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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 SEPTEMBER 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
October 31, 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 September 30, 2003 (unaudited) and
December 31, 2002................................................................. 2
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2003 and 2002 (unaudited)...................... 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2003 and 2002 (unaudited)....................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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........................................................ 18
Item 2. Changes in Securities and Use of Proceeds................................ 19
Item 3. Defaults Upon Senior Securities.......................................... 19
Item 4. Submission of Matters to a Vote of Security
Holders.................................................................. 19
Item 6. Exhibits and Reports on Form 8-K......................................... 19
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 September 30, 2003 and December 31, 2002
Dollar amounts in thousands except share data
UNAUDITED
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $185 $563
Accounts receivable, net of allowance for doubtful accounts of $3,524 and
$3,725, respectively 4,804 4,908
Inventories 4,277 5,107
Prepaid insurance 2,106 1,945
Other current assets 1,032 760
--------- ---------
Total current assets 12,404 13,283
Property, plant and equipment (net) 51,974 57,048
Assets held for sale 625 638
Goodwill 12,474 12,650
Other intangibles (net) 500 529
Other assets 580 1,902
--------- ---------
Total assets $ 78,557 $ 86,050
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $6,860 $8,593
Notes and capital leases payable, current portion 18,311 6,386
Accrued expenses 5,206 6,107
Restructuring accrual -- 64
Other current liabilities 1,872 2,091
--------- ---------
Total current liabilities 32,249 23,241
Notes and capital leases payable, net of current portion 2,253 13,385
Other liabilities 5,016 6,082
Subordinated notes and convertible debentures 8,572 8,432
--------- ---------
Total liabilities 48,090 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 111,924 111,924
Accumulated deficit (81,463) (77,020)
--------- ---------
Total stockholders' equity 30,467 34,910
--------- ---------
Total liabilities and stockholders' equity $ 78,557 $ 86,050
========= =========
See accompanying notes to unaudited
condensed 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 September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Sales, net $ 7,981 $ 10,646
Cost of goods sold 9,887 11,028
------------ ------------
Gross loss (1,906) (382)
Selling, general and administrative expenses 1,924 2,614
Restructuring and asset impairment charge -- 453
------------ ------------
Operating loss (3,830) (3,449)
Interest and other income 8 53
Loss on sale of assets (56) (7)
Interest expense 852 4,093
------------ ------------
Loss from continuing operations before income taxes (4,730) (7,496)
Income tax provision -- --
------------ ------------
Loss from continuing operations (4,730) (7,496)
Discontinued Operations:
Income from operations of discontinued environmental recycling segment -- 2,920
Gain on disposal of discontinued environmental recycling segment 353 1,637
------------ ------------
Income from discontinued operations 353 4,557
------------ ------------
Net loss $ (4,377) $ (2,939)
============ ============
Net loss per common share - Basic:
Loss from continuing operations $ (0.07) $ (0.15)
Income from discontinued operations $ 0.00 $ 0.09
------------ ------------
Net loss per common share $ (0.07) $ (0.06)
============ ============
Net loss per common share - Diluted:
Loss from continuing operations $ (0.07) $ (0.15)
Income from discontinued operations $ 0.00 $ 0.09
------------ ------------
Net loss per common share $ (0.07) $ (0.06)
============ ============
Weighted average common shares outstanding:
Basic 64,479,216 48,725,448
Diluted 64,479,216 48,725,448
See accompanying notes to unaudited
condensed 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
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Sales, net $ 28,905 $ 39,773
Cost of goods sold 29,751 34,111
------------ ------------
Gross profit (846) 5,662
Selling, general and administrative expenses 6,679 9,657
Restructuring and asset impairment charge -- 453
------------ ------------
Operating loss (7,525) (4,448)
Interest and other (expense) income (6) 233
Gain (loss) on sale of assets 4,354 (10)
Interest expense 1,969 10,659
------------ ------------
Loss from continuing operations before income taxes (5,146) (14,884)
Income tax provision -- --
------------ ------------
Loss from continuing operations (5,146) (14,884)
Discontinued Operations:
Income from operations of discontinued environmental recycling segment -- 3,823
Gain on disposal of discontinued environmental recycling segment 703 1,637
------------ ------------
Income from discontinued operations 703 5,460
------------ ------------
Net loss (4,443) (9,424)
Preferred stock dividend earned -- 177
------------ ------------
Net loss attributable to common stockholders $ (4,443) $ (9,601)
============ ============
Net loss per common share - Basic:
Loss from continuing operations $ (0.08) $ (0.34)
Income from discontinued operations $ 0.01 $ 0.13
------------ ------------
Net loss per common share $ (0.07) $ (0.21)
============ ============
Net loss per common share - Diluted:
Loss from continuing operations $ (0.08) $ (0.34)
Income from discontinued operations $ 0.01 $ 0.13
------------ ------------
Net loss per common share $ (0.07) $ (0.21)
============ ============
Weighted average common shares outstanding:
Basic 64,453,397 44,720,499
Diluted 64,453,397 44,720,499
See accompanying notes to unaudited
condensed consolidated financial statements.
4
U. S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002 Dollar amounts
in thousands except share data
(Unaudited)
2003 2002
-------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,443) $ (9,424)
-------- ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,529 2,859
Amortization 53 52
Gain on disposal of discontinued operating segment -- (1,637)
Income from discontinued operations (703) (3,823)
Write down of obsolete inventory -- 134
Amortization of deferred financing costs 428 1,686
Reduction of discounts on convertible subordinated debentures -- 560
Interest expense paid in kind 319 130
Beneficial conversion feature of convertible subordinated debentures -- 3,041
Non-cash asset impairment charge -- 453
(Gain) on sale of business (4,264) --
(Gain) loss on sale of property, plant & equipment (90) 10
Changes in operating assets and liabilities, net of divestitures:
Accounts receivable (718) (319)
Inventories 348 453
Prepaid expenses and other current assets 123 (2,330)
Other assets 370 246
Accounts payable (1,733) 662
Other liabilities (1,668) (31)
Accrued expenses (745) 2,370
-------- ------------
Net cash used in operating activities - continuing operations (10,194) (4,908)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (385) (1,885)
Proceeds from the sale of business 8,242
Proceeds from the sale of discontinued operations,
net of cash retained by the purchaser -- 41,118
Divestitures of property, plant and equipment 254 229
-------- ------------
Net cash provided by investing activities - continuing operations 8,111 39,462
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 1 376
Net borrowings (repayments) on lines of credit 2,578 (12,400)
Proceeds from notes payable -- 1,092
Payments of notes payable (2,077) (27,683)
-------- ------------
Net cash (used in) provided by financing activities -
continuing operations 502 (38,615)
-------- ------------
Net change in cash and cash equivalents - continuing operations (1,581) (4,061)
Cash from discontinued operations 1,203 3,255
Cash and cash equivalents, beginning of period, including
cash of discontinued operations 563 912
-------- ------------
Cash and cash equivalents, end of period $ 185 $ 106
======== ============
Supplemental disclosure of cash flow information -
continuing operations: Cash
paid (received) during the period for:
Interest $ 1,531 $ 1,633
Income taxes $ (403) $ 4
Number of shares issued during the period for non-cash transactions:
Acquisitions, Clean Earth merger and other items -- (41,137)
Compensation - employees and directors 1,800 4,400
Litigation settlements -- 18,000
Conversion of debenture and preferred stock -- 23,839,302
Modification of convertible subordinated debt agreements -- (285,714)
Settlement of trade payables and professional services -- 480,173
See accompanying notes to unaudited
condensed 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 unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and the regulations of
the Securities and Exchange Commission ("SEC") for quarterly reporting. The
interim unaudited 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.
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 was required to provide GBCC with an executed
non binding letter of intent for the sale of certain assets of the Company prior
to August 31, 2003, and a letter meeting these requirements was provided to GBCC
within the requisite time frame. The proceeds of such a sale, if it takes place,
will 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 required 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 September 30,
2003 is approximately $4,669,000.
On October 31, 2003, the Company entered into a Third Amendment to the GBCC
Credit Facility whereby the maturity date was extended through November 30,
2003. The Company is in compliance with the reporting requirements of the GBCC
Credit Facility as amended, and GBCC continues to make loans under the revolving
credit facility in accordance with the amended terms of the facility. The
6
Company is continuing negotiations to complete the sale of certain assets and
retire the GBCC Credit Facility on or before November 30, 2003, however no
assurance can be given that the Company will be successful.
In addition, the Company was not in compliance with the EBITDA covenant
contained in its Master Credit Facility, as amended, during the three and nine
months ended September 30, 2003. Although the Company has not obtained a waiver
for these covenant violations, as of November 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 $10,642,000
as of September 30, 2003. In September of 2003 the Company suspended the monthly
principal and interest payments required under the facility pending the sale of
certain assets.
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 September 30, 2003 the Company has a working capital deficit and
accumulated deficit of $19.8 million and $81.5 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 packaging
division to a unit of Illinois Tool Works, Inc. (see note 10). 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", as amended and
interpreted. There is no stock-based employee compensation cost reflected in net
income as no grants were issued during the nine months ended September 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 loss and 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
IN THOUSANDS 2003 2002 2003 2002
------- ------- ------- -------
Net loss, as reported $(4,377) $(2,939) $(4,443) $(9,424)
Net loss attributable to common
Stockholders, as reported (4,377) (2,939) (4,443) (9,601)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 18 64 91 293
------- ------- ------- -------
Pro forma net loss $(4,395) $(3,003) $(4,534) $(9,717)
Pro forma net loss attributable to common
stockholders $(4,395) $(3,003) $(4,534) $(9,894)
Basic and diluted loss per share as
reported $(0.07) $(0.06) $(0.07) $(0.21)
Basic and diluted loss per share - pro
forma $(0.07) $(0.06) $(0.07) $(0.21)
7
The pro forma adjustments in the preceding table are based on the Company's
estimates of the fair value of each stock option using the Black-Scholes
option-pricing model with the following assumptions for all periods presented:
no dividend yield, expected volatility of 100%, risk free interest rate of 5.0%
and expected life of 10 years. There were no stock option grants during the
three months ended September 30, 2003 and 2002.
4. EARNINGS PER SHARE
Basic income or loss per share is computed by dividing net income or loss
attributable 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
three and nine months ended September 30, 2003 and 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.
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 10, 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. The outstanding balance under the GBCC
Credit Facility as of September 30, 2003 is approximately $4,669,000. On October
31, 2003, the Company entered into a Third Amendment to the GBCC Credit Facility
whereby the maturity date was extended through November 30, 2003. . The Company
is in compliance with the reporting requirements of the GBCC Credit Facility, as
amended, and GBCC continues to make loans under the revolving credit facility in
accordance with the amended terms of the facility. The Company is currently in
negotiations to complete the sale of certain assets in order to retire the
facility by November 30, 2003 (see note 2) however there can be no assurances
that the Company will be successful in completing such a transaction.
A portion of the outstanding balance under the GBCC Credit Facility has
been guaranteed by Schultes, Inc. through a Junior Participation Agreement.
August C. Schultes, a director of the Company, is affiliated with Schultes, Inc.
The Company was not in compliance with the EBITDA covenant contained in its
Master Credit Facility, as amended, during the three and nine months ended
September 30, 2003. As of November 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 $10,642,000 as of September 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 10. In September of 2003 the Company
suspended the monthly principal and interest payments required under the
facility pending the sale of certain assets.
In addition, the Master Credit 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.
8
Notes payable and capital leases consist of the following (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Term loan under the GBCC Credit Facility $ 1,929 $ 3,000
Revolving credit line under the GBCC Credit Facility 2,740 161
Quakertown notes 1,000 1,000
Equipment term loans under the Master Credit Facility 10,642 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 20,564 19,771
Less current portion: (18,311) (6,386)
----------------- -----------------
$ 2,253 $ 13,385
================= =================
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 nine 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 September
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
$1,211,000 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 September 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 September 30, 2003 and December 31, 2002:
(Dollar amounts in thousands:)
2003 2002
----- -----
Patents $ 835 $ 811
Accumulated amortization (335) (282)
----- -----
Carrying amounts, net $ 500 $ 529
===== =====
During the nine months ended September 30, 2003, aggregate amortization
expense from continuing operations for the Company's intangible assets was
approximately $53,000. As of September 30, 2003, estimated aggregate annual
amortization expense for the Company's intangible assets are as follows (in
thousands):
YEAR ENDING AMOUNTS
- ----------- ------------
2003........................................ $ 17
2004........................................ 70
2005........................................ 70
2006........................................ 70
2007........................................ 70
2008........................................ 70
------------
$ 367
============
9
8. COMPREHENSIVE LOSS
The Company's comprehensive loss equals its net loss for the three and
nine-month periods ended September 30, 2003 and 2002.
9. PRODUCT WARRANTIES
The Company's building products contain a basic limited warranty from structural
damage from termites or fungal decay which commences on the date of original
consumer purchase of the product and extends through a period of 10 or 50 years
depending on the applicable product. The Company further warrants that its
products will not rot, split, splinter, or check during the applicable warranty
period. Factors that enter into the Company's estimate of its warranty reserve
include the number of units shipped, historical and anticipated rates of
warranty claims, and cost per claim. The Company recorded the warranty expense
as part of its Cost of Goods Sold for the three months and nine months ended
September 30, 2003. The following table presents the changes in the Company's
product warranty accrual:
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------ ------------------
Balance at the beginning of the period $ 384 $ 199
Additions to the accrual charged to expense 1,752 2,192
Payments charged against the accrual (1,579) (1,995)
Other adjustments 330 492
------- -------
Balance at the end of the period $ 887 $ 887
======= =======
10. 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 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 September 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 $13.4 million. In the event the Company does not exercise the
Chicago Property Option on or before November 28, 2003, the option rights will
expire in which event the Company will have to write-off the net book value of
the Chicago Property of approximately $7.3 million, net of the $3 million
purchase option. 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)
10
Clean Earth paid $850,000 to the Company on June 11, 2003, (ii) Clean Earth paid
to the Company an additional $410,000 in August of 2003 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 $1,203,000
of cash payments received in the settlement of the dispute, net of $57,000 in
related legal and other expenses, the Company recorded $703,000 as income from
discontinued operations in the nine months ending September 30, 2003.
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. All pending PRP matters have been settled, and at September 30,
2003, the Company has accrued approximately $250,000 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
Company and PADEP have agreed to settle this claim for approximately $1.2
million, and the Company expects to finalize the settlement prior to December
31, 2003. The net proceeds from the settlement will be used to pay down the
Quakertown Notes, which have an outstanding balance of $1 million as of
September 30, 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.
On November 3, 2003, the Company and its CEO, Mark Alsentzer, were notified
of a formal investigation by the Securities and Exchange Commission, entitled In
the Matter of Mace Security International, Inc. and U.S. Plastic Lumber
Corporation (HO-09774). The Company and Mr. Alsentzer were each served with a
subpoena from the Securities and Exchange Commission pursuant to a formal
investigation under Section 20(a) of the Securities Act of 1933 and Section
21(a) of the Securities Exchange Act of 1934. The Company and Mr. Alsentzer will
fully cooperate in the investigation and seek to produce documents responsive to
the subpoenas. The Company believes it is in full compliance with all Securities
Laws.
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.
ACCIDENT AT OCALA FACILITY
On August 18, 2003, an explosion took place at the Company's Ocala, FL
manufacturing facility which resulted in the death of one employee.
Investigations by the Company, local authorities and the Occupational Health and
Safety Administration ("OSHA") as to the precise cause of the explosion are
continuing. The Company is currently unable to predict the outcome of any civil
action or sanctions which may be brought against the Company as a result of this
accident. The Company believes that its insurance coverage is adequate to
recover losses pertaining to the damage to its equipment and the interruption of
its business that were incurred as a result of the accident. The Ocala plant has
resumed partial production and the Company estimates that the Ocala plant will
return to the full production levels by the end of January 2004.
11
11. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 interprets 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. On October 9, 2003, the FASB issued FASB Staff Position No. FIN
46-6, "Effective Date of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," which defers the implementation date for public entities
that hold an interest in a variable interest entity or potential variable
interest entity from the first fiscal year or interim period beginning after
June 15, 2003 to the end of the first interim or annual period ending after
December 15, 2003. This deferral applies only if 1) the variable interest entity
was created before February 1, 2003 and 2) the public entity has not issued
financial statements reporting that variable interest entity in accordance with
FIN 46, other than disclosures required by paragraph 26 of FIN 46. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual period. The Company has identified no VIE's, and 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, it 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 is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable noncontrolling
(minority) interests which, on October 29, 2003, the FASB decided to defer
indefinitely. 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.
12. SALE OF CORNERBOARD DIVISION
On May 13, 2003 the Company completed the sale of it's cornerboard division
to a unit of Illinois Tool Works, Inc. ("ITW") for a net purchase price of
approximately $8.2 million, after giving effect to various sales 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 $4,264,000.
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 were required to provide
GBCC with an executed letter of intent for the sale of certain assets of the
Company prior to August 31, 2003. We provided such a letter to GBCC within the
requisite time period. The proceeds from such a sale, if it takes place, will be
used to pay off the entire outstanding balance due under the GBCC Credit
Facility and the facility will be terminated upon payment in full of all of the
obligations payable to GBCC. The amendment also required that all amounts
outstanding under the GBCC Credit Facility be paid in full prior to October 31,
2003. On October 31, 2003, the Company entered into a Third Amendment to the
GBCC Credit Facility whereby the maturity date was extending through November
30, 2003, and GBCC continues to make loans under the revolving credit facility
in accordance with the amended terms of the facility. The Company is currently
in negotiations to complete the sale of certain assets and retire the GBCC
Credit Facility prior to November 30, 2003, however no assurance can be given
that the Company will be successful. The outstanding balance under the GBCC
Credit Facility as of September 30, 2003 is approximately $4,669,000, a portion
of which is guaranteed by Schultes, Inc. through a Junior Participation
Agreement. August C. Schultes, a director of the Company, is affiliated with
Schultes, Inc.
In addition, we were not in compliance with the EBITDA covenant contained
in our Master Credit Facility during the three and nine months ending September
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 $10,642,000 as of September 30,
2003, and in September of 2003 we suspended the monthly principal and interest
payments required under the facility pending the sale of certain assets.
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 September 30, 2003 we had a working capital deficit and accumulated
deficit of $19.8 million and $81.5 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.
13
On May 13, 2003 we completed the sale of our cornerboard packaging division
to a unit of Illinois Tool Works, Inc. (see note 10). 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 not expected to be significant.
Our working capital deficit increased from $10.0 million at December 31,
2002 to $19.8 million at September 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 September 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 business.
Cash and cash equivalents totaled $185,000 at September 30, 2003, a decrease of
$378,000 from the $563,000 at December 31, 2002. Cash used in operating
activities from continuing operations amounted to $10,194,000 for the first nine
months of 2003, as compared to $4,908,000 for the comparable period in 2002. The
following table summarizes the different components of cash used in operating
activities from continuing operations for the nine months ended September 30,
2003 and 2002.
Dollar amounts in thousands:
2003 2002
-------- --------
Loss from continuing operations $ (5,146) $(14,884)
Non-cash charges 3,329 8,915
Increase in accounts receivable (718) (319)
Decrease in inventories 348 453
(Gain) loss on the sale of assets (4,354) 10
(Decrease) increase in accounts payable (1,733) 662
Changes in other working capital and other assets (1,920) 255
-------- --------
Net cash used in operating activities $(10,194) $ (4,908)
======== ========
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
$8,111,000 in the first nine months of 2003, as compared to $39,462,000 in the
comparable period of a year ago. The change is mainly due to the sale of the
discontinued environmental recycling and remediation business in 2002, which
yielded net proceeds of $41,118,000 while the sale of the cornerboard business
in 2003 yielded net proceeds of $8,242,000. Capital expenditures in the first
nine months of 2003 amounted to $385,000, as compared to $1,885,000 for the same
period in 2002.
Cash provided by financing activities from continuing operations totaled
$502,000 for the nine months ending September 30, 2003, as compared to
$38,615,000 used in financing activities during the first nine months of 2002.
In 2002 we paid down $40,083,000 of outstanding indebtedness with the proceeds
from the sale of the discontinued environmental recycling and remediation
business, partially offset by $1,092,000 in proceeds from notes payable and
$376,000 from the sale of common stock. In 2003 we had net borrowings on our
revolving line of credit of $2,578,000, largely offset by the payment of notes
payable in the amount of $2,077,000.
Cash provided by our discontinued environmental recycling and remediation
business segment, which we sold on September 9, 2002, amounted to $1,203,000 in
the first nine months of 2003 (see note 7), compared to $3,255,000 in the first
nine months of 2002.
PRODUCTION ACCIDENT AT OCALA FACILITY
On August 18, 2003, an explosion took place at our Ocala, FL manufacturing
facility which resulted in the death of one employee. Investigations by the
14
Company, local authorities and the Occupational Health and Safety Administration
("OSHA") as to the precise cause of the explosion are continuing. We are
currently unable to predict the outcome of any civil action or sanctions which
may be brought against us as a result of this accident. We believe that our
insurance coverage is adequate to recover losses related to the damage to our
equipment and the interruption of our business that were incurred as a result of
the accident. The Ocala plant has resumed partial production and the Company
estimates that the Ocala plant will return to the full production levels by the
end of January 2004.
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.
INTERIM RESULTS OF CONTINUING OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Net sales in the third quarter of 2003 were $7,981,000, as compared to
$10,646,000 in the third quarter of 2002, a decrease of $2,665,000, or 25%. The
decrease is due mainly to the sale of the cornerboard business, which was sold
in the second quarter of 2003 and contributed net sales of $2,048,000 in the
third quarter of 2002. In addition, sales of the Company's OEM, transportation
and fabricated products decreased by $1,098,000 in the third quarter of 2003,
partially offset by slight increases in sales of Building Products and slipsheet
packaging products. Building Products revenues were negatively impacted by
approximately $476,000 in 2002 due to our decision to allow certain customers to
return older product in anticipation of a newly formulated deck product to be
released later in 2002.
Gross loss for the three months ending September 30, 2003 increased from
$382,000 in 2002 to $1,906,000 in 2003, mainly due to approximately $1,752,000
of additional warranty claims recognized in 2003 and, to a lesser extent, the
sale of the cornerboard business in the second quarter of 2003, partially offset
by the aforementioned returned product and a write down of obsolete inventory in
the amount of $134,000 in 2002. Net sales and gross profit were also negatively
impacted in the third quarter of 2003 by the temporary shutdown of our Ocala,
Florida manufacturing facility due to a production accident and subsequent
investigation.
Selling, general and administrative expenses ("SG&A"), decreased by
$690,000, or 26%, to $1,924,000 for the three months ending September 30, 2003
as compared to $2,614,000 in the comparable period of a year ago, mainly due to
reduced corporate overhead and lower sales, marketing and legal expenses.
The third quarter of 2003 produced an operating loss of $3,830,000, as
compared to an operating loss of $3,449,000 for the third quarter of 2002. The
change is due mainly to the sale of the cornerboard business and the increase in
warranty expense in 2003. In addition, operating loss in 2002 was negatively
impacted by an asset impairment charge of $453,000.
Interest expense in the third quarter of 2003 was $852,000, as compared to
$4,093,000 in the third quarter of 2002, a decrease of $3,241,000, or 79%. The
decrease is mainly due to beneficial conversion features recognized in 2002 in
the amount of $2,791,000, and, to a lesser extent, lower amortization of
deferred financing costs in 2003.
Loss from continuing operations in the third quarter of 2003 was $4,730,000,
as compared to $7,496,000 for the same period in 2002. The decrease is mainly
due to higher interest expense in 2002.
Income from discontinued operations was $353,000 in the three months ending
September 30, 2003 and $4,557,000 in the three months ending September 30, 2002.
The environmental recycling and remediation business was sold on September 9,
2002. The discontinued operating segment generated income of $2,920,000 in the
third quarter of 2002 prior to the closing of the sale, and we recorded a gain
15
on the sale of $1,637,000. We received cash of $353,000, net of $57,000 of
related legal and other expenses, in 2003 as the remaining outstanding issues
with respect to the sale agreement were settled.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Net sales for the first nine months of 2003 were $28,905,000, as compared to
$39,773,000 in the first nine months of 2002, a decrease of $10,868,000, or 27%.
Approximately $5,512,000 of this decrease was attributable to the decline in
sales of our building products, and approximately $3,524,000 was attributable to
the sale of the cornerboard business in May of 2003. 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 nine 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, and
by the temporary shutdown of our Ocala, Florida manufacturing facility.
Gross loss in the first nine months of 2003 was $846,000, as compared to
gross profit of $5,662,000 in 2002, mainly due to an increase in our warranty
accrual of approximately $2,192,000, significantly lower sales of the decking
products and the sale of the cornerboard business. 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 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 $2,978,000, or 31%, to $6,679,000 in the first nine months of 2003
as compared to $9,657,000 in the first nine months of 2002. The decrease was
primarily a result of cost reduction initiatives implemented during 2003 which
resulted in substantially lower marketing, selling and commission expenses, as
well as a significant reduction in corporate overhead expenses.
The first nine months of 2003 produced an operating loss of $7,525,000, as
compared to an operating loss of $4,448,000 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 nine months of 2003
was $1,969,000, as compared to $10,659,000 in the first nine months of 2002, a
decrease of $8,690,000, or 82%. In addition to the substantially higher debt
levels we had in the prior year, interest expense in 2002 was negatively
impacted by recognition of beneficial conversion features of $3,041,000,
$1,818,000 in higher amortization of deferred financing costs and discounts on
convertible debentures than experienced in 2003, 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 $4,264,000 on the sale of the cornerboard business in
May of 2003, with no comparable amount in 2002. Our loss from continuing
operations for the nine months ending September 30, 2003 was $5,146,000,
compared to a loss from continuing operations of $14,884,000 for the nine months
ending September 30, 2002. The decrease is due primarily to lower interest
expense and the gain on the sale of the cornerboard business, partially offset
by a higher operating loss in 2003.
Income from discontinued operations in 2003 was $703,000, as compared to
$5,460,000 in 2002, which includes a gain on the sale of the discontinued
operation of $1,637,000.
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 January 2003 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 interprets the application of Accounting Research Bulletin No.
16
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. On October 9, 2003, the FASB issued FASB Staff Position No. FIN
46-6, "Effective Date of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," which defers the implementation date for public entities
that hold an interest in a variable interest entity or potential variable
interest entity from the first fiscal year or interim period beginning after
June 15, 2003 to the end of the first interim or annual period ending after
December 15, 2003. This deferral applies only if 1) the variable interest entity
was created before February 1, 2003 and 2) the public entity has not issued
financial statements reporting that variable interest entity in accordance with
FIN 46, other than disclosures required by paragraph 26 of FIN 46. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual period. The Company has identified no VIE's, and 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, it 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 is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable noncontrolling
(minority) interests which, on October 29, 2003, the FASB decided to defer
indefinitely. 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) As of the end of the period covered by this Quarterly Report ("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
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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 paid
an additional $410,000 in August of 2003 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 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. All pending PRP matters have been settled, and at September 30,
2003, the Company has accrued approximately $250,000 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
Company and PADEP have agreed to settle this claim for approximately $1.2
million, and the Company expects to finalize the settlement prior to December
31, 2003. The net proceeds from the settlement will be used to pay down the
Quakertown Notes, which have an outstanding balance of $1 million as of
September 30, 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.
On November 3, 2003, the Company and its CEO, Mark Alsentzer, were each
served with a subpoena from the Securities and Exchange Commission in the matter
of Mace Security International, Inc. and US Plastic Lumber Corporation pursuant
to a formal investigation under Section 20(a) of the Securities Act of 1933 and
Section 21(a) of the Securities Exchange Act of 1934. The Company and Mr.
Alsentzer will fully cooperate in the investigation and seek to produce
documents responsive to the subpoenas. The Company believes it is in full
compliance with all Securities Laws.
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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first nine 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 5 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
none
(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.
On November 3, 2003 Company filed a Report on Form 8-K to report
that its credit facility with Guaranty Business Credit Corp. was amended
to, among other things, extend the maturity date of the facility to
November 30, 2003.
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.
November 14, 2003 /s/ MICHAEL D. SCHMIDT
- ----------------- ---------------------------------
Date Michael D. Schmidt,
Chief Financial Officer
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