10-Q 1 g84499e10vq.txt US PLASTIC LUMBER CORP. FORM 10-Q ================================================================================ 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. ================================================================================ 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

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)

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)

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)

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:

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):

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. 18 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

U S PLASTIC LUMBER CORP 10-Q