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UNITED STATES
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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 YES [ ] NO [X]
The number of shares outstanding of the registrant's common stock as of June
30, 2003 is 64,479,216 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, 2003 (unaudited)
and December 31, 2002............................................ 2
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2003 and 2002 (unaudited)............ 3
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2003 and 2002 (unaudited).............. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 (unaudited).............. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 17
Item 2. Changes in Securities and Use of Proceeds................. 18
Item 3. Defaults Upon Senior Securities........................... 18
Item 4. Submission of Matters to a Vote of Security Holders....... 18
Item 6. Exhibits and Reports on Form 8-K.......................... 18
SIGNATURES......................................................... 19
Section 302 Certifications 20
Section 906 Certifications 22
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, 2003 and December 31, 2002
Dollar amounts in thousands except share data
Unaudited
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 105 $ 563
Accounts receivable, net of allowance for doubtful accounts of $3,546 and
$3,725, respectively 5,534 4,908
Inventories 4,936 5,107
Prepaid insurance 692 1,945
Other current assets 1,110 760
--------- ---------
Total current assets 12,377 13,283
Property, plant and equipment (net) 53,362 57,048
Assets held for sale 638 638
Goodwill (net) 12,474 12,650
Other intangibles (net) 507 529
Other assets 1,270 1,902
--------- ---------
Total assets $ 80,628 $ 86,050
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,504 $ 8,593
Notes and capital leases payable, current portion 17,527 6,386
Accrued expenses 4,270 6,107
Restructuring accrual 23 64
Other current liabilities 1,258 2,091
--------- ---------
Total current liabilities 29,582 23,241
Notes and capital leases payable, net of current portion 2,253 13,385
Other liabilities 5,376 6,082
Subordinated notes and convertible debentures 8,572 8,432
--------- ---------
Total liabilities 45,783 51,140
--------- ---------
STOCKHOLDERS' EQUITY
Common stock par value $.0001, authorized 100,000,000 shares;
issued and outstanding 64,479,216 and 64,427,416 shares, respectively 6 6
Additional paid-in capital 111,925 111,924
Accumulated deficit (77,086) (77,020)
--------- ---------
Total stockholders' equity 34,845 34,910
--------- ---------
Total liabilities and stockholders' equity $ 80,628 $ 86,050
========= =========
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, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Sales, net $ 9,708 $ 14,924
Cost of goods sold 8,897 12,036
------------ ------------
Gross profit 811 2,888
Selling, general and administrative expenses 2,722 3,840
------------ ------------
Operating loss (1,911) (952)
Interest and other (expense) income (17) 114
Gain (loss) on sale of assets 4,326 (3)
Interest expense 531 3,253
------------ ------------
Income (loss) from continuing operations before income taxes 1,867 (4,094)
Income tax provision -- --
------------ ------------
Income (loss) from continuing operations 1,867 (4,094)
Discontinued Operations:
Income from operations of discontinued environmental recycling segment 350 419
------------ ------------
Net income (loss) $ 2,217 $ (3,675)
============ ============
Net income (loss) per common share - Basic:
Income (loss) from continuing operations $ 0.03 $ (0.09)
Income from discontinued operations $ 0.00 $ 0.01
------------ ------------
Net income (loss) per common share $ 0.03 $ (0.08)
============ ============
Net loss per common share - Diluted:
Income (loss) from continuing operations $ 0.03 $ (0.09)
Income from discontinued operations $ 0.00 $ 0.01
------------ ------------
Net income (loss) per common share $ 0.03 $ (0.08)
============ ============
Weighted average common shares outstanding:
Basic 64,451,743 44,322,988
Diluted 67,713,264 44,322,988
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, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
Sales, net $ 20,924 $ 29,128
Cost of goods sold 19,424 23,083
------------ ------------
Gross profit 1,500 6,045
Selling, general and administrative expenses 5,195 7,043
------------ ------------
Operating loss (3,695) (998)
Interest and other income (14) 180
Gain (loss) on sale of assets 4,410 (3)
Interest expense 1,117 6,567
------------ ------------
Loss from continuing operations before income taxes (416) (7,388)
Income tax provision -- --
------------ ------------
Loss from continuing operations (416) (7,388)
Discontinued Operations:
Income from operations of discontinued environmental recycling segment 350 903
------------ ------------
Net loss (66) (6,485)
Preferred stock dividend earned -- 177
------------ ------------
Net loss attributable to common stockholders $ (66) $ (6,662)
============ ============
Net loss per common share - Basic:
Loss from continuing operations $ (0.01) $ (0.18)
Income from discontinued operations $ 0.01 $ 0.02
------------ ------------
Net loss per common share $ (0.00) $ (0.16)
============ ============
Net loss per common share - Diluted:
Loss from continuing operations $ (0.01) $ (0.18)
Income from discontinued operations $ 0.01 $ 0.02
------------ ------------
Net loss per common share $ (0.00) $ (0.16)
============ ============
Weighted average common shares outstanding:
Basic 64,440,273 42,684,834
Diluted 64,440,273 42,684,834
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, 2003 and 2002
Dollar amounts in thousands except share data
(Unaudited)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (66) $ (6,485)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,706 1,910
Amortization 35 34
Income from discontinued operations (350) (903)
Amortization of deferred financing costs 132 1,661
Reduction of discounts on convertible subordinated debentures -- 525
Interest expense paid in kind 440 130
Beneficial conversion feature of convertible subordinated debentures -- 250
(Gain) loss on sale of business (4,299) --
(Gain) loss on sale of property, plant & equipment (112) (12)
Changes in operating assets and liabilities, net of divestitures:
Accounts receivable (1,413) (2,156)
Inventories (310) 429
Prepaid expenses and other current assets 903 127
Other assets (13) (273)
Accounts payable (2,089) 2,179
Other liabilities (1,580) (946)
Accrued expenses (2,120) (795)
----------- -----------
Net cash used in operating activities - continuing operations (9,136) (4,325)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (367) (1,656)
Proceeds from the sale of business 8,242
Divestitures of property, plant and equipment 235 280
----------- -----------
Net cash provided by (used in) investing activities - continuing operations 8,110 (1,376)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 1 376
Net borrowings on lines of credit 1,612 500
Payments of notes payable (1,895) (124)
----------- -----------
Net cash (used in) provided by financing activities - continuing operations (282) 752
----------- -----------
Net change in cash and cash equivalents - continuing operations (1,308) (4,949)
Cash from discontinued operations 850 5,578
Cash and cash equivalents, beginning of period, including cash of discontinued operations 563 912
----------- -----------
Cash and cash equivalents, end of period $ 105 $ 1,541
=========== ===========
Supplemental disclosure of cash flow information - continuing operations:
Cash paid during the period for:
Interest $ 462 $ 670
Income taxes $ 9 $ 4
Number of shares issued during the period for non-cash transactions:
Compensation - employees and directors 1,800 4,400
Conversion of debenture and preferred stock -- 3,903,494
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 alternative wood and other specialty
products made primarily from recycled plastic. Prior to September 9, 2002, the
Company also provided environmental remediation services, including recycling of
soils that had been exposed to hydrocarbons and the beneficial reuse of dredge
materials. The Company's 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
were 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 condensed 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, 2002. 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 2002 have been reclassified to conform to
the 2003 presentation.
The Company completed the sale of its environmental recycling and
remediation business on September 9, 2002. The results of operations for the
three and six months ended June 30, 2002 and the statement of cash flows for the
six months ended June 30, 2002 presented in this Form 10-Q have been restated to
reflect the environmental recycling and remediation business as a discontinued
operation.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and ability to meet its financial obligations and
maintain its current operations in 2003 and beyond will be dependent on its
ability to meet the payment obligations under and maintain compliance with the
financial covenants in its various debt agreements and provide financing for
working capital. The Company's senior secured credit facility with Guaranty
Business Credit Corporation (the "GBCC Credit Facility") and its Master Credit
Facility equipment term loans both contain significant financial covenants,
including but not limited to the requirement to achieve specified levels of
earnings before interest, taxes, depreciation and amortization ("EBITDA"), which
is measured periodically throughout the term of these agreements. The Company
did not meet its EBITDA financial covenant requirements under the GBCC Credit
Facility for each of the first three months of 2003. On May 13, 2003 the GBCC
Credit Facility was amended to waive all covenant violations as of and prior to
March 31, 2003, and to reset the parameters of some of the financial covenants
for the remainder of 2003. The amended terms of the GBCC Credit Facility
continued to require that financial covenants be measured on a monthly basis
beginning in May 2003. The Company was not in compliance with the financial
covenants, as amended, for the month of May 2003 and, as previously reported on
Form 8-K, on July 10, 2003 received a default notice from GBCC. On July 25, 2003
the Company entered into a second amendment to the GBCC Credit Facility that
waived all existing defaults under the GBCC Credit Facility. Under the terms of
the second amendment the Company is required to provide GBCC with an executed
letter of intent for the sale of certain assets of the Company prior to August
31, 2003. The proceeds of such a sale, if it takes place, would be used to pay
off the entire outstanding balance due under the GBCC Credit Facility and the
facility would be terminated upon payment in full of all of the obligations
payable to GBCC. The amendment also requires that all amounts outstanding under
the GBCC Credit Facility be paid in full prior to October 31, 2003. The
outstanding balance under the GBCC Credit Facility as of June 30, 2003 is
approximately $3,809,000.
6
In addition, the Company was not in compliance with the EBITDA covenant
contained in its Master Credit Facility during the three and six months ending
June 30, 2003. Although the Company has not obtained a waiver of for these
covenant violations, as of August 14, 2003 neither GE Capital Corporation nor
any of the other lenders that participate in the Master Credit Facility (the "GE
Lending Group") have taken any action against the Company. The outstanding
balance of the Master Credit Facility is approximately $10,718,000 as of June
30, 2003, and monthly principal payments of approximately $37,500 resume in July
of 2003.
The Company has a history of operating losses and past inability to comply
with similar financial covenant requirements. In the absence of a written
waiver, any failure to comply with the covenants under the Company's GBCC Credit
Facility and Master Credit Facility in 2003 could lead to a demand for immediate
repayment of the outstanding balance due under the facility. Such an occurrence
would have a material adverse effect upon the Company as it does not have the
resources to repay these amounts should they become immediately due without
obtaining additional debt and/or equity financing or by selling some of its
assets.
At June 30, 2003 the Company has a working capital deficit and accumulated
deficit of $17.2 million and $77.1 million respectively. Capital requirements
relating to the implementation of the Company's business plan have been and will
continue to be significant. As a result of the Company's past financial
performance, and because substantially all of its assets have been pledged as
collateral under its current debt agreements, the Company may not be able to
obtain additional external debt and/or equity financing to fund its operations
in 2003 and beyond should it become necessary, which raises substantial doubt
about the Company's ability to continue as a going concern.
On May 13, 2003 the Company completed the sale of its cornerboard operation
to a unit of Illinois Tool Works, Inc. (see note 11). The net proceeds of
approximately $8.2 million from this transaction were used for general corporate
purposes and to pay down certain indebtedness. The Company is continuing to
explore the potential sale of non-strategic assets and other alternatives to
meet its financial obligations.
3. STOCK BASED COMPENSATION
The Company has granted stock options to key employees and directors under
previously approved stock option plans. The Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." There is no
stock-based employee compensation cost reflected in net income as no grants were
issued during the six months ended June 30, 2003 and substantially all options
previously granted under those plans had an exercise price greater than or equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and income (loss)
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
In Thousands 2003 2002 2003 2002
------- -------- -------- -------
Net income (loss), as reported $ 2,217 $(3,675) $ (66) $(6,485)
Net income (loss) attributable to common
Stockholders, as reported 2,217 (3,675) (66) (6,662)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 24 95 64 207
------- ------- ------- -------
Pro forma net loss $ 2,193 $(3,770) $ (130) $(6,692)
Pro forma net loss attributable to common
stockholders $ 2,193 $(3,770) $ (130) $(6,869)
Basic and diluted income (loss) per share
as reported $ 0.03 $ (.08) $ (.00) $ (0.16)
Basic and diluted loss per share - pro
forma $ 0.03 $ (.09) $ (.00) $ (0.16)
4. EARNINGS PER SHARE
Basic income or loss per share is computed by dividing net income or
loss attributable
7
to common stockholders by the weighted average number of shares outstanding
during the year. Diluted income or loss per share attributable to common
stockholders further considers the impact of dilutive common stock equivalents.
Diluted loss per share has not been presented separately for the six months
ended June 30, 2003 and 2002 or for the for the three months ended June 30, 2002
because the effect of the additional shares which would be issued assuming
conversion of the convertible debentures, convertible preferred stock and the
outstanding common stock options and warrants are anti-dilutive for the
aforementioned periods.
The following is a reconciliation of the numerator (net earnings) and
the denominator (common shares outstanding) of the basic and diluted per share
computations for the three months ending June 30, 2003 (in thousands):
Net Earnings Shares Amount
------------ ------ ------
BASIC EPS
Net earnings available to common
shareholders $ 2,217 64,451,743 $ .03
EFFECT OF DILUTIVE SECURITIES
Stock options -- 189,142 --
EFFECT OF DILUTIVE SECURITIES -
CONVERTIBLE SUBORDINATED DEBENTURE 35 3,072,379
DILUTED EPS $ 2,252 67,713,264 $ .03
5. NOTES AND CAPITAL LEASES PAYABLE
The Company was not in compliance with the financial covenants contained in
the GBCC Credit Facility during the first three months of 2003 and in May of
2003. On May 13, 2003 the GBCC Credit Facility was amended whereby all covenant
violations as of March 31, 2003 were waived and the financial covenant terms
were adjusted through December of 2003. The terms of the amendment also include
an amendment fee of $63,000 to be paid over a twelve month period, consent by
the lender for the asset sale described in note 11, a prepayment of $750,000 on
the GBCC term loan using a portion of the proceeds from the sale transaction as
described in note 10 and additional limitations on the availability of the GBCC
revolving credit line. The Company was not in compliance with the financial
covenants, as amended for the month of May 2003 and June 2003. On July 25, 2003
the Company entered into a second amendment to the GBCC Credit Facility that
waived all existing defaults, rescinded the tangible net worth and EBITDA
covenants retroactive to May 1, 2003 and changed the maturity date of the entire
credit facility to October 31, 2003. Under the terms of the second amendment we
are required to provide GBCC with an executed letter of intent for the sale of
certain assets of the Company prior to August 31, 2003. The proceeds of such a
sale, if it takes place, would be used to pay off the entire outstanding balance
due under the GBCC Credit Facility and the facility would be terminated upon
payment in full of all of the obligations payable to GBCC. The current
outstanding balance under the GBCC Credit Facility as of June 30, 2003 is
approximately $3,809,000.
The Company was not in compliance with the EBITDA covenant contained in its
Master Credit Facility during the three and six months ending June 30, 2003. As
of August 14, 2003 neither GE Capital Corporation or any of the other lenders
that participate in the Master Credit Facility (the "GE Lending Group") have
taken any action against the Company. With the absence of a waiver for these
covenant violations, the GE Lending Group can demand immediate repayment from
the Company of the outstanding balance of the Master Credit Facility, which is
approximately $10,718,000 as of June 30, 2003. While the Company does not
believe the GE Lending Group is likely to take such action, the Company
currently does not have the resources to pay this obligation if it becomes
currently due. On May 13, 2003 a principal payment of approximately $631,000 was
made on the Master Credit Facility using some of the proceeds from the sale
transaction as described in note 11.
In addition, the facility as currently amended gives the GE Lending Group 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 required the Company to exercise this purchase option no later than May 1,
2003. This option was not exercised prior to May 1, 2003. As a result, the GE
Lending Group currently has the right to exercise this purchase option on its
own behalf.
Notes payable and capital leases consist of the following (in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Term loan under the GBCC Credit Facility $ 2,036 $ 3,000
Revolving credit line under the GBCC Credit Facility 1,773 161
Quakertown notes 1,000 1,000
Equipment term loans under the Master Credit Facility 10,718 11,356
Capital lease payable on the Chicago Property 3,000 3,000
Other notes payable 1,253 1,254
-------- --------
Total notes payable and capital leases 19,780 19,771
Less current portion: (17,527) (6,386)
-------- --------
$ 2,253 $ 13,385
======== ========
8
6. SUBORDINATED NOTES AND CONVERTIBLE DEBENTURES
On September 24, 2002 the Company entered into an Exchange and Repurchase
Agreement with Halifax Fund, L.P. ("Halifax") whereby all of the Company's
previously existing obligations to Halifax, including but not limited to
convertible debentures and related accrued interest, penalties and default
charges were exchanged for $2.5 million in cash, a 10% convertible subordinated
debenture in the principal amount of $2,832,000 and a 10% subordinated note with
a principal amount of $5.6 million. Interest on the subordinated note and
convertible subordinated debenture is payable in kind for the first two years of
each instrument. During the first six months of 2003 approximately $440,000 of
interest expense in kind was added to the face value of the instruments and the
Company paid down $300,000 of the convertible subordinated debenture using the
proceeds received from the sale transaction described in note 10. The face value
of the subordinated note and convertible debenture was $8,572,000 at June 30,
2003.
The exchange transaction that took place in 2002 was accounted for as a
modification of debt terms under a troubled debt restructuring and approximately
$1,334,000 of default charges, penalties, preferred dividends in arrears and
accrued interest from the predecessor debt instruments are reflected in the
Company's balance sheet in other non-current liabilities at June 30, 2003. This
amount is being amortized as a reduction of interest expense over the life of
the subordinated note and convertible debenture.
7. INTANGIBLE ASSETS
The following table summarizes the carrying value of the Company's
amortizable intangible assets as of June 30, 2003 and December 31, 2002:
(Dollar amounts in thousands:)
2003 2002
----- -----
Patents $ 824 $ 811
Accumulated amortization (317) (282)
----- -----
Carrying amounts, net $ 507 $ 529
===== =====
During the six months ended June 30, 2003, aggregate amortization expense
from continuing operations for the Company's intangible assets was approximately
$35,000. As of June 30, 2003, estimated aggregate annual amortization expense
for the Company's intangible assets are as follows (in thousands):
Year Ending Amounts
- ----------- ------------
2003 $ 35
2004 70
2005 70
2006 70
2007 70
2008 70
------------
$ 385
============
8. COMMITMENTS AND CONTINGENCIES
CHICAGO PURCHASE OPTION
In January of 1999 the Company acquired Eaglebrook Plastics, Inc. and
Eaglebrook Products, Inc. (collectively "Eaglebrook"), a plastic recycling and
plastic lumber manufacturing company located in Chicago, IL. In accordance with
the terms of the acquisition agreement, the Company entered into a ten year
lease on the Chicago Property, which now encompasses approximately 400,000
square feet of manufacturing and office space and is the Company's primary
manufacturing location. The Company has an option to purchase the Chicago
Property for $3 million at anytime prior to January 28, 2004, at which time the
option expires, by providing the property's owner with 60 days notice of the
Company's intent to exercise the option. At the date that Eaglebrook was
acquired, the then-appraised value of the
9
Chicago Property of approximately $11.6 million was recorded in Property, Plant
and Equipment on the Company's balance sheet and the $3 million purchase option
was recorded as a capital lease obligation.
At June 30, 2003 the net book value of the Chicago Property, after giving
effect to additional improvements and construction on the leased property
undertaken by the Company subsequent to the Eaglebrook acquisition, was
approximately $13.5 million. While the Company intends to exercise the purchase
option on the Chicago Property prior to the option's expiration date, there can
be no assurance that the Company will have access to adequate funds necessary to
do so. If the Company does not exercise the purchase option prior to January 1,
2004, the Company may be required to record an impairment charge for the net
book value of the land and buildings originally acquired, and adjust the
depreciable life of the building improvements to the length of the remaining
lease term.
LEGAL PROCEEDINGS
On June 11, 2003 the Company and the purchaser of Clean Earth settled their
dispute regarding the final audited closing date balance sheet in which the
purchaser and Clean Earth had originally sought an adjustment to the purchase
price in the amount of approximately $4,000,000 due to various closing
adjustments to the final audited balance sheet. Under the terms of the
settlement agreement between the Company and the purchaser and Clean Earth (i)
Clean Earth paid $850,000 to the Company on June 11, 2003, (ii) Clean Earth will
pay to or on behalf of the Company an additional $650,000 pursuant to the terms
of the settlement agreement, (iii) the 5% $3.5 million Junior Promissory Note
that the Company received as part of the purchase price from the sale of Clean
Earth was cancelled and (iv) the $1 million portion of the purchase price that
was held in escrow was returned to the purchaser. As a result of the settlement
agreement, there will be no additional purchase price adjustments with respect
to the final audited closing date balance sheet. The Company also agreed to make
a joint election with Clean Earth under Section 338 of the U.S. Federal Income
Tax Code regarding the tax treatment of the Clean Earth sale transaction.
The Company had previously assigned a value of $500,000 to the Junior
Promissory Note received from the sale of Clean Earth and had reflected that
amount on its balance sheet within other assets. As a result of the $850,000
cash payment received in the settlement of the dispute, the Company recorded
$350,000 as income from discontinued operations in the three and six months
ending June 30, 2003. The additional $650,000 to be paid to the Company will be
recorded when received.
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, 2003, the Company has accrued approximately $217,000
for estimated liabilities related to these matters. While the Company believes
this accrual is sufficient to cover the aggregate liability that may be incurred
in these matters, there can be no assurances that the accrual will be
sufficient.
On April 15, 2002, the Company filed a Complaint, entitled Integrated
Technical Services, Inc. v Pennsylvania Department of Environmental Protection,
Board of Claims, Commonwealth of Pennsylvania, Civil Action No. 3484, seeking
$7.5 million in a contract claim arising from the Quakertown foundry site
clean-up. This litigation was assumed as part of the Clean Earth sale. The PADEP
has offered approximately $980,000 retroactive to September 7, 2001 to settle
this claim. The Company rejected this offer and is proceeding with discovery. A
dispute resolution hearing is currently scheduled for November 2003.
On June 10, 2003, Dolphin Marina, Ltd and Sunset Aquatic Park served upon
the Company litigation in the Superior Court of California, County of Los
Angeles against the Company seeking damages arising from certain product issues
with Trimax(R) product manufactured by U.S. Plastic Lumber Ltd., a wholly owned
subsidiary of the Company The Complaint seeks replacement product and damages
relative to the re-installation of approximately 11,000 boards aggregating
approximately $1.6 million in damages. The Company believes that the product
issues are not covered by the Limited Warranty on the product and has denied
plaintiff's claim. The parties are engaging in settlement discussions.
From time to time, the Company is involved as plaintiff or defendant in
various other legal proceedings arising in the usual course of business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of the Company's management that the resolution of
these legal actions should not have a material effect on the financial position,
results of operations or liquidity of the Company.
10
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." The Statement amends the transition
provisions of SFAS No. 123 for companies that choose to adopt the fair value
based method of accounting for stock based employee compensation. The Statement
does not amend the provisions of SFAS No. 123 which allow for entities to
continue to apply the intrinsic value-based method as prescribed in APB No. 25,
"Accounting for Stock Issued to Employees", however it does amend some of the
disclosure requirements regardless of the method used to account for stock-based
employee compensation. See note 3, "STOCK-BASED COMPENSATION."
In January 2003 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities ("VIE's") created after
January 31, 2003, and to VIE's in which an enterprise obtains an interest in
after that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to VIE's in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period. The Company has
identified no VIE's, accordingly, the adoption of FIN 46 is not expected to have
a material impact on the Company's consolidated financial position, liquidity,
or results of operations.
During April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, except as stated below and for
hedging relationships designated after June 30, 2003. In addition, except as
stated below, all provisions of this Statement should be applied prospectively.
The provisions of this Statement that relate to Statement 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective dates.
In addition, paragraphs 7(a) and 23 (a), which relate to forward purchases or
sales of then-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
During May 2003 the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. This Statement established standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a freestanding
financial instrument that is within its scope as a liability (or as an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements." The Company is evaluating the effect of this new
pronouncement, if any, and will adopt FASB 150 within the prescribed time.
10. SEGMENT REPORTING
On September 9, 2002 the Company completed the sale Clean Earth, whose
subsidiaries comprised the Company's Environmental recycling division. As a
result the Company has determined that it has only one operating segment. This
determination is based primarily on the similar nature of the Company's
remaining products and production processes utilized.
11. SALE OF CORNERBOARD OPERATION
On May 13, 2003 the Company completed the sale of it's cornerboard operation
to a unit of Illinois Tool Works, Inc. ("ITW") for a net purchase price of
approximately $8.2 million, after giving effect to various purchase price
adjustments. This sale transaction was structured as an asset purchase,
primarily for accounts receivable, inventory and property, plant and equipment.
The proceeds realized in the transaction were used to pay down certain
indebtedness and for general corporate purposes. The transaction resulted in a
pre-tax gain of $4,299,000.
11
12. SUBSEQUENT EVENTS
On July 10, 2003 the Company received a notice of default from GBCC stating
that the Company was in violation of some of the financial covenants contained
in the GBCC Credit Facility for the month of May 2003. On July 25, the GBCC
Credit Facility was amended. See note 2 for further information.
12
U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and ability to meet our financial obligations and maintain
our current operations in 2003 and beyond will be dependent on our ability to
meet the payment obligations under and maintain compliance with the financial
covenants in our various debt agreements and provide financing for working
capital. Our senior secured credit facility with Guaranty Business Credit
Corporation (the "GBCC Credit Facility") and our Master Credit Facility
equipment term loans both contain significant financial covenants, including but
not limited to the requirement to achieve specified levels of earnings before
interest, taxes, depreciation and amortization ("EBITDA"), which is measured
periodically throughout the term of these agreements. We did not meet the EBITDA
financial covenant requirements under the GBCC Credit Facility for each of the
first three months of 2003. On May 13, 2003 the GBCC Credit Facility was amended
to waive all covenant violations as of and prior to March 31, 2003, and to reset
the parameters of some of the financial covenants for the remainder of 2003. The
amended terms of the GBCC Credit Facility continued to require that financial
covenants be measured on a monthly basis beginning in May 2003. We were not in
compliance with the financial covenants, as amended, for the month of May 2003
and, as previously reported on Form 8-K, on July 10, 2003 received a default
notice from GBCC. On July 25, 2003 we entered into a second amendment to the
GBCC Credit Facility that waived all existing defaults under the GBCC Credit
Facility. Under the terms of the second amendment we are required to provide
GBCC with an executed letter of intent for the sale of certain assets of the
Company prior to August 31, 2003. The proceeds of such a sale, if it takes
place, would be used to pay off the entire outstanding balance due under the
GBCC Credit Facility and the facility would be terminated upon payment in full
of all of the obligations payable to GBCC. The amendment also requires that all
amounts outstanding under the GBCC Credit Facility be paid in full prior to
October 31, 2003. The outstanding balance under the GBCC Credit Facility as of
June 30, 2003 is approximately $3,809,000.
In addition, we were not in compliance with the EBITDA covenant contained
in our Master Credit Facility during the three and six months ending June 30,
2003. Although we have not obtained a waiver of for these covenant violations,
as of August 14, 2003 neither GE Capital Corporation nor any of the other
lenders that participate in the Master Credit Facility (the "GE Lending Group")
have taken any action against the Company. The outstanding balance of the Master
Credit Facility is approximately $10,718,000 as of June 30, 2003, and monthly
principal payments of approximately $37,500 resume in July of 2003.
We have a history of operating losses and past inability to comply with
similar financial covenant requirements. In the absence of a written waiver, any
failure to comply with the covenants under the Company's GBCC Credit Facility
and Master Credit Facility in 2003 could lead to a demand for immediate
repayment of the outstanding balance due under the facility. Such an occurrence
would have a material adverse effect upon the Company as we do not have the
resources to repay these amounts should they become immediately due without
obtaining additional debt and/or equity financing or by selling some of our
assets.
At June 30, 2003 we had a working capital deficit and accumulated deficit
of $17.2 million and $77.1 million respectively. Capital requirements relating
to the implementation of the Company's business plan have been and will continue
to be significant. As a result of our past financial performance, and because
substantially all of our assets have been pledged as collateral under our
current debt agreements, we may not be able to obtain additional external debt
and/or equity financing to fund our operations in 2003 and beyond should it
become necessary, which raises substantial doubt about our ability to continue
as a going concern.
On May 13, 2003 we completed the sale of our cornerboard operation to a
unit of Illinois Tool Works, Inc. (see note 11). The net proceeds of
approximately $8.2 million from this transaction were used for general corporate
purposes and to pay down certain indebtedness. We are continuing to explore the
potential sale of non-strategic assets and other alternatives to meet our
financial obligations.
The principal and interest obligations of our outstanding indebtedness for
the remainder of 2003 will be approximately $200,000 per month. Capital
expenditures for the remainder of the year are expected to be approximately
$400,000.
13
Our working capital deficit increased from $10.0 million at December 31,
2002 to $17.2 million at June 30, 2003. The increase is mainly due to the entire
outstanding balances on the GBCC Credit Facility and the Master Credit Facility
being reclassified to current liabilities due to the amended terms of the GBCC
Credit Facility and the financial covenant violation with respect to the Master
Credit Facility at June 30, 2003, partially offset by the paydown of accounts
payable and accrued expenses in 2003 with the proceeds received from the GBCC
Credit Facility and the sale of the cornerboard operation. Cash and cash
equivalents totaled $105,000 at June 30, 2003, a decrease of $458,000 from the
$563,000 at December 31, 2002. Cash used in operating activities from continuing
operations amounted to $9,136,000 for the first six months of 2003, as compared
to $4,325,000 for the comparable period in 2002. The following table summarizes
the different components of cash used in operating activities from continuing
operations for the six months ended June 30, 2003 and 2002.
Dollar amounts in thousands:
2003 2002
------- -------
Loss from continuing operations $ (416) $(7,388)
Non-cash charges 2,313 4,510
Increase in accounts receivable (1,413) (2,156)
(Increase) decrease in inventories (310) 429
Gain on the sale of assets (4,410) (12)
(Decrease) increase in accounts payable (2,089) 2,179
Changes in other working capital and other assets (2,811) (1,887)
------- -------
Net cash used in operating activities $(9,136) $(4,325)
======= =======
Non cash charges consist primarily of depreciation expense, amortization of
intangibles, deferred financing costs and discounts on convertible debentures,
beneficial conversion features of convertible debentures and interest expense
paid in kind.
Cash received from investing activities from continuing operations was
$8,110,000 in the first six months of 2003, as compared to $1,376,000 used in
investing activities in the comparable period of a year ago. The change is
mainly due to the sale of the cornerboard business and, to a lesser extent,
lower capital expenditures in 2003.
Cash used in financing activities from continuing operations totaled
$282,000 for the six months ending June 30, 2003, as compared to $752,000
received from financing activities during the first six months of 2002. The
change is due primarily to the paydown of indebtedness with the proceeds from
the sale of the cornerboard business in 2003. During 2002 we received $376,000
in net cash proceeds from a common stock private placement, with no comparable
amount in 2003.
Cash provided by our discontinued environmental recycling and remediation
business segment, which we sold on September 9, 2002, amounted to $850,000 in
the first six months of 2003 (see note 7), compared to $5,578,000 in the first
six months of 2002.
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,
2002. 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.
On September 9, 2002 we completed the sale of our Clean Earth subsidiary,
thereby exiting the environmental recycling and remediation business. As such,
the results of Clean Earth have been accounted for as a discontinued operation
for the three and six months ending June 30, 2002 as presented in this Form
10-Q. In addition, the discussion of our results of operations below is confined
to our continuing plastic lumber operations.
14
INTERIM RESULTS OF CONTINUING OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Net sales in the second quarter of 2003 were $9,708,000, as compared to
$14,924,000 in the first quarter of 2002, a decrease of $5,216,000, or 35.0%.
Approximately $2,931,000 of this decrease was attributable to the decline in
sales of our building products, and approximately $1,310,000 of the decrease is
due to the sale of the cornerboard business midway through the second quarter of
2003. The decrease in building product sales is a result of extended lead times
due to continuing cash constraints and slow production rate of our newly
formulated decking products. The Company was unable to provide its distributors
with adequate stock inventory for the spring deck building season. The Company
believes it has now completed its commitment to accept returns of its deck
product containing the older formula from some of its key distributors.
Gross profit for the three months ending June 30, 2003 decreased from
$2,888,000 in 2002 to $811,000 in 2003, mainly due to significantly lower sales
of the decking products. Gross margin, as percentage of net sales, was 8.4% in
the second quarter of 2003 as compared to 19.4% in the prior year. Gross profit
was negatively impacted by the lower sales levels as compared to the same period
last year. In addition the Company experienced higher raw material prices
throughout all product lines. Higher than expected scrap rates and under
absorption of fixed manufacturing overhead due to the lower sales volume.
Selling, general and administrative expenses ("SG&A") from continuing
operations decreased by $1,118,000, or 29%, to $2,722,000 in the second quarter
of 2003 as compared to $3,840,000 in the second quarter of 2002, primarily due
to the cost reduction initiatives implemented in 2002. The Company had recorded
an additional $325,000 in warranty expense during the second quarter 2003 for
potential claims from the older formulated decking product. These cost saving
efforts have resulted in lower marketing, selling and commission expenses, as
well as significant reductions in corporate overhead expenses, and were driven
mainly by headcount reductions and reduced discretionary spending in the sales
and marketing areas. We have also begun to integrate our sales efforts by cross
selling our different product lines throughout our sales force.
The second quarter of 2003 produced an operating loss of $1,911,000, as
compared to an operating loss of $952,000 for the same period in 2002. The
change is due mainly to reduced sales volume and lower gross margins, partially
offset by the decrease in SG&A.
Interest expense from continuing operations in the second quarter of 2003
was $531,000, as compared to $3,253,000 in the second quarter of 2002, a
decrease of $2,722,000, or 84%. The decrease is due to significantly lower debt
levels in 2002, as well as lower amortization of deferred financing costs and
discounts on convertible debentures.
The gain on the sale of the cornerboard business in the second quarter of
2003 in the amount of $4,299,000 resulted in income from continuing operations
of $1,867,000, as compared to a loss from continuing operations of $4,094,000
for the same period in 2002.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Net sales for the first six months of 2003 were $20,924,000, as compared to
$29,128,000 in the first six months of 2002, a decrease of $8,204,000, or 28.2%.
Approximately $5,556,000 of this decrease was attributable to the decline in
sales of our building products, and approximately $1,310,000 was attributable to
the sale of the cornerboard business in May of 2002. Part of the decrease in
sales of the building products was a result of not having sufficient inventory
to meet the demands for our building products during the first six months of
2003, mainly due to cash constraints and slower production rates of our newly
formulated decking products. In addition, we implemented a price increase in the
first quarter of 2003, which resulted in our distributors deciding not to stock
inventory in advance of the spring deck building season as they had in 2002.
Building products revenues in the first six months of 2003 were also negatively
impacted by our commitment to accept an additional $250,000 of returns of deck
product containing the older formulation from some of our key distributors.
Gross profit in the first six months of 2003 decreased to $1,500,000 from
$6,045,000 in 2002, mainly due to significantly lower sales of the decking
products. Gross margin, as percentage of net sales, was 7.2% in the first six
months of 2003 as compared to 20.8% in the prior year. Gross profit was also
negatively impacted in 2003 by higher raw material prices throughout all our
product lines and higher than normal scrap rates during initial production runs
of the
15
newly formulated decking products and the under-absorption of fixed
manufacturing overhead due to the lower sales volume.
Selling, general and administrative expenses from continuing operations
decreased by $1,848,000, or 26.2%, to $5,195,000 in the first six months of 2003
as compared to $7,043,000 in the first six months of 2002, primarily due to the
cost reduction initiatives that were initially implemented in 2002 and have
continued into 2003. The Company had recorded an additional $325,000 in
warranty expense during the second quarter 2003 for potential claims from the
older formulated decking product.
The first six months of 2003 produced an operating loss of $3,695,000, as
compared to an operating loss of $998,000 for the same period in 2002. The
change is due mainly to reduced sales volume and lower gross margins.
Interest expense from continuing operations in the first six months of 2003
was $1,117,000, as compared to $6,567,000 in the first six months of 2002, a
decrease of $5,450,000, or 83%. In addition to the substantially higher debt
levels we had in the prior year, interest expense in 2002 was negatively
impacted by $2,186,000 in amortization of deferred financing costs and discounts
on convertible debentures, recognition of a $250,000 beneficial conversion
feature related to the partial conversion of a convertible debenture, and the
accrual of $690,000 in penalties for our failure to file a registration
statement for our common stock.
We recorded a gain of $4,299,000 on the sale of the cornerboard business in
May of 2003, with no comparable amount in 2002. Our net loss from continuing
operations for the first six months of 2003 was $66,000, compared to a net loss
of $6,485,000 in the first six months of 2002.
SEASONALITY
Sales of certain plastic lumber products tend to slow significantly in the
winter months, as adverse whether conditions negatively impact outdoor building
projects in most of the continental United States.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." The Statement amends the transition
provisions of SFAS No. 123 for companies that choose to adopt the fair value
based method of accounting for stock based employee compensation. The Statement
does not amend the provisions of SFAS No. 123 which allow for entities to
continue to apply the intrinsic value-based method as prescribed in APB No. 25,
"Accounting for Stock Issued to Employees", however it does amend some of the
disclosure requirements regardless of the method used to account for stock-based
employee compensation. See note 3, "STOCK-BASED COMPENSATION."
In January 2003 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities ("VIE's") created after
January 31, 2003, and to VIE's in which an enterprise obtains an interest in
after that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to VIE's in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period. The Company has
identified no VIE's, accordingly, the adoption of FIN 46 is not expected to have
a material impact on the Company's consolidated financial position, liquidity,
or results of operations.
During April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, except as stated below and for
hedging relationships designated after June 30, 2003. In addition, except as
stated below, all provisions of this Statement should be applied prospectively.
The provisions of this Statement that relate to Statement 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective dates.
In addition, paragraphs 7(a) and 23 (a), which relate to forward purchases or
sales of then-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered
16
into after June 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
During May 2003 the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. This Statement established standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a freestanding
financial instrument that is within its scope as a liability (or as an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements." The Company is evaluating the effect of this new
pronouncement, if any, and will adopt FASB 150 within the prescribed time.
NASDAQ DELISTING NOTICE
Our common stock currently trades on the Nasdaq over the counter bulletin
board under the trading symbol "USPL.OB." On May 14, 2003 we received a letter
from Nasdaq advising us that we have not regained compliance with the $1.00
minimum bid price requirement and that our common stock will be delisted from
The Nasdaq SmallCap Market at the opening of business on May 23, 2003. We chose
not to appeal Nasdaq's decision, and as a result our stock currently trades on
Nasdaq's over the counter bulletin board.
ITEM 3. 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, 2002. There
have been no significant developments with respect to exposure to market risk.
ITEM 4. DISCLOSURES AND CONTROLS
(a) Within 90 days of filing this report on Form 10-Q ("the
Evaluation Date"), our Chief Financial Officer and Chief
Executive Officer evaluated our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). Based on that evaluation, these
officers have concluded that as of the Evaluation Date, our
disclosure controls and procedures were effective in timely
alerting them to material information relating to our company
(including our consolidated subsidiaries) required to be
included in our reports filed or submitted by us under the
Exchange Act.
(b) There have been no significant changes in our internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 11, 2003 the Company and the purchaser of Clean Earth settled their
dispute regarding the final audited closing date balance sheet in which the
purchaser and Clean Earth had originally sought an adjustment to the purchase
price in the amount of approximately $4,000,000 due to various closing
adjustments to the final audited balance sheet. Under the terms of the
settlement agreement between the Company and the purchaser and Clean Earth (i)
Clean Earth paid $850,000 to the Company on June 11, 2003, (ii) Clean Earth will
pay to or on behalf of the Company an additional $650,000 pursuant to the terms
of the settlement agreement, (iii) the 5% $3.5 million Junior Promissory Note
that the Company received as part of the purchase price from the sale of Clean
Earth was cancelled and the $1 million portion of the purchase price that was
held in escrow was returned to the purchaser. As a result of the settlement
agreement, there will be no additional purchase price adjustments with respect
to the final audited closing date balance sheet. The
17
Company also agreed to make a joint election with Clean Earth under Section 338
of the U.S. Federal Income Tax Code regarding the tax treatment of the Clean
Earth sale transaction.
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, 2003, the Company has accrued approximately $217,000
for estimated liabilities related to these matters. While the Company believes
this accrual is sufficient to cover the aggregate liability that may be incurred
in these matters, there can be no assurances that the accrual will be
sufficient.
On April 15, 2002, the Company filed a Complaint, entitled Integrated
Technical Services, Inc. v Pennsylvania Department of Environmental Protection,
Board of Claims, Commonwealth of Pennsylvania, Civil Action No. 3484, seeking
$7.5 million in a contract claim arising from the Quakertown foundry site
clean-up. This litigation was assumed as part of the Clean Earth sale. The PADEP
has offered approximately $980,000 retroactive to September 7, 2001 to settle
this claim (see note 4). The Company rejected this offer and is proceeding with
discovery. A dispute resolution hearing is currently scheduled for November
2003.
On June 10, 2003, Dolphin Marina, Ltd and Sunset Aquatic Park served upon
the Company litigation in the Superior Court of California, County of Los
Angeles against the Company seeking damages arising from certain product issues
with Trimax(R) product manufactured by U.S. Plastic Lumber Ltd., a wholly owned
subsidiary of the Company The Complaint seeks replacement product and damages
relative to the re-installation of approximately 11,000 boards aggregating
approximately $1.6 million in damages. The Company believes that the product
issues are not covered by the Limited Warranty on the product and has denied
plaintiff's claim. The parties are engaging in settlement discussions.
From time to time, the Company is involved as plaintiff or defendant in
various other legal proceedings arising in the usual course of business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of the Company's management that the resolution of
these legal actions should not have a material effect on the financial position,
results of operations or liquidity of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first six months of 2003 1,800 shares of common stock were issued
as annual compensation to the Company's non-employee directors and 50,000 shares
of common stock were issued as a result of the exercise of employee stock
options.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Events of default are discussed in Notes 2 and 4 to the Condensed Unaudited
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification required under Section 302 of the Sarbanes-Oxley
Act of 2002 by Mark S. Alsentzer
31.2 Certification required under Section 302 of the Sarbanes-Oxley
Act of 2002 by Michael D. Schmidt
32.1 Certification required under Section 906 of the Sarbanes-Oxley
Act of 2002 by Mark S. Alsentzer
32.2 Certification required under Section 906 of the Sarbanes-Oxley
Act of 2002 by Michael D. Schmidt
(b) Reports on Form 8-K
On July 30, 2003 the Company filed a Report on Form 8-K to report that the
Company had received a notice of default with respect to its credit facility
with Guaranty Business Credit Corp. and that the facility was subsequently
amended.
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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, 2003 /s/ MICHAEL D. SCHMIDT
-----------------------------------------
Date Michael D. Schmidt,
Chief Financial Officer
19