $187,008 and $384,446 for 1998 and 1997, respectively. The
requirement to make payments ended on August 31, 1998.
LEGAL PROCEEDINGS
The Company is subject to claims and legal actions that arise in the ordinary
course of its business. The Company believes that the ultimate liability, if
any, with respect to these claims and legal actions, will not have a material
effect on the financial position or results of operations of the Company.
LICENSING AGREEMENT
During February of 1997, the Company entered into a licensing agreement with
Rutgers University for the rights to commercially develop, manufacture and sell
a composite building material from recycled waste. In exchange for $10,000 in
cash and 187,500 shares of the Company's common stock, the Company received an
exclusive license to use this material for certain applications, including
railroad ties, marine pilings and building materials. The total consideration
was valued at $103,750 and has been recorded as a component of other assets in
the consolidated balance sheet. This agreement is in effect for at least ten
30
<PAGE> 31
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
years from the date of the initial product sales and requires the Company to
pay a maintenance fee and a 3% royalty fee. Such fees are subject to certain
minimum future payment thresholds, as follows:
MAINTENANCE ROYALTY
FEE FEE
-------- --------
1999 $ 10,000 $ 40,000
2000 10,000 60,000
2001 10,000 60,000
2002 10,000 60,000
2003 10,000 60,000
Thereafter 50,000 300,000
-------- --------
$100,000 $580,000
======== ========
The Company had minimal initial product sales in 1998 and paid $21,667 of
maintenance and prorated royalty fees in 1998 after the initial shipments of
railroad ties were made to potential customers for testing.
ROYALTY AGREEMENT
Carteret Biocycle, Inc. ("CBC") has a license and operating agreement with SD&G
Aggregates, Inc. ("SD&G") to conduct remediation of contaminated soils. The
Company pays SD&G a royalty of 2% of CBC's sales. CBC commenced operations in
July 1998 and recorded royalty expense of $33,360 in 1998.
SIGNIFICANT CUSTOMERS
The Plastic Division had sales to one customer of $4,117,000 in 1998 and
$2,590,000 in 1997.
12. SEGMENT REPORTING
The Company's sales generating operations are conducted through its Plastic
Lumber Division and its Environmental Recycling Division. Separate monthly
consolidated financial statements are prepared for each division. There are no
inter segment or foreign revenues. The corporate administrative expenses
consist of the executive officers of the Company and include the legal,
accounting and enterprise wide cash management functions and public company
expenses. Substantially all of the debt and related interest expense is also
retained at corporate. The corporate administrative and interest expenses are
not allocated to the two Divisions for management reports. The operating income
of each of the Divisions is the principal measurement tool used to manage the
two segments.The operating results of each segment and the reconciliation of
each element to the consolidated statement of operations for each of the years
ended December 31, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Environmental recycling $ 48,000 $ 34,633
Plastic lumber 15,720 8 ,130
-------- --------
$ 63,720 $ 42,763
======== ========
Operating income (loss):
Environmental recycling $ 2,883 $ 2,795
Plastic lumber (596) (1,033)
Corporate (1,513) (1,600)
-------- --------
$ 774 $ 162
======== ========
Depreciation and amortization:
Environmental recycling $ 1,101 $ 420
Plastic lumber 1,115 392
Corporate 174 160
-------- --------
$ 2,390 $ 972
======== ========
</TABLE>
31
<PAGE> 32
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
Information with respect to assets and capital expenditures of the segments and
reconciliation to the financial statements is set forth below (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Segment assets at December 31:
Environmental recycling $34,753 $14,790
Plastic lumber 22,915 15,113
Corporate 2,529 --
------- -------
$60,197 $29,903
======= =======
Capital expenditures for the years ended December 31:
Environmental recycling $ 5,425 $ 1,690
Plastic lumber 2,831 1,126
Corporate 23 --
------- -------
$ 8,279 $ 2,816
======= =======
</TABLE>
13. SUBSEQUENT EVENTS
ACQUISITION OF BRASS
On January 7, 1999, the Company executed a contract to acquire the all of the
stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP
operates a soil remediation facility in Philadelphia, PA similar to the
Company's soil remediation facility in New Castle, DE and has been a competitor
of the Company. AWI provides environmental services similar to the Company's
environmental services division. The Company signed a Management Contract on
January 7, 1999 taking over all responsibility for day to day management and
financial control of SRP and AWI as of that date. Unaudited sales of SRP and
AWI, prior to intercompany eliminations, for the year ended December 31, 1998
were $14,922,000 with unaudited operating income of $2,025,000. The Company
finalized its transaction with Brass in March 1999. The Company purchased Brass
for cash plus 1,000,000 shares of restricted common stock plus granted
1,500,000 warrants to Louis Paolino, Jr. to purchase restricted common stock of
the Company. The real estate and accounts receivable of Brass will secure loans
to fund the cash portion of the purchase. The acquisition of Brass will be
accounted for as a purchase.
ACQUISITION OF EAGLEBROOK
On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook"), located in
Chicago, Illinois. Eaglebrook processes HDPE for use as a raw material and
produces plastic lumber similar to the Company's. Eaglebrook also produces
composite lumber through a continuous extrusion process. The Company purchased
Eaglebrook for cash plus 1,668,025 shares of restricted common stock,
$4,000,000 of convertible secured debentures and 150,000 options to purchase
common stock. The acquisition of Eaglebrook will be accounted for as a
purchase.
The Company will lease the 260,000 square foot Chicago facility from the
sellers for ten years at a monthly rental of $39,181 with an option to purchase
the facility for $3,000,000. The Sellers all signed three year employment
contracts and will manage the Company's Plastic Lumber Division. The unaudited
sales of both Eaglebrook companies were $22,145,000, before $1,706,000 of
intercompany eliminations, and the unaudited operating income was $1,325,000
for the year ended December 31, 1998.
ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES
On January 26, 1999 the Company issued an additional $2,500,000 of Convertible
Subordinated debentures to the same debenture holders with substantially the
same terms as the $4,000,000 issued on December 22, 1998 (see Note 6). The
debenture holders can demand repayment of the $2,500,000 only during the first
quarter of 2000. The proceeds were used in the purchase of Eaglebrook.
32
<PAGE> 33
U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) -- (CONTINUED)
LOANS FROM RELATED PARTIES
On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan to
the Company. The loan bears interest at 10% and matures in 18 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership
borrowed the $5,000,000 from PNC Bank and the individual partners have
personally guaranteed the loan. In January 1999 the Company borrowed $1,500,000
from a company owned by one of the directors and his family (see Note 10). The
loan bears interest at 1% over prime and matures in 12 months. The proceeds
were used in the Eaglebrook acquisition.
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 $1,225,000 of expenses related to these private placements.
ACQUISITION OF BARBELLA IN 1999 ACCOUNTED FOR AS A "POOLING OF INTERESTS"
On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("Barbella"), an environmental remediation and
construction service company located in Somerville, New Jersey. The Company
incurred merger costs totaling $595,000 in the Barbella transaction which will
be charged to expenses in the second quarter of 1999. The Company has accounted
for the Barbella transaction as a pooling of interests. Accordingly, the 1998
and 1997 financial statements have been restated to include the applicable
amounts for Barbella as if the acquisition had taken place on January 1, 1997.
Following is a summary of the Barbella amounts included in the accompanying
restated income statements for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net sales $ 18,014,884 $18,024,223
Net income (loss) (300,272) 303,980
Income (loss) per share $ (.02) $ .02
</TABLE>
The statement of shareholders equity has also been restated to include
$1,957,169 of retained earnings and $100,000 of additional paid in capital of
Barbella as of January 1, 1997.
SETTLEMENT OF EARNOUT AGREEMENT WITH HISTORICAL SHAREHOLDERS
In August of 1999 the Company proposed a 15% settlement to all shareholders
entitled to receive 4,609,386 shares of common stock ("Historical Shareholders")
under the earnout agreement described in Note 7. As of October 1, 1999,
Historical Shareholders entitled to receive 4,410,794 shares under the earnout
agreement have accepted the settlement offer and on approximately January 5,
2000 the Company will issue 661,732 restricted shares in full settlement of the
earnout agreement with these Historical shareholders. The Company has open
offers to issue a total of 29,676 shares to settle with the Historical
Shareholders entitled to the remaining 198,592 shares under the earnout
agreement. The value assigned to the total shares ultimately issued pursuant to
the settlement will be added to acquired intangibles and amortized over
approximately 17 years.
33
<PAGE> 34
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
DESCRIPTION OF PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The following unaudited pro forma consolidated financial information gives
effect to the combination for financial reporting purposes of U.S. Plastic
Lumber Corp. and the subsidiary companies owned as of December 31, 1996 (USPLC)
with the following companies acquired since December 31, 1996:
Recycled Plastics Industries, Inc. (RPI), acquired January 27, 1997
Advanced Remediation and Disposal Technologies, Inc. (ARDT), acquired
February 24, 1997
Environmental Specialty Products, Inc. (ESP), acquired March 28, 1997
Integrated Technical Services, Inc. (ITS), acquired March 31, 1997
EnviroPlastics Corporation (EPC), acquired June 30, 1997
Waste Concepts, Inc. (WCI), acquired November 18, 1997
Green Horizon Environmental, Inc. (GHE), acquired January 2, 1998
Chesapeake Plastic Lumber, Inc. (CPL), acquired March 1, 1998
Cycle-Masters, Inc. (CMI), acquired May 13, 1998
Trimax of Long Island, Inc. and Polymerix, Inc. (Trimax), acquired
June 30, 1998
Geocore, Inc. (GCI), acquired June 30, 1998
S&W Waste, Inc. (S&W), acquired December 30, 1998
Eaglebrook Plastics, Inc. and Eaglebrook Products, Inc. (Eaglebrook),
acquired January 28, 1999
Brass Investment Co. (Brass), acquired March 23, 1999
Barbella Environmental Technology, Inc. (Barbella), acquired June 29,
1999
The pro forma consolidated financial information is based on the historical
financial statements of USPLC, RPI, ARDT, ESP, ITS, EPC, WCI, GHE, CPL, CMI,
GCI, S&W, Eaglebrook and Brass and on estimates and assumptions set forth below
and in the notes to the pro forma consolidated financial information.
Insignificant acquisitions (e.g. Brigadoon, acquired on June 30, 1999) and
companies with insignificant or no operations (e.g. CTI) are not included in
the pro forma information. Trimax is not included because no information was
available to USPLC on the Trimax operations before and during the period it was
under the protection of the Federal bankruptcy court.
As of December 31, 1998 the balance sheets of USPLC, RPI, ARDT, ESP, ITS, EPC,
WCI, GHE, CPL, CMI, Trimax, GCI, and S&W are included in the USPLC consolidated
balance sheet which has been restated for the acquisition of Barbella which was
accounted for as a" Pooling of Interests". The pro forma consolidated balance
sheet as of December 31, 1998 gives effect to the combination of the restated
USPLC, Eaglebrook and Brass as if the acquisitions had occurred on the latest
balance sheet date, December 31, 1998.
The pro forma consolidated statements of operations present pro forma results
from operations for the years ended December 31, 1998 and 1997. For purposes of
the pro forma consolidated statements of operations, the acquisitions of RPI,
ARDT, ESP, ITS, EPC, WCI, GHE, CPL, CMI, GCI, S&W, Eaglebrook and Brass are
included as if the acquisitions had occurred on January 1, 1997. The
acquisition of Barbella is included in the restated USPLC as if Barbella had
always been a part of the consolidated group.
The pro forma consolidated statement of operations for the year ended
December 31, 1998 includes: (i) the audited financial information of USPLC for
the year ended December 31, 1998 (which includes USPLC, restated to include the
audited financial information of Barbella, for the full year, and, for the
following periods ended December 31, 1998, GHE twelve months, CPL ten months,
CMI eight months, Trimax six months and GCI six months); (ii) the unaudited
financial information of CPL for the two month period ended February 28,1998;
(iii) the unaudited financial information of CMI for the four months ended April
30, 1998; (iv) the unaudited financial information of GCI for the six months
ended June 30, 1998; (v) the unaudited financial information of S&W for the year
ended December 31, 1998; (vi) the audited financial information of Eaglebrook
for the year ended December 31, 1998; and (vii) the audited financial
information of Brass for the year ended December 31, 1998.
34
<PAGE> 35
The pro forma consolidated statements of operations for the year ended December
31, 1997 includes: (i) the audited financial information of USPLC (which include
USPLC, restated to include the audited financial information of Barbella, for
the year ended December 31, 1997 and, for the following periods ended December
31, 1997: RPI eleven months, ARDT ten months, ESP and ITS nine months, EPC six
months and WCI one month); (ii) the unaudited financial information of GHE, CPL,
GCI and S&W for the year ended December 31, 1997; (iii) the audited financial
information of CMI for the year ended September 30, 1997; (iv) the audited
financial information of Eaglebrook for the year ended December 31, 1997; and
(v) the audited financial information of the Brass Investment Companies for year
ended June 30, 1997. Prior to fiscal year 1998, the two Brass wholly-owned
subsidiaries, Soil Remediation of Philadelphia, Inc. and Allied Waste Services,
Inc., reported consolidated results of operations on fiscal year ended June 30,
1997.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial information presented herein is not
necessarily indicative of the results the companies would have obtained had the
acquisitions occurred on January 1, 1997, as assumed, or of the future results
of the companies. The pro forma consolidated financial information should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this document or incorporated herein by reference.
35
<PAGE> 36
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Proforma
Proforma Consolidated
USPLC EB Brass Adjustments Balance Sheet
----------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,912,664 $ 705,536 $ 3,984 d $ (813,221) $ 2,808,963
Accounts Receivables (Net) 16,773,147 1,680,827 -- 18,453,974
Inventories 4,869,006 970,881 -- 5,839,887
Prepaid expenses and other
assets 1,514,241 392,628 43,256 1,950,125
----------- ---------- ---------- ----------- ------------
TOTAL CURRENT ASSETS 26,069,058 3,749,872 47,240 (813,221) 29,052,949
PROPERTY, PLANT AND EQUIPMENT
(NET) 19,198,190 4,818,175 4,698,589 p,q,r 28,822,672 57,537,626
OTHER ASSETS
Acquired intangibles, net 9,553,642 -- -- s,t 5,006,306 14,559,948
Other assets 5,376,403 -- -- e (300,000) 5,076,403
----------- ---------- ---------- ----------- ------------
TOTAL ASSETS $60,197,293 $8,568,047 $4,745,829 $32,715,757 $106,226,926
=========== ========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and capital
leases, current portion $ 4,134,362 $2,352,520 $ -- $ 6,486,882
Accounts payable 6,816,685 1,403,888 -- 8,220,573
Accrued expenses 2,303,081 1,027,616 214,901 3,545,598
Other liabilities 1,735,463 -- 24,125 n $ 1,262,392 3,021,980
----------- ---------- ---------- ----------- ------------
TOTAL CURRENT LIABILITIES 14,989,591 4,784,024 239,026 1,262,392 21,275,033
Notes payable and capital f,j,k,
leases, net of current portion 15,770,624 1,517,357 -- m,o 9,298,933 26,586,914
Deferred income taxes 498,602 -- -- 498,602
Minority Interest 250,164 -- -- 250,164
Loans from related parties -- -- -- h,i 6,000,000 6,000,000
Convertible subordinated
debentures, net of discount 3,555,556 -- -- g,l 6,500,000 10,055,556
----------- ---------- ---------- ----------- ------------
TOTAL LIABILITIES 35,064,537 6,301,381 239,026 23,061,325 64,666,269
----------- ---------- ---------- ----------- ------------
STOCKHOLDERS' EQUITY
10% Convertible preferred stock,
par value $.001; authorized
5,000,000 shares; issued and
outstanding 382,709 shares
(aggregate liquidation
preference of $7,808,877) 383 383
Common stock par value $.0001,
authorized 50,000,000 shares;
issued and outstanding 18,230,528
shares and pro forma 21,898,553
shares 1,904 10 2,710 a,u (2,353) 2,271
Additional paid-in capital 24,769,166 875,857 2,715,057 b,c,v 11,837,074 40,197,154
Retained earnings
(accumulated deficit) 361,303 1,390,799 1,789,036 w,x,y (2,180,289) 1,360,849
----------- ---------- ---------- ----------- ------------
TOTAL STOCKHOLDERS' EQUITY 25,132,756 2,266,666 4,506,803 9,654,432 41,560,657
----------- ---------- ---------- ----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $60,197,293 $8,568,047 $4,745,829 $32,715,757 $106,226,926
=========== ========== ========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements
36
<PAGE> 37
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
PROFORMA ADJUSTMENTS TO CONSOLIDATED PROFORMA BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Increase\(Decrease)
-------------------
Issuance of 3,668,025 shares of USPLC common stock to Eaglebrook and Brass shareholders
Common Stock a $ 367
Additional paid-in-capital b 14,392,909
--------------
$14,393,276
==============
Issuance of 500,000 warrants to purchase USPLC common stock to Brass shareholder c $ 1,035,079
==============
Cash and debt issued to acquire Eaglebrook and Brass:
Costs of the acquisition d $ 813,221
Downpayment for Eaglebrook included in other assets at December 31, 1998 e 300,000
Income taxes to be paid with $500,000 related party loan and revolving credit facility f 963,494
Closing payment for Eaglebrook financed by:
Issuance of convertible debentures g 2,500,000
Loan from related party-Stout Partnership h 5,000,000
Loan from related party i 1,000,000
Closing payment for Brass financed by:
Loan from Credit Facility j 3,250,000
Mortgage from PNC Bank k 1,200,000
--------------
Total cash paid $15,026,715
==============
Convertible Secured Debentures issued to Eaglebrook shareholders L $ 4,000,000
==============
Note Payable assumed for Brass acquisition m $ 724,134
==============
Liabilities assumed in EB and Brass acquisitions in January, 1999 n $ 1,262,392
==============
NPV of capital Lease to acquire the EB land and building o $ 3,161,305
Estimated fair value of EB land and building p $16,500,000
==============
Estimated fair value of EB equipment above EB net book value at January 31, 1999 q $ 2,263,996
==============
Estimated fair value of Brass property and equipment above Brass net book value at
January 31, 1999 r $10,058,676
==============
Adjustment to reflect excess of purchase price of EB over estimated fair value of assets
and liabilities acquired effective January 31, 1999 (includes net income of EB for
January less the dividend paid) s $ 4,492,851
==============
Adjustment to reflect excess of purchase price of Brass over estimated fair value of
assets and liabilities acquired effective January 7, 1999 t $ 513,455
==============
Adjustment to eliminate the stockholders equity of EB and Brass at December 31, 1998:
Eliminate the capital stock of EB and Brass u $ (2,720)
Eliminate the additional paid-in-capital of EB and Brass v (3,590,914)
Eliminate the retained earnings of EB and Brass as of December 31, 1998 w (3,179,835)
--------------
$(6,773,469)
==============
Dividends issued to EB shareholders after December 31, 1998 x $ 1,040,000
==============
Income of EB for month of January 1999 y $ (40,454)
==============
</TABLE>
37
<PAGE> 38
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
USPLC CPL CMI GEO S&W EB
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES, NET $63,719,824 $ 46,686 $1,267,459 $352,311 $6,908,998 $20,439,262
COST OF SALES 51,956,096 60,371 713,739 165,004 4,331,516 13,857,991
------------------------------------------------------------------------------
GROSS PROFIT 11,763,728 (13,685) 553,720 187,307 2,577,482 6,581,271
GENERAL, ADMINISTRATIVE AND SELLING 10,989,523 40,925 372,354 159,947 2,130,415 5,559,474
------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 774,205 (54,609) 181,366 27,360 447,067 1,021,797
INTEREST INCOME\OTHER INCOME 334,340 -- 612 -- 23,946 120,659
INTEREST EXPENSE (1,243,244) (2,748) -- -- (98,497) (333,286)
MINORITY INTEREST (262,659) -- -- (1,632) -- --
PROVISION FOR INCOME TAXES (CREDITS) (192,884) -- 64,020 -- -- --
------------------------------------------------------------------------------
NET INCOME (LOSS) $ (204,474) $(57,357) $ 117,958 $ 25,728 $ 372,516 $ 809,170
==============================================================
PREFERRED STOCK DIVIDEND EARNED (677,078)
--------------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ (881,552)
==============
BASIC AND DILUTED LOSS PER SHARE $ (0.05)
==============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,686,651
==============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- COMBINED
BRASS DR CR TOTAL
---------- ----------- --------- ------------
<S> <C> <C> <C>
SALES, NET $12,175,629 $104,910,169
COST OF SALES 9,484,587 d,b $ 660,344 79,908,960
----------- ------------
GROSS PROFIT 2,691,042 25,001,210
GENERAL, ADMINISTRATIVE AND SELLING 651,378 c 196,256 20,100,272
----------- ------------
OPERATING INCOME (LOSS) 2,039,664 4,900,938
INTEREST INCOME\OTHER INCOME 31,418 510,975
INTEREST EXPENSE -- e 2,406,720 (4,086,127)
MINORITY INTEREST -- (262,659)
PROVISION FOR INCOME TAXES (CREDITS) 476,811 f 347,947 --
----------- ---------- ---------- ------------
NET INCOME (LOSS) 1,594,271 $2,602,976 $1,008,291 1,063,126
=========== ========== ==========
PREFERRED STOCK DIVIDEND EARNED (677,078)
------------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS g $ 386,048
============
BASIC AND DILUTED LOSS PER SHARE $ 0.02
============
WEIGHTED AVERAGE SHARES OUTSTANDING g 21,883,511
============
</TABLE>
See accompanying notes to unaudited pro forma consolidated
statements of operations.
38
<PAGE> 39
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONTINUED
USPLC RPI ARDT ESP ITS EPC WCI GHE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales, net $42,763,604 $82,868 $ 38,276 $ 147,145 $1,785,026 $2,891,508 $4,791,242 $911,304
Cost of Sales 35,673,201 62,604 59,984 137,434 1,483,824 3,125,953 3,903,960 762,615
--------------------------------------------------------------------------------------------------
GROSS PROFIT 7,090,403 20,264 (21,708) 9,711 301,202 (234,445) 887,282 148,689
General, administrative
and selling 6,927,406 13,032 38,432 131,545 188,586 285,019 953,229 52,391
--------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 162,997 7,232 (60,140) (121,834) 112,616 (519,464) (65,947) 96,298
Interest income\Other
Income (expense) 105,489 189 -- -- -- -- (16,665) --
Interest expense (307,636) (2,055) (1,911) (1,693) (4,638) (51,639) (24,823) (4,182)
Equity in loss of JV (131,897) -- -- -- -- -- -- --
Provision for
income taxes (credits) 230,602 -- -- (29,918) 18,738 (97,822) -- --
--------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (401,649) $ 5,366 $(62,051) $ (93,609) $ 89,240 $ (473,281) $(107,435) $ 92,116
===================================================================================
Preferred stock dividends
earned (409,705)
---------------
NET INCOME (LOSS)
ATTRIBUTABLE
TO COMMON STOCKHOLDERS (811,354)
===============
BASIC AND DILUTED LOSS
PER SHARE $ (0.05)
===============
Weighted average shares
outstanding 14,856,862
================
</TABLE>
See accompanying notes to unaudited pro forma consolidated
statements of operations.
39
<PAGE> 40
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONTINUED
CPL CMI GEO S&W EB Brass
--------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net $ 704,560 $2,610,958 $489,668 $6,601,207 $20,222,795 $12,146,375
Cost of Sales 848,240 1,570,240 125,313 3,526,012 15,099,767 15,014,147
--------- ---------- -------- ---------- ----------- -----------
GROSS PROFIT (143,680) 1,040,718 364,355 3,075,195 5,123,028 (2,867,772)
General, administrative
and selling 167,066 728,135 292,868 3,100,970 5,062,782 1,094,125
--------- ---------- -------- ---------- ----------- -----------
OPERATING INCOME (LOSS) (310,746) 312,583 71,487 (25,775) 60,246 (3,961,897)
Interest income/Other income
(expense) 9,473 3,903 82,881 290,408 --
Interest expense (23,250) (3,920) (41,300) (348,767) --
Equity in loss of JV -- -- -- -- -- --
Provision for
income taxes (credits) -- 122,000 -- -- -- (1,588,721)
--------- ---------- -------- ---------- ----------- -----------
NET INCOME (LOSS) $(324,523) $ 194,486 $ 67,567 $ 15,806 $ 1,887 $ 2,373,176
========= ========== ======== ========== =========== ===========
<CAPTION>
PRO FORMA ADJUSTMENTS COMBINED
DR CR TOTAL
--------- ----------- --------
<S> <C> <C> <C>
Sales, net a $1,041,433 $95,145,103
Cost of Sales a,b,d 2,464,974 78,928,320
-----------
GROSS PROFIT 16,216,783
General, administrative
and selling c 172,969 19,208,555
-----------
OPERATING INCOME (LOSS) (2,991,772)
Interest income/Other income
(expense) 475,678
Interest expense 2,585,115 (3,400,929)
Equity in loss of JV e (131,897)
Provision for
income taxes (credits) f 1,345,121 --
---------- ---------- -----------
NET INCOME (LOSS) $5,144,638 $2,464,974 (6,048,920)
========== ========== ===========
Preferred stock dividends
earned (409,705)
===========
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(6,458,625)
===========
BASIC AND DILUTED LOSS
PER SHARE g $ (0.32)
===========
Weighted average shares
outstanding g 20,008,653
===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated
statements of operations.
40
<PAGE> 41
US PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTES:
a = Eliminate inter company sales
b = Adjustments to eliminate rent paid to former owner replaced by
imputed interest on loan and property taxes on S&W land purchased
from seller and to add additional rent to be paid to the owners
of the Eaglebrook plant.
c = Adjustment to reflect increase in amortization expense on the
goodwill recorded or to be recorded on the acquisitions of GHE,
CPL, CMI, GCI, Trimax, S&W, EB and Brass.
d = Adjustment for increased depreciation expense on equipment
recorded at the higher FMV and decreased depreciation from
using longer lives on the Eaglebrook plant and equipment.
e = Adjustment to reflect increase in interest expense for cash paid
and or notes payable issued to consummate the acquisitions, net
of debt not assumed or replaced.
f = Adjustment to eliminate income taxes provided on the separate
companies' results. No taxes are provided on the consolidated
proforma results due to valuation allowances on NOL
carryforwards.
g = The weighted average shares outstanding used to calculate pro
forma income per share is based on the historical average number
of common shares outstanding during the period adjusted for
the acquisitions as if they had occurred on January 1, 1997.
Common stock equivalents have been excluded because they are
anti-dilutive and there is no significant difference between
primary and fully diluted net income per share for period ended
December 31, 1998.
41
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
Barbella Environmental Technology, Inc.
Somerville, New Jersey
We have audited the accompanying balance sheets of BARBELLA ENVIRONMENTAL
TECHNOLOGY, INC. as of December 31, 1998 and 1997, and the related statements
of operations and retained earnings, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of BARBELLA
ENVIRONMENTAL TECHNOLOGY, INC. as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/Callahan & Company P.C.
Neptune, New Jersey
March 12, 1999
42
<PAGE> 43
BARBELLA ENVIRONMENTAL STATEMENT 1
TECHNOLOGY, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $2,010,694 $3,433,788
Contracts receivable, net of allowance 4,438,244 1,852,660
Costs and estimated earnings in excess
of billings on uncompleted contracts 513,571
Income taxes refundable 46,512 185,731
Related party receivable 214,775 192,775
Prepaid expenses and sundry assets 21,064 22,000
---------- ----------
Total current assets 6,731,289 6,200,525
---------- ----------
Property and equipment, at cost 2,009,647 1,074,365
Less, accumulated depreciation 702,093 543,430
---------- ----------
1,307,554 530,935
---------- ----------
Totals $8,038,843 $6,731,460
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Equipment obligation, current portion $ 394,122
Capital lease obligations, current portion 104,940
Accounts payable 2,586,713 $2,147,182
Billings in excess of costs and estimated
earnings on uncompleted contracts 637,701 322,544
Accrued expenses and sundry liabilities 738,137 787,110
Income taxes payable 31,409
Deferred income taxes, current portion 359,715 1,033,615
---------- ----------
Total current liabilities 4,821,328 4,321,860
Equipment obligation, non-current portion 1,002,540
Capital lease obligations, non-current portion 98,980
Deferred income taxes, non-current portion 55,118 48,451
---------- ----------
Total liabilities 5,977,966 4,370,311
---------- ----------
Stockholders' Equity:
Common stock (100 shares no-par,
authorized, issued and outstanding) 100,000 100,000
Retained earnings 1,960,877 2,261,149
---------- ----------
Total stockholders' equity 2,060,877 2,361,149
---------- ----------
Totals $8,038,843 $6,731,460
========== ==========
</TABLE>
See Notes to Financial Statements.
43
<PAGE> 44
BARBELLA ENVIRONMENTAL STATEMENT 2
TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATIONS
Construction revenues $ 18,014,884 $18,024,223
Construction costs 16,936,826 15,893,329
------------ -----------
Gross profit 1,078,058 2,130,894
General and administrative expenses 1,759,165 1,646,593
------------ -----------
Income (loss) from operations (681,107) 484,301
------------ -----------
Other income (expense):
Miscellaneous income 5,774
Investment income 96,890
Loss on sale of assets (1,749)
Interest income 91,061 50,585
------------ -----------
Total other income 187,951 54,610
------------ -----------
Income (loss) before income tax expense (benefit) (493,156) 538,911
Income tax expense (benefit) (192,884) 234,931
------------ -----------
Net income (loss) (300,272) 303,980
RETAINED EARNINGS
Balance, beginning of year 2,261,149 1,957,169
------------ -----------
BALANCE, END OF YEAR $ 1,960,877 $ 2,261,149
============ ===========
</TABLE>
See Notes to Financial Statements.
44
<PAGE> 45
BARBELLA ENVIRONMENTAL STATEMENT 3
TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ (300,272) $ 303,980
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense 263,664 182,619
Loss on sale of assets 1,749
Income tax expense (benefit) (192,884) 234,931
Income taxes paid (366,539) (322,210)
(Increase) decrease in operating assets:
Contracts receivable (2,585,584) 191,549
Costs in excess of billings 513,571 (177,328)
Prepaid expenses and sundry assets 936 96,795
Increase (decrease) in operating liabilities:
Accounts payable 439,531 1,142,317
Billings in excess of costs 315,157 271,157
Accrued expenses and sundry liabilities (48,973) 730,780
----------- -----------
Net cash provided by (used in) operating activities (1,961,393) 2,656,339
----------- -----------
Investing Activities:
Proceeds from sale of property and equipment 4,000
Loans to related party (178,222)
Purchase of property and equipment (1,040,283) (194,523)
----------- -----------
Net cash used in investing activities (1,040,283) (368,745)
----------- -----------
Financing Activities:
Proceeds from equipment obligation 1,500,000
Principal payments on equipment obligation (103,338)
Proceeds from capital lease obligations 213,460
Principal payments on capital lease obligations (9,540)
Loans to related party (22,000)
----------- -----------
Net cash provided by financing activities 1,578,582
----------- -----------
Increase (decrease) in cash and cash equivalents (1,423,094) 2,287,594
Cash and cash equivalents, beginning of year 3,433,788 1,146,194
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,010,694 $ 3,433,788
=========== ===========
</TABLE>
See Notes to Financial Statements.
45
<PAGE> 46
BARBELLA ENVIRONMENTAL STATEMENT 3
TECHNOLOGY, INC. (CONCLUDED)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Analysis of net cash provided by (used in) operating activities:
Cash flows from (to) operating activities:
Cash received from customers $ 16,258,028 $ 18,309,441
Cash paid to suppliers and vendors (16,281,668) (14,471,598)
Cash paid for general and administrative expenses (1,740,254) (915,653)
Income taxes paid (366,539) (322,210)
Interest expense (18,086)
Bad debt expense (825)
Miscellaneous income 5,774
Unrealized gain on investments 96,890
Interest income 91,061 50,585
------------ ------------
Net cash provided by (used in)
operating activities $ (1,961,393) $ 2,656,339
============ ============
</TABLE>
See Notes to Financial Statements.
46
<PAGE> 47
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies:
Company's Activities:
Barbella Environmental Technology, Inc. (the Company) is an
environmental contractor. The Company performs work on contracts
issued by both public and private sector owners, primarily in the
Northeast.
Revenue and Cost Recognition:
The Company reports revenues under the percentage of completion
method for financial reporting purposes, measured by the
percentage of contract costs incurred to date to the estimated
total costs for each contract. Contract costs include all direct
material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. General and administrative costs
are charged to expenses as incurred. Provisions for estimated
losses on uncompleted contracts, if material, are made in the
period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability, including
those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization
is reasonably assured. An amount equal to contract costs
attributable to claims is inventoried when realization is probable
and the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess
of amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings
in excess of revenues recognized.
Property and Equipment:
Property and equipment are stated at cost. When an asset is
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain
or loss is reflected in operations. Costs of repairs and
maintenance are charged to expense as incurred and improvements
are capitalized. Depreciation has been provided on the modified
ACRS method at rates calculated to provide for the retirement of
property and equipment at the end of their estimated useful lives.
Cash Equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less, when purchased, to be cash
equivalents.
Allowance for Doubtful Accounts:
The allowance for doubtful accounts is based on management's
evaluation of outstanding contracts receivable at the end of the
year. This allowance for doubtful accounts for December 31, 1998
was $800 and is included in contracts receivable on the balance
sheet. Bad debt expense for the years ended December 31, 1998 and
1997 was $825 and $160, respectively.
47
<PAGE> 48
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC. (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies:
(Con't) Advertising:
Advertising costs, which are included in general and
administrative expenses, are expensed as incurred. Advertising
expense for the years ended December 31, 1998 and 1997 was $7,129
and $6,638, respectively.
Income Taxes:
The Company provides for deferred income taxes on temporary
differences arising from assets and liabilities whose basis are
different for financial reporting and income tax reporting
purposes. The differences relate primarily to depreciable assets
and reported contract revenue. Construction contracts are reported
for tax purposes on the completed-contract method and for
financial statement purposes on percentage-of-completion.
Different lives and methods of depreciating certain assets are
used for tax purposes than are used for financial statement
purposes.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2 - Contracts Receivable:
The contracts receivable balances at December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Completed contracts $ 762,592 $ 178,218
Contracts in progress 2,931,750 866,217
Retainage 744,702 808,225
---------- ----------
4,439,044 1,852,660
---------- ----------
Less: Allowance for doubtful accounts 800 -0-
---------- ----------
Totals $4,438,244 $1,852,660
========== ==========
</TABLE>
Note 3 - Costs and Estimated Earnings on Uncompleted Contracts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Costs incurred on uncompleted contracts $ 11,912,140 $18,716,710
Estimated earnings 521,604 2,312,825
------------ -----------
12,433,744 21,029,535
Less: Billings to date 13,071,445 20,838,508
------------ -----------
Totals $ (637,701) $ 191,027
============ ===========
</TABLE>
48
<PAGE> 49
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC. (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
Note 3 - Costs and Estimated Earnings on Uncompleted Contracts:
(Con't) The above amounts are included in the accompanying balance sheets
under the following captions at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts $ -0- $ 513,571
Billings in excess of costs and
estimated earnings on uncompleted contracts (637,701) (322,544)
--------- ---------
Totals $(637,701) $ 191,027
========= =========
</TABLE>
Note 4 - Property and Equipment:
Major classes of property and equipment at December 31, 1998 and
1997 are summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Machinery and equipment $1,466,461 $ 581,923
Autos and trucks 490,577 473,697
Furniture and fixtures 52,609 18,745
---------- ----------
2,009,647 1,074,365
Less, accumulated depreciation 702,093 543,430
---------- ----------
Totals $1,307,554 $ 530,935
========== ==========
</TABLE>
Note 5 - Line of Credit:
Summit Bank has extended the Company an unsecured working capital
line of credit in the amount of $1,000,000, which expires on
August 1, 1999. Borrowings accrue interest at prime plus 1% and
are personally guaranteed by the stockholders. The entire line of
credit was available at December 31, 1998.
Note 6 - Equipment Obligation:
The Company finances equipment through Northwest Equipment Finance
at an interest rate of 7.5%. The obligation is payable in monthly
installments of principal and interest through March 2002. The
financing is secured by several pieces of equipment.
Equipment obligation $1,396,662
Less, current portion 394,122
----------
Non-current portion $1,002,540
==========
49
<PAGE> 50
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC. (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Equipment Obligation:
(Con't) Future principal payments, as of December 31, 1998, on this
obligation are set forth below:
YEAR
ENDING
DECEMBER 31,
------------
1999 $ 394,122
2000 424,785
2001 457,835
2002 119,920
----------
Total $1,396,662
==========
Note 7 - Capital Lease Obligations:
The Company finances equipment with KDC Financial through capital
leases. The obligations are payable in monthly installments
through December 1999, with lump sums due in January 2000. The
financing is secured by equipment, the value of which exceeds the
obligation.
Capital lease obligations $203,920
Less, current portion 104,940
--------
Non-current portion $ 98,980
========
Future principal payments, as of December 31, 1998, on these
obligations are set forth below:
YEAR
ENDING
DECEMBER 31,
------------
1999 $104,940
2000 98,980
--------
Total $203,920
========
Note 8 - Lease Commitments:
The Company leases equipment, autos, and offices under operating
leases, which expire at various dates through June 2001. Future
minimum lease payments as of December 31, 1998 under these
operating leases are set forth below:
YEAR
ENDING
DECEMBER 31,
------------
1999 $1,008,052
2000 389,783
2001 71,120
----------
Total $1,468,955
==========
50
<PAGE> 51
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC. (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
Note 9 - Pension Plans:
Non-Union:
The Company has established a profit sharing 401(k) retirement
plan for its non-union employees. The profit sharing plan is
non-contributory. Contributions by the Company are determined
solely at the discretion of the Board of Directors. Under the
401(k) plan, the Company matches 50% of employee contributions up
to 4% of base compensation which is further limited to a yearly
cap of $500 per employee. Contributions made for the year ended
December 31, 1998 were $9,036 and are included in employee
benefits.
Union:
The Company contributes to several different pension plans for
union employees. Each union has its own terms and policies for
their members for their pension plans. The Company complies with
these policies. These expenses are included in union benefits
expense.
Note 10 - Related Party Transactions:
The Company has a loan receivable from a related party, which has
the same ownership. This receivable amounts to $214,775 as of
December 31, 1998. These loans are intended to be repaid
currently.
Note 11 - Income Taxes:
The Company's net deferred tax assets and liabilities at
December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
CURRENT FEDERAL STATE TOTAL
------------------------ ----------- ---------------- -----------
<S> <C> <C> <C>
Deferred tax assets $ 3,688,100 $ 1,072,815 $ 4,760,915
Deferred tax liabilities (3,966,757) (1,153,873) (5,120,630)
----------- ----------- -----------
Totals $ (278,657) $ (81,058) $ (359,715)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NON-CURRENT FEDERAL STATE TOTAL
------------------------ ------------ ---------------- -----------
<S> <C> <C> <C>
Deferred tax assets $ -0- $ -0- $ -0-
Deferred tax liabilities (42,698) (12,420) (55,118)
------- ------- -------
Totals $(42,698) $(12,420) $(55,118)
======== ======== ========
</TABLE>
The components of income tax expense from continuing operations at
December 31, 1998 are as follow:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Current expense $ 411,087 $ 109,773 $ 520,860
Deferred benefit (548,930) (164,814) (713,744)
--------- --------- ---------
Totals $(137,843) $ (55,041) $(192,884)
========= ========= =========
</TABLE>
The amount of tax expense differs from the amount of expense that
would result from applying the statutory rates to pre-tax net
income from continuing operations primarily due to certain
non-deductible expenses.
51
<PAGE> 52
BARBELLA ENVIRONMENTAL STATEMENT 4
TECHNOLOGY, INC. (CONCLUDED)
NOTES TO FINANCIAL STATEMENTS
Note 12- Backlog:
The following represents the backlog of signed contracts in
existence at December 31, 1998:
Contracts in progress $14,517,745
Contracts signed but not started as of
December 31, 1998
-----------
Total Work-on-Hand $14,517,745
===========
Note 13 - Risk Concentrations:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash,
contracts receivable, and costs in excess of billings.
Primarily, the Company maintains its cash balances in financial
institutions located in New Jersey. These balances, as reflected
in the bank's records, are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. From time to time, in
the ordinary course of business, the Company has cash balances in
excess of the FDIC insurance limit.
Of the Company's December 31, 1998 contracts receivable, 79% is
due on contracts with public and quasi-public entities for work on
contracts in New Jersey, Delaware, Maryland and Connecticut. The
entities are primarily state and local governmental agencies. The
remaining 21% is due from private entities on contracts in New
Jersey, New York, Pennsylvania, Delaware, Connecticut and
Maryland. In addition, 90% of the Company's revenues for the year
ended December 31, 1998 were on contracts with public entities and
the remaining 10% were on contracts with private entities.
Management believes that its contract acceptance, billing and
collection policies are adequate to minimize potential credit
risk.
Note 14 - Commitments and Contingencies:
The Company is subject to laws and regulations relating to the
protection of the environment. Although it is not possible to
quantify with any degree of certainty the potential financial
impact of the Company's continuing compliance efforts, management
believes any future remediation or other compliance related costs
will not have a material adverse effect on the financial condition
or reported results of operations of the Company.
The Company has taken actions to understand the nature and extent
of the work required for its systems to be Year 2000 compliant.
The Company believes, based on available information, that it will
be able to manage its total year 2000 transition without any
material adverse effect on its business operations, products, or
financial prospects.
* * *
52
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K, into the previously filed
Registration Statements of U.S. Plastic Lumber Corporation on Forms S-3
(Registration Nos. 333-86533 and 333-76845), Form S-4 (Registration No.
333-84047), and Form S-8 (Registration No. 333-76277).
ARTHUR ANDERSEN LLP
Miami Florida
October 8, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K, into the previously
filed Registration Statement of U.S. Plastic Lumber Corporation on Form S-3
(Registration Nos. 333-86533 and 333-76845), Form S-4 (Registration No.
333-84047), and Form S-8 (Registration No. 333-76277).
Callahan & Company P.C.
Neptune, New Jersey
March 12, 1999
