<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1995
Commission File Number 1-10367
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
DELAWARE 71-0675758
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 W. Robinson
P.O. Box 1237
Springdale, Arkansas 72765
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (501)750-1299
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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:
As of October 31, 1995, the number of shares outstanding of the Registrant's
Class A Common Stock, which is the class registered under the Securities
Exchange Act of 1934, was 14,062,370 and the number of shares outstanding of the
Registrant's Class B Common Stock was 1,465,530.
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 Financial Statements
Balance Sheets, September 30, 1995 and December 31, 1994______ 1-2
Statements of Operations,
Three months and nine months ended September 30, 1995
and 1994______________________________________________________ 3
Statements of Cash Flows,
Nine months ended September 30, 1995 and 1994_________________ 4
Notes to Financial Statements_________________________________ 5-13
Review Report of Arthur Andersen LLP
Independent Public Accountants________________________________ 14
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations___________________________ 15-19
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings ____________________________________________ 20-21
Signatures ___________________________________________________ 22
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30, 1995 December 31,
(Unaudited) 1994
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,655 $ 5,977
Receivables 44,933 60,920
Inventories 527,657 710,694
Prepaid expenses and other 173,598 113,518
---------- ----------
Total current assets 775,843 891,109
---------- ----------
Buildings and equipment,
at cost, including construction
in progress of $0 (1995) and
$201,608 (1994):
Buildings 675,420 675,009
Machinery and equipment 8,438,599 8,405,688
Transportation equipment 112,411 112,411
Office equipment 170,659 166,278
Leasehold improvements 349,931 347,155
---------- ----------
9,747,020 9,706,541
Less accumulated depreciation
and amortization 2,899,676 2,129,348
---------- ----------
Net buildings and equipment 6,847,344 7,577,193
---------- ----------
Other assets, at cost less accumulated
amortization of $77,082 (1995) and
$59,801 (1994) 332,475 313,605
---------- ----------
$7,955,662 $8,781,907
========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
1
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30, 1995 December 31,
(Unaudited) 1994
----------- ------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt-
Related parties $ 268,366 $ 170,655
Other 485,111 211,205
Accounts payable - trade 901,049 813,265
Payables to related parties 166,970 58,415
Accrued liabilities 150,279 143,891
Notes payable 66,512 93,431
Notes and advances payable - related parties 748,874 -
------------- ------------
Total current liabilities 2,787,161 1,490,862
------------- ------------
Long-term debt, less current maturities
Related parties 1,173,817 1,334,645
Other 166,457 509,952
------------- 1,844,597
Total long-term debt, less current maturities 1,340,274 ------------
-------------
Stockholders' equity
Preferred stock, $1 par value; 5,000,000
shares authorized, none issued - -
Class A common stock, $.01 par value;
50,000,000 shares authorized, 14,062,370 (1995)
and 14,038,038 (1994) shares issued and
outstanding 140,624 140,380
Class B convertible common stock, $.01 par
value; 7,500,000 shares authorized, 1,465,530
(1995) and 7,090,530 (1994) shares issued
and outstanding 14,655 70,905
Additional paid in capital 18,304,567 18,219,606
Deficit accumulated (14, 631,619) (12,984,443)
------------- ------------
Total stockholders' equity 3,828,227 5,446,448
------------- ------------
$ 7,955,662 $ 8,781,907
============= ============
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
2
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sales $ 1,693,444 $ 985,466 $ 4,260,418 $ 2,725,016
Cost of Goods Sold 1,786,749 1,312,677 4,700,344 3,731,270
----------- ----------- ----------- -----------
Gross Margin (93,305) (327,211) (439,926) (1,006,254)
Selling and Administrative Costs 327,869 285,051 1,000,438 1,258,403
----------- ----------- ----------- -----------
Operating Income (Loss) (421,174) (612,262) (1,440,364) (2,264,657)
Other Income (Expense)
Other Income 8 (9,384) 792 (7,668)
Interest Expense (74,070) (44,492) (207,604) (138,887)
----------- ----------- ----------- -----------
Loss before extraordinary item (495,236) (666,138) (1,647,176) (2,411,212)
Extraordinary Gain 879,373
----------- ----------- ----------- -----------
Net Loss $ (495,236) $ (666,138) $(1,647,176) $(1,531,839)
=========== =========== =========== ===========
Loss per share of common stock
before extraordinary gain ($.03) ($.04) ($.11) ($.18)
=========== =========== =========== ===========
Net loss per share of common
stock ($.03) ($.04) ($.11) ($.11)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 15,511,477 15,476,196 15,506,233 13,724,127
=========== =========== =========== ===========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
3
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1995 1994
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,647,176) $(1,531,839)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 771,181 698,190
Amortization of other assets 17,281 14,842
Loss (Gain) on disposition of assets (734) 8,954
Increase in other assets (36,151) (45,160)
Extraordinary gain - (879,373)
Changes in current assets & current liabilities 341,671 965,330
----------- -----------
Net cash used in operating activities (553,928) (769,056)
Cash flows from investing activities:
Additions to buildings and equipment (45,598) (928,581)
Proceeds of sale of equipment 5,000 1,000
----------- -----------
Net cash used in investing activities (40,518) (927,581)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes 1,035,696 1,761,952
Payments on notes (446,447) (618,601)
Proceeds from issuance of common stock, net 28,955 372,341
----------- -----------
Net cash provided by financing activities 618,204 1,515,692
----------- -----------
Increase (Decrease) in cash & cash equivalents 23,678 (180,945)
Cash and cash equivalents:
Beginning of period 5,977 192,381
----------- -----------
End of period $ 29,655 $ 11,436
=========== ===========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
4
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Unaudited Information
- ------------------------------
The financial statements included herein have been prepared by Advanced
Environmental Recycling Technologies, Inc. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). However, all adjustments, consisting solely of a normal, recurring
nature, have been made to the accompanying financial statements which are, in
the opinion of the Company's management, necessary for a fair presentation of
the Company's operating results. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented herein not misleading. It is
recommended that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
Note 2: Organization and Description of the Company
- ----------------------------------------------------
Advanced Environmental Recycling Technologies, Inc. (the Company) has developed
and manufactures composite building material from waste plastic and wood fiber
waste for certain specialized applications in the construction industry. The
Company markets this material as a substitute for wood and plastic filler
materials for standard door frames, window sills, flooring, and decking.
Additionally, the Company produces and markets recycled waste plastics resin.
The Company was initially capitalized on December 2, 1988, with a contribution
of machinery and equipment, plant facilities and technology, most of which was
used by certain members of management in an unsuccessful prior business. The
prior business was organized in June 1985 to manufacture artificial firelogs
using certain technology somewhat similar to that used in the Company's
manufacturing process. By 1986, the prior business had incurred substantial
losses from operations, had no further working capital resources and
discontinued its business. The initial contribution consisted of approximately
$3,000,000 in buildings, machinery and equipment, supplies and other tangible
assets, as well as technological rights and expertise. In connection with such
initial organization, the Company assumed $795,000 in bank indebtedness secured
by certain of the contributed assets. All amounts are reflected in the
accompanying financial statements at the contributor's book value.
For periods prior to April 1, 1995, the Company was a development stage
enterprise whose operations consisted primarily of design development and
improvement of the equipment and production process and initial marketing and
determination of product markets. Accordingly, the Company has reclassified
certain prior period amounts to conform to the current period presentation.
Note 3: Future Operations
- --------------------------
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At September 30, 1995, the Company had a working capital deficit of
$2,011,318 and had incurred net losses of $495,236 and $1,647,176 for the three
months and nine months ended September 30, 1995, respectively. On November 1,
1995, certain affiliated and non-affiliated shareholders exercised 1,630,496
Class F Warrants. The proceeds from the exercise of these warrants, which
amounted to $994,602, reduced the working capital deficit of the Company. The
Company has not yet achieved a successful level of operations since inception in
1988, nor is there any assurance that the Company will be able to achieve future
revenue levels sufficient to support existing operations, generate positive cash
flow from operations or recover its investment in its property, plant and
equipment. Management believes that the Company's currently achieved production
and sales levels are sufficient to significantly
5
<PAGE>
reduce or eliminate the need for additional capital resources to support
existing operations. However, there can be no assurance that such production and
sales levels can actually be maintained over any extended period. The Company
has limited additional financial resources available to support its ongoing
operations and in the past few years has, in large part, been supported by
certain major shareholders. There is no commitment for such shareholders to
continue such support. The Company also has claims in litigation outstanding
against it as described in Note 13, the outcome of which is uncertain. There can
be no assurance that the Company's existing operation will maintain adequate
levels which will not require additional capital resources as have been required
since inception. Further, if the litigated claims were to be assessed against
the Company, the Company would likely be unable to pay such claims. These
factors, among others, raise substantial doubt concerning the ability of the
Company to continue as a going concern. The ability of the Company to continue
as a going concern is dependent upon the ongoing support of its stockholders,
investors, customers and creditors and its ability to successfully mass produce
and market its product at economically feasible levels.
Note 4: Significant Accounting Policies
- ----------------------------------------
Statements of Cash Flows
------------------------
In order to determine net cash used in operating activities, loss from
continuing operations has been adjusted by, among other things, changes in
current assets and current liabilities, excluding changes in cash and temporary
cash investments, current maturities of long-term debt, advances from affiliates
included in notes payable - related parties. Those changes, shown as an
(increase) decrease in current assets and an increase (decrease) in current
liabilities, are as follows:
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, 1995 September 30, 1994
(unaudited) (unaudited)
------------------- -------------------
<S> <C> <C>
Receivables $ 15,987 $ 652,449
Inventories 183,037 (129,700)
Prepaid expenses and other (60,080) (70,469)
Accounts payable -
trade & related parties 196,339 408,280
Accrued liabilities 6,388 94,411
Deferred revenue - (459,016)
Current liabilities included in
extraordinary gain - 469,375
-------- ---------
$341,671 $ 965,330
======== =========
</TABLE>
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Buildings and Equipment
-----------------------
Buildings and equipment contributed to the Company in exchange for Class B
Common Stock are carried at the contributor's historical book value. Property
additions and betterments include capitalized interest, and acquisition,
construction and administrative costs allocable to construction projects and
property purchases. Gains or losses on sales or other disposition of property
are credited or charged to income.
Provision for depreciation and amortization of buildings and equipment is
provided on a straight-line basis for buildings and leasehold improvements,
transportation equipment and office equipment over the estimated useful lives of
these facilities. Machinery and equipment is depreciated on a straight line
basis over the estimated useful life of the related equipment or on a units of
production basis over the estimated useful production lives of the related
assets.
6
<PAGE>
Estimated useful lives are; buildings and leasehold improvements - 20 years,
transportation equipment - 3 to 5 years, office equipment - 5 years and
machinery and equipment - 7 to 12 years or 120 million units (pounds).
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of the following:
September 30, 1995 December 31,
(Unaudited) 1994
------------------- ------------
Raw materials $ 93,821 $ 78,302
Finished goods 433,836 632,392
-------- --------
$527,657 $710,694
======== ========
Other Assets
------------
Other assets consist primarily of the costs for the preparation of patent
applications ($404,467 and $368,317 at September 30, 1995 and December 31, 1994
respectively) which are amortized using the straight-line method over 17 years.
Note 5: Receivables
- --------------------
In April 1993, the Company renewed for one year its agreement with an affiliate
whereby the Company agreed to sell certain of its trade receivables which the
affiliate deems acceptable. Upon the acceptance of a sale of a receivable, the
affiliate will remit to the Company 100% of the receivable, as defined in the
agreement, and the Company shall remit to the affiliate .88% as a factoring
charge. The Company will indemnify the affiliate for any loss arising out of
rejections or returns of any merchandise, or any claims asserted by the
Company's customers. During the nine months ended September 30, 1995, the
Company sold an aggregate of approximately $4,278,235 in receivables under this
agreement. Costs of approximately $37,675 associated with the factoring
agreement are included in selling, production, general and administrative
expenses for the nine month period.
Note 6: Notes and advances payable - related parties
- -----------------------------------------------------
Bridge Notes in the amount of $225,000 issued in connection with the June 29,
1993 private placement offering were included in notes payable-related party at
December 31, 1993. On December 31, 1993, the Company issued a note in the
amount of $81,341 to an affiliated company for payment of amounts due for
returns on merchandise related to receivables previously sold under the accounts
receivable factoring agreement discussed in Note 5. In May 1994, these notes
were redeemed by the Company with the issuance of Class A Common Stock and
certain Warrants as a part of the Private Placement Offering described in Note
9. In May and June 1994, the Company received additional loans from affiliated
parties aggregating $230,000 at June 30, 1994. These notes are payable on demand
and accrue interest at the rate of 8% per annum.
In July 1994, the Company obtained a $1,000,000 line of credit financing
agreement with Jim G. and Marjorie S. Brooks. The credit line is secured by
substantially all of the assets of the Company and accrues interest at a rate of
8.5% per annum. Proceeds from the line of credit were used to redeem the notes
payable to related parties previously discussed and provide working capital for
Company operations. At December 31, 1994, the outstanding balance on the line
of credit was $1,411,903. In February 1995, the line of credit was increased to
$2,000,000 of which approximately $1,566,903 was converted to a term note to be
amortized at 9 3/4 % over five years beginning April 1, 1995. The balance of
$433,097 is a revolving credit line which expires in February 1996, to be
available as needed by the Company and as of September 30, 1995, the total
amount available had been drawn. As of September 30, 1995, the Brooks have
advanced the Company additional amounts totaling $315,777, such amounts being
reflected as current liabilities in the accompanying financial statements.
7
<PAGE>
Note 7: Long-term debt
- -----------------------
Long-term debt as of September 30, 1995 and December 31, 1994, consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
-------------- -------------
1995 1994
-------------- -------------
<S> <C> <C>
Note payable, due in 23-monthly installments
of $10,156 plus interest at prime plus two
percent (10.75% at September 30, 1995) beginning
October 1, 1994 with the remaining balance due
September 1, 1996; secured by certain manufacturing
equipment, inventories and receivables. (See Note 14) $ 355,438 $ 456,998
Note payable, due in monthly installments of accrued
interest from January 1, 1995 through April 1, 1995,
and monthly installments of principal and interest
beginning May 1, 1995 with the remaining balance
due March 1, 1997, interest at eight percent, secured
by unescrowed shares of Class B Common Stock owned by
certain officers of the Company and certain
manufacturing equipment. 233,561 258,823
Note payable, to a related party, due in 60-monthly
installments of principal and interest, beginning
April 1, 1995, interest at 9.75%. 1,442,183 1,411,903
Other 62,569 98,733
---------- ----------
Total 2,093,751 2,226,457
Less current maturities (753,477) (381,860)
Long-term debt, net of ---------- ----------
current maturities $1,340,274 $1,844,597
========== ==========
</TABLE>
The fair value of the Company's outstanding debt is approximately equal to its
carrying value at September 30, 1995.
The aggregate maturities of long-term debt as of September 30, 1995 are as
follows:
1996 753,477
1997 455,037
1998 330,567
1999 361,600
2000 193,070
---------
$ 2,093,751
===========
8
<PAGE>
Note 8: Interest
- -----------------
Interest incurred, capitalized, expensed and cash payments for interest are
summarized as follows:
Nine months Nine months
ended ended
September 30, September 30,
1995 1994
(unaudited) (unaudited)
-------------- --------------
Interest incurred and expensed $207,604 $133,887
======== ========
Cash payments for interest $163,983 $188,890
======== ========
Note 9: Stockholders' equity
- -----------------------------
The Class A Common Stock and the Class B Common Stock are substantially similar
in all respects except that the Class B Common Stock has five votes per share
while the Class A Common Stock has one vote per share. Each share of Class B
Common Stock is convertible at any time at the holder's option to one share of
Class A Common Stock and, except in certain instances, is automatically
converted into one share of Class A Common Stock upon any sale or transfer.
On November 9, 1989, the Company completed a public offering of 1,250,000 units,
at a price to the public of $4.00 per unit. In December 1989, the Company sold
an additional 100,000 units to the underwriter at the same price. Each unit
consists of three shares of Class A Common Stock and three redeemable Class A
Warrants, which are separable and transferable immediately upon issuance. Each
Class A Warrant entitles the holder to purchase a unit consisting of one share
of Class A Common Stock and one Class B Warrant at an exercise price of $2.00.
Each Class B Warrant entitles the holder to purchase one share of Class A Common
Stock at an exercise price of $3.00. The Class B Warrants are redeemable at
$.05 per Warrant at the option of the Company if certain public stock trading
prices are achieved and expire in November 1995.
In connection with the public offering, the Class B Stockholders placed in
escrow, on a pro rata basis, an aggregate of 5,625,000 shares of Class B Common
Stock. Upon the occurrence of certain events, escrow shares were to be released
from escrow and returned to the Class B Stockholders if during the calendar year
ended December 31, 1994 (1) the Company's minimum pretax income was at least $16
million or (2) the market price of the Company's Class A Common Stock averages
in excess of $6.50 per share for 20 consecutive trading days. The Company did
not achieve any of the above requirements, and, as such, the escrowed shares
were contributed to the Company's treasury on March 31, 1995 and then canceled.
In March 1992, the Company issued notice of redemption of the aforementioned
Class A Warrants, of which approximately 4.3 million were outstanding on the
redemption date of April 27, 1992. Prior to the redemption date, holders of
4,212,740 Class A Warrants exercised their warrants at $2.00 per warrant which
totalled $8,425,480 in warrant exercise proceeds. Accordingly, the Company
issued 4,212,740 shares of Class A Common Stock and 4,212,740 Class B Warrants
to the exercisers of the Class A Warrants. The remaining unexercised Class A
Warrants were redeemed at $0.05 per warrant. During the fourth quarter of 1992,
holders of 300 Class B Warrants exercised their warrants at $3.00 per warrant.
In August 1995, the Company's Board of Directors approved a resolution extending
the expiration date of the outstanding Class B Warrants to September 1, 1996.
9
<PAGE>
In July 1993, in connection with the issuance of $650,000 in Bridge Notes which
matured June 29, 1994, the Company issued 650,000 Class C Warrants which are
exercisable ratably into one share of Class A Common Stock at an exercise price
of $3.00 per share. The Warrants expire on June 29, 1998.
In September 1993, the Company initiated an offering of up to $2,000,000 of
discounted gross offering proceeds of Class A Common Stock to qualified foreign
investors under Regulation S of the Securities Act of 1933. At December 31,
1993, 736,135 shares of such stock had been issued resulting in approximately
$602,000 net offering proceeds to the Company. In January 1994, an additional
450,000 shares were issued, resulting in approximately $344,000 net offering
proceeds to the Company. As a part of the offering, the Company has issued
168,501 Class D Warrants as of December 31, 1993 and an additional 38,250 Class
D Warrants subsequent to year end to the Stock Placement Distributor. The Class
D Warrants expire five years from the date of issue and are exercisable at a
price of $1.50 per share of Class A Common Stock for each Class D Warrant
exercised.
Also in connection with the Regulation S offering, the Company has reserved for
issuance one Class E Warrant for each two shares of Class A Common Stock
purchased by the aforementioned qualified foreign investors. The Class E
Warrants will be issued six months after the Class A Common shareholders' stock
acquisition date, provided that the shares of Class A Common Stock are still
owned by and registered in the name of the original purchaser as of such date.
The Class E Warrant will expire two years from the date of issue and will be
exercisable at $1.50 per share of Class A Common Stock for each Class E Warrant
exercised.
In May 1994, the Company completed a Private Placement Offering at market price
to certain affiliated stockholders and bridge note holders with the issuance of
3,468,400 shares of Class A Common Stock, 3,468,400 Class F Warrants, and
3,468,400 Class G Warrants. Net offering proceeds of approximately $2,065,000
consisted of $2,020,000 conversion of debt and accrued interest and $45,000 in
cash. The Class F and Class G Warrants expire five years from the date of
issuance and are exercisable at a price of $.61 and $.92 per share,
respectively, for each share of Class A Common Stock purchased. On November 1,
1995, certain affiliated and non-affiliated stockholders exercised 1,630,496
Class F Warrants. The proceeds from the exercise of these warrants amounted to
$994,602 and were used to reduce the current liabilities of the Company.
In 1995, in connection with an extension of a line of credit to the Company by a
related party (see Note 6), the Company's Board of Directors authorized the
issuance of up to 2,000,000 Class H Warrants on a one-for-one basis for each
dollar advanced under the loan agreement and having an exercise price equal to
the per share market value of the Company's Class A Common Stock on the date of
such advances. While no warrants have been issued as of the date of this
filing, all authorized Class H Warrants are currently issuable. Upon issue, the
warrants will be exercisable at prices from $.39 to $49 per share of Class A
Common Stock for each Class H Warrant exercised. The Class H Warrants will
expire in February 2000.
At September 30, 1995, the Company had Class A Common Stock reserved for
issuance as follows:
Class A
Common Stock
equivalent shares
-----------------
Class B Warrants 4,212,440
Stock option plans (Note 10) 3,050,000
Class C Warrants 650,000
Class D Warrants 206,751
Class E Warrants 128,609
Class F Warrants 3,468,400
Class G Warrants 3,468,400
Class H Warrants issuable 2,000,000
----------
17,184,600
==========
10
<PAGE>
Note 10: Stock option plans
- ---------------------------
The Company's Stock Option Plans (the "1990 Plan" and the "1989 Plan") authorize
the issuance of a total of 1,500,000 shares of the Company's Class A Common
Stock to its directors, employees, and outside consultants. The option price of
the stock options awarded must be at least equal to the market value of the
Class A Common Stock on the date of grant. Stock options may not be granted to
an individual to the extent that in any calendar year in which options first
become exercisable, the shares subject to options first exercisable in such year
have a fair market value on the date of grant in excess of $100,000. Stock
options may not be granted after March 2000 and May 1999 for the 1990 Plan and
the 1989 Plan, respectively. No option may be outstanding for more than ten
years after its grant. The purpose of the Plans is to enable the Company to
encourage key employee, directors and outside consultants to contribute to the
success of the Company by granting such persons incentive stock options ("ISOs")
and/or non-incentive stock options ("nonqualified stock options"). The ISOs are
available for employees only.
In order to provide for disinterested administration of the Plans for purposes
of Rule 16b-3 under the Securities Exchange Act of 1934, the 1990 Plan also
provides that outside directors will automatically receive annual awards of
nonqualified stock options.
In June 1994, stockholders of the Company approved the adoption of the Amended
and Restated Stock Option Plan which superceded and replaced the Company's 1990
Stock Option Plan. The new Plan provides for the granting of options to
purchase up to 1,000,000 shares of the Company's Class A Common Stock by
recipients of incentive stock options or non-qualified stock options as granted
by the Company's Board of Directors. 406,000 options were granted from this
plan during 1995.
The Company's stockholders also approved the Non-Employee Director Stock Option
Plan. The Director Plan provides for the issuance of options to purchase up to
an aggregate of 500,000 shares of the Company's Class A Common Stock to eligible
outside directors of the Company. Each eligible outside director will be
granted options to purchase 25,000 shares of common stock annually commencing in
1995 and each year thereafter. In April 1995, 25,000 such options were granted
to each of the three outside directors serving on the Board at that time.
Also in June 1994, stockholders of the Company approved the Chairman Stock
Option Plan. The Chairman Plan provides that Jim G. Brooks, the Company's
Chairman and Chief Executive Officer be awarded a one-time grant, effective May
1, 1994, to purchase 500,000 shares of the Company's Class A Common Stock. The
options granted are exercisable at $.63 per share and are vested at the rate of
20% per year commencing on the first anniversary of the grant date.
A summary of the activity in the Company's Stock Option Plans during the nine
month ended September 30, 1995 is as follows:
Shares Per Share
--------- -------------
Outstanding
December 31, 1994 1,568,000 $.63 - $3.00
Granted 481,000 $ .38
Forfeited - -
Exercised 24,332 $ 1.19
---------
Outstanding
September 30, 1995 2,024,668 $.38 - $3.00
=========
Exercisable
September 30, 1995 1,037,668 $.66 - $3.00
=========
11
<PAGE>
Note 11: Significant customer
- ------------------------------
During the nine months ended September 30, 1995, the Company had $1,605,229 in
sales to a single customer which represented 38% of total sales. Sales to that
customer during the comparable period of 1994 were $1,941,008 or 71% of total
sales. Additionally, in the first nine months of 1995, there were sales to
another customer of $447,452 representing 11% of total sales. There were no
sales to that customer in 1994. Sales to a third customer in the nine months
ended September 30, 1995 were $439,733 or 11% of total sales. There were no
sales to that customer in the first nine months of 1994.
Note 12: Net loss per share of common stock
- --------------------------------------------
The net loss per share of common stock was based on the combined weighted
average number of shares of Class A and Class B Common Stock outstanding during
the period. For purposes of such calculation, the 5,625,000 shares of Class B
Common Stock which were placed in escrow in connection with the public offering
were not considered as outstanding in any period due to their cancellation as
described in Note 9. Further, the Company's other common stock equivalents
(options which accompanied the subordinated notes, Class A, B, C, D, E, F, G,
and H Warrants issued or contingently issuable, and the stock options) have a
dilutive effect on the loss per share calculation and, accordingly, were also
excluded.
Note 13: Commitments and contingencies
- --------------------------------------
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
-----------------------------------------------------------------------
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
- ----
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) The AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by inequitable
conduct. Thereafter, the Judge adopted the jury's advisory findings on
inequitable conduct and held that each of the four AERT patents were
unenforceable for failure to disclose certain alleged prior art to the patent
office during patent prosecution.
Because of the nature of certain of the jury verdict interrogatory responses,
AERT's counsel concluded that the verdict was adversely affected by improper
conduct by Mobil counsel during trial, and false statements of law and fact made
during closing argument, that caused the jury to misapply the law on inequitable
conduct and to render clearly erroneous findings. Consequently, AERT moved for
a new trial. That motion was denied. The Company's additional post-trial
motions were also denied by the Delaware Court. On March 14, 1995, the Company
filed a sealed motion with the Court based upon newly discovered evidence which
alleges prejudicial misconduct by Mobil prior to the trial. The motion also
brings to the Court's attention,evidence which the Company believes was
intentionally withheld from it in direct defiance of the Delaware Court's
January 4, 1994 Motion to Compel, prior to the trial. It also brings to the
Court's attention, an official government safety approval document which was
altered prior to submission to AERT during pre-trial discovery, which also
relates to a portion of the alleged withheld
12
<PAGE>
discovery documentation. The motion seeks further discovery into Mobil's
misconduct, and a new trial. Although the March 14, 1995 Motion is still
pending before the Delaware Court, the Company filed an appeal with the U.S.
Court of Appeals on July 10, 1995 on the initial trial arguments. Should the
Delaware Court deny the Company's pending Prejudicial Misconduct Motion, the
Company intends to follow-up with an additional appeal on these issues. Should
the Court not rule in favor of the Company on such motions, all appellate
processes available will be pursued. There can be no assurance that the Company
will receive a more favorable outcome upon appeal.
In August 1994, Mobil filed a motion seeking an award of attorneys' fees and
costs in the amount of $2.7 million. On November 1, 1994, the Court ruled that
the motion was premature and will not be considered at the present time. In
January 1995, Mobil renewed its Motion for Attorneys' Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
pending. The Company will vigorously defend against Mobil's claim for
attorneys' fees and costs, however, there can be no assurances as to the outcome
of this litigation.
The Company's counterclaims against Mobil and other defendants are to be heard
in a separate trial which has not yet been scheduled.
Note 14: Extraordinary gain
- ---------------------------
During the second quarter of 1993, the Company received a $500,000 advance
payment from The Dow Chemical Company toward future purchases of recycled
plastic bag film resins from the Company. On March 18, 1994, Dow Chemical and
the Company reached an agreement whereby Dow Chemical's obligation to purchase
material from the Company was terminated. In consideration for this release,
Dow forgave the repayment of the $456,158 outstanding advance payment.
In addition, Dow Chemical paid the Dow Credit Corporation and forgave the
Company's outstanding balance of $359,998 principal plus accrued interest under
the loan agreement dated October 22, 1991, amended as of January 23, 1993,
between Dow Credit and the Company. Also the outstanding balance of $440,000
principal plus accrued interest due Dow Credit under the loan agreement dated
June 13, 1991, amended as of January 1, 1993 between Dow Credit and the Company,
was restructured whereby the Company will repay the entire principal balance due
plus accrued interest. (See Note 7).
Further provisions of the agreement include the contribution in the amount of
$50,000 of Dow-owned laboratory equipment to the Company and continued technical
assistance from Dow Chemical. Accordingly, the Company has recognized an
extraordinary gain primarily from the retirement of debt in the amount of
$879,373 in the three months ended March 31, 1994.
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.:
We have reviewed the accompanying balance sheet of Advanced Environmental
Technologies, Inc. (a Delaware Corporation), as of September 30, 1995, and the
related statements of operations for the three-month and nine-month periods
ended September 30, 1995 and 1994, and the statements of cash flows for the
nine-month periods ended September 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Antonio, Texas
November 8, 1995
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
General
- -------
The Company reported that sales for the quarter ended September 30, 1995
increased to $1,693,444. The Company's Composites Unit increased sales to
$1,612,106 and generated quarterly divisional operating profit of $107,567.
However, the loss of a significant Plastics customer caused Plastics sales to
decrease to $81,338 and combined with implementation of a re-engineering and
refocus, the Plastics Unit recorded an operating loss of $407,237, which along
with corporate expenses of $198,566 resulted in a net loss for the quarter of
$495,236. The Company continues to focus on improving its Composites efficiency
and further increasing sales. To accommodate increased Composite sales will
require increased amounts of recycled plastics and the Company's Plastic Unit
will now be shifting towards internal supply requirements. The Company is,
therefore, preparing to streamline overhead associated with outside Plastics
sales and is currently evaluating redeploying assets for improved utilization
and increased composite production.
The Company exited the development stage during the second quarter and its
efforts are directed towards improving efficiency, streamlining overhead,
increasing production capacity and expanding its customer base to obtain
positive cash-flows and profitability.
In May 1995, the Company entered into an exclusive marketing and distribution
agreement with a division of Weyerhaeuser, Inc. ("Weyerhaeuser") for sales of
its Lifecycle(TM) line of extruded decking components, which are primarily
targeted towards the high-end residential housing market. Weyerhaeuser will
market the product under the Company's trade-name, ChoiceDek(TM), initially in a
limited number of its 80 distribution and reload centers throughout the United
States and Canada. The Company continues to add customers, and its sales efforts
are now primarily focused towards the following three market areas which are
supplied by the Company's composites manufacturing facility in Junction, Texas
(the "Junction Facility"): (1) components for the national door and window
market, (2) the heavy industrial flooring market as floor blocks for industrial
applications, and (3) as decking components for commercial and residential
applications through Weyerhaeuser. The Company will continue to primarily
utilize production capacity of its plastics reclamation facility in Rogers,
Arkansas (the "Rogers Facility") as a source of raw materials supply for the
Junction Facility. Although the Company will continue to utilize excess capacity
from the Rogers Facility to effect sales of recycled plastics to third parties,
it is the Company's overall objective to increase the production capacity of the
composites manufacturing operation to a level that will require substantially
all of the Rogers Facility's production to be dedicated thereto. In addition,
should market conditions or product demand warrant, the Rogers Facility could
increase production by extending such facility's operating hours or by adding
additional equipment. By focusing on internal requirements with its Plastics
Unit, the Company believes it can further reduce overhead and costs
associated with outside plastics sales. Management is also working to further
improve operating efficiencies at the Plastics Unit. The Company currently
maintains a concentrated customer base with approximately 61% of its sales
directed to three customers. (See Note 11 to Financial Statements.) The Company
lost a large Plastics customer during the third quarter, which accounted for 47%
of outside sales from that unit during the first six months of 1995. The
loss of sales from this customer helped contribute to the poor performance of
that unit which significantly lessened the overall financial improvement by
the Composites Unit.
The Company is currently unable to predict the future size of the markets for
its composite building products, however, the Company believes that the national
door and window and residential decking material markets are significant. The
Company believes that it can further penetrate these markets and/or expand sales
to its existing customer base if the Company's goals for increased production
capacity and efficiency are achieved. By focusing its marketing strategy on a
limited number of large door and window companies, and by initiating sales of
its new decking products through the Weyerhaeuser marketing and distribution
agreement, the Company believes it can increase market penetration and sales
without significantly increasing administrative overhead. To a lesser extent,
the Company's marketing focus also utilizes outside commissioned sales
representatives for a portion of its door and window accounts.
15
<PAGE>
Results of Operations
- ---------------------
Quarter ended September 30, 1995 compared to quarter ended September 30, 1994
- -----------------------------------------------------------------------------
Net sales increased to $1,693,444 for the quarter ended September 30, 1995 which
represented an increase of $707,978, or 72% over the third quarter of 1994.
Sales from the Composites manufacturing unit were $1,612,106 in the third
quarter of 1995 compared to $877,869 in the third quarter of 1994. Although the
Company was able to increase production volume at the Junction facility, such
increased volume was still below the efficiency level and throughput that
management is working to attain and sustain. Demand for sales of the Company's
door and window products increased from $841,966 to $1,062,473, decking from
$107,883 to $375,058, industrial flooring from $48,116 to $174,575 between the
second and third quarters of 1995. Sales of recycled plastics were $81,338 in
the third quarter of 1995 compared to $108,546 in the third quarter of 1994.
Sales of recycled plastics decreased 80% from $397,699 to $81,338 during the
second and third quarters of 1995, primarily due to the loss of a significant
customer.
Of total third quarter net composites sales, 66% were to the door and window
segment, 11% were to the industrial flooring segment, and 23% were to the
decking segment. This compares to 87%, 5%, and 8%, respectively, during the
second quarter. Since shipments under the Company's exclusive marketing
agreement with Weyerhaeuser did not begin until the summer of 1995, the Company
expects the contribution from such sales to continue to increase in future
periods. The Company is currently experiencing an order back-log primarily due
to the Weyerhaeuser agreement and is working to increase efficiency and
production to accommodate higher sales.
Increased volume from the composite manufacturing unit was the result of
increased production achieved through reduced scrap rates and increased
efficiencies in the Company's milling and painting departments, as well as sales
to new customers. Management believes that by broadening its composites sales
base, it can reduce the overall adverse effects of sales decreases and housing
market fluctuations. However, the Company's ability to successfully increase
its customer base and sales is dependent upon the Company's ability to continue
to increase production capacity and efficiencies. Although Composites gross
margin improved and generated a profit of $107,567 during the third quarter, the
Company must further improve operating efficiencies and increase outputs in
the Composites Unit, while also reducing overhead and expenses associated with
the Plastics Unit in order to attain overall Company profitability. By
refocusing the Plastics Unit toward internal supply requirements, the Company
believes it can reduce costs and overhead associated with the operation of
extrusion and melt filtration equipment required for outside Plastics sales.
Cost of goods sold was $1,786,749 for the third quarter of 1995 compared to
$1,312,677 for the comparable quarter in 1994. The increase in cost of goods
sold was primarily attributable to increased production volumes at the
Composites Unit. The Rogers Plastics Unit continued to experience poor
operating efficiencies, however, the Company recently completed various upgrades
to equipment necessary to increase and sustain an acceptable throughput level at
the Rogers Facility with a refocus towards internal supply, and is now preparing
to phase out of outside Plastics sales and further reduce overhead.
Selling, General and Administrative expenses during the second quarter of 1995
were $327,869 compared to $285,051 during the third quarter of 1994. The
increase in Selling, General and Administrative expenses was primarily
attributable to increased overhead expenses.
The net loss for the quarter ended September 30, 1995 was $495,236, or a net
loss per weighted average common share outstanding of $.03. The loss compares
to a loss of $666,138 or a net loss per weighted average common share
outstanding of $.04 for the three months ended September 30, 1994.
16
<PAGE>
Management believes that for the Company to ultimately obtain profitability, it
must improve operating efficiencies and increase overall capacity at both the
Junction and Roger's Facilities. Management is currently pursuing efforts to
increase throughput capacity at both facilities through better utilization of
existing equipment and continuing its effort to reduce scrap rates and increase
throughputs at the Junction Facility. When these efficiencies are attained, the
Company will commence an expansion program aimed at increasing sales and intends
to add a third extrusion line at its Composites Unit.
Nine Months ended September 30, 1995 compared to nine months ended September 30,
- --------------------------------------------------------------------------------
1994.
- -----
Net sales increased to $4,260,418 for the nine months ended September 30, 1995
which represented an increase of $1,535,402 or 56% over the nine months ended
September 30, 1994. Sales from the composites manufacturing unit were
$3,289,660 in the first nine months of 1995 compared to $2,392,331 for the first
nine months of 1994.
Sales of recycled plastics were $970,758 in the first nine months of 1995
compared to $332,685 in the first nine months of 1994. The increase in recycled
plastics was primarily attributable to increased sales prices and increased
short-term demand for recycled plastics due to higher prices of virgin resins
although sales dropped significantly during the third quarter of 1995 to
$81,338.
Increased volume from the composite manufacturing unit was the result of
increased production achieved through reduced scrap rates and increased
efficiencies in the Company's milling and painting departments, as well as sales
to new customers. Additionally, in the middle of the second quarter, the
Company added another production shift at the Junction Facility. The price
decrease in the Company's composite products was attributable to a significant
decrease in the price of competing wood products. Additionally, composites
sales were affected by a drop-off in U.S. residential construction starts in
February and March, 1995, which resulted in slower door and window sales in the
first and second quarter.
Cost of goods sold was $4,700,344 for the first nine months of 1995 compared to
$3,731,270 for the comparable period in 1994. The overall cost of goods sold to
sales ratio, although still negative, showed improvement over the comparable
period in 1994 and the Composites division recently turned positive during the
third quarter. The numbers have been adjusted for comparable past periods to
reflect the Company's exit from the development stage. The increase in cost of
goods sold was primarily attributable increased raw material and labor costs at
the Rogers Facility. The increased labor costs were due to certain poor
operating efficiencies which resulted in reduced throughput rates.
Selling, General and Administrative expenses during the first nine months of
1995 were $1,000,438 compared to $1,258,403 for the comparable period of 1994.
The decrease in Selling, General and Administrative expenses is primarily
attributable to decreased legal expenses.
The net loss for the first nine months ended September 30, 1995 was $1,647,176
or a net loss per weighted average common share outstanding of $.11. This
compares to a loss of $1,531,839 or a net loss per weighted average common share
outstanding of $.11 for the nine months ended September 30, 1994 which included
an extraordinary gain in the amount of $879,373.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, the Company had a working capital deficit of $2,011,318
compared to working capital deficit of $599,753 at December 31, 1994. The
increased deficit is primarily attributable to costs of operations as revenues
during the first nine months of 1995 were not sufficient to support such costs.
Cash and cash
17
<PAGE>
equivalents increased $23,678 in the nine months ended September 30, 1995.
Significant components of that increase were: (i) cash used in operating
activities of $553,928, which consisted of the net loss for the period of
$1,647,176 reduced by depreciation and amortization of $788,462, plus other uses
of cash of $304,786; (ii) cash used in investing activities of $40,598, and
(iii) cash provided by financing activities of $618,204. Payments on notes
during the period were $446,447 and proceeds from the issuances of notes
amounted to $1,035,696. $903,874 of such proceeds were provided by the
Company's major stockholders, Jim and Marjorie Brooks (the "Major Stockholders")
under the line of credit described below (see also Note 6 to Accompanying
Financial Statements). At September 30, 1995, the Company had notes payable in
the amount of $2,160,263, of which $819,989 were current notes payable or
current portion of long-term debt. On November 1, 1995, the Major Stockholders
and certain non-affiliated shareholders exercised 1,630,496 Class F Warrants.
The proceeds from the exercise of these warrants, which amounted to $994,602,
reduced the working capital deficit of the Company and were used to reduce
current liabilities.
The Company maintains an accounts receivable factoring agreement for up to
$650,000 through an affiliated company of a related party. The terms of this
agreement call for the factor to advance 99.12% of the total of invoices
presented by the Company and for the Company to indemnify the factor against
loss of the amounts advanced. At September 30, 1995, approximately $65,000 was
available to factor additional receivables. The Company also secured a line of
credit from the Major Stockholders during 1994 which provided approximately
$981,000 of additional cash for general corporate purposes through January 1995.
In February 1995, this obligation was restructured, converting the amount
previously advanced as of that date ($1,566,903) into long-term note payable and
providing an additional $433,097 revolving line of credit to be available as
needed. As of September 30, 1995, the total amount had been drawn against the
line and additional advances of approximately $315,777 had been made by the
Major Stockholders through such date.
The Company currently does not have additional commitments for financing beyond
the sources described immediately above and revenues have not historically been
sufficient to support operational needs. However, the Company believes that if
it can improve the production rates and efficiencies it is experiencing as of
the date of this filing in conjunction with refocusing its Plastics division and
streamlining overhead, it will be able to achieve a level of operations in the
fourth quarter and thereafter which will significantly reduce or eliminate the
need for additional sources of capital to support its operations. As such, the
Company believes it will be able to continue operating as a going concern for at
least the following twelve months. Continued improvements in production
efficiency and capacity as previously discussed will be required for the Company
to increase sales levels to those necessary to attain profitable results of
operations and provide funds to repay the Company's outstanding obligations.
While it is not anticipated that significant additional capital expenditures
will be required to support existing plant capacity, management is currently
evaluating plans to better position the Company to address potential increasing
sales opportunities on a timely basis. This could require significant
additional composite production capacity beyond that of the existing Junction
facility and require additional funds for capital expenditures. The Company has
limited sources of equity financing to fund such capital expenditures, if
necessary. One such source of financing could consist of certain of the
Company's outstanding warrants. The Company has currently outstanding,
approximately 4.2 million Class B Warrants with an exercise price of $3.00. The
expiration date of the Class B Warrants has been extended to September 1, 1996.
The Company also has outstanding 1,167,584 Private Placement Warrants held by
non-affiliated entities, which, if exercised by holders, could generate equity
capital for the Company (See Note 9 to the Financial Statements). The receipt
of additional funds by the Company upon exercise of any such warrants, however,
is subject to a number of contingencies, including, but not limited to, (i)
compliance with applicable federal and state securities laws, (ii) the desire
and ability of the holders to exercise their warrants, and (iii) the market
price of the Company's stock.
The foregoing plan is not intended to satisfy the long-term cash needs of the
Company; rather the plan assumes that the Company will achieve and maintain
positive operating cash flows throughout the future. There can be no assurance
that the Company will be able to maintain its current operating levels or
achieve increased production volumes and sales levels or that the Company could
obtain additional capital resources to support manufacturing operations if
required.
18
<PAGE>
If the Company is unable to achieve and maintain a successful level of
operations in the near future or unable to secure additional debt or equity
financing to provide support to ongoing operations, or were it to be assessed
the Mobil legal claims described in Note 13 to the financial statements, it is
likely the Company will be unable to continue as a going concern. (See Note 2
to the accompanying financial statements)
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
-----------------------------------------------------------------------
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
- ----
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) The AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by inequitable
conduct. Thereafter, the Judge adopted the jury's advisory findings on
inequitable conduct and held that each of the four AERT patents were
unenforceable for failure to disclose certain alleged prior art to the patent
office during patent prosecution.
Because of the nature of certain of the jury verdict interrogatory responses,
AERT's counsel concluded that the verdict was adversely affected by improper
conduct by Mobil counsel during trial, and false statements of law and fact made
during closing argument, that caused the jury to misapply the law on inequitable
conduct and to render clearly erroneous findings. Consequently, AERT moved for
a new trial. That motion was denied. The Company's additional post-trial
motions were also denied by the Delaware Court. On March 14, 1995, the Company
filed a sealed motion with the Court based upon newly discovered evidence which
alleges prejudicial misconduct by Mobil prior to the trial. The motion also
brings to the Court's attention,evidence which the Company believes was
intentionally withheld from it in direct defiance of the Delaware Court's
January 4, 1994 Motion to Compel, prior to the trial. It also brings to the
Court's attention, an official government safety approval document which was
altered prior to submission to AERT during pre-trial discovery, which also
relates to a portion of the alleged withheld discovery documentation. The
motion seeks further discovery into Mobil's misconduct, and a new trial.
Although the March 14, 1995 Motion is still pending before the Delaware Court,
the Company filed an appeal with the U.S. Court of Appeals on July 10, 1995 on
the initial trial arguments. Should the Delaware Court deny the Company's
pending Prejudicial Misconduct Motion, the Company intends to follow-up with an
additional appeal on these issues. Should the Court not rule in favor of the
Company on such motions, all appellate processes available will be pursued.
There can be no assurance that the Company will receive a more favorable outcome
upon appeal.
In August 1994, Mobil filed a motion seeking an award of attorneys' fees and
costs in the amount of $2.7 million. On November 1, 1994, the Court ruled that
the motion was premature and will not be considered at the present time. In
January 1995, Mobil renewed its Motion for Attorneys' Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
pending. The Company will vigorously defend against Mobil's claim for
attorneys' fees and costs, however, there can be no assurances as to the outcome
of this litigation.
The Company's counterclaims against Mobil and other defendants are to be heard
in a separate trial which has not yet been scheduled.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
/s/ Joe G. Brooks
--------------------------------------------------
Joe G. Brooks, President
DATE: November 14, 1995
21
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<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 29,655
<SECURITIES> 0
<RECEIVABLES> 44,933
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<OTHER-SE> 3,672,948
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<EPS-DILUTED> (.11)
</TABLE>
