<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23855
U.S PLASTIC LUMBER CORP.
(NAME OF ISSUER IN ITS CHARTER)
---------------------
<TABLE>
<S> <C>
NEVADA 87-0404343
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
---------------------
2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
(561) 394-3511
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PLACE OF
BUSINESS)
Check here whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
September 30, 2000 is 34,819,944 shares.
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<PAGE> 2
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999...................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999...................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 2000 and 1999...................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999...................... 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 15
Item 2. Changes in Securities and Use of Proceeds........... 15
Item 6. Exhibits and Reports on Form 8-K.................... 15
SIGNATURES.................................................. 16
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to economic conditions, changes in laws or
regulations, exposure on providing extended warranties on products, access to
capital, demand for products and services of the Company, dilution, expertise,
newly developing technologies, loss of permits, conflicts of interest in related
party transactions, regulatory matters, environmental liability, the occurrence
of events not covered by insurance, a substantial increase in interest rates,
protection of technology, lack of industry standards, raw material commodity
pricing, the ability to receive bid awards, the inability to implement our
growth strategy, operating hazards, seasonality, inability to retain key
employees, the effects of competition, the risks and costs associated with the
change in the year 2000 and the ability of the Company to obtain additional
financing. Such factors, which are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the notes to
condensed consolidated financial statements, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
undue reliance on any such forward-looking statements, which speak only as of
the date made. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
2
<PAGE> 3
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,094,353 $ 1,807,588
Accounts receivable, net of allowance for doubtful accounts
of $1,069,289 and $1,139,870 in 2000 and 1999,
respectively.............................................. 50,162,123 32,915,420
Inventories................................................. 11,326,661 7,339,543
Prepaid expenses and other current assets................... 5,998,122 2,636,812
------------ ------------
Total current assets.............................. 68,581,259 44,699,363
Property, plant and equipment (net)......................... 100,295,466 80,423,952
Acquired intangibles (net).................................. 36,916,753 35,837,568
Other assets................................................ 4,095,734 5,350,549
------------ ------------
Total assets...................................... $209,889,212 $166,311,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 27,427,384 $ 20,180,807
Notes and capital leases payable, current portion........... 24,288,431 5,867,779
Accrued expenses............................................ 5,615,467 4,111,309
Restructuring accruals...................................... 240,255 734,661
Other liabilities........................................... 3,366,246 1,615,800
------------ ------------
Total current liabilities......................... 60,937,783 32,510,356
Notes and capital leases payable, net of current portion.... 42,214,729 36,322,452
Notes payable, affiliates -- long term...................... 5,000,000 6,000,000
Convertible subordinated debentures, net of unamortized
discount.................................................. 7,063,145 6,500,000
Deferred income taxes and other liabilities................. 577,833 1,718,061
Minority interest........................................... 248,627 250,165
------------ ------------
Total liabilities................................. 116,042,117 83,301,034
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001, 5,000,000 shares
authorized; 1,187,286 and 0 shares issued and outstanding
in 2000 and 1999, respectively............................ 1,187 --
Common stock par value $.0001, authorized 50,000,000 shares;
issued and outstanding 34,819,944 and 32,077,632 shares in
2000 and 1999, respectively............................... 3,482 3,208
Additional paid-in capital.................................. 94,513,243 81,171,322
Retained (deficit) earnings................................. (670,817) 1,835,868
------------ ------------
Total stockholders' equity........................ 93,847,095 83,010,398
------------ ------------
Total liabilities and stockholders' equity........ $209,889,212 $166,311,432
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
2000 1999
----------- -----------
<S> <C> <C>
Sales, net.................................................. $50,087,729 $40,741,163
Cost of goods sold.......................................... 43,972,460 29,535,024
----------- -----------
Gross profit...................................... 6,115,269 11,206,139
Selling, general and administrative expenses................ 7,807,530 4,930,275
Merger costs................................................ -- 810,000
----------- -----------
Operating income (loss)........................... (1,692,261) 5,465,864
Interest and other income (expense)......................... 87,409 (67,143)
Interest expense............................................ 1,946,562 1,362,163
----------- -----------
Earnings (loss) before income taxes............... (3,551,414) 4,036,558
Provision (benefit) for income taxes........................ (1,100,938) 886,152
----------- -----------
Net earnings (loss)............................... (2,450,476) 3,150,406
Preferred stock dividend earned............................. 182,560 41,982
----------- -----------
Net earnings (loss) attributable to common
stockholders.................................... $(2,633,036) $ 3,108,424
=========== ===========
Net earnings (loss) per common share -- Basic:.............. $ (0.08) $ 0.10
Net earnings (loss) per common share -- Diluted:............ $ (0.08) $ 0.10
Weighted average common shares outstanding:
Basic............................................. 34,786,236 30,030,376
Diluted........................................... 34,786,236 31,944,390
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
2000 1999
------------ ------------
<S> <C> <C>
Sales, net.................................................. $124,752,166 $102,570,625
Cost of goods sold.......................................... 103,489,116 73,798,372
Inventory revaluation charge................................ -- 2,025,000
------------ ------------
Gross profit......................................... 21,263,050 26,747,253
Selling, general and administrative expenses................ 18,839,407 14,957,759
Merger Costs................................................ -- 1,405,000
Restructuring and equipment revaluation charges............. -- 3,720,000
------------ ------------
Operating income..................................... 2,423,643 6,664,494
Interest and other income................................... 209,226 75,069
Interest expense............................................ 4,484,794 4,377,040
------------ ------------
Earnings (loss) before income taxes and extraordinary
item................................................ (1,851,925) 2,362,523
Provision (benefit) for income taxes........................ (467,475) 1,276,207
------------ ------------
Earnings (loss) before extraordinary item............ (1,384,450) 1,086,316
Extraordinary loss on early extinguishment of debt, net of
taxes of $599,514......................................... 939,675 --
------------ ------------
Net earnings (loss).................................. (2,324,125) 1,086,316
Preferred stock dividend earned............................. 182,560 316,782
Net earnings (loss) attributable to common stockholders... $ (2,506,685) $ 769,534
============ ============
Net earnings (loss) per common share -- Basic:
Earnings (loss) before extraordinary item............ $ (0.04) $ 0.03
Loss on early extinguishment of debt................. $ (0.03) $ --
------------ ------------
Net earnings (loss) per common share................. $ (0.07) $ 0.03
============ ============
Net earnings (loss) per common share -- Diluted:
Earnings (loss) before extraordinary item............ $ (0.04) $ 0.03
Loss on early extinguishment of debt................. $ (0.03) $ --
------------ ------------
Net earnings (loss) per common share................. $ (0.07) $ 0.03
============ ============
Weighted average common shares outstanding:
Basic................................................ 34,107,478 26,824,660
Diluted.............................................. 34,107,478 28,338,310
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED RESTATED
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)......................................... $ (2,324,125) $ 1,086,316
------------ -----------
Adjustments to reconcile net cash (used in) provided by
operating activities:
Depreciation............................................ 3,459,456 2,974,196
Amortization............................................ 1,424,846 651,017
Loss on early extinguishment of debt.................... 1,539,189 --
Deferred income tax benefit............................. (1,066,990) --
(Gain) on sale of property, plant and equipment......... (19,753) --
Restructuring charge and inventory revaluation charge... -- 5,472,182
Beneficial conversion feature of convertible
subordinated debentures................................ 270,946 --
Reduction of discounts on convertible subordinated
debentures............................................. 138,848 --
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (16,071,502) (13,388,754)
Inventories............................................. (3,595,188) (1,390,175)
Prepaid expenses and other current assets............... (3,338,247) 22,674
Other assets............................................ (1,101,323) 1,264,600
Accounts payable........................................ 7,017,576 5,431,192
Other liabilities and restructuring accrual............. 1,190,640 (105,881)
Accrued expenses........................................ 1,190,494 (251,903)
------------ -----------
Net cash (used in) provided by operating activities... (11,285,133) 1,765,464
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (20,749,331) (16,965,861)
Cash paid for acquisitions, net of cash received.......... (62,297) (14,592,277)
Proceeds from the sale of property, plant and equipment... 534,893 --
------------ -----------
Net cash used in investing activities.............. (20,276,735) (31,558,138)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options, net of
costs................................................... 744,589 1,833,050
Proceeds from the issuance of common stock, net of
issuance costs.......................................... -- 25,265,746
Proceeds from the issuance of preferred stock, net of
issuance costs.......................................... 4,119,331 --
Proceeds from sale of convertible debentures.............. 7,500,000 2,500,000
Advances from (repayment to) affiliates................... (1,000,000) 4,274,080
Proceeds from notes payable............................... 59,846,620 14,753,582
Payments of notes payable................................. (40,361,907) (15,420,542)
------------ -----------
Net cash provided by financing activities.......... 30,848,633 33,205,916
------------ -----------
Net change in cash and cash equivalents..................... (713,235) 3,413,242
Cash and cash equivalents, beginning of period.............. 1,807,588 3,052,518
------------ -----------
Cash and cash equivalents, end of period.................... $ 1,094,353 $ 6,465,760
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 3,865,634 $ 3,529,741
Income taxes.............................................. $ 129,710 $ 387,474
Capitalized interest as of September 30..................... $ 1,379,818 $ 27,545
Number of shares issued during the period for non-cash
transactions:
Acquisitions and Clean Earth merger (Note 3).............. 827,943 5,667,205
Compensation -- employees and directors................... 29,284 6,908
Litigation settlements.................................... 11,666 33,000
Conversion of debentures.................................. 1,693,085
Financing fees and other.................................. -- 55,450
Conversion of preferred stock............................. -- 2,834,746
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
U.S. Plastic Lumber Corp. and its subsidiaries (the "Company") are engaged in
the manufacturing of plastic lumber from recycled plastic waste and provide
environmental recycling services. The Company's Plastic Lumber Division
manufactures structural and non-structural plastic lumber and a variety of
accessory products such as park and site amenities, made from 100% recycled high
density polyethylene. The structural plastic lumber is manufactured under
patent-protected processes and is sold to customers located throughout the
world.
The Company's 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 four plants providing various methods to
remediate soil brought to the facilities by both third parties and other
operating units of the Company. The Division's operations and customers are
located primarily in the Northeastern United States.
BASIS OF PRESENTATION
The Company's consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and the regulations of the Securities and Exchange Commission (SEC) for
quarterly reporting. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-KSB as filed with the SEC for
the year ended December 31, 1999. Management acknowledges its responsibility for
the preparation of the accompanying interim consolidated financial statements
which reflect all adjustments considered necessary, in the opinion of
management, for a fair statement of the results of interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results of operations for the entire year. Where appropriate, certain
amounts have been reclassified to conform with the 2000 presentation.
After September 30, 1999 the Company acquired one company that was accounted for
under the pooling of interests accounting method. Accordingly, the 1999
financial statements have been restated to include the applicable amounts for
the pooled company as if the acquisition had taken place on January 1, 1999.
2. ACQUISITION OF BARON ENTERPRISES, INC.
On February 10, 2000, the Company acquired certain assets and certain
liabilities of Baron Enterprises, Inc. ("Baron"), a manufacturer of plastic slip
and tier sheets used in handling freight for a purchase price of $2,105,000.
Baron operates facilities in Denver, CO and Reidsville, NC. The acquisition was
accounted for as a purchase. The excess of the purchase price over the value of
the net tangible assets acquired amounted to $1,633,147 is included in acquired
intangibles as of September 30, 2000. The acquisition was financed primarily
through the issuance of 202,376 shares of the Company's common stock, valued at
$1,776,526. Cash acquired as a result of the acquisition was $266,177 resulting
in net cash paid of $62,297.
A summary of the allocation of the $2,105,000 aggregate purchase price of the
Baron acquisition to the net assets acquired follows:
<TABLE>
<S> <C>
Working capital............................................. $1,540,072
Long-term assets............................................ 3,096,778
Long-term debt.............................................. (4,166,997)
Acquired intangibles........................................ 1,635,147
----------
Aggregate purchase price.......................... $2,105,000
==========
</TABLE>
7
<PAGE> 8
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITAL STOCK AND EARNOUT AGREEMENT
In January 2000, the Company issued 632,833 shares to certain shareholders who
accepted the Company's offer to settle certain earnout agreements related to the
Company's merger with Clean Earth, Inc. in 1996. The Company has included the
$5,166,005 value of the shares issued in acquired intangibles and additional
paid in capital on the balance sheet as of December 31, 1999. The Company is
amortizing the $5,166,005 over 17 years as additional cost of the merger of the
Company with Clean Earth, Inc. Amortization expense relating to the settlement
was approximately $228,000 in the first nine months of 2000, with no such
expense for the same period in 1999.
4. NOTES AND CAPITAL LEASES PAYABLE
In 1999 and the first six months of 2000, the Company had a line of credit with
a division of Southern Pacific Bank ("SPB") whereby borrowings would be
collateralized by specific equipment and/or inventory and eligible accounts
receivable. On June 30, 2000 the Company terminated the agreement with SPB and
entered into a new three-year credit agreement with three banks. The new
agreement provides for a $30,000,000 term loan and a $15,000,000 revolving
credit line. The facility allows the Company to select from two interest rate
options, one based on a spread over the prime rate and the other based on a
spread over the Eurodollar deposit rate. The spread above each interest rate
option is determined by the Company's ratio of consolidated debt to Earnings
Before Interest, Taxes, Depreciation and Amortization.
In terminating the previously existing loan agreements, the Company incurred an
extraordinary loss in the second quarter of 2000 for prepayment penalties and
the write off of deferred loan costs amounting to $939,675, net of taxes.
Proceeds from the new credit facility were used to pay down portions of the
Company's existing indebtedness and for general corporate purposes. At September
30, 2000 the Company had outstanding borrowings of $43,650,000 under this
facility.
The facility requires the maintenance of defined levels of net worth, various
financial performance ratios and restrictions on capital expenditures, dividend
payments, acquisitions and additional indebtedness. At September 30, 2000 the
Company was not in compliance with certain covenant requirements for which the
Company received waivers and amendments dated November 13, 2000. In addition to
an interest rate increase of 200 basis points and amendment fees of $428,125,
the terms of the amendments require the Company to raise a minimum of $2 million
prior to November 30, 2000, an addition $2 million prior to December 26, 2000,
and an additional $500,000 prior to January 31, 2001. The amended terms also put
further limits on the Company's capital expenditures, and gives the banking
group the option to permanently reduce their commitment on the revolving credit
line when payments are made on that portion of the facility by the amount paid.
Notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Term loan under credit agreement..................... $28,750,000 --
Borrowings under revolving credit line............... 14,900,000 --
Receivables and Inventory, Equipment term and Real
Estate loans under loan agreements with SPB........ -- 27,202,588
Mortgage notes and capital leases payable
collateralized by certain facilities owned by the
Company and its subsidiaries....................... 5,562,170 5,708,961
Other notes and capital leases payable collateralized
by various equipment of subsidiaries of the
Company............................................ 16,120,486 6,785,320
Note payable assumed in acquisition of Brass
Investment Co...................................... 800,000 800,000
Other notes payable.................................. 370,504 1,693,362
----------- -----------
Total notes payable and capital leases..... 66,503,160 42,190,231
Less current portion:........................... 24,288,431 5,867,779
----------- -----------
42,214,729 $36,322,452
=========== ===========
</TABLE>
8
<PAGE> 9
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the nine months ended September 30, 2000, the Company obtained
$14,600,000 in new equipment financing in order to finance the expansion of its
plastic lumber manufacturing facilities and used approximately $8.7 million of
the proceeds from the credit facility to pay down previously existing debt.
5. CONVERTIBLE SUBORDINATED DEBENTURES
On February 2, 2000 the Company issued $7,500,000 of 5% convertible subordinated
debentures. The principal terms of the debentures are as follows:
- The conversion price is the lower of $9.65 or the lowest trading price of the
Company's common stock during the four trading days prior to the conversion
date, but not less than $8.25 (the "minimum floating conversion price").
- If the market price stays below $8.25 for 10 consecutive trading days after
the first anniversary of the date of issuance, the holder has the right to a
put option. This put option enables the holder to require the Company (at the
Company's option) to either repurchase the debentures for cash or reset the
minimum floating conversion price of the debentures to zero. If the Company
elects to repurchase the debentures for cash, the repurchase price would be
equal to 110 percent of the outstanding balance of the debentures plus accrued
interest. If the Company elects to reset the minimum floating conversion price
of the debentures to zero, the conversion price for the debentures into common
stock shall be the lowest trading price between the effective date of the put
notice and the fourth trading day immediately following the Company's
notification to the holder of its election to reset the minimum floating
conversion price.
- The Company can force conversion of the debentures at $9.65 if the market
price stays above $16.84 for 20 consecutive trading days.
- The debentures are scheduled to mature on February 2, 2005.
- Under certain circumstances, the debentures can be redeemed for stock, cash or
a combination thereof.
In conjunction with the issuance of the debentures, the Company issued 200,000
warrants to purchase Common stock at $10.09 per share. The Company has filed a
Registration statement with the SEC to register the shares underlying the
debenture and warrant agreements. The Company recognized a beneficial conversion
feature of $270,946 in the first quarter of 2000. The $575,703 value assigned to
the warrants and the $750,000 discount attributed to the put feature are
reflected as discounts from the face value of the debentures and are being
accreted over the term of the debentures.
On March 1, 2000 $4,000,000 of previously issued debentures and $33,440 of
unpaid interest were converted into 762,465 shares of common stock at the $5.29
conversion price. On May 5, 2000 $2,500,000 of previously issued debentures and
$12,671 of unpaid interest were converted into 930,620 shares of common stock at
the conversion price of $2.70 per share. Both debentures were converted in
accordance with the terms of the debentures. Unamortized debenture issue costs
of $614,792 and $373,000 were charged to additional paid-in-capital on March 1
and May 5 respectively.
6. PREFERRED STOCK
In September of 2000 the Company issued 1,187,286 shares of its Series "D"
Preferred Stock. The stock pays a quarterly cash dividend at an annual rate of
15%, with the initial dividend payable on March 31, 2001. Each share of
Preferred Stock is convertible into one share of the Company's common stock at
the option of the holder any time after March 31, 2001, subject to certain
rights of the Company. The Company can redeem the Preferred Stock at 115% of the
initial purchase price in cash prior to March 31, 2001. In addition, if the
common stock of the Company is trading at an average closing price of $3.50 per
share or higher for 20 consecutive trading days at any time prior to March 1,
2002 the Company has the right to require conversion of the Preferred Stock into
common stock. Otherwise, the Preferred Stock automatically converts into
9
<PAGE> 10
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock on March 1, 2002. The beneficial conversion feature in the amount
of $1,080,563 is being accreted from the date the preferred stock was issued
until the earliest possible conversion date.
The net proceeds of $4.1 million from the issuance of Preferred Stock were used
for general corporate purposes.
7. SEGMENT REPORTING
The Company has two reportable operating segments. The Plastic Lumber Division
manufactures structural and non-structural plastic lumber and a variety of
accessory products such as park and site amenities. 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. In the first quarter of 1999 a
$4,365,000 restructuring charge (including $2,025,000 for inventory revaluation)
was recorded by the Plastic Lumber Division and a $1,380,000 restructuring
charge was recorded by the Environmental Recycling Division. In the second
quarter of 1999 the Environmental Recycling Division incurred $595,000 of merger
costs in connection with the Barbella transaction. In the third quarter of 1999
the Plastic Lumber Division incurred merger costs in the amount of $810,000 in
connection with the Ecosource and Eureka transactions. The operating results of
the two segments excluding the aforementioned restructuring and merger expenses
are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Environmental recycling............................... $30,562 $26,727 $ 65,455 $ 63,984
Plastic Lumber........................................ 19,526 14,014 59,297 38,587
------- ------- -------- --------
Total......................................... $50,088 $40,741 $124,752 $102,571
======= ======= ======== ========
Operating Income (Loss):
Environmental recycling............................... $ 3,301 $ 4,124 $ 5,913 $ 9,184
Plastic Lumber........................................ (4,096) 2,646 (1,199) 6,054
Corporate............................................. (897) (496) (2,290) (1,424)
------- ------- -------- --------
Total......................................... $(1,692) $ 6,276 $ 2,424 $ 13,814
======= ======= ======== ========
Depreciation and Amortization:
Environmental recycling............................... $ 827 $ 562 $ 2,290 $ 1,579
Plastic Lumber........................................ 797 579 2,263 1,897
Corporate............................................. 108 60 332 149
------- ------- -------- --------
Total......................................... $ 1,732 $ 1,201 $ 4,885 $ 3,625
======= ======= ======== ========
Capital Expenditures:
Environmental recycling............................... $ 1,419 $ 2,669 $ 3,885 $ 5,950
Plastic Lumber........................................ 1,958 7,677 16,858 10,904
Corporate............................................. 3 32 6 112
------- ------- -------- --------
Total......................................... $ 3,380 $10,378 $ 20,749 $ 16,966
======= ======= ======== ========
</TABLE>
10
<PAGE> 11
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The identifiable assets of the respective segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
2000 1999
------------- -----------
<S> <C> <C>
Identifiable assets:
Environmental recycling................................... $ 92,948 $ 72,334
Plastic lumber............................................ 113,477 90,181
Corporate................................................. 3,464 3,796
-------- --------
Total............................................. $209,889 $166,311
======== ========
</TABLE>
The following table reconciles the measure of profit (loss) used in segment
reporting to the Company's consolidated Earnings (loss) before income taxes and
extraordinary item for the periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------- ---------------------
2000 1999 2000 1999
------- ------ ----------- -------
<S> <C> <C> <C> <C>
Operating income (loss)......................... $(1,692) $6,276 $ 2,424 $13,814
Restructuring and revaluation charges........... -- -- -- 5,745
Merger costs.................................... -- 810 -- 1,405
Interest and other income (expense)............. 87 (67) 209 75
Interest expense................................ 1,946 1,362 4,485 4,377
------- ------ ------- -------
Earnings (loss) before income taxes and
extraordinary item............................ $(3,551) $4,037 $(1,852) $ 2,362
======= ====== ======= =======
</TABLE>
11
<PAGE> 12
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1,094,000 at September 30, 2000, a decrease
of $713,000 from the $1,807,000 at December 31, 1999. Cash used in operating
activities amounted to $11,285,000 for the first nine months of 2000 while cash
provided by operating activities for the comparable period in 1999 amounted to
$1,765,000. The change is primarily due to lower earnings excluding
restructuring charges, increased receivables and inventories.
Cash used in investing activities was $20,277,000 in the first nine months of
2000, a decrease of $11,281,000 from the prior year. The decrease is primarily
due to acquisitions completed in the first half of 1999, partially offset by
higher capital expenditures in the Plastic Lumber Division in 2000.
Cash provided by financing activities totaled $30,849,000, including $14,600,000
of financing for new equipment, $7,500,000 from the issuance of 5% convertible
subordinated debentures (see Note 5 to the Consolidated Financial Statements)
and $4,119,000 in net proceeds from the issuance of convertible preferred stock
(see Note 6 to the Consolidated Financial Statements). In addition, the Company
entered into a new lending agreement with three banks, consisting of both a term
loan and a revolving credit line (see Note 4 to the Consolidated Financial
Statements). Proceeds from the new credit agreement were used to make principal
payments on debt totaling $39,112,000, and for general corporate purposes.
Capital expenditures in the first nine months of 2000 amounted to $20,749,000,
primarily for machinery and equipment to expand capacity at the Plastic Lumber
Division's California, Illinois and Florida manufacturing facilities.
As reported in the Company's report on Form 8-K dated October 23, 2000, at
September 30, 2000 the Company was not in compliance with certain financial
covenants pertaining to the credit agreement discussed in Note 4. The Company
received waivers and amendments to the agreement dated November 13, 2000 that
require the Company to raise a minimum of $2 million in equity prior to November
30, 2000, an additional $2 million prior to December 26, 2000, and an additional
$500,000 prior to January 31, 2001. In addition to amendment fees of $428,125
and an interest rate increase of 200 basis points which will be in effect until
the Company returns to compliance under the original terms of the agreement, the
amended terms also put further limits on the Company's capital expenditures, and
gives the banking group the option to permanently reduce their commitment on the
revolving credit line by the amount of payments made on that portion of the
facility at the time such payments are made. The amended terms also allow the
Company to raise up to $8 million in total equity between November 13, 2000 and
April 1, 2001 to be used for general corporate purposes without requiring any
prepayments to the term loan.
The Company will require additional working capital for dredging opportunities
being pursued for its environmental recycling operations and to complete the
expansion of its plastic lumber manufacturing facilities. In addition, the
Company experiences a seasonal slow down at each of its divisions during the
winter months, when adverse weather and normal ground freezing can impact the
Company's environmental recycling operations, and sales of certain plastic
lumber products slow significantly. Should the Company experience significantly
lower revenues during this period it will be required to raise additional
working capital.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales in the third quarter of 2000 were $50,088,000, an increase of
$9,347,000, or 23%, over the third quarter of 1999. Sales of plastic lumber
products increased by 39% in the quarter to $19,526,000, as the aforementioned
new equipment at the Plastic Lumber Division's facilities began to come on line.
12
<PAGE> 13
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Environmental recycling revenues increased by 14% in the quarter as work
commenced on several significant projects, primarily related to the Company's
environmental construction operations. Gross profit decreased by $5,091,000, or
45%, as compared with the third quarter of 1999. Most of the decrease was at the
Plastic Lumber Division, and was in large part the result of returns of
SmartDeck product that were accepted from a large customer due primarily to
issues with color variation. The Company has since implemented an extensive
engineering and manufacturing program to ensure that all products entering the
distribution system meet rigorous quality control standards. Gross profit was
also negatively impacted by higher material and direct labor costs at the
Plastic Lumber Division. While plans have been put into place to reduce these
costs in the fourth quarter and in 2001, further increases in the price of oil,
which impacts our raw material costs, could adversely effect gross margin. Gross
profit at the Environmental Recycling Division decreased by $583,000, or 9%, due
to a greater degree of lower margin replacement revenues for construction
services present in the third quarter. Gross margin as a percent of revenues in
the Plastic Lumber division decreased in the third quarter, from 35.1% in 1999
to 2.1%, primarily due to product returns, associated handling and regrind costs
and the write down of inventory that did not meet the newly implemented Quality
Control standards. Gross margin at the Environmental Recycling Division
decreased to 18.7% in 2000 from 23.5% in 1999.
Selling, general and administrative expenses ("SG&A) increased by $2,877,000 in
2000, primarily due to increases in marketing and promotion costs, an increase
bad debt expense and higher amortization expense for intangibles. As a
percentage of net sales, SG&A increased to 15.6% in 2000 from 12.1% in 1999.
Cost reduction programs implemented at the Plastic Lumber Division during the
third quarter of 2000 are expected to slow this trend in the fourth quarter and
in 2001.
The third quarter of 2000 produced an operating loss of $1,692,000 as compared
to operating income of $5,466,000 for the comparable period in 1999, primarily
due to the decline in gross margins and the increase in SG&A. Operating income
decreased by $823,000 at the Environmental Recycling Division and by $6,742,000
at the Plastic Lumber Division, excluding the impact of $810,000 of merger costs
incurred by the Plastic Lumber Division in 1999 for the Eureka and Ecosource
transactions.
Interest expense increased by $584,000 for the quarter, mainly due to higher
debt levels in 2000 as compared to 1999.
As a result of the losses incurred in the third quarter of 2000, income tax
benefit was $1,101,000 as compared to an expense of $886,000 in 1999.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales for the first nine months of 2000 were $124,752,000, an increase of
$22,182,000, or 22% over the comparable period of the prior year. Plastic Lumber
Division sales increased by 54% to $59,297,000, reflecting the impact of the
Baron acquisition and sales growth in the Company's packaging, decking and OEM
product lines. Environmental recycling revenues increased by $1,471,000, or
2.3%. Environmental Recycling revenues were negatively impacted by abnormally
wet weather in the northeastern United States in the first quarter of 2000,
which affected all of the soil recycling plants. In addition, revenues were
negatively impacted by the three-month shut down of the Soil Remediation of
Philadelphia (SRP) facility, which was retrofitted to process additional waste
streams under its newly expanded permit.
Consolidated gross profit decreased by $5,484,000 in the first nine months of
2000, as compared to 1999. Excluding the effect of a $2,025,000 inventory
revaluation charge recorded by the Plastic Lumber Division in the first quarter
of 1999, gross profit decreased by $7,509,000, or 26%. The decrease is due to
declines in gross margins at both divisions. Gross margin as a percent of sales
for the Plastic Lumber Division was 15.1% in 2000 as compared to 33.8% in 1999,
excluding the effect of the inventory revaluation charge. This decline is due to
the product returns and associated handling costs experienced in the third
quarter of 2000, increased
13
<PAGE> 14
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
material and direct labor costs and start up costs at the division's Ocala, FL,
Chicago, IL and Fontana, CA manufacturing facilities. Environmental Recycling
gross margins declined from 24.6% of sales in 1999 to 18.8% in 2000. Reduced
soil coming to the Clean Earth New Castle, Clean Rock and SRP facilities, the
shut down of the SRP facility and lower margin replacement revenues for
construction services all contributed to this decline.
Consolidated SG&A expenses increased 26% to $18,839,000 for the first nine
months of 2000, largely due to increased bad debt, marketing, and amortization
expenses. As a percentage of net sales, SG&A expenses was largely unchanged at
15.1% in 2000 compared to 14.6% in 1999.
Operating income was $2,424,000 for the first nine months of 2000, a decrease of
$4,241,000, or 64%, from the $6,664,000 of operating income for the comparable
period of 1999. 1999 operating income was negatively impacted by the
aforementioned $2,025,000 inventory revaluation charge, a $3,720,000
restructuring and equipment revaluation charge and 1,405,000 in merger expenses.
Excluding these charges, operating income decreased by $11,391,000. The decline
is primarily due to the lower gross margins at both divisions and the increase
in SG&A.
Interest expense increased by $108,000 in 2000 as compared to 1999, as higher
debt levels in 2000 were mostly offset by lower amortization of financing costs,
including discounts on convertible subordinated debentures. For the nine-month
period of 2000 interest expense includes a $358,000 charge for the beneficial
conversion feature and accretion of discounts associated with the issuance of
the $7.5 million convertible debentures during the first quarter.
Income tax benefit was $467,000 in 2000 compared to expense of $1,276,000 in
1999 due to pre-tax losses in 2000.
On June 30, 2000 the Company terminated its existing borrowing agreement in
favor of a new credit facility. In connection with the early termination, the
Company incurred an extraordinary loss of $939,675, net of taxes, for prepayment
penalties and the write off of deferred loan costs.
ACQUISITION COMPLETED DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2000
On February 10, 2000, the Company acquired certain assets and assumed certain
liabilities of Baron Enterprises, Inc. ("Baron"), a manufacturer of plastic slip
and tier sheets, for 202,376 shares of common stock. Baron operates facilities
in Denver, CO and Reidsville, NC. Both plants manufacture tier and slip sheets
that are used in handling freight. The Company manufactures similar products in
its Chicago facility. The acquisition was accounted for as a purchase.
Accordingly, the operating results of the acquired business are included in the
consolidated results of operations from the date of acquisition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in values of derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company does
not expect SFAS No. 133 to have a material impact on the Company's results of
operations or financial position.
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 ("SAB No. 101"), which becomes effective in the fourth quarter of 2000.
The bulletin provides guidance on the recognition, disclosure and presentation
of revenue in financial statements. The Company does not expect SAB No. 101 to
have a material impact on the Company's results of operations or financial
position.
14
<PAGE> 15
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved as plaintiff or defendant in various
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Issuances of common shares during the three months ended September 30, 2000 are
listed in the following paragraphs.
4,197 shares of Common Stock were canceled due to a prior acquisition
adjustment.
36,667 shares of Common Stock were issued as a result of the exercise of stock
options and warrants.
21,850 shares of Common Stock were issued as a result of production bonus
incentives and license fees relative to process technology.
2,000 shares of Common Stock were issued as a result of an acquisition.
The Common Stock underlying the stock options was previously registered with the
SEC. The Common Stock issued pursuant to the conversion of debentures has been
registered through the filing of a Form S-3 that was deemed effective by the SEC
on May 14, 1999.
All of the other transactions were not registered under the Securities Act of
1933 in reliance on the exemption from registration in Section 4(2) of the Act,
as transactions not involving any public offering. These offerings were
completed without any general or public solicitation. In each case the offering
was made to a very limited number of officers, directors and shareholders of the
companies being acquired or to independent consultants or employees of the
Company. The independent consultants, officers, directors and shareholders who
participated in the private placements had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of these individuals enabled them to
evaluate the risks and merits of the investment. The securities issued in all of
the foregoing transactions were issued as restricted securities and the
certificates were stamped with restrictive legends to prevent any resale without
registration under the Act or in compliance with an exemption from registration.
The cash proceeds from the exercise of stock options and warrants were used for
general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.47 Amendment to the Master Credit Agreement with Bank of America
27.1 Financial Data Schedule for the three months ended September 30, 2000
(b) Reports on Form 8-K
On October 23, 2000 the Company filed a Report on Form 8-K to report a
default on its credit agreement with Bank of America.
15
<PAGE> 16
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C>
November 14, 2000 /s/ MARK S. ALSENTZER
------------------------------------ -----------------------------------------------------
Date Mark S. Alsentzer,
Chairman, President and CEO
November 14, 2000 /s/ JOHN W. POLING
------------------------------------ -----------------------------------------------------
Date John W. Poling,
Chief Financial Officer
</TABLE>
16
