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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 JUNE 30, 2002
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)
---------------
NEVADA 87-0404343
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
---------------
2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
(561) 394-3511
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive
offices and place of business)
Check here whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of July
10, 2002 is 44,296,149 shares.
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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
----
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001............................................ 2
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2002 and 2001........................ 3
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2002 and 2001.......................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001.............................. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 24
Item 2. Changes in Securities and Use of Proceeds................. 24
Item 3. Defaults Upon Senior Securities........................... 24
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................... 25
SIGNATURES......................................................... 26
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 risks associated with our credit facilities and
liquidity, the ability to obtain adequate financing on commercially acceptable
terms, economic conditions, demand for products and services of the Company,
newly developing technologies, the Company's ability to compete, regulatory
matters, protection of the Company's proprietary technology, the effects of
competition from entities with greater financial resources than that possessed
by the Company and shareholder dilution. Such factors, which are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to consolidated financial statements, could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with undue reliance on any such forward-looking statements, which speak only as
of the date made. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30, 2002 and December 31, 2001
Dollar amounts in thousands except share data
UNAUDITED
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,541 $ 912
Accounts receivable, net of allowance for doubtful accounts of $4,485 and
$5,171, respectively 32,908 37,316
Inventories 5,121 5,666
Prepaid expenses and other assets 4,699 2,351
--------- ---------
Total current assets 44,269 46,245
Property, plant and equipment (net) 84,957 86,916
Assets held for sale 1,071 1,071
Goodwill (net) 12,650 13,031
Other intangibles 8,741 8,665
Other assets 4,030 5,741
--------- ---------
Total assets $ 155,718 $ 161,669
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,303 $ 30,658
Notes and capital leases payable, current portion 51,974 51,779
Accrued expenses 10,246 9,182
Convertible subordinated debentures, net of unamortized discount 4,000 3,579
Convertible subordinated debentures - affiliates, net of
unamortized discount -- 5,000
Restructuring accrual 104 1,275
Deferred revenue 2,161 --
Other liabilities 3,178 5,297
--------- ---------
Total current liabilities 99,966 106,770
Notes and capital leases payable, net of current portion 6,171 5,641
Deferred income taxes and other liabilities 1,821 324
Minority interest 165 165
Convertible subordinated debentures, net of unamortized discount 5,468 5,584
Convertible subordinated debentures - affiliates, net of
unamortized discount 5,000 --
--------- ---------
Total liabilities 118,591 118,484
--------- ---------
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.001; authorized 5,000,000 shares;
Series "D" 15%, issued and outstanding 0 and 1,187,285 shares,
respectively -- 1
Series "E" 10%, issued and outstanding 0 and 1,714,285 shares,
respectively -- 2
Common stock par value $.0001, authorized 100,000,000 shares;
issued and outstanding 44,296,149 and 39,611,392 shares,
respectively 4 4
Additional paid-in capital 104,784 104,177
Accumulated deficit (67,661) (60,999)
--------- ---------
Total stockholders' equity 37,127 43,185
--------- ---------
Total liabilities and stockholders' equity $ 155,718 $ 161,669
========= =========
See accompanying notes to condensed unaudited
consolidated financial statements.
2
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Dollar amounts in thousands except share and per share data
Three Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Sales, net $ 35,383 $ 50,750
Cost of goods sold 29,334 41,954
------------ ------------
Gross profit 6,049 8,796
Selling, general and administrative expenses 6,381 6,060
------------ ------------
Operating (loss) income (332) 2,736
Interest and other income 73 122
Interest expense 3,416 2,787
------------ ------------
(Loss) income before income taxes (3,675) 71
Income tax provision -- --
------------ ------------
Net (loss) income (3,675) 71
Preferred stock dividend earned -- 231
------------ ------------
Net loss attributable to common stockholders $ (3,675) $ (160)
============ ============
Net loss per common share - Basic: $ (0.08) $ (0.00)
Net loss per common share - Diluted: $ (0.08) $ (0.00)
Weighted average common shares outstanding:
Basic 44,322,988 35,403,171
Diluted 44,322,988 35,403,171
See accompanying notes to condensed unaudited
consolidated financial statements.
3
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Dollar amounts in thousands except share and per share data
Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Sales, net $ 72,271 $ 89,387
Cost of goods sold 59,793 77,809
------------ ------------
Gross profit 12,478 11,578
Selling, general and administrative expenses 12,306 11,775
Restructuring and asset impairment charge -- 182
------------ ------------
Operating income (loss) 172 (379)
Interest and other income 156 140
Interest expense 6,813 5,372
------------ ------------
Loss before income taxes (6,485) (5,611)
Income tax benefit -- (710)
------------ ------------
Net loss (6,485) (4,901)
Preferred stock dividend earned 177 911
------------ ------------
Net loss attributable to common stockholders $ (6,662) $ (5,812)
============ ============
Net loss per common share - Basic: $ (0.16) $ (0.17)
Net loss per common share - Diluted: $ (0.16) $ (0.17)
Weighted average common shares outstanding:
Basic 42,684,834 35,160,320
Diluted 42,684,834 35,160,320
See accompanying notes to condensed unaudited
consolidated financial statements.
4
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
Dollar amounts in thousands except share data
(Unaudited)
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,485) $ (4,901)
----------- -----------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 3,183 3,224
Amortization 567 1,016
Deferred income tax benefit -- (710)
Amortization of deferred financing costs 1,661 862
Reduction of discounts on convertible subordinated debentures 525 230
Interest expense paid in kind 130 --
Beneficial conversion feature of convertible subordinated debentures 250 280
Restructuring charge -- 182
(Gain) loss on sale of property, plant & equipment (12) 26
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 4,036 (2,187)
Inventories 613 2,004
Prepaid expenses and other current assets (2,348) 187
Other assets (222) (3,276)
Accounts payable (2,354) 2,264
Other liabilities 1,278 (449)
Accrued expenses 898 552
----------- -----------
Net cash provided by (used in) operating activities 1,720 (696)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (1,798) (1,573)
Divestitures of property, plant and equipment 518 95
----------- -----------
Net cash used in investing activities (1,280) (1,478)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 376 8
Proceeds from the sale of preferred stock, net of issuance costs -- 999
Proceeds from the sale of convertible subordinated debentures, net of issuance costs -- 3,950
Proceeds from notes payable 528 1,200
Payments of notes payable (715) (5,666)
----------- -----------
Net cash provided by financing activities 189 491
----------- -----------
Net change in cash and cash equivalents 629 (1,683)
Cash and cash equivalents, beginning of period 912 2,211
----------- -----------
Cash and cash equivalents, end of period $ 1,541 $ 528
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,516 $ 4,158
Income taxes $ 6 $ 5
Number of shares issued (canceled) during the period for non-cash transactions:
Acquisitions, Clean Earth merger and other items (41,137) 8,075
Compensation - employees and directors 4,400 4,400
Litigation settlements 18,000 45,000
Conversion of debenture and preferred stock 3,903,494 2,134,742
Investment banking and commitment fees -- 200,000
See accompanying notes to condensed unaudited
consolidated financial statements.
5
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 that have
been exposed to hydrocarbons and the beneficial reuse of dredge materials. The
Company's plastic lumber customers are located primarily throughout the United
States, however the Company does have a small number of international customers.
The Company's environmental remediation, dredge and soil recycling 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-K as filed with the SEC for
the year ended December 31, 2001. Management acknowledges its responsibility for
the preparation of the accompanying interim condensed 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 for 2001 have been reclassified to conform to the 2002 presentation.
2. AGREEMENT TO SELL CLEAN EARTH, INC.
On December 29, 2001 the Company entered into a purchase agreement,
subsequently amended on February 12, 2002, and again on March 5, 2002, to sell
100% of the capital stock of its wholly-owned subsidiary, Clean Earth, Inc.
("Clean Earth") to New CEI Inc., a Delaware corporation owned by affiliates of
Founders Equity, Inc., an investment group headquartered in New York, New York,
subject to approval of the Company's shareholders. Although approval of this
transaction was obtained from the Company's shareholders on March 19, 2002, New
CEI was unable to obtain the necessary financing to complete the transaction and
assigned all of its rights and obligations under the purchase agreement to CEI
Holding Corporation ("CEI Holding Corp."), a corporation recently formed by Eos
Partners, L.P. and Bank of America Capital Investors, two private equity
investment groups. On June 14, 2002 the Company entered into an amended and
restated purchase agreement with CEI Holding Corp. to sell 100% of the capital
stock of Clean Earth under terms similar to those of the original purchase
agreement signed on December 29, 2001. No assurances can be given that the
Company will be able to close this transaction or that the Company will be
successful in selling Clean Earth at all in the event the sale to CEI Holding
Corp. is not consummated.
Under the terms of the purchase agreement, the purchase price will consist
of:
o $45.0 million, of which $44.0 million will be payable at the closing and
$1.0 million will be held in escrow pending the outcome of several
purchase price adjustments pursuant to the terms of the Purchase
Agreement; and
o A 5% Promissory note issued by CEI Holding Corp. in the original
principal amount of $3.5 million with a maturity date on the ten-year
anniversary date of the closing of the sale of Clean Earth, subject to
certain adjustments and rights of set-off as described in the purchase
agreement. The promissory note will be subordinate to all of the senior
debt of CEI Holding Corp.
The purchase price is subject to adjustments pertaining to the working
capital of Clean Earth and the debt of Clean Earth to be retained by the
purchaser as of the date of closing. If the debt and other obligations of CEI
are less than $5.5 million as of the closing date, the purchase price will be
increased by the difference. The Company currently projects that this will
result in an increase to the purchase price of approximately $1.2 million. If
6
the working capital of Clean Earth is less than $10 million as of the closing
date, the purchase price will be decreased by the shortfall. The Company
currently projects that this will result in a decrease to the purchase price of
approximately $2.9 million.
There may be additional adjustments to the cash portion of the purchase
price based upon a final audited balance sheet to be delivered after the closing
if the amount of outstanding debt and other obligations and non-cash working
capital set forth on the final audited balance sheet differ from the amounts of
such items set forth on the unaudited balance sheet on the closing date. The
adjustments for a reduction in the purchase after the closing, if any, would
first be paid to the purchaser out of the $1.0 million placed in escrow. If the
audited balance sheet results in downward adjustments to the purchase price in
excess of the $1.0 million that will be placed in escrow, the amount of the
excess adjustment would be paid by the Company to the purchaser, at the
purchaser's option, in cash or in the form of a principal reduction of the $3.5
million promissory note.
A Clean Earth subsidiary has received a notice of an unmatured event of
default dated July 9, 2002 regarding its failure to comply with a financial
covenant as of December 31, 2001 under a $1.2 million term note. As of June 30,
2002 the outstanding balance on this note is approximately $938,000 and the note
is secured by one of Clean Earth's fixed base treatment facilities. The notice
indicated that the failure to comply with the financial covenant will become an
event of default on August 9, 2002. While the notice stated that the lender had
determined not to exercise its rights and remedies under the note at this time,
it would consider taking appropriate action if the note is not fully repaid from
the proceeds of the sale of Clean Earth. Since the note represents outstanding
indebtedness of a Clean Earth subsidiary, this debt was to be retained by the
purchaser as part of the sale transaction. The holder of the note has indicated
that it would not provide its consent to the sale transaction due to, among
other things, this default. The Company does not believe the holder's consent is
necessary, and the Company is working with the purchaser and the holder of the
note to resolve this matter. In the event the Company is not successful in
resolving this matter and is required to repay the note in connection with the
closing of the sale transaction, the repayment would increase the purchase price
adjustment by the amount of the repayment, and the net cash proceeds to be
received by the Company as a result of the sale transaction would be unaffected.
In addition, the receivables pursuant to (i) the Company's ownership
interest in the joint venture between Interstate Industrial Corp. and the
Company; and (ii) the Quakertown Foundry Site Agreement between Integrated
Technical Services, a subsidiary of Clean Earth, and the Pennsylvania Department
of Environmental Protection were not included as part of the purchase agreement.
The net book value of these receivables was approximately $1,640,000 as of June
30, 2002.
The Company expects to realize approximately $40.6 million of net cash
proceeds from the sale of CEI, after giving effect to purchase price
adjustments, transaction expenses and the $1.0 million to be held in escrow. The
Company intends to use the proceeds to pay down a portion of its existing
indebtedness, including a substantial portion, if not all, of the outstanding
balance on its Senior Credit Facility. The Company also expects to receive a new
$10.0 million revolving credit facility from its senior lenders or an
alternative lender at the time of the closing of the transaction to provide for
its ongoing working capital requirements.
The sale of Clean Earth was approved by the Company's board of directors on
June 14, 2002 prior to the execution of the purchase agreement. On August 2,
2002 the Company filed a definitive proxy statement with the Securities and
Exchange Commission to hold a special meeting of the Company's stockholders on
August 27, 2002. The shareholder vote to take place on that date is applicable
only to the specific purchase agreement with CEI Holding Corp. and does not
authorize the Company's management or board of directors to pursue alternative
plans for the sale or disposal of CEI. A tentative date of August 28, 2002 has
been set for the closing of this transaction.
Because shareholder approval has not yet been obtained for this sale
transaction, the Company did not account for Clean Earth as a discontinued
operation in the accompanying consolidated financial statements.
3. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and ability to meet its financial obligations and
maintain its current operations in 2002 and beyond will be dependent on, among
other things, its ability to refinance its Senior Credit Facility, meet its
payment obligations under, achieve and maintain compliance with the financial
covenants in its debt agreements and provide financing for working capital.
7
The Company is highly leveraged, and during 2000 and 2001 incurred
substantial losses from operations, primarily resulting from the significant
expenses incurred in its plastic lumber division. The Company's accumulated
deficit and working capital deficit totaled approximately $67.7 million and
$55.7 million respectively as of June 30, 2002. The Company's obligations to
make payments under, achieve and maintain compliance with the covenants in its
Senior Credit Facility and Master Credit Facility are material financial
commitments.
The Company currently does not have the financial resources to repay its
debt obligations under the Senior Credit Facility, Master Credit Facility and $4
million convertible debenture as they become due, or in the event that the
Company is unable to complete the sale of Clean Earth as described in note 2, or
in the event that current or future events of default are not waived in writing
and such debt is immediately due, without obtaining new debt and/or equity
capital, negotiating different payment terms and/or selling some of its assets.
The Company's current and past failures to comply with the terms of its Senior
Credit Facility and Master Credit Facility, as well as the related forbearance
agreement and other debt obligations, and the material financial obligations
currently contained in its Senior Credit Facility and Master Credit Facility
have a material adverse effect upon the Company's liquidity and capital
resources and raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
See note 5 for additional information regarding the Company's past defaults on
its Senior Credit Facility and Master Credit Facility.
On June 14, 2002 the Company entered into an agreement to sell 100% of the
capital stock of its wholly owned subsidiary, Clean Earth, Inc., to CEI Holding
Corporation. See note 2 for further information on the proposed sale of Clean
Earth. No assurances can be given that the Company will be able to close this
transaction or that the Company will be successful in selling Clean Earth at all
in the event this transaction is not consummated. If the Company is successful
in completing the sale transaction as described in note 2, it will pay down a
substantial portion, if not all, of its Senior Credit Facility, restructure its
Halifax debentures and have a new revolving line of credit to provide working
capital after the sale transaction is completed. While there can be no
assurances, the Company believes that this sale transaction, if consummated,
would allow the Company to reorganize its capital structure and cure its
liquidity crisis.
If the Company is not successful in completing the sale transaction
described in note 2, it will be required to seek other alternatives for
refinancing its capital structure which could include raising additional equity,
selling some of its assets or restructuring the Senior Credit Facility. There
can be no assurances that this course of action will be successful. The
Company's failure to refinance its capital structure would require the Company
to significantly curtail its operations. In this event, the Company may be
forced to seek protection under the Bankruptcy Code or it may be forced into a
bankruptcy proceeding by these lenders.
4. CAPITAL STOCK
SERIES D CONVERTIBLE PREFERRED STOCK
In September of 2000 the Company issued 1,187,285 shares of its Series D
Preferred Stock and received net proceeds of $4.1 million. The Series D
Preferred Stock contained a quarterly cash dividend at an annual rate of 15%,
with the initial dividend payable on March 31, 2001. Each share of Series D
Preferred Stock was convertible into one share of the Company's common stock at
the option of the holder any time after March 31, 2001, and the Company had
certain rights to redeem or require conversion of the Series D Preferred Stock
prior to March 1, 2002. Otherwise, the Series D Preferred Stock would
automatically convert into common stock on March 1, 2002.
The Company did not pay any of the required cash dividends on the Series D
Preferred Stock due to a deterioration in the Company's financial condition.
Dividends in arrears on the Series D Preferred Stock amounted to approximately
$809,000 at December 31, 2001 and $911,000 at February 28, 2002. On February 28,
2002 the Company offered a 5% promissory note due April 1, 2004 to each holder
of Series D Preferred Stock for the corresponding amount of unpaid dividends
owed to each holder and this amount is reflected in Notes Payable on the
Company's balance sheet as of June 30, 2002. Only one Series D shareholder has
executed the note as of June 30, 2002. On March 1, 2002 all 1,187,285 shares of
outstanding Series D Preferred Stock were converted into an equal number of
shares of common stock.
SERIES E CONVERTIBLE PREFERRED STOCK
Between November 2000 and March 2001, the Company issued a total 1,714,285
shares of its Series E Preferred Stock to the Stout Partnership in exchange for
8
payments to the Company in the aggregate of $3,000,000. The stock paid a monthly
cash dividend at an annual rate of 10%. Each share of Series E Preferred Stock
was convertible into one share of the Company's common stock at the option of
the holder at any time after December 31, 2001, subject to certain rights of the
Company to redeem or require conversion of the Series E Preferred Stock prior to
March 1, 2002. Otherwise, the Series E Preferred Stock was to have automatically
converted into common stock on March 1, 2002. On March 4, 2002 the Company's
Board of Directors extended the automatic conversion date of the Series E
Preferred Stock to March 31, 2002. On March 31, 2002 all 1,714,285 shares of
outstanding Series E Preferred Stock were converted into an equal number of
shares of common stock.
COMMON STOCK PRIVATE PLACEMENT
On February 19, 2002, the Company issued 800,000 shares of common stock at a
purchase price of $0.50 per share. This private placement transaction was not
registered under the Securities and Exchange Act of 1933 (the "Act") in reliance
upon the exemption from registration in Section 4(2) of the Act, as a
transaction not involving any public offering. Net proceeds after issuance costs
of $376,000 were used for general corporate purposes.
CONVERSION OF STOUT DEBENTURE
The Company has a $5.0 million convertible subordinated debenture payable to
Stout Partnership, the Company's largest stockholder, which is due on July 1,
2003. Several members of the Company's board of directors and Mark S. Alsentzer,
the Company's Chief Executive Officer, are affiliated with Stout Partnership. On
May 29, 2002 the Stout Partnership agreed to convert the entire debenture plus
accrued interest of approximately $183,000 into 19,935,808 shares of the
Company's common stock. The conversion price of $0.26 per share is in accordance
with the conversion formula as stated in the terms of the debenture, and the
transaction is subject to shareholder approval and the completion of the sale of
Clean Earth, Inc. This transaction is a requirement of the Company's senior
lenders as a condition of extending new credit to the Company after the sale of
Clean Earth, Inc. is completed, and will be voted on at the Special Meeting of
Shareholders on August 27, 2002. In connection with the conversion, if approved
by the shareholders, the Company will recognize as interest expense a beneficial
conversion feature of approximately $1,196,000.
5. NOTES AND CAPITAL LEASES PAYABLE
The Company has not made required principal payments on its Senior Credit
Facility since June 30, 2001, and was not in compliance with some of the
facility's financial covenants since September 30, 2001. The original terms of
the Senior Credit Facility, as amended, required the Company to make principal
term loan payments of $2.5 million each on September 30, 2001, December 31,
2001, March 31, 2002 and June 30, 2002, with the remainder of the facility due
July 1, 2002. The outstanding balance on the Senior Credit Facility as of June
30, 2002 is approximately $41.5 million, including accrued interest, fees and
penalties. Substantially all of the assets of the Company have been pledged as
collateral with respect to the Senior Credit Facility. Effective since November
14, 2001, the Company has entered into a succession of forbearance agreements
with the participating banks whereby the lenders under the Senior Credit
Facility have agreed to accept certain interest payments from the Company and
allowed it to defer the payment of principal until the earlier of the
termination of the forbearance period or the sale of the Company's Clean Earth,
Inc. subsidiary (see note 2 to the Condensed Unaudited Consolidated Financial
Statements). Currently, the forbearance period terminates on August 31, 2002.
Pursuant to the terms of the forbearance agreements, the lenders have agreed not
to take any action against the Company with respect to principal payments that
were not made as they became due and for all of the Company's outstanding
financial covenant violations.
Under the terms of the supplemental forbearance agreement entered into by
the Company and its senior lenders on April 12, 2002, which was subsequently
amended on May 31, 2002, the Company was required to make certain payments to
the senior lenders in the aggregate of approximately $716,000 at various dates
between April 12, and May 30, 2002, including all of the costs and expenses
pertaining to the senior lenders' retention of a financial consultant to
evaluate the operations, financial records, business prospects, economic value
and other aspects of the Company. Payments made under the terms of this
agreement were to be applied first to amounts payable to the lenders' financial
consultant, second to interest that was due January 31, 2002, third to interest
that was due February 28, 2002 and fourth to interest that was due April 1,
2002. The Company is also required to maintain at all times a retainer with the
lenders' financial consultant of not less than $75,000. As of June 30, 2002 the
Company has made all required payments under the supplemental forbearance
agreements, including $500,000 of payments to the lenders' financial consultant.
In addition, a termination of the purchase agreement that was signed on June 14,
2002 between the Company and CEI Acquisition Corp., (see note 2), shall be
considered a forbearance default under the terms of the current forbearance
agreement.
9
The Company has not made principal payments on its Master Credit Facility
with GE Capital Corporation since December of 2001 and, as of September 30, and
December 31, 2001, was not in compliance with the tangible net worth covenant
under the Master Credit Facility. On February 28, 2002 the Company, GE Capital
Corp. and the other participants in the Master Credit Facility agreed to and
signed a Forbearance and Modification Agreement which restructures the Master
Credit Facility by allowing the Company to defer principal payments until April
1, 2002 while continuing to make interest payments, and providing a waiver of
the September 30, and December 31, covenant violations. In accordance with the
agreement, the Company will be required to make a $500,000 principal payment
upon the proposed sale of Clean Earth, Inc., if it takes place. The forbearance
and Modification Agreement was subsequently amended on May 30, 2002 and again on
June 14, 2002 to, among other things, extend the forbearance period until the
date that is twenty four months following the date of the closing of the sale of
Clean Earth, Inc., provided that the transaction take place prior to August 30,
2002. However, if the Company obtains a new revolving credit facility upon the
closing of, or subsequent to, the sale of Clean Earth, Inc. from a lending group
other than that which comprises the lending group under the Company's Senior
Credit Facility, the Company must resume monthly principal payments on a
schedule sufficient to retire the facility by June 30, 2007. The outstanding
balance on the Master Credit Facility is approximately $11.4 million. The June
14, 2002 amendment also gives the lenders a first priority lien on the Company's
option to purchase the land and buildings in Chicago, Illinois (the "Chicago
property") currently leased by the Company, and requires the Company to exercise
this purchase option no later than May 1, 2003.
In addition, the Company will be required to make a $2 million prepayment on
the Master Credit Facility upon the earlier of (i) the Company's replacement of
its existing revolving credit facility with a new facility with availability of
at least $10 million; (ii) the Company's exercising the purchase option on, and
subsequently obtaining a mortgage against, its Chicago property; or (iii) July
31, 2003. The Company will also be required to pay a forbearance fee in
connection with the Forbearance and Modification Agreement in an amount equal to
2% of its obligations outstanding under the Master Credit Facility as of the
date of the proposed sale of Clean Earth. This forbearance fee will be due upon
the earlier of the Company obtaining a new revolving credit facility from a
lender other than that which exists under its current revolving credit facility,
or the closing of the Company's financing of its Chicago property. The
Forbearance and Modification Agreement also re-sets the minimum tangible net
worth covenant commencing with the quarter in which the sale of Clean Earth,
Inc. takes place and adds new covenants for minimum levels of earnings before
interest, taxes, depreciation and amortization ("EBITDA") commencing March 31,
2002. It also requires the Company, under certain circumstances, to grant
additional security interest to GE Capital Corp. and to the other participants
in the Master Credit Facility for some of the Company's property, plant and
equipment that these lenders currently have no security interest in. The Company
was not in compliance with the EBITDA covenant as of June 30, 2002, however the
lenders under the Master Credit Facility have not taken any action, including
declaration of default, against the Company with respect to this covenant
violation. As a result of the covenant violation, the Company has included the
entire outstanding balance of the facility in current portion of long term debt.
The Master Credit Facility also contains a provision whereby an event which
would accelerate payment terms of the Company's Senior Credit Facility would
also accelerate the payment terms of the Master Credit Facility to the same due
date as the Senior Credit Facility. The Senior Credit Facility has a similar
provision with respect to the Master Credit Facility. In addition, defaults
under these lending agreements cause defaults, pursuant to cross default
provisions, of the Company's other agreements, including, but not limited to,
other lending agreements, debenture agreements, lease agreements and others.
A Clean Earth subsidiary has received a notice of an unmatured event of
default dated July 9, 2002 regarding its failure to comply with a financial
covenant as of December 31, 2001 under a $1.2 million term note. As of June 30,
2002 the outstanding balance on this note is approximately $938,000 and the note
is secured by one of Clean Earth's fixed base treatment facilities. The notice
indicated that the failure to comply with the financial covenant will become an
event of default on August 9, 2002. While the notice stated that the lender had
determined not to exercise its rights and remedies under the note at this time,
it would consider taking appropriate action if the note is not fully repaid from
the proceeds of the sale of Clean Earth. Since the note is a liability of a
Clean Earth subsidiary, such liability was to be assumed by the purchaser as
part of the sale transaction. The holder of the note has indicated that it would
not provide its consent to the sale transaction due to, among other things, this
default. The Company does not believe the holder's consent is necessary, and the
Company is working with the purchaser and the holder of the note to resolve this
matter. To date, the holder of this note has not taken any action against the
Company.
The Company did not make the payments of approximately $267,000 that were
due on December 31, 2001 and December 31, 2000 in connection with the $800,000
Note assumed in a 1999 acquisition. On February 4, 2002 the Company reached an
10
agreement with the holder of the Note, Waste Management Inc., to amend the terms
of the Note whereby it would be due in three equal annual installments beginning
December 31, 2002. The agreement also waives the failure to make the
aforementioned principal and interest payments that had been due on December 31,
2001 and 2000.
Notes payable and capital leases consist of the following (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Term loan under the Senior Credit Facility $25,000 $25,000
Revolving credit line under the Senior Credit Facility 12,900 12,400
Equipment term loans under the Master Credit Facility 11,356 11,356
Mortgage notes and capital leases payable collateralized by
certain facilities and equipment owned by the Company and its
subsidiaries 4,168 4,840
Other notes payable 4,721 3,824
------- -------
Total notes payable and capital leases 58,145 57,420
Less current portion: 51,974 51,779
------- -------
$ 6,171 $ 5,641
======= =======
6. CONVERTIBLE SUBORDINATED DEBENTURES
On February 2, 2000 the Company issued a 5% $7,500,000 convertible
subordinated debenture (the "Fiscal 2000 Debenture") which is convertible into
the Company's common stock to Halifax Fund, L.P. ("Halifax"). On February 20,
2001, Halifax exercised its rights under the terms of the debenture to require
the Company to (a) repurchase the debenture for cash at 110% of the outstanding
principal amount plus all accrued, unpaid interest, or (b) have the Minimum
Floating Conversion Price permanently re-set to zero. The Company did not elect
option (a), therefore the Minimum Floating Conversion Price was permanently
re-set to zero. The effect of re-setting the Minimum Floating Conversion Price
to zero is that upon conversion of the Fiscal 2000 Debenture into common stock
the price at which the common stock of the Company will be issued to Halifax
shall be equal to the lowest trading price of the common stock on the principal
trading market for such common stock (which is currently the NASDAQ National
Market) during the four (4) trading days prior to but not including the holder's
conversion date. The right of the debenture holder to convert the debenture to
common stock is limited in that the holder may not convert the debenture if upon
such conversion the holder will become a beneficial owner of more than 9.9% of
the total issued and outstanding shares of the Company's common stock. If the
holder elects to convert and the entire debenture cannot be converted due to
this limitation, the Company must settle in cash that portion of the debenture
which cannot be converted to stock when the debenture matures in February of
2005, at 110% of the sum of the outstanding balance of the debenture that is in
excess of the limitation and accrued but unpaid interest and default payments.
On February 4, 2002 $349,000 of the previously issued convertible
subordinated debenture and approximately $2,000 of unpaid interest were
converted into 1,001,923 shares of common stock at a conversion price of $0.35
per share. As a result of this conversion, the Company recorded a beneficial
conversion feature benefit granted to the holder of approximately $250,000,
which was charged to interest expense during the six months ended June 30, 2002.
As of June 30, 2002, approximately $5,468,000 net of discounts, is outstanding
on the Fiscal 2000 convertible subordinated debenture. The terms of the
debenture allow for the quarterly interest payments to be paid in kind by
increasing the outstanding principal balance of the debenture. During the first
six months of 2002 approximately $130,000 of interest was paid in kind.
On June 15, 2001, the Company issued a convertible subordinated debenture
due May 31, 2002 in the principal amount of $4.0 million (the "Fiscal 2001
Debenture") and a warrant to purchase 250,000 shares of its common stock, at an
initial purchase price of $2.00 per share, to Halifax. Halifax paid the Company
$4.0 million for these securities. The principal amount of the Fiscal 2001
Debenture currently bears interest at an annual rate of 25% and was due on July
1, 2002.
The Company had the option at any time and, upon five business day's notice,
to repurchase all or any part of the Fiscal 2001 Debenture. At August 15, 2001,
the Company did not repurchase the Fiscal 2001 Debenture, nor did it consummate
a sale/leaseback of some of its assets under the terms described in the Fiscal
2001 Debenture Purchase Agreement. As a result, Halifax may convert the
principal amount plus accrued interest and any default payments on the Fiscal
11
2001 Debenture into shares of the Company's common stock at a conversion price
per share equal to the average of the lowest trading price of the common stock
during any three trading days during the twenty-two trading days immediately
prior to the conversion date. In addition, because the Fiscal 2001 Debenture was
not repurchased by August 15, 2001 and the sale/leaseback was not completed, in
accordance with the terms of the Fiscal 2001 Debenture the Company issued to
Halifax for no consideration another Warrant to purchase 250,000 shares of its
common stock at a purchase price per share equal to 120% of the closing market
price of such stock on August 15, 2001, which was $0.90 per share. As of June
30, 2002 the outstanding balance on the Fiscal 2001 convertible debenture is
$4.0 million. The Company did not make the required quarterly interest payments
on this debenture of $250,000 for the three-month periods ending December 31,
2001, March 31, 2002 and June 30, 2002.
As part of the financing, the Company also granted a subordinate lien on all
its assets to Halifax through a Security Agreement. The lien not only secures
the Company's obligations under the Fiscal 2001 Debenture, but it also secures
the Company's obligations under the Fiscal 2000 Debenture due February 5, 2005
and the promissory note for dividends in arrears pertaining to the Company's
Series D Convertible Preferred Stock previously sold to Halifax. In addition,
the Fiscal 2001 Debenture Purchase Agreement with Halifax required that the
shares and associated warrants underlying the Fiscal 2001 Debenture be
registered within 90 days of the June 15, 2001 closing date of the agreement.
The Fiscal 2001 Debenture Purchase Agreement provides that the Company pay in
cash a default payment of 2.5% of the sum of the outstanding principal amount of
the Fiscal 2001 Debenture plus the accrued interest for each thirty day period
that the shares are not registered. As of June 30, 2002 the Company had not
filed a registration statement to register these shares and the Company has
accrued $950,000 in penalties due Halifax as a result of the Company's failure
to register these shares.
On June 5, 2002 a non-binding agreement was reached with Halifax whereby,
subject to the completion of the sale of Clean Earth:
o The existing Halifax debentures will be terminated
o All default charges, fees and penalties will be waived by Halifax
o Halifax will release the Company from any action Halifax has against the
Company relative to the Halifax Debentures
o Halifax will release its second lien on the Company's assets that are to
be transferred in connection with the sale of Clean Earth
In exchange for the preceding, the Company will, at the closing of the sale
of Clean Earth,
o Pay $2.5 million in cash to Halifax
o Issue a 10% subordinated convertible debenture in the principal amount
of $2.8 million with a term of three years, with interest being paid in
kind for the first two years and paid in cash for the third year. One
third of the principal amount of the debenture will be convertible into
shares of the Company's common stock at $0.75 per share, one third will
be convertible at $1.00 per share and one third will be convertible at
$1.25 per share.
o Issue a 10% subordinated debenture with no conversion rights in the
principal amount of $5.6 million with a term of three years, with
interest being paid in kind for the first two years and paid in cash for
the third year
o Negotiate with Halifax a limitation on the Company's ability to incur
senior debt based upon a ratio of total senior debt to total assets
The Company is currently negotiating a definitive agreement with Halifax to
encompass the above terms.
7. RESTRUCTURING CHARGES
In September of 2001 the Company announced the closing of three of its
manufacturing facilities and the leasing of two of its resin processing plants
to third parties in an effort to reduce fixed costs, improve customer service
and narrow management's focus to a smaller number of manufacturing facilities,
without reducing total manufacturing capacity. With the exception of activities
associated with exiting the facilities, the Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the equipment and manufacturing processes at these plants were transferred to
the Chicago, Illinois and Ocala, Florida manufacturing locations. The Company is
currently attempting to obtain a buyout or sublease of the closed facilities. In
addition, the Company discontinued raw material processing at its Auburn,
Massachusetts and Chino, California resin plants and agreed to lease these
operations to other raw material processors. Approximately 140 full time
manufacturing and administrative positions were eliminated in connection with
the reduction in facilities. The plan of restructure was adopted by management
and the board of directors and communicated to employees in late September of
2001. During the fourth quarter of 2001, the Company recorded an acquired
intangibles impairment charge related to the environmental division of $13.5
12
million as a result of the proposed sale of CEI (see note 2) and the requirement
to reduce to fair value the carrying value of CEI's long-lived assets. The
following is a summary of the restructuring and asset impairment charges
recorded during the third and fourth quarter of 2001:
Write-down for equipment impairment $8,694,000
Write-down for goodwill impairment 14,616,000
Lease termination, severance and other exit costs 1,656,000
------------
Total restructuring and asset impairment charges $24,966,000
============
During 2001 the Company paid approximately $761,000 in employee termination,
lease termination and other exit costs in connection with the restructuring and
approximately $895,000 remained in the accrual as of December 31, 2001,
primarily for lease termination expenses. During the six months ended June 30,
2002 the Company paid approximately $877,000 in lease termination and employee
termination costs in connection with the restructuring and approximately $18,000
remained in the accrual at June 30, 2002.
In the fourth quarter of 2000, the Company committed to a plan to
restructure and to consolidate some of its smaller plants within the plastic
lumber division. Specifically, the Company closed its Reidsville, North Carolina
facility in the fourth quarter of 2000, its Green Bay, Wisconsin and Vernon,
California facilities in January 2001 and its Sweetser, Indiana facility early
in the third quarter of 2001. As a result, the Company recorded a charge of
$3,417,000 in the fourth quarter of 2000 for equipment impairment and lease
termination costs in connection with the restructuring. As of December 31, 2000,
the Company had accrued $1,098,000 in connection with the lease termination
costs and anticipates making lease termination payments throughout 2001 and 2002
as it completes its restructuring plan. During 2001 the Company paid
approximately $564,000 in lease termination payments and charged this amount
against the accrual. Also during 2001, the Company reversed $154,000 of the
accrual for other exit costs due to a change in estimate. As of December 31,
2001 the Company had approximately $380,000 remaining in its 2000 restructuring
accrual for lease termination payments. During the six months ended June 30,
2002 the Company paid approximately $294,000 in lease termination payments and
had approximately $86,000 remaining in its 2000 restructuring accrual as of June
30, 2002.
8. LEGAL PROCEEDINGS
On February 28, 2002 a judgment in the amount of $1,760,000 plus
administrative fees, arbitrators' compensation and interest was awarded to
Southern Wood Services due to the Company's breach of a purchase contract. As a
result, the Company accrued $1,844,000 at December 31, 2001 in connection with
this ruling. On June 18, 2002 the Company entered into a settlement agreement
with Southern Wood Services whereby the Company agreed to pay $1,590,000 payable
in 53 equal monthly payments of $30,000, commencing with the date of the
settlement agreement. As a result, the Company reversed $254,000 of the amount
accrued at December 31, 2001 due to this change in the estimated amount of the
liability.
In December 1998, the Company purchased Clean Earth of North Jersey ("CENJ",
then known as S&W Waste, Inc.) in a stock purchase transaction. Pursuant to such
purchase, the Company could be responsible for liabilities resulting from
matters wherein CENJ has been named as a potentially responsible party ("PRP")
in matters involving the possible disposal of hazardous waste at certain
disposal sites. At June 30, 2002 the Company has accrued approximately $324,000
for estimated liabilities related to these matters. The Company believes the
accrual is sufficient to cover the aggregate liability that may be incurred in
these matters; however, there can be no assurances that the accrual will be
sufficient.
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.
13
9. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.
The Company adopted the provisions of SFAS No. 141 during 2001 and initially
adopted the provisions of SFAS No. 142 on January 1, 2002. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 continued to be amortized prior to the initial adoption of SFAS No. 142.
SFAS No. 141 required that upon adoption of SFAS No. 142 the Company must
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and make any necessary reclassifications in
order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. SFAS No. 142 required the Company to reassess the useful lives
and residual values of all amortizable intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment in accordance
with the provisions of SFAS No. 142 within six months of adoption.
In connection with the transitional goodwill impairment evaluation, SFAS No.
142 required the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of January 1, 2002. To accomplish this,
the Company identified its reporting units to which goodwill is associated and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. Based on an independent third party
valuation of each of the Company's reporting units and a comparison to each
reporting unit's carrying amount as of January 1, 2002, the Company did not
record any goodwill impairment.
In addition to approximately $13.0 million of unamortized goodwill
associated with the Company's Plastic Lumber division, the Company had at
December 31, 2001 an unamortized permit in the amount of approximately $8.1
million, which was acquired in a purchase business combination by its
environmental recycling division in 1999, and unamortized patents of
approximately $600,000, which are subject to the transition provisions of SFAS
No. 141 and 142. During the first six months of 2002 the Company added
approximately $372,000 of other intangibles with an estimated useful life of
four years which are also subject to these provisions. The Company has
determined that the permit has a useful life of 18 years as of January 1, 2002
and adjusted its amortization from 25 years effective with that date. The
following table summarizes the carrying value of the Company's amortizable
intangible assets:
(Dollar amounts in thousands:)
2002 2001
------- -------
Permit $ 9,337 $ 9,337
Accumulated amortization (1,500) (1,269)
------- -------
Carrying amount - Permit 7,837 8,068
Patents 811 810
Accumulated amortization (248) (213)
------- -------
Carrying amount - Patents 563 597
Other 372 --
Accumulated amortization (31) --
------- -------
Carrying amount - Other 341 --
------- -------
Total, net $ 8,741 $ 8,665
======= =======
14
During the six months ended June 30, 2002, aggregate amortization expense
for the Company's intangible assets was approximately $281,000. As of June 30,
2002, estimated aggregate annual amortization expense for the Company's
intangible assets are as follows (in thousands):
YEAR ENDING AMOUNTS
----------- ---------
2002........................................ $ 401
2003........................................ 556
2004........................................ 556
2005........................................ 556
2006........................................ 548
--------
$ 2,617
========
In connection with the initial adoption of SFAS No. 142, the Company ceased
amortization of goodwill and adjusted the amortization of the permit as of
January 1, 2002. Had the adoption of SFAS 142 taken place as of January 1, 2001,
net amortization expense pertaining to the permit for the six months ended June
30, 2001 would have increased by $64,000, and amortization expense for goodwill
would have decreased by $535,000. As a result, net loss and loss per diluted
common share for the six months of 2001 would have been reduced by approximately
$471,000 and $.01 respectively.
On February 10, 2000 the Company acquired certain assets and liabilities of
Baron Enterprises, Inc. for 202,376 shares of the Company's common stock,
including 42,358 shares held in escrow pending the resolution of outstanding
issues within the purchase agreement. On June 30, 2002 the Company determined
that these issues had been resolved and that the Company would not be required
to release these shares. As such, the Company reduced its number of common
shares outstanding by 42,358 and reduced acquisition goodwill by approximately
$381,000, based on a market price of $9.00 per share as of February 10, 2000.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". That standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity will capitalize a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier adoption
permitted. The Company is currently evaluating the effect that the adoption of
SFAS No. 143 may have on its consolidated results of operations and financial
position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Adoption of the provisions of SFAS
No. 144 on January 1, 2002 had no material effect on the Company's consolidated
results of operations and financial position.
15
11. 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. The
operating results of the two segments are as follows (in thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales:
Environmental recycling $ 20,459 $ 34,197 $ 43,143 $ 57,178
Plastic lumber 14,924 16,553 29,128 32,209
-------- -------- -------- --------
Total $ 35,383 $ 50,750 $ 72,271 $ 89,387
======== ======== ======== ========
Operating Income (Loss):
Environmental recycling $ 1,016 $ 3,742 $ 2,170 $ 3,463
Plastic lumber 945 (70) 1,755 (2,202)
Corporate (2,293) (936) (3,753) (1,640)
-------- -------- -------- --------
Total $ (332) $ 2,736 $ 172 $ (379)
======== ======== ======== ========
Depreciation and Amortization:
Environmental recycling $ 904 $ 902 $ 1,806 $ 1,835
Plastic lumber 960 1,119 1,896 2,191
Corporate 24 106 48 214
-------- -------- -------- --------
Total $ 1,888 $ 2,127 $ 3,750 $ 4,240
======== ======== ======== ========
Expenditures for Long-Lived Assets:
Environmental recycling $ 17 $ 321 $ 514 $ 1,110
Plastic lumber 562 427 1,656 592
Corporate 0 9 0 9
-------- -------- -------- --------
Total $ 579 $ 757 $ 2,170 $ 1,711
======== ======== ======== ========
The operating income of the Plastic Lumber division for the six months ended
June 30, 2001 includes a $182,000 restructuring charge, with no comparable
amount in 2002.
The identifiable assets of the respective segments is set forth below (in
thousands):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Identifiable assets:
Environmental recycling $ 65,668 $ 71,945
Plastic lumber 85,594 84,858
Corporate 4,456 4,866
-------- --------
Total $155,718 $161,669
======== ========
16
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROPOSED SALE OF CLEAN EARTH, INC. SUBSIDIARY
On December 29, 2001 we entered into a purchase agreement to sell 100% of
the capital stock of our Clean Earth, Inc. subsidiary ("Clean Earth") to
Founders Equity, Inc., an investment group headquartered in New York, New York,
subject to the approval of our shareholders. Although we obtained shareholder
approval of the transaction on March 19, 2002, this original purchaser was
unable to obtain the necessary financing to complete the transaction. On June
14, 2002 we entered into an amended and restated purchase agreement with CEI
Holding Corporation ("CEI Holding Corp."), a corporation recently formed by Eos
Partners, L.P. and Bank of America Capital Investors, two private equity
investment groups, to sell 100% of the capital stock of Clean Earth under terms
similar to those of the original purchase agreement signed on December 29, 2001.
No assurances can be given we will be able to close this transaction or that we
will be successful in selling Clean Earth at all in the event the sale to CEI
Holding Corp. is not consummated.
Under the terms of the purchase agreement, the purchase price will consist
of:
o $45.0 million, of which $44.0 million will be payable at the closing and
$1.0 million will be held in escrow pending the outcome of several
purchase price adjustments pursuant to the terms of the Purchase
Agreement; and
o A 5% Promissory note issued by CEI Holding Corp. in the original
principal amount of $3.5 million with a maturity date on the ten-year
anniversary date of the closing of the sale of Clean Earth, subject to
certain adjustments and rights of set-off as described in the purchase
agreement. The promissory note will be subordinate to all of the senior
debt of CEI Holding Corp.
The purchase price is subject to adjustments pertaining to the working
capital of Clean Earth and the debt of Clean Earth to be retained by the
purchaser as of the date of closing. We currently project that this will result
in a decrease to the purchase price of approximately $2.9 million. There may be
additional adjustments to the cash portion of the purchase price based upon a
final audited post-closing balance sheet and resulting outstanding debt and
working capital amounts. The adjustments for a reduction in the purchase after
the closing, if any, would first be paid to the purchaser out of the $1.0
million placed in escrow. If the audited balance sheet results in downward
adjustments to the purchase price in excess of the $1.0 million that will be
placed in escrow, the amount of the excess adjustment would be paid by the
Company to the purchaser, at the purchaser's option, in cash or in the form of a
principal reduction of the $3.5 million promissory note.
A Clean Earth subsidiary has received a notice of an unmatured event of
default dated July 9, 2002 regarding its failure to comply with a financial
covenant as of December 31, 2001 under a $1.2 million term note. As of June 30,
2002 the outstanding balance on this note is approximately $938,000 and the note
is secured by one of Clean Earth's fixed base treatment facilities. The notice
indicated that the failure to comply with the financial covenant will become an
event of default on August 9, 2002. While the notice stated that the lender had
determined not to exercise its rights and remedies under the note at this time,
it would consider taking appropriate action if the note is not fully repaid from
the proceeds of the sale of Clean Earth. Since the note is a liability of a
Clean Earth subsidiary, such liability was to be assumed by the purchaser as
part of the sale transaction. The holder of the note has indicated that it would
not provide its consent to the sale transaction due to, among other things, this
default. We do not believe the holder's consent is necessary, and we are working
with the purchaser and the holder of the note to resolve this matter. In the
event the we are not successful in resolving this matter and are required to
repay the note in connection with the closing of the sale transaction, the
repayment would increase the purchase price adjustment by the amount of the
repayment, and the net cash proceeds to be received by us as a result of the
sale transaction would be unaffected.
We expect to realize approximately $40.6 million of net cash proceeds from
the sale of Clean Earth, after giving effect to purchase price adjustments,
transaction expenses and the $1.0 million to be held in escrow. We intend to use
the proceeds to pay down a portion of our existing indebtedness, including a
substantial portion of the outstanding balance on our Senior Credit Facility. We
also expect to receive a new $10.0 million revolving credit facility from our
senior lenders or an alternative lender at the time of the closing of the
transaction to provide for our ongoing working capital requirements.
17
The sale of Clean Earth was approved by our board of directors on June 14,
2002 prior to the execution of the purchase agreement. On August 2, 2002 we
filed a definitive proxy statement with the Securities and Exchange Commission
to hold a special meeting of our stockholders on August 27, 2002. The
shareholder vote to take place on that date is applicable only to the specific
purchase agreement with CEI Holding Corp. and does not authorize our management
or board of directors to pursue alternative plans for the sale or disposal of
Clean Earth. A tentative date of August 28, 2002 has been set for the closing of
this transaction.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and ability to meet our financial obligations and maintain our
current operations in 2002 and beyond will be dependent on, among other things,
our ability to refinance our Senior Credit Facility, meet our payment
obligations under and comply with the financial covenants in our various debt
agreements and provide financing for working capital.
We are highly leveraged, and during 2000 and 2001 we incurred substantial
losses from operations, primarily resulting from the significant expenses
incurred in our plastic lumber division. Our accumulated deficit and working
capital deficit totaled approximately $67.7 million and $55.7 million
respectively as of June 30, 2002. Our obligations to make payments under,
achieve and maintain compliance with the covenants in our Senior Credit Facility
and Master Credit Facility are material financial commitments.
We have not made required principal payments on our Senior Credit Facility
since June 30, 2001, and we were not in compliance with some of the facility's
financial covenants as of September 30, 2001. The original terms of the Senior
Credit Facility, as amended, required us to make principal term loan payments of
$2.5 million each on September 30, 2001, December 31, 2001, March 31, 2002 and
June 30, 2002, with the remainder of the facility due July 1, 2002. The
outstanding balance on the Senior Credit Facility as of June 30, 2002 is
approximately $41.5 million, including accrued interest, fees and penalties.
Substantially all of our assets have been pledged as collateral with respect to
the Senior Credit Facility. Since November 14, 2001 we have entered into a
succession of forbearance agreements with the participants in our Senior Credit
Facility whereby these lenders have agreed to accept certain interest payments
from us and allowed us to defer the payment of principal until the earlier of
the termination of the forbearance period or the sale of our Clean Earth, Inc.
subsidiary. Currently, the forbearance period terminates on August 31, 2002.
Pursuant to the terms of the forbearance agreements, the lenders have agreed not
to take any action against us with respect to principal payments that were not
made as they became due and for all of our outstanding financial covenant
violations.
Under the terms of the supplemental forbearance agreement entered into by us
and our senior lenders on April 12, 2002, which was subsequently amended on May
31, 2002, we were required to make certain payments to the senior lenders in the
aggregate of approximately $716,000 at various dates between April 12, and May
30, 2002, including all of the costs and expenses pertaining to the senior
lenders' retention of a financial consultant to evaluate the operations,
financial records, business prospects, economic value and other aspects of the
Company. Payments made under the terms of this agreement were to be applied
first to amounts payable to the lenders' financial consultant, second to
interest that was due January 31, 2002, third to interest that was due February
28, 2002 and fourth to interest that was due April 1, 2002. We are also required
to maintain at all times a retainer with the lenders' financial consultant of
not less than $75,000. As of June 30, 2002 we made all required payments under
the supplemental forbearance agreements, including $500,000 of payments to the
lenders' financial consultant. In addition, in the event a termination of the
purchase agreement that was signed on June 14, 2002 between us and CEI
Acquisition Corp. were to occur, such an event would be considered a forbearance
default under the terms of the current forbearance agreement.
We have not made principal payments on our Master Credit Facility with GE
Capital Corporation since December of 2001 and, as of September 30, and December
31, 2001, we were not in compliance with the tangible net worth covenant under
the Master Credit Facility. On February 28, 2002 we, GE Capital Corp. and the
other participants in the Master Credit Facility agreed to and signed a
Forbearance and Modification Agreement which restructures the Master Credit
Facility by allowing the Company to defer principal payments until April 1, 2002
while continuing to make interest payments, and providing a waiver of the
September 30, and December 31, covenant violations. In accordance with the
agreement, we will be required to make a $500,000 principal payment upon the
proposed sale of Clean Earth if it takes place. The forbearance and Modification
Agreement was subsequently amended on May 30, 2002 and again on June 14, 2002
to, among other things, extend the forbearance period until the date that is
twenty four months following the date of the closing of the sale of Clean Earth,
provided that the transaction take place prior to August 30, 2002. However, if
18
we obtain a new revolving credit facility upon the closing of, or subsequent to,
the sale of Clean Earth from a lending group other than that which comprises the
lending group under our Senior Credit Facility, we must resume monthly principal
payments on a schedule sufficient to retire the facility by June 30, 2007. The
outstanding balance on the Master Credit Facility is approximately $11.4
million. The June 14, 2002 amendment also gives the lenders a first priority
lien on our option to purchase the land and buildings in Chicago, Illinois (the
"Chicago property") currently leased by us, and requires us to exercise this
purchase option no later than May 1, 2003.
In addition, we will be required to make a $2 million prepayment on the
Master Credit Facility upon the earlier of (i) our replacement of our existing
revolving credit facility with a new facility with availability of at least $10
million, unless the new facility is with our current senior lending group; (ii)
our exercising the purchase option on, and subsequently obtaining a mortgage
against, our Chicago property; or (iii) July 31, 2003. We will also be required
to pay a forbearance fee in connection with the Forbearance and Modification
Agreement in an amount equal to 2% of our obligations outstanding under the
Master Credit Facility as of the date of the proposed sale of Clean Earth. This
forbearance fee will be due upon the earlier of our obtaining a new revolving
credit facility from a lender other than that which exists under our current
revolving credit facility, or the closing of our financing of our Chicago
property. The Forbearance and Modification Agreement also re-sets the minimum
tangible net worth covenant commencing with the quarter in which the sale of
Clean Earth takes place and adds new covenants for minimum levels of earnings
before interest, taxes, depreciation and amortization ("EBITDA") commencing
March 31, 2002. It also requires us, under certain circumstances, to grant
additional security interest to GE Capital Corp. and to the other participants
in the Master Credit Facility for some of our property, plant and equipment that
these lenders currently have no security interest in. We were not in compliance
with the EBITDA covenant as of June 30, 2002, however the lenders under the
Master Credit Facility have not taken any action, including declaration of
default, against us with respect to this covenant violation.
The Master Credit Facility also contains a provision whereby an event which
would accelerate payment terms of our Senior Credit Facility would also
accelerate the payment terms of the Master Credit Facility to the same due date
as the Senior Credit Facility. The Senior Credit Facility has a similar
provision with respect to the Master Credit Facility. In addition, defaults
under these lending agreements cause defaults, pursuant to cross default
provisions, of some of our other agreements, including, but not limited to,
other lending agreements, debenture agreements, lease agreements and others.
We had been required to retire our $4.0 million convertible debenture issued
to Halifax Fund, L.P., ("Halifax") on or before July 1, 2002. On June 5, 2002 we
executed a letter agreement with Halifax to restructure all of the Halifax
debentures, subject to the completion of the sale of Clean Earth, whereby
Halifax will receive $2.5 million at the close of the sale of Clean Earth and
the debentures will be exchanged for two new subordinated debentures with an
aggregate principal amount of $8.4 million. Halifax has a second lien on
substantially all of our assets. See note 6 of the consolidated financial
statements for additional information on the restructuring of the Halifax
debentures.
On April 2, 2002 the maturity date of the $5.0 million convertible debenture
payable to Stout Partnership, our largest stockholder, was extended from July 1,
2002 to July 1, 2003 in exchange for increasing the interest rate on the
debenture from 11.5% to 16%. Several members of our board of directors and Mark
S. Alsentzer, our Chief Executive Officer, are affiliated with Stout
Partnership. On May 29, 2002 the Stout Partnership agreed to convert the entire
debenture plus accrued interest of approximately $183,000 into 19,935,808 shares
of the Company's common stock. The conversion price of $0.26 per share is in
accordance with the conversion formula as stated in the terms of the debenture,
and the transaction is subject to shareholder approval and the completion of the
sale of Clean Earth. This transaction is a requirement of our senior lenders as
a condition for extending additional credit to the Company after the sale of
Clean Earth is completed.
We currently do not have the financial resources to repay our debt
obligations under the Senior Credit Facility, Master Credit Facility and $4
million convertible debenture as they become due or in the event that current or
future events of default, including the failure to complete the sale of Clean
Earth, are not waived in writing and such debt is immediately due without
obtaining new debt and/or equity capital, negotiating different payment terms
and/or selling some of its assets. Our current and past failures to comply with
the terms of our Senior Credit Facility and Master Credit Facility, as well as
the related forbearance agreements and other debt obligations, and the material
financial obligations currently contained in our Senior Credit Facility and
Master Credit Facility have a material adverse effect upon our liquidity and
capital resources and raise substantial doubt about our ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
19
As discussed above, we have entered into an agreement to sell Clean Earth,
and expect to close this transaction prior to August 30, 2002. No assurances can
be given that we will be able to close this transaction or that we will be
successful in selling Clean Earth at all in the event this transaction is not
consummated. If we are successful in completing this sale transaction, we will
pay down a substantial portion, if not all, of our Senior Credit Facility,
restructure our Halifax debentures and have a new revolving line of credit to
provide working capital after the sale transaction is completed. While there can
be no assurances, we believe that this sale transaction, if consummated, would
allow us to reorganize our capital structure and cure our liquidity crisis.
If we are not successful in completing this sale transaction, we will be
required to seek other alternatives for refinancing our capital structure which
could include raising additional equity, selling some of our assets or
restructuring the Senior Credit Facility. There can be no assurances that this
course of action will be successful. Our failure to refinance our capital
structure would require us to significantly curtail its operations. In this
event, we may be forced to seek protection under the Bankruptcy Code or we may
be forced into a bankruptcy proceeding by these lenders.
Cash and cash equivalents totaled $1,541,000 at June 30, 2002, an increase
of $629,000 from the $912,000 at December 31, 2001. Cash provided by operating
activities amounted to $1,720,000 for the first six months of 2002, as compared
to cash used in operating activities of $696,000 for the comparable period in
2001. The following table summarizes the different components of cash provided
by operating activities for the six months ended June 30, 2002 and 2001.
Dollar amounts in thousands:
2002 2001
------- -------
Net loss $(6,485) $(4,901)
Non-cash charges 6,304 5,110
Decrease (Increase) in accounts receivable 4,036 (2,187)
Decrease in inventories 613 2,004
Increase (Decrease) in accounts payable (2,354) 2,264
Changes in other working capital and other assets (394) (2,986)
------- -------
Net cash provided by operating activities $ 1,720 $ (696)
======= =======
Non cash charges consist primarily of depreciation expense, amortization of
intangibles, deferred income tax benefit, amortization of deferred financing
costs and discounts on convertible debentures and beneficial conversion features
of convertible debentures.
Cash used in investing activities was $1,280,000 in the first six months of
2002, an decrease of $198,000 from the prior year, as a $225,000 increase in
capital expenditures was more than offset by the disposal of certain property,
plant and equipment. Capital expenditures in the first six months of 2002
amounted to $1,798,000. We expect to incur approximately $500,000 in capital
expenditures for the remainder of 2002
Cash provided by financing activities totaled $189,000 for the six months
ending June 30, 2002, as compared to $491,000 during the comparable period in
2001. In the first six months of 2002 we borrowed $0.5 million on our Senior
Credit Facility revolving credit line and raised approximately $0.4 million
through a common stock private placement, while making principal payments on
notes payable of approximately $0.7 million. During the first six months of 2001
we raised approximately $5 million through the issuance of convertible
debentures and preferred stock, mostly offset by approximately $4.5 million of
principal payments on long term debt, including $2.5 million of principal
payments on our Senior Credit Facility term loan.
At June 30, 2002, we had a working capital deficit of $55,697,000, compared
to $60,525,000 at December 31, 2001. The change is due primarily to the
extension of the maturity date of the Stout Partnership convertible debenture
from July 1, 2002 to July 1, 2003. In accordance with its terms, this debenture
will be converted into common stock at a conversion price of $0.26 per share
during the third quarter of 2002, subject to shareholder approval at the Special
Meeting of Stockholders on August 27, 2002. The Stout Partnership is our largest
shareholder. Several members of our Board of Directors and our Chief Executive
Officer are affiliated with the Stout Partnership.
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting policies that we have identified as critical to our business
operations and to an understanding of our results of operations are described in
detail in our Annual Report on Form 10-K for the fiscal year ended December 31,
2001. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United
States of America, with no need for management's judgement in their application.
In other cases, preparation of our unaudited condensed consolidated financial
statements for interim periods requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, 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. There
can be no assurance that the actual results will not differ from those
estimates.
INTERIM RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Net sales in the second quarter of 2002 were $35,383,000, as compared to
$50,750,000 in the second quarter of 2001, a decrease of $15,367,000, or 30.2%.
Most of the decrease was due to the decline in revenues from our Environmental
Recycling division. Environmental Recycling revenues for the quarter of
$20,459,000 were $13,738,000, or 40.2%, lower than in the prior year, as our
current liquidity constraints delayed the start of certain projects, due to an
inability to pay vendors and obtain performance bonds.
Plastic Lumber division revenues decreased by 9.8% in the quarter to
$14,924,000. Our decision to discontinue resin processing for outside customers,
which has historically been a very low margin business, resulted in lower
revenues of approximately $1.5 million. In addition, sales of our decking
products declined by approximately $1.4 million. These decreases were partially
offset by increased sales of our OEM and transportation specialty products, as
well as our slipsheet packaging products.
Gross profit in the second quarter of 2002 decreased by 31.2% to $6,049,000,
as compared to $8,796,000 in the second quarter of 2001, mainly due to lower
revenues at the Environmental Recycling division. Gross profit as a percent of
revenues at the Environmental Recycling division decreased from 18.0% in 2001 to
15.5% in 2002, as our liquidity constraints have delayed the commencement of
some of our dredging projects and have also required us to purchase materials
and supplies on less than optimal terms. Gross profit as a percent of revenues
at the Plastic Lumber division increased from 15.7% in 2001 to 19.4% in 2002,
mainly due to the completion of the division's restructuring plan which has
improved our direct manufacturing margins and lowered our fixed manufacturing
costs.
Selling, general and administrative expenses ("SG&A), increased by to
$6,380,000 in the second quarter of 2002 as compared to $6,060,000 in 2001 as
reduced expenses at both operating divisions were more than offset by increased
corporate expenses. During the second quarter of 2002 we incurred approximately
$396,000 in connection with the sale of Clean Earth, primarily legal fees, and
incurred approximately $646,000 in financial consulting and legal fees that were
directly related to our distressed financial situation. Neither of these costs
were present in the comparable period of a year ago. Approximately two thirds of
the aforementioned financial consulting and legal fees were required to be paid
by us for services performed on behalf of our senior lenders under the terms of
the series of forbearance agreements we entered into with them. SG&A was
favorably impacted by our adoption of Statement of Financial Accounting Standard
No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002. In
connection with the adoption of this standard, we ceased amortization of
goodwill effective January 1, 2002. The second quarter of 2001 included $228,000
of goodwill amortization expense. The elimination of goodwill amortization in
2002 resulted in reduced SG&A expense of approximately $114,000 for the second
quarter of 2002.
The second quarter of 2002 produced an operating loss of $331,000, as
compared to an operating income of $2,736,000 for the same quarter in 2001. The
change is due mainly to the decline in the Environmental Recycling division's
operating performance and to higher corporate SG&A expenses. The Environmental
Recycling division had operating income of $1,016,000 in 2002, as compared to
$3,742,000 in 2001. Operating income at the Plastic Lumber division was $945,000
in 2002, compared to an operating loss of $70,000 in 2001.
Interest expense increased by $629,000 from the second quarter of 2001,
mainly due to increased amortization of deferred financing costs and debt
discounts as compared to 2001.
21
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net sales in the first six months of 2002 were $72,271,000, as compared to
$89,387,000 in the first six months of 2001, a decrease of $17,116,000, or
19.1%. Most of the decrease was due to the decline in revenues from our
Environmental Recycling division. Environmental Recycling revenues for the first
six months of 2002 of $43,143,000 were $14,035,000, or 24.5%, lower than in the
prior year, as our current liquidity constraints delayed the start of certain
dreding and construction projects.
Plastic Lumber division revenues decreased by 9.6% in 2002 to $29,128,000.
Our decision to discontinue resin processing for outside customers, which has
historically been a very low margin business, resulted in lower revenues of
approximately $3.5 million for the first six months of 2002 as compared to the
prior year. This amount was partially offset by increased sales of our OEM
specialty products and, to a lesser extent, higher sales of composite decking
products.
Despite lower revenues in both divisions, gross profit in the first six
months of 2002 increased by 7.8% to $12,478,000, as compared to $11,578,000 in
the first six months of 2001. The increase was due to the completion of the
restructuring plan at the Plastic Lumber division, which resulted in improved
gross profit margins a percent of net revenues. Gross profit margin as a percent
of revenues in the Plastic lumber division increased in the first six months of
2002 to 20.8%, as compared to 10.3% in the six months of 2001, resulting in an
increase in gross profit of $2,722,000. As a result of the restructuring at the
Plastic Lumber division, the division currently operates in three facilities,
whereas during the first six months of 2001 the division operated in nine
facilities. In addition to a significant reduction in fixed manufacturing costs,
the restructuring also resulted in more efficient and uniform manufacturing
processes and decreased variable manufacturing costs. The Environmental
Recycling division's gross profit decreased by $1,822,000 due to lower revenues.
Gross profit margin as a percent of revenue increased from 14.4% in 2001 to
14.9% in 2002, mainly due to improved margins at the division's fixed base
treatment facilities.
Excluding a $182,000 restructuring charge at the Plastic Lumber division in
the first quarter of 2001, SG&A increased by $531,000 to $12,306,000, as reduced
expenses at both operating divisions were more than offset by increased
corporate expenses. The increase in corporate expenses is due primarily to legal
fees and proxy solicitation, printing and mailing costs in connection with the
proposed sale of the Environmental Recycling division. These costs totaled
approximately $1,000,000 in the first six months of 2002. In addition, we
incurred approximately $774,000 in financial consulting and legal fees that were
directly related to our financial situation. Neither of these costs were present
in 2001. Most of the aforementioned financial consulting and legal fees were
required to be paid by us for services performed on behalf of our senior lenders
under the terms of the series of forbearance agreements we entered into with
them. SG&A was also favorably impacted by our adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets", on January
1, 2002. In connection with the adoption of this standard, we ceased
amortization of goodwill effective January 1, 2002. The first six months of 2001
included $535,000 of goodwill amortization expense. The elimination of goodwill
amortization in 2002 resulted in reduced SG&A expense of approximately $229,000
for the first six months of 2002.
The first six months of 2002 produced operating income of $172,000, as
compared to an operating loss of $379,000 for the same period in 2001. The
Environmental Recycling division had operating income of $2,170,000 in 2002,
compared to $3,463,000 in 2001, with the decrease being attributable to lower
revenues. The decrease in operating income at the Environmental Recycling
division and increased corporate SG&A expenses were largely offset by the
improved operating performance at the Plastic Lumber division. Operating income
at the Plastic Lumber division was $1,755,000 in 2002, compared to an operating
loss of $2,022,000 in 2001, with the improvement attributable to a higher gross
profit margin and lower marketing expenses.
Interest expense increased by $1,441,000 from the first six months of 2001,
mainly due to increased amortization of deferred financing costs and debt
discounts as compared to 2001, and to penalties of $690,000 we accrued in 2002
connection with our failure to file a registration statement for some of the
holders of our common stock and warrants.
SEASONALITY
We normally experience a seasonal slow down during the winter months because
our environmental operations are located in the Northeastern United States where
adverse weather and normal ground freezing can impact our performance.
Additionally, sales of certain plastic lumber products tend to slow
significantly in the winter months.
22
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.
The Company adopted the provisions of SFAS No. 141 during 2001 and initially
adopted the provisions of SFAS No. 142 on January 1, 2002. Adoption of SFAS No.
141 and SFAS No. 142 did not have a material effect upon our results of
operations or financial condition.
Also, in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". That standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002, with earlier
adoption permitted. The Company is currently evaluating the effect that the
adoption of SFAS No. 143 may have on its consolidated results of operations and
financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Adoption of SFAS No. 144 on January
1, 2002 had no material effect on the Company's consolidated results of
operations and financial position.
NASDAQ DELISTING NOTICE
Our common stock currently trades on the Nasdaq SmallCap Market under the
trading symbol "USPL." In May 2002, we were notified by Nasdaq that we did not
meet the Nasdaq maintenance criteria for continued listing on the Nasdaq Natinal
Market due to the decline in our stock price and that our common stock would be
delisted on May 24, 2002. As a result, we filed an application with Nasdaq to
transfer our securities to The Nasdaq SmallCap Market, and the initiation of the
delisting proceedings was stayed pending Nasdaq's review of our application. On
June 13, 2002, we were notified via telephone by our Nasdaq analyst that our
application for listing on the Nasdaq SmallCap Market was approved, subject to
receipt of payment of the applicable fees, which was made accordingly. As a
result of our listing on the Nasdaq SmallCap Market, we have until August 13,
2002 to regain compliance with the $1.00 bid price requirement. We may also be
eligible for an additional 180 day grace period if we meet certain requirements.
In addition, assuming we are not delisted on August 13, 2002 and are provided
with the 180 day grace period, we can transfer back to the Nasdaq National
Market if our bid price is $1.00 per share for 30 consecutive trading days by
February 10, 2003 and we meet the other criteria for continued listing on the
Nasdaq National Market. No assurance can be given as to whether we will be
successful in maintaining our Nasdaq SmallCap listing or transferring back to
the Nasdaq National Market.
23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion of the Company's market risks is contained in Part I Item 7A
"Quantitative and Qualitative Disclosures About Market Risks" in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001. There
have been no significant developments with respect to exposure to market risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 28, 2002 a judgment in the amount of $1,760,000 plus
administrative fees, arbitrators' compensation and interest was awarded to
Southern Wood Services due to the Company's breach of a purchase contract. As a
result, the Company accrued $1,844,000 at December 31, 2001 in connection with
this ruling. On June 18, 2002 the Company entered into a settlement agreement
with Southern Wood Services whereby the Company agreed to pay $1,590,000 payable
in 53 equal monthly payments of $30,000, commencing with the date of the
settlement agreement.
In December 1998, the Company purchased Clean Earth of North Jersey ("CENJ",
then known as S&W Waste, Inc.) in a stock purchase transaction. Pursuant to such
purchase, the Company could be responsible for liabilities resulting from
matters wherein CENJ has been named as a potentially responsible party ("PRP")
in matters involving the possible disposal of hazardous waste at certain
disposal sites. At June 30, 2002 the Company has accrued approximately $324,000
for estimated liabilities related to these matters. The Company believes the
accrual is sufficient to cover the aggregate liability that may be incurred in
these matters; however, there can be no assurances that the accrual will be
sufficient.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 2002, Halifax Fund, L.P. converted $349,000 of its 5%
convertible subordinated debenture due February 2, 2005 and approximately $2,000
of unpaid interest into 1,001,923 shares of common stock at a conversion price
of $0.35 per share.
On March 1, 2002 all 1,187,285 shares of outstanding Series D Preferred
Stock was converted into an equal number of shares of common stock.
On March 31, 2002 all 1,714,285 shares of outstanding Series E Preferred
Stock was converted into an equal number of shares of common stock.
On February 19, 2002, the Company issued 800,000 shares of common stock at a
purchase price of $0.50 per share. This private placement transaction was not
registered under the Securities and Exchange Act of 1933 (the "Act") in reliance
upon the exemption from registration in Section 4(2) of the Act, as a
transaction not involving any public offering. Net proceeds after issuance costs
of $376,000 were used for general corporate purposes.
During the first six months of 2002 4,400 shares of common stock were issued
as annual compensation to the Company's non-employee directors, and 18,000
shares were issued to settle employment related litigation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Events of default are discussed in Notes 3 and 5 to the Condensed Unaudited
Consolidated Financial Statements.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 19, 2002 the shareholders approved the sale of the Company's
wholly-owned subsidiary, Clean Earth Inc., under the terms described in the
Purchase Agreement between the Company and New CEI, Inc. The sale was not
completed due to the inability of New CEI, Inc. to obtain the necessary
financing. On August 27, 2002 a Special Meeting of Stockholders will be held to
ratify the purchase agreement between the Company and CEI Holding Corp. to sell
Clean Earth, Inc., and the conversion of the convertible subordinated debenture
held by the Stout Partnership into 19,935,808 shares of common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
On April 23, 2002 the Company filed a Report on Form 8-K to report
that the Company had entered into a supplemental forbearance agreement
with its senior lenders.
On April 29, 2002 the Company filed a Report on Form 8-K to report
that the Company terminated the engagement with KPMG LLP as its
principal independent accountant and had engaged BDO Seidman, LLP as its
new principal independent accountant.
On June 21, 2002 the Company filed a Report on Form 8-K to report
that the Company had executed an amended purchase agreement to sell its
Clean Earth subsidiary, had signed a second supplemental forbearance
agreement with the lenders under its Senior Credit Facility, and signed
an amendment to the Forbearance and Modification Agreement with the
lenders under its Master Credit Facility, reached an agreement with the
Stout Partnership on the conversion of its subordinated convertible
debenture into shares of the Company's common stock and had reached an
agreement with Halifax Fund, L.P. on restructuring their debentures.
On July 25, 2002 the Company filed a Report on Form 8-K to report
that the Company signed a second amendment to the Forbearance and
Modification Agreement with the lenders under its Master Credit
Facility, and that to refile its audited financial statements as of
December 31, 2001 to include supplemental transition disclosures
required by Statement of Financial Accounting Standard No. 142.
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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.
August 14, 2002 /s/ MICHAEL D. SCHMIDT
- --------------- --------------------------------------
Date Michael D. Schmidt,
Vice President of Finance and Treasurer
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