U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company") are engaged in the manufacturing of recycled plastic lumber and other products and environmental remediation services, including recycling of soils which have been exposed to hydrocarbons and the beneficial reuse of dredge materials. The Company's plastic lumber customers are located throughout the United States. The Company's environmental remediation, dredge and soil recycling customers are located primarily in the Northeastern United States.

The accompanying consolidated financial statements include the accounts of U.S. Plastic Lumber Corp. and its wholly-owned subsidiaries U.S. Plastic Lumber, LTD, Clean Earth, Inc., Carteret Biocycle Corp. ("CBC"), Clean Earth of New Castle, Consolidated Technologies, Inc. ("CTI"), Integrated Technical Services, Inc. ("ITS") and S&W Waste, Inc. (See subsidiary mergers effective December 31, 1998 in Note 2). All significant intercompany balances and transactions have been eliminated in consolidation.

In July 1997, the Company and Interstate Industrial Corp. ("IIC") formed a 50/50 joint venture dredging business. The joint venture had minor operations in 1997 incurring a loss of $263,794. The Company manages the day to day dredging operations and has consolidated 100% of the assets, liabilities and results of operations of the joint venture after the Company obtained majority control effective April 1, 1998. A summary of the 1998 operations of the Joint Venture follows:

The Company provided 100% of the funds to finance the joint venture's operations and all of its cash advances will be returned before any funds are distributed to IIC. The IIC minority interest in the net income of the joint venture since inception totaling $250,164 is shown as minority interest in the accompanying consolidated balance sheet at December 31, 1998. The $119,403 minority interest in the CTI losses prior to June 30, 1998 are combined with the $382,062 minority interest in the IIC joint venture in the statement of Operations.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Inventories are valued at the lower of cost or market, cost being determined by the first-in, first-out method.

Property and equipment are stated at cost. Depreciation is computed for financial statement purposes by the use of the straight-line method over the estimated useful lives of the assets. Accelerated methods of computing depreciation are used for tax purposes. Upon sale or retirement, the cost and related accumulated depreciation of such assets are removed from the accounts and any resulting gain or loss realized is credited or charged to income during the period. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renewals, improvements and betterments are capitalized.

The excess of cost over the fair value of net assets of businesses acquired is amortized on a straight-line basis over a period of twenty years. Amortization expense for acquired intangibles was $468,449 in 1998 and $268,279 in 1997. Accumulated amortization of acquired intangibles excluding the Trimax patents was $716,039 at December 31, 1998 and $268,279 at December 31, 1997.

It is the Company's policy to evaluate the excess of cost over the net assets of businesses acquired based on an evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates or if the expected undiscounted future net cash flows are less than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made.

The Company incurred $2,045,436 of costs in 1997 and 1998 to permit and develop dredge material disposal sites in strip mines in Pennsylvania. The costs are being amortized over the total number of yards currently permitted for disposal including $71,071 of amortization in 1998. The $358,478 value assigned to the Trimax patents acquired in 1998 is being amortized over 15 years including $25,000 of amortization in 1998. Other assets are summarized as follows at December 31, 1998:

Revenues from the Company's plastic lumber division are recognized at the date the products are shipped. Revenues from the environmental recycling division are recognized when services are performed or upon treatment and certification for disposal of contaminated soil.

The Company provides for estimated losses on doubtful accounts. The following is a summary of activity of the Company's allowance accounts:

The Company follows Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." In accounting for stock-based transactions with nonemployees, the Company records compensation expense when these types of options are issued. As permitted by SFAS No. 123, the Company accounts for stock-based compensation granted to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be settled or realized.

Advertising costs are charged to operations as incurred and were approximately $106,022 and $81,068 in 1998 and 1997, respectively.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company maintains its cash and cash equivalents with various financial institutions which are primarily located in the Eastern United States. At December 31, 1998, the Company had bank balances of approximately $1,270,000 (including issued but not cleared checks) in excess of amounts insured by federal deposit insurance. Trade receivables are concentrated primarily in the Northeastern United States. The Company does not require collateral from its customers.

Financial instruments include cash and cash equivalents, receivables, accounts payable, due to affiliates, notes payable and convertible subordinated debentures. The carrying amounts reported in the consolidated balance sheet for these financial instruments approximate their fair value.

Basic income or loss per share is computed by dividing net income or loss less preferred stock dividends by the weighted-average number of shares actually outstanding. Diluted income or loss per share attributable to common stockholders further considers the impact of common stock equivalents to the extent that they are dilutive. The Company's basic and diluted loss per share are the same for both 1998 and 1997 because the common stock equivalents are anti dilutive. See Notes 6 and 7 for potentially dilutive securities.

During the years ended December 31, 1998 and 1997 the Company did not have any changes in its stockholders equity resulting from non-owner sources. Accordingly, comprehensive income as set forth in SFAS No. 130 was equal to the net loss amounts presented in the statements of operations.

Cash paid during the year totaled $849,585 and $302,305 for interest in the years ended December 31, 1998 and 1997, respectively, and $242,441 for income taxes in 1998 (none paid in 1997).

See Notes 2, 5, 6, 7, 11 and 13 for information regarding common shares, stock options, stock warrants and debt issued for acquisitions, non compete agreements, licensing agreement, earnout agreements, the convertible subordinated debentures and loan guarantees by the Stout partners.

The Company acquired three companies in the plastic lumber business and three companies in the environmental services business in 1997. The $3,872,481 total purchase price for all six acquisitions consisted of 2,190,150 shares of common stock valued at an aggregate of $2,277,481 and cash payments totaling $1,595,000. Several of the acquisitions include non compete agreements and earnout provisions based on achieving specified profitability levels for key employees and former owners.

A summary of the allocation of the $3,872,481 aggregate purchase price of the 1997 acquisitions to net assets acquired follows:

In January 1998 the Company acquired Green Horizon Environmental, Inc. ("GHE"), an environmental services company located in Norristown, Pennsylvania.

In February 1998, the Company acquired 55% of the stock of Consolidated Technologies, Inc. ("CTI"), an environmental recycling services company located in Norristown, Pennsylvania.

On February 28, 1998 the Company acquired substantially all of the assets of Chesapeake Plastic Lumber, Inc. ("CPL"), a manufacturer of plastic lumber in Denton, Maryland.

Effective April 30, 1998 the Company acquired 100% of the stock of Cycle-Masters, Inc. ("CMI"), a manufacturer of plastic lumber in Sweetser, Indiana.

Effective June 30, 1998 the Company acquired 100% of the stock of Geocore, Inc. ("GCI") a small environmental services company in northern New Jersey.

Effective June 30, 1998 the Company acquired the remaining 45% of CTI. The $119,403 minority interest in the CTI losses prior to June 30, 1998 are combined with the minority interest in the joint venture with IIC in the statement of Operations.

Effective June 30, 1998 the Company purchased substantially all of the assets of Trimax of Long Island, Inc. and Polymerix, Inc. ("Trimax") through the U.S. Bankruptcy Court. The Trimax purchase includes two patents for the manufacture of structural plastic lumber.

On December 30, 1998 the Company acquired 100% of S&W Waste, Inc. ("S&W"), a RCRA facility that recycles and beneficially re-uses industrial wastes and disposes of contaminated materials, located in northern New Jersey.

The total purchase price of $8,517,273 for all of the 1998 acquisitions consisted of 952,875 shares of USPL common stock valued at an aggregate of $3,535,660, cash payments of $3,705,000, issuance of debt totaling $954,952, costs totaling $303,868 and $17,793 assigned to options granted to a former owner. Several of the acquisitions include non compete agreements, stock options and earnout provisions based on achieving specified profitability levels for key employees and former owners.

A summary of the allocation of the aggregate purchase price of the 1998 acquisitions follows:

All of the acquisitions in 1997 and 1998 have been accounted for as purchases. Accordingly, the results of operations of the acquired companies are included in the Consolidated Financial Statements for periods subsequent to the date of acquisition. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired has been recorded as acquired intangibles and is being amortized on a straight-line basis over a period of twenty years from the effective date of each acquisition (15 years for the $358,478 assigned to the Trimax patents).

Effective December 31, 1998 all of the companies in the Plastic Lumber division were merged into U.S. Plastic Lumber, LTD and Waste Concepts, Inc., GHE and GCI were merged into ITS.

The unaudited pro forma combined results of operations of the Company and all of its subsidiaries for the years ended December 31, 1998 and 1997, after giving effect to certain pro forma adjustments as if the acquisitions had taken place on January 1, 1997, are as follows:

The foregoing unaudited pro forma results of operations reflect adjustments for amortization of goodwill, depreciation on re-valued buildings and equipment and interest on cash paid to the sellers. Per share amounts are calculated after preferred dividends are subtracted from net income. They do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred at January 1, 1997 or of future results of operations of the consolidated entities.

Inventories consist of the following at December 31, 1998 and 1997:

Property and equipment consist of the following at December 31, 1998 and 1997:

Depreciation expense was $1,511,209 and $520,888 for the years ended December 31, 1998 and 1997, respectively.

In January 1998, the Company obtained a $4,000,000 increase in its revolving line of credit bringing the total line of credit to $5,500,000. To obtain this increase the Stout partners, consisting of the Company's Chairman and two directors, pledged assets and guaranteed the line. In exchange for this guarantee the Company granted 320,000 non-employee stock options, exercisable at $2.25 per share, to the Stout Partnership. The $400,000 value of such options is being amortized as interest over the original 18 month term of the line of credit. On August 13, 1998 the Bank added $2,000,000 to the line, bringing the total line to $7,500,000, and extended the maturity date to September 30, 1999. The line was increased to $8,400,000 in October before it was repaid from proceeds of the new credit agreement. (See Note 13 for continuing loan from Stout Partnership.)

In October 1998 the Company negotiated a five year line of credit for $30,000,000 with a division of Southern Pacific Bank ("SPB"). The draws on the line are collateralized by specific equipment and/or inventory and eligible accounts receivable. The line bears interest at 1% over prime on inventory and receivable loans, 1.25% over prime on equipment loans and 2% over prime on real estate loans. The prime rate was 7.75% on December 31, 1998. Loans secured by specific equipment are payable over terms up to 7 years in equal monthly installments with the unpaid balance due in October 2003. The total costs of obtaining the line aggregating approximately $850,000 are being amortized over the five year term of the agreement as interest expense.

In the fall of 1998 the Company made net draws of $13,008,766 including $4,883,766 secured by accounts receivable and inventory, $6,125,000 secured by specific equipment and a $2,000,000 bridge loan which, subsequent to year end, converted to a real estate loan. The proceeds were used to payoff the PNC Bank line and approximately $770,000 of loans secured by specific equipment at six subsidiary locations. Certain equipment loans were left in place for various business reasons. On December 30, 1998 an additional $490,000 equipment loan was taken out in connection with the purchase of S&W.

Notes payable and capital leases consist of the following at December 31, 1998 and 1997:

Notes payable and capital leases mature as follows:

On December 22, 1998 the Company issued $4,000,000 of subordinated debentures convertible into common stock at the lower of $5.29 or 90% of the lowest trading price in the four days preceding the conversion date. The $444,444 allocated to the 10% discount on conversion was recorded as additional paid-in-capital and will accrete to the debentures outstanding as additional interest expense over the period to the earliest conversion date. The conversion price is adjustable downward if, in the one year period ending December 22, 1999, the Company issues convertible securities or common stock at a more favorable price than the debenture conversion price. The 5% per annum debenture interest is payable 1.25% per quarter starting April 1, 1999. The Company issued the debenture holders warrants to purchase 100,000 shares of common stock for $7.215 per share at any time before December 22, 2003. See Note 13 for issuance of additional $2,500,000 debentures subsequent to year end.

The Debentures mature on December 22, 2003, however, beginning on June 22, 1999 the debenture holders have the right to force the Company to redeem up to $1,000,000 of debentures at a 10% premium (i.e. $1,100,000 for $1,000,000 of debentures). In addition the debenture holders can require the Company to redeem 100% of the debentures at a 30% premium if the Company fails to register the underlying shares with the Securities and Exchange Commission before August 19, 1999. The Company intends to register the shares underlying the debentures before August 19, 1999 and keep the registration statement effective until December 22, 2001 as required by the debenture agreement.

The debenture holders can force the Company to issue up to $1,500,000 of debentures on the same terms at any time until December 22, 2001. This "Call" right is in addition to the $2,500,000 of debentures issued in January 1999 (See Note 13). The Company can compel the debenture holders to purchase an additional $500,000 of debentures between June 22, 1999 and December 22, 1999. However, the maximum total debentures that can be issued is $8,000,000. The Company must issue additional warrants in the same proportion (2.5%) as any additional debentures are issued.

The Company incurred costs totaling $688,116 related to the $4,000,000 debentures including $197,600 assigned to the 100,000 warrants. These costs are being amortized as additional interest expense over the five year term of the debentures. The unamortized balance is included in other assets. If the debentures are converted into common stock the unamortized balance will be charged to additional paid-in-capital.

In 1996 and 1997 the Company sold 193,970 shares of the Company's Series A Preferred Stock for total gross proceeds of $3,879,400. The shares are nonvoting and have a 10% cumulative stock dividend payable semiannually. The dividend is payable only in Series A Preferred Stock. No cash dividends will be paid. Each share is convertible into seven shares of the Company's Common Stock at the option of the stockholder or mandatorily on the date a registration statement, which would yield the Company $10 million in proceeds, is declared effective by the Securities and Exchange Commission ("SEC"). In the event of any liquidation, after payment of debts and other liabilities, the holders of Series A Preferred Stock will be entitled to receive, before the holder of any of the Common Stock, the stated value of $20 per share plus any unpaid dividends. The Series A Preferred Stock can be redeemed at any time at the sole option of the Company for $25 per share. In 1998 approximately 2,431 Series A shares were converted into 17,017 common shares.

Semi annual 5% stock dividends were declared as of March 31 and September 30 each year for a total of 21,511 and 14,960 Series A shares in 1998 and 1997, respectively. At December 31, 1998 approximately 228,012 Series A shares are outstanding.

In the summer of 1998 the Company issued 211,020 shares of Series B Preferred Stock to accredited investors. The Series B shares have substantially the same rights and features as the Series A Preferred shares except that the stated and liquidation value of the Series B shares is $21.00 per share.

A 5% stock dividend of 7,455 Series B shares was declared as of September 30, 1998 for the pro rata portion of the six month period that the Series B preferred shares were outstanding. In 1998 approximately 63,776 Series B shares were converted into 446,432 common shares. At December 31, 1998 approximately 154,697 Series B shares are outstanding.

The Company has granted stock options to key employees and directors. The option price at the date of grant is determined by the Board of Directors and is generally tied to the market price of the Company's freely trading shares. The term for exercising the stock options is generally ten years. Stock options granted by the Company generally vest ratably over a period of three years. Employee stock option activity in 1998 is as follows:

Additional information regarding options outstanding at December 31, 1998 follows:

The following table summarizes the pro forma consolidated results of operations of the Company as though the fair value based accounting method in SFAS 123 had been used in accounting for employee stock options for the years ended December 31, 1998 and 1997.

For purposes of the above disclosure, the determination of the fair value of stock options granted in 1998 and 1997 was based on the following: (i) a risk free interest rate of 7.5%; (ii) expected option lives of seven years; (iii) expected volatility in the market price of the Company's common stock of 75%; and (iv) no expected dividends on the underlying common stock.

Magellan Finance Corporation ("Magellan"), a stockholder, was originally granted options to purchase up to 353,684 shares of the Company's common stock at $1.77 per share. Magellan exercised 117,895 of the options in 1997 and another 117,895 options in September 1998. The remaining 117,894 options expire on June 30, 1999. If Magellan does not exercise its option to purchase the shares, then the Company is obligated to issue the shares to certain USPL stockholders at no cost.

The Stout Partnership was granted 320,000 options at $2.25 per share in January 1998 in exchange for enabling the Company to obtain a line of credit by providing guarantees (see Notes 5 and 13). In 1998 options for a total of 37,500 shares at a $3.50 exercise price were granted to outside directors. A total of $100,000 was recorded as compensation expense and added to additional paid-in-capital for these nonemployee director options. Options for 20,000 shares with a $5 exercise price were also granted in one of the 1998 acquisitions and options for 10,000 shares with a $3.50 price were granted in connection with the convertible debentures.

Nonemployee stock option activity in 1998 and 1997 is summarized as follows:

The Company previously issued 950,000 of Series A and 950,000 Series B warrants to purchase the Company's common stock at $2.50 and $4.50 per share, respectively. The Company received $2,291,193 from the exercise of 916,477 Series A warrants in 1998. The 33,523 unexercised Series A warrants expired on June 30, 1998. None of the Series B warrants were exercised and all 950,000 of the Series B warrants expired in the third quarter of 1998.

The Company issued the debenture holders warrants to purchase 100,000 shares of common stock for $7.215 per share at any time before December 22, 2003. Warrants to purchase 62,500 shares for $7.215 per share will be issued in 1999 as a result of the issuance of $2,500,000 of convertible debentures in January 1999 (see Notes 6 and 13).

The Company has earnout agreements with certain shareholders that provide for 4,573,686 shares of the Company's Common Stock to be reserved for issuance if certain sales/production goals for plastic lumber product are achieved prior to December 31, 2000 as set forth in the March 29, 1996 Agreement and Plan of Reorganization between Earth Care Global Holdings, Inc. and Educational Storybooks International, Inc. The additional shares, if any, will be issued at their then current fair value and allocated to acquired intangibles as an additional cost of the reverse merger of Earth Care Global Holdings, Inc. with USPL and the subsequent reverse merger of USPL with Clean Earth Inc. ("CEI") in 1996.

At December 31, 1998, common stock was reserved for the following:

The Company has defined contribution 401(k) and profit sharing plans that cover substantially all employees who have met the eligibility requirements. Employees may contribute up to the maximum allowable under current regulations to the 401(k). There are no employee contributions to the profit sharing plan. The Company's contribution to each plan is at the discretion of the Company. The Company contributed $5,772 to one of the plans during 1998 (none in 1997).

The provision for income taxes includes federal and state taxes currently payable and those deferred because of temporary differences between financial statement and tax basis of assets and liabilities. The components of the provision for income taxes (benefit) included in the consolidated statements of operations is as follows:

The provision for income taxes differed from the amount obtained by applying the federal statutory income tax rate to pre-tax accounting income (loss), as follows:

Deferred taxes primarily represent the impact of businesses acquired in 1998 and 1997 that formerly accounted for Federal income taxes on a cash basis and differences between the fair market value and tax basis of equipment owned by acquired companies. At December 31, 1998 the Company had Federal and state net operating loss carryforwards of approximately $6,000,000 and $4,300,000, respectively, that expire in 2002 through 2012. For financial reporting purposes a valuation allowance of $2,300,000 has been established to offset the net deferred tax assets related to these carryforwards. If realized in the future, most of the benefit of these carryforwards will be recorded as a reduction of acquired intangible assets.

In 1998 the Company reduced the valuation reserves on deferred tax assets of Companies acquired in 1996 and 1997. Accordingly, net deferred tax liabilities and the related acquired intangibles were reduced by $150,000. Deferred tax assets of acquisitions in 1998 also reduced the net deferred tax liability.

In 1997 and 1998, the Company borrowed up to $2,400,000 under a $2,500,000 line of credit agreement from a company controlled by a member of the Board of Directors and his family. The line of credit bears interest at prime plus 1% and expires on June 30, 1999. No balance was outstanding at December 31, 1998 (See Note 13) and $1,956,810 was outstanding at December 31, 1997. The Company paid $171,849 and $90,938 in interest on this line in 1998 and 1997, respectively.

The Company leases office space, equipment, manufacturing facilities, and land under non-cancelable operating leases that expire at various dates through 2028. Future minimum payments are as follows for the years ending December 31:

The Company leases approximately 7.5 acres of land at its soil recycling facility at a rental of $1.00 per ton of soil received with a minimum rental of $50,000 per year. Rent expense under this lease was $219,986 and $192,223 in 1998 and 1997, respectively. The lease was renewed for five years in 1998 and contains two five-year renewal options. The lessor has the right and option at the time of renewal to require the Company to purchase the property at a purchase price of $100,000 per acre subject to annual escalation based on the Consumer Price Index from inception of the lease.

The Company currently leases approximately 5 acres of land under the CBC facility. The lease term is 30 years with two renewal options Rent expense for all operating leases for the years ended December 31, 1998 and 1997 was approximately $1,013,000 and $563,000, respectively.

At December 31, 1998, the Company had employment agreements with certain officers and key employees. Salaries and benefits expense recorded under the Agreements totaled approximately $1,714,000 and $792,000 during years ended December 31, 1998 and 1997, respectively. Future minimum payments under these employment agreements are as follows:

The Company had a covenant not to compete agreement requiring payments of $2.00 per ton of soil received for processing. Payments under the covenant not to compete totaled $187,008 and $384,446 for 1998 and 1997, respectively. The requirement to make payments ended on August 31, 1998.

The Company is subject to claims and legal actions that arise in the ordinary course of its business. The Company believes that the ultimate liability, if any, with respect to these claims and legal actions, will not have a material effect on the financial position or results of operations of the Company.

During February of 1997, the Company entered into a licensing agreement with Rutgers University for the rights to commercially develop, manufacture and sell a composite building material from recycled waste. In exchange for $10,000 in cash and 187,500 shares of the Company's common stock, the Company received an exclusive license to use this material for certain applications, including railroad ties, marine pilings and building materials. The total consideration was valued at $103,750 and has been recorded as a component of other assets in the consolidated balance sheet. This agreement is in effect for at least ten years from the date of the initial product sales and requires the Company to pay a maintenance fee and a 3% royalty fee. Such fees are subject to certain minimum future payment thresholds, as follows:

The Company had minimal initial product sales in 1998 and paid $21,667 of maintenance and prorated royalty fees in 1998 after the initial shipments of railroad ties were made to potential customers for testing.

Carteret Biocycle, Inc. ("CBC") has a license and operating agreement with SD&G Aggregates, Inc. ("SD&G") to conduct remediation of contaminated soils. The Company pays SD&G a royalty of 2% of CBC's sales. CBC commenced operations in July 1998 and recorded royalty expense of $ 33,360 in 1998.

The Plastic Division had sales to one customer of $4,117,000 in 1998 and $2,590,000 in 1997.

The Company's sales generating operations are conducted through its Plastic Lumber Division and its Environmental Recycling Division. Separate monthly consolidated financial statements are prepared for each division. There are no intersegment or foreign revenues. The corporate administrative expenses consist of the executive officers of the Company and include the legal, accounting and enterprise wide cash management functions and public company expenses. Substantially all of the debt and related interest expense is also retained at corporate. The corporate administrative and interest expenses are not allocated to the two Divisions for management reports. The operating income of each of the Divisions is the principal measurement tool used to manage the two segments.

The operating results of each segment and the reconciliation of each element to the consolidated statement of operations for each of the years ended December 31, 1998 and 1997 follows (in thousands):

Information with respect to assets and capital expenditures of the segments and reconciliation to the financial statements is set forth below (in thousands):

On January 7, 1999, the Company executed a contract to acquire all of the stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates a soil remediation facility in Philadelphia, PA similar to the Company's soil remediation facility in New Castle, DE and has been a competitor of the Company. AWI provides environmental services similar to the Company's environmental services division. The Company signed a Management Contract on January 7, 1999 taking over all responsibility for day to day management and financial control of SRP and AWI as of that date. Unaudited sales of SRP and AWI, prior to intercompany eliminations, for the year ended December 31, 1998 were $14,922,000 with unaudited operating income of $2,025,000. The Company finalized its transaction with Brass in March 1999. The Company purchased Brass for cash plus 1,000,000 shares of restricted common stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to purchase common stock of the Company. The real estate and accounts receivable of Brass will secure loans to fund the cash portion of the purchase price. The acquisition of Brass will be accounted for as a purchase.

On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook"), located in Chicago, Illinois. Eaglebrook processes HDPE for use as a raw material and produces plastic lumber similar to the Company's. Eaglebrook also produces composite lumber through a continuous extrusion process. The Company purchased Eaglebrook for cash plus 1,668,025 shares of restricted common stock, $4,000,000 of convertible secured debentures and 150,000 options to purchase common stock. The acquisition of Eaglebrook will be accounted for as a purchase.

The Company will lease the 260,000 square foot Chicago facility from the sellers for ten years at a monthly rental of $39,181 with an option to purchase the facility for $3,000,000. The Sellers all signed three year employment contracts and will manage the Company's Plastic Lumber Division.

The unaudited sales of both Eaglebrook companies were $22,145,000, before $1,706,000 of intercompany eliminations, and the unaudited operating income was $1,325,000 for the year ended December 31, 1998.

On January 26, 1999 the Company issued an additional $2,500,000 of Convertible Subordinated debentures to the same debenture holders with substantially the same terms as the $4,000,000 issued on December 22, 1998 (see Note 6). The debenture holders can demand repayment of the $2,500,000 only during the first quarter of 2000. The proceeds were used in the purchase of Eaglebrook.

On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan to the Company. The loan bears interest at 10% and matures in 18 months. The proceeds were used in the purchase of Eaglebrook. The Stout Partnership borrowed the $5,000,000 from PNC Bank and the individual partners have personally guaranteed the loan. In January 1999 the Company borrowed $1,500,000 from a company owned by one of the directors and his family (see Note 10). The loan bears interest at 1% over prime and matures in 12 months. The proceeds were used in the Eaglebrook acquisition.