<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A (No. 1)
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1994 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________________
to ____________________
Commission File Number 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
Securities Registered Pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value
Redeemable Class B Warrants
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: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES: [X] NO: [ ]
Aggregate market value of voting stock held by non-affiliates of the
registrant at September 21, 1995: $17,414,342
Number of Shares of the common stock outstanding at September 21, 1995:
Class A - 14,059,038
Class B - 1,465,530
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Advanced Environmental Recycling Technologies, Inc. hereby amends and
restates the following items of its Annual Report on Form 10-K for the Year
Ended December 31, 1994:
ITEM 1. BUSINESS
General
Advanced Environmental Recycling Technologies, Inc., ("AERT" or the
"Company") is comprised of two separate, yet interrelated manufacturing
facilities; the Composites Manufacturing Unit located in Junction, Texas,
which manufactures and markets moisture resistant composite building
materials made from waste plastics and by-product wood fibers, and the
Plastics Reclamation Unit located in Rogers, Arkansas, which processes
waste plastics, forming various materials that are used in the composite
manufacturing process or are marketed to manufacturers of plastic grocery
bags, trash bags, and other products. AERT was founded in December of 1988
and since inception, has completed research and development resulting in
the receipt of eleven U.S. Patents on its technologies and systems. See
Item 3. "Legal Proceedings".
The Company employs a three-part business strategy: (1) it utilizes low-
cost waste products and internally-produced products as raw materials; (2)
it configures its production facilities so that it can economically
manufacture a broad range of products on the same equipment in short
production runs and (3) its marketing program identifies and sells to niche
markets with defined needs in which the Company believes it can be
prominent or dominant.
The Composites Unit
The Company's Composites Manufacturing Unit located in Junction, Texas
markets its moisture-resistant composite building materials under the
trade names MOISTURESHIELD TM and LIFECYCLE TM. The composite materials
are hard, dense, short-grained substances with a dark, speckled
surface appearance. Because of their plastic content, the composites can
be engineered for moisture resistance, do not require preservative or
chemical treatments like traditional wood, can be designed and extruded to
customer specifications to minimize waste, and are less subject to rotting,
cracking, warping, insect infestation and water absorption than
conventional wood materials. Because of the wood fiber content, composites
are less subject to thermal contraction or expansion and display greater
dimensional stability than conventional plastic materials for such
applications. The composites are denser than the straight-grained, clear
grades of wood from western United States forests traditionally used in the
building applications for which AERT's products compete.
The composites manufacturing process involves proprietary
technologies and specialized manufacturing equipment, custom-built or
modified for the Company's purposes. It utilizes recycled plastics and
wood-filler materials and, in certain cases, special additives or virgin
plastics in varying mixtures which can be formulated based on the
customer's desired end-product characteristics. A key advantage of the
Company's process is the ability to utilize plentiful, low-cost raw
material components, encapsulate the wood fibers in the plastic and create
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a consistent material, free of foreign matter, which can be extruded into a
desired shape while the end product maintains many properties similar to
traditional wood materials.
The Composite Manufacturing Unit is comprised of a cedar fiber raw
material processing department, a composite extrusion department, a
millwork and fabrication department, and a priming and paint department.
The raw materials processing department consists of cedar fiber cleaning,
drying, grinding and storage equipment; the extrusion department consists
of two extrusion and downstream production lines; the millwork department
consists of two molding and endwork lines; and the painting department
consists of inspection, preparation and a painting and drying line.
In August 1993, a fire severely damaged the composites facility,
destroying the raw materials handling and processing area and one of the
two extrusion production lines. Clean-up and reconstruction began
immediately and within two weeks, one production line was operating on a
limited basis. As part of the rebuilding, an in-house wood dryer was
incorporated into the raw materials processing area and improvements were
made to the production lines such that both lines now operate more
efficiently than before the fire occurred. The reconstruction was
completed in August 1994 and with the restored and improved production
capability, the Company is now prepared to increase its sales commitments
to existing customers and provide products to new customers.
In May 1995, the Company entered into an exclusive marketing and
distribution agreement with a division of Weyerhaeuser, Inc.
("Weyerhaeuser") for sales of its LifecycleTM 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, ChoiceDekTM, initially in a limited number of its 80
distribution and reload centers throughout the United States and
Canada.
The Plastics Reclamation Unit
The Plastics Reclamation Unit located in Rogers, Arkansas was
established to develop plastic recycling technology primarily to serve
as a dependable, cost-effective source of plastic raw material for the
Composites Manufacturing Unit . The Company began activities at its
Plastics Reclamation Unit in 1990. Since that time, the Company has
further developed it patented and proprietary waste plastics reclamation
technologies which allow it to recover waste plastics from the by-product
of paper recycling mills, as well as certain waste plastic from post-
consumer or industrial plastic films. See " - Supply and Pricing of Raw
Materials". Secondary fiber recovery mills recycle paper and
polyethylene-coated paperboard to recover the paper fiber through a process
known as hydropulping. The by-product of the hydropulping process is a
water-saturated mixture of polyethylene and unrecovered paper fiber, which
most such mills currently dispose of without further processing. Using
certain plastics recycling technologies, which such paper recycling
companies do not generally have available, the Company has been able to
economically recover polyethylene suitable for use in its composite
manufacturing process.
In 1991, while continuing to develop its initial plastic recycling
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technology, the Company entered into a technology development agreement
with The Dow Chemical Company for the purpose of further developing and
commercializing the Company's plastic reclamation technology for additional
applications of polyethylene films. The Company received an initial 10
million pound market development order from Dow in 1992 for recycled
plastic. However, that order was restructured in 1994, allowing the
Company to significantly reduce indebtedness. Pursuant to the
restructuring, Dow forgave approximately $879,000 in debt from the Company
in lieu of purchasing the remaining portion of the recycled plastic.
Following the restructuring and completion of the Dow contract, the
Company began utilizing production capacity not required for processing raw
materials for the Composites Manufacturing Unit to produce other types of
materials for sale to manufacturers of grocery bags, trash bags, and other
manufacturers of plastic goods desiring recycled content in their
products.
The Company's main focus, however, continues to be on utilizing the
Plastics Reclamation Unit as a source of supply for the Composites
Manufacturing Unit. Therefore, it is anticipated that as sales of the
Company's composite products and accordingly, the composites division's raw
materials requirements increase, recycled plastics sales to third party
customers will be diminished or curtailed. However, as market conditions
and product demand warrant, the Company will continue to utilize excess
capacity from this facility in an effort to capitalize on additional sales
opportunities. For example, during the latter part of 1994 and continuing
into 1995, the price of virgin resins has remained high, in comparison to
the prices of recycled resins produced by the plastics reclamation
facility, thereby causing sales of recycled plastics to increase. See " -
Supply and Pricing of Raw Materials".
Supply and Pricing of Raw Materials
The Company's composites are currently manufactured from cedar fiber,
polyethylene industrial and post-consumer film scrap and ground industrial
and post-consumer high-density polyethylene containers. AERT has no formal
supply agreements for the cedar fiber or waste plastics used in its
composite manufacturing process, although it is the Company's intention to
enter into such supply agreements in the future. The Company currently
purchases raw materials from sources which it believes are dependable and
adequate for at least its short-term manufacturing requirements, and the
Company believes suitable alternative sources are available. However, a
significant disruption of supply arrangements or significant increases in
raw material prices could have a material adverse effect on AERT's
operations.
Cedar Fiber. The composite facility is located near four cedar
mills which extract cedar oil for perfumes and industrial detergents and
dispose of the cedar fiber as a by-product of their operations. The
Company, in the past, has purchased all of the wood fiber required for its
manufacturing purposes from these mills. Although the Company believes it
has access to sufficient supplies of cedar fiber for the foreseeable
future, the Company has also manufactured its composite material with other
types of wood fibers, and believes that a number of substitute wood fibers
could be satisfactorily used in its manufacturing process and that other
sources are currently available.
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Recycled Plastics. The cost of recycled waste plastics for use in
the composites manufacturing process has been subject to significant market
fluctuations over the past several years and the Company has experienced
supply problems associated with contaminated plastics in the past.
Accordingly, to reduce its exposure to such price volatility and potential
supply disruptions, the Company in 1990 developed its own patented plastic
recycling technologies and established the waste Plastics Reclamation Unit
in Rogers, Arkansas to assure itself of a cleaner, more dependable and
consistent supply of plastic raw material for its composite manufacturing
operations.
The Company's plastics manufacturing processes primarily focus on
recycling the following polyethylene films for use in the composites
manufacturing process:
- Low Density Polyethylene ("LDPE") poly coatings or linings from
recycled bleached food-board, which are generated from the
hydropulping process;
- High Density Polyethylene ("HDPE") and Low Linear Density
Polyethylene ("LLDPE") mixed plastic grocery bags from
supermarket and store collection programs; and
- HDPE ground container material.
These films are highly contaminated with paper and other non-plastic
materials which makes them less desirable for traditional plastic uses, and
thus lessens their value to producers of recycled plastics. However,
plastic used for the Company's Composites Manufacturing Unit does not
require the purity, extensive cleaning, additional washing and melt
filtration associated with conventional plastics, and can be processed
faster and more economically. Further, these contaminated plastics are
acquired by the Company at minimal costs (i.e. primarily freight costs).
By focusing on contaminated plastics, the Company is able to process these
materials through its Plastics Reclamation Unit and produce an acceptable
lower-cost feed stock for the composites facility. The Company believes
that it has adequate and reliable sources of LDPE hydropulp and HDPE/LLDPE
mixed plastic grocery bags for the foreseeable future. The Company also
from time to time purchases plastic, if available at reasonable costs and
quality, from outside sources, such as brokers or other plastic recyclers,
to supplement the above described sources.
In addition to recycling plastics for the composites business, the
Company will, as market conditions and product demand warrant, continue to
utilize excess capacity from the Plastics Reclamation Unit in an effort to
capitalize on additional sales opportunities to outside third manufacturers
of grocery bags, trash bags and other producers of plastic goods desiring
recycled content in their products. In producing recycled plastics for
third-party sales, the Company is unable to utilize the less costly LDPE
hydropulp. The Company utilizes HDPE/LLDPE mixed plastic grocery bags and
LLDPE stretch or packaging films ("LLDPE Films") which are primarily
sourced from warehouse or distribution centers. LLDPE films are more
valuable, and as a result, the Company is required to compete for sourcing
of these materials which have acquisition costs that are significantly
higher than those of contaminated plastics. Demand for recycled plastics
increased somewhat during the second half of 1994 and the first half of
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1995, primarily due to a recent run-up in virgin resin prices. Generally,
producers of virgin resins enjoy a competitive advantage over producers of
recycled resins, including the Company, since such resins can be produced
at a lower cost than recycled resins and sell at a premium over such
recycled resins due to the quality and consistency of the material.
Historically, the cost of producing virgin resins is approximately $.20 -
$.23 per pound, which is below the Company's cost to source, clean,
repelletize and melt-filter HDPE/LLDPE grocery bags and LLDPE Films. Such
virgin resins have historically sold for as low as $.30 per pound, which
would make it very difficult for the Company to be competitive. Recently,
however, the price of virgin LLDPE has risen to approximately $.45 to $.50
per pound, allowing the Company's product to compete with such resins.
The Rogers Plastics Reclamation Unit has, to date, not shown the ability
to consistently produce, compete and generate positive cash flows through
outside sales of recycled plastics. Should virgin resin prices fall back
down to lower historical levels, it will be very difficult for the Company
to generate sales at prices which are competitive and profitable.
Accordingly, the Company will continue to focus on primarily growing its
composites business with an emphasis on utilizing its technologies and
facilities internally. The Company is currently reorganizing the Roger's
facility, and evaluating splitting the equipment into two designated lines.
In this way, composites LDPE hydropulp could be run on one dedicated line
and down-time and clean-out time could be reduced. HDPE and LLDPE Films
could be run on the other line allowing for composites production and
outside sales capacity to be achieved simultaneously, thus potentially
reducing overhead. The Company currently has most of the required
equipment on hand to install this second line.
Marketing and Sales
The Company has directed its initial marketing activities to specialized
market segments in the building and construction industry in which cost and
physical characteristics place AERT's composite products, such as the
subsurface component pieces of standard door and window products, at a
competitive advantage over alternative conventional materials and in which
the current weaknesses of composites (for example, certain of its strength
and aesthetic characteristics) are not critical disadvantages.
To the extent a prospective customer currently uses wood for such component
pieces, the Company emphasizes the "value-added" potential of its
MOISTURESHIELD composite product which, unlike competing wood products, can
be engineered to incorporate certain desired end-product characteristics.
The Company also calls the prospective customer's attention to the savings
in time and expense that can be achieved by designing into the equipment
used in the extrusion process much of the millwork required in the
customer's finished product. In addition, the Company emphasizes the
customer's avoidance of the chemical treatments and in plant volatile
organic compounds requirements often necessary to give competing wood
products durability and the customer's avoidance of the substantial scrap
wood or sawdust waste-product typically generated in the sawing and milling
process.
MOISTURESHIELD composites have been previously marketed primarily to
companies that manufacture products for use by the construction industry in
new home construction and home improvement work. The construction industry
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is subject to significant fluctuations in activity and periodic downturns
caused by general economic conditions. Reductions in construction activity
could have an adverse effect on the demand for AERT composites; however,
the Company believes that significant demand now exists for its products,
and its market diversification program is intended to reduce the effects
that reductions in construction activity would have on the Company. The
Company also focuses heavily on products for the home improvement market,
which often tends to increase in activity when housing starts decline, and
the Company has recently expanded its marketing focus with its LIFECYCLE
products to accommodate a wider range of applications in order to avoid
being totally dependent on one industry.
In May 1995, the Company entered into an exclusive marketing and
distribution agreement with a division of Weyerhaeuser for sales of its
LifecycleTM 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, ChoiceDekTM,
initially in a limited number of its 80 distribution and reload centers
throughout the United States and Canada.
As a result of the Weyerhaeuser agreement, the Company's sales efforts
are now primarily focused towards the following three market areas which
are supplied by the Company's Composites Manufacturing Unit: (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 unit as a source of raw
materials supply for the composites facility. Although the Company will in
the short-term continue to utilize excess capacity from the Rogers Plastics
Reclamation Unit to effect sales of recycled plastics to third parties, it
is the Company's long-term 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. However, to the extent that market conditions warrant, and virgin
prices remain high, the Company will also sell recycled plastic to outside
customers for use in items such as trash bags, slip sheets, grocery bags,
or other items utilizing recycled plastics. Such materials are sold
directly by the Company or through brokers and are primarily used by third
party purchasers in conjunction with, and not in replacement of, virgin and
other resins.
The Company currently maintains a concentrated customer base. The
Company is 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.
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Industry Standards
ASTM and certain industry trade organizations have established general
standards and methods for measuring the characteristics of specific
building materials. Users of building materials (and frequently, issuers
of building codes) generally specify that the building materials comply
with such standards relative to the proposed applications. Since no
standards or methods have yet been established for measuring the
characteristics of wood-plastic composite building materials, such as the
Company's composites, users cannot judge whether or not it may be suitable
for their particular requirements without conducting their own testing.
The lack of such accepted standards (and the assurance of extensive
testing, quality control and performance capability which compliance with
accepted standards typically provide) may limit the market potential of the
Company's building materials and make potential purchasers of such building
materials reluctant to use them.
The Company has accumulated significant product test data and begun the
internal preparation of proposed guidelines for wood-plastic composite
materials for certain construction applications for eventual submission to
ASTM committees. The consideration and testing of proposed standards by
ASTM is a lengthy process, however, typically requiring several years at a
minimum. Although the Company believes that its proposed submission will
expedite serious industry-wide consideration of such standards, there can
be no assurance that industry-accepted standards will be adopted by ASTM,
or, if adopted, that ASTM-promulgated standards would be compatible with
the technological and product capabilities of the Company.
Competition
In seeking to introduce MOISTURESHIELD composites as alternative building
materials to high grade western pine and other woods, aluminum, high-
performance plastics and other construction materials, the Company will
compete with major forestry product companies, aluminum fabricating
companies, and major plastic and petrochemical companies. The conventional
material manufacturers with which the Company must compete have, in many
cases, long-established ties to the building and construction industry and
have proven, well-accepted products.
Many large competitors also have research and development budgets,
marketing staffs and financial and other resources which far surpass the
resources of the Company. There can be no assurance that such competitors
will not attempt to develop and introduce similar recycled composite
materials. The Company must also compete in the building materials market
with certain other plastics recyclers currently manufacturing recycled
materials intended for similar building material applications, including
decking and fencing. None of such recyclers, to the Company's
knowledge, have achieved significant commercial acceptance to date,
however, Mobil Oil Company has recently entered the market with a new
composite products division and a decking and fencing product called
Timbrex, which was recently renamed Trex. Mobil has many resources, has
initiated a large national marketing and advertising program and is a
significant competitor in recycled plastic products. Mobil has challenged
and invalidated four AERT composite patents, and is continuing to assert a
claim for substantial attorney's fees against the Company. See Item 3.
"Legal Proceedings". If a final determination in this matter is
unfavorable to the Company, it can be expected that the Company will be
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faced with additional competition with respect to certain products.
As the Company has developed its own plastics reclamation technologies,
it has in certain instances been required to compete for raw materials with
other plastics recyclers, or plastic resin producers, most of which are far
larger and better established than the Company. However, management
believes that its focus towards sources of contaminated polyethylene films
that it recycles and uses in its composites business are less attractive to
most producers of recycled plastics. As a result, the Company has not
historically experienced significant competition for such raw materials.
Further, the Company believes that the plastics reclamation processes it
has developed for composite manufacturing business are targeted to the
waste management needs of particular industrial waste generators, to
plastic film wastes and to other plastic waste generators, whose potential
as a recycling source is not being utilized to a significant extent by
current plastics recyclers, rather than to post-consumer, source-separated
plastic containers recycling processes, in which a substantially greater
number of plastics recyclers compete for plastic waste materials. The
Company may encounter new entrants into the composites or plastics
reclamation business which could effect the Company's source of raw
materials supply and who may have substantially greater financial and other
resources than the Company and which may include beverage bottlers,
distributors and retailers as well as forestry product producers,
petrochemical and other companies. For example, Mobil is now competing
with the Company for certain raw materials in connection with the
production of its Trex product described above.
Patented and Proprietary Technology
The Company's composite manufacturing process and its development efforts
in connection with waste plastics reclamation technologies involve patents
and many trade secrets which are considered proprietary by the Company, as
well as certain methods, processes and equipment designs for which the
Company has sought additional patent protection. The Company has taken
measures which are designed to safeguard its trade secrets by, among other
things, entering into confidentiality and nondisclosure agreements. Should
the Company's trade secrets be disclosed notwithstanding these efforts, the
business and prospects of the Company could be materially and adversely
affected. The Company has filed seventeen patent applications and have
received issuance from the United States Patent and Trademark Office for
eleven patents, five of which relate to the Company's composite materials
manufacturing operations and six of which relate to its waste plastics
reclamation technologies. The patent applications recently allowed relate
to the Company's extrusion process, extrusion apparatus, and its continuous
downstreaming cooling and forming conveyor system, and its plastic
reclamation process and equipment. In February 1994, in litigation with
Mobil Oil Corporation, a Delaware jury returned a verdict that four AERT
patents on its composite product technology were invalid. See Item 3.
"Legal Proceedings". The Company's additional pending applications relate
to additional manufacturing apparatus, the composite product composition
and technology involving its film reclamation processes. There can be no
assurance such additional patents will be allowed. The Company has granted
Dow Chemical a nonexclusive worldwide license with respect to its waste
plastics reclamation technology and will accordingly seek appropriate
international patent protection on such technology as well. The Company
intends to take other steps reasonably necessary in the future to protect
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its existing technology and any technology which may be subsequently
developed. The Company may license its technologies to industrial users in
the future if licensing terms can be agreed upon and if the Company
believes it can preserve adequate demand for its own products.
Employees and Technical Consultants
At December 31, 1994, the Company employed 121 full-time personnel, 12 of
whom are executive or office personnel and 109 of whom are full-time
factory personnel. The Company, from time-to-time, employs additional
persons on a part-time basis in its manufacturing operations. The Company
anticipates that as its business expands it will employ additional
management personnel and factory personnel.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical data for the Company for
the years ended December 31, 1994, December 31, 1993, December 31, 1992,
December 31, 1991, and December 30, 1990, and for the period from December
2, 1988 (inception) through December 31, 1994. For the year ended December
31, 1994, the data was obtained from the Company financial statements
contained in this document at pages F-1 through F-24. Data for the periods
prior to December 31, 1994 was obtained from Item 6 of the Company's Annual
Report or Form 10-K for the year ended December 31, 1993.
<TABLE>
Statements of Operations Data:
<CAPTION>
Dec. 2, 1988
Inception
Year Ended Year Ended Year Ended Year Ended Year Ended Through
Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991 Dec. 31, 1990 Dec. 31, 1994
<S> <C> <C> <C> <C> <C> <C>
Sales $3,675,018 $2,043,476 $ 559,886 $ 127,213 $ 7,227 $ 6,415,832
Net Loss before
extraordinary gain (2,970,135) - - - - -
Extraordinary gain 879,373 - - - - -
Net Loss (2,090,762) (3,692,773) (3,241,158) (1,655,290) (1,455,970) (12,984,443)
Net Loss before
extraordinary gain
per common share (.21) - - - - -
Extraordinary gain
per common share .06 - - - - -
Net Loss Per
common share (1) (.15) (.34) (.34) (.26) (.24) (1.44)
Weighted Average
Number of Shares
Outstanding (1) 14,166,869 10,853,938 9,579,858 6,346,877 5,983,493 9,014,100
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Balance Sheet Data:
<CAPTION> Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991 Dec. 31, 1990
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) $ (599,753) $ (701,142) $ 812,199 $ (875,295) $ (231,006)
Total Assets 8,781,907 9,146,981 9,925,393 5,148,531 4,902,697
Long-Term Debt 1,844,597 892,294 598,129 746,134 27,962
Total Liabilities 3,335,459 3,010,529 1,698,484 1,833,195 381,028
Stock Subscription 1,000,000
Stockholders' Equity $ 5,446,448 $ 5,136,452 $8,226,909 $3,315,336 $4,521,669
<FN>
(1) The net loss per share of common stock is based on the combined weighted average 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 in November 1989 (common stock equivalents) were not considered as
outstanding after the date of the public offering since they were contingently cancelable if certain conditions do not occur.
Subsequent to March 31, 1995, all shares of Class B common stock held in escrow were cancelled.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company during the year ended December 31, 1994 to each executive officer
of the Company whose aggregate cash compensation exceeded $100,000, and to
the chief executive officer.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Securities Long-Term
Name and Annual Stock Underlying Incentive All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jim G. Brooks, 1994 $0 $0 $0 $0 500,000 $0 $0
Chief Executive 1993 0 0 0 0 25,000 0 0
Officer (9/28/93)
and Chairman of
the Board of
Directors
Joe G. Brooks, 1993 $70,919 $0 $1,200 $0 $0 $0 $0
Chief Executive 1992 80,000 0 1,200 0 0 0 0
Officer (to 9/28/ 1991 80,000 0 1,092 0 40,000 0 0
93) and President
</TABLE>
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<TABLE> OPTION/SAR GRANTS IN YEAR ENDED DECEMBER 31, 1994
<CAPTION>
Individual Grants
Potential Realizable
Number of Value at Assumed Annual
Securities % of Total Rates of Stock Price
Underlying Options Granted Appreciation for
<S> Options to Employees Exercise or Expiration Option Term(2)
Name Granted(1) in Fiscal Year Base Price ($/Sh) Date 5% 10%
<C> <C> <C> <C> <C> <C>
Jim G. Brooks 500,000 96.5% $.63 May 1, 2004 $200,000 $515,000
<FN>
(1) These options were granted under the Company's Chairman Stock Option Plan with respect to the Company's Class A Common
Stock for a ten year period beginning on May 1, 1994. The options do not qualify as "incentive stock options" under the
Internal Revenue Code. The option price of $.63 per share was the fair market value of the Class A Common Stock on the date of
grant. Vesting at 20% begins on May 1, 1995, the end of the third year, and continues at 20% for each subsequent year until
all shares are vested on May 1, 1999. Options not exercised expire on May 1, 2004.
(2) As required by Securities and Exchange Commission rules and regulations, potential realizable values are based on the
assumption that the Class A Common Stock price appreciates at the annual rates shown, compounded annually from the date of
grant until the end of the ten year option term and is not intended to forecast appreciation in stock price.
</TABLE>
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<TABLE> AGGREGATED OPTION EXERCISES IN
YEAR ENDED DECEMBER 31, 1994
AND OPTION VALUES AT DECEMBER 31, 1994
<CAPTION>
Number of Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares at December 31, 1994 at December 31, 1994
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
_______________________________________________________________________________________________________________________________
<S> <S> <S> <S> <S>
Jim G. Brooks 0 $0 25,000(1)/500,000(2) $0/$0
<FN>
(1) Represent fully vested options granted under the Company's 1990 Stock Option Plan.
(2) Represent options granted under the Company's Chairman Stock Option Plan.
</TABLE>
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 employees, 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. During 1994, 42,000 options
were granted to employees from the Plans.
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 April 1994, 25,000 such options
were granted to each of the four outside directors serving on the Board at
that time.
The Plans will be administered by a committee (the "Option Committee") of
three or more directors to be appointed by the Board of Directors. Members
of the Option Committee are not eligible to participate in the Plans except
pursuant to the automatic award provisions for directors contained in the
1990 Plan. The Option Committee determines, among other things, the
recipients of grants, whether a grant will consist of ISOs or nonqualified
stock options or a combination thereof, and the number of shares to be
subject to such options.
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<PAGE>
Upon exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of the
Company's Class A Common Stock, or in a combination of both. The Plans
permit the Company to lend to the holder of an option funds sufficient to
pay the exercise price, subject to certain limitations. Generally, options
may be exercised while the recipient is an employee or director, or within
three months after termination of such status.
In June 1994, stockholders of the Company approved the adoption of the
Amended and Restated Stock Option Plan which superseded 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. 18,000
options were granted from this plan during 1994.
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.
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.
The federal income tax treatment of ISOs is generally more favorable to
employees than the treatment accorded other options. Upon the exercise of
an ISO, the employee does not recognize any income. Instead, upon
disposition of the stock received, the employee is entitled to capital gain
or loss treatment on the difference between the sales proceeds and the
amount paid to exercise the ISO, provided certain required holding periods
as described in section 422(a)(1) of the Internal Revenue Code of 1986, as
amended, have been met. The tax treatment of an ISO is less favorable to
the Company because the Company is not entitled to a tax deduction with
respect to the grant or exercise of an ISO or with respect to any
disposition of such shares after the required holding periods. The Company
is entitled to a tax deduction for an amount equal to the ordinary income
realized by an optionee in the event shares purchased under the Plans are
sold before the end of the relevant holding periods.
In the case of nonqualified stock options, an optionee will not recognize
income for federal income tax purposes when a nonqualified stock option is
granted to him pursuant to the Plans. Generally, upon exercise of such
option, he recognizes ordinary income in an amount equal to the difference
between the fair market value on the date of exercise of the stock he
receives and the amount he pays to exercise the option. The Company is
entitled to a tax deduction for an equal amount.
The Board of Directors may amend or terminate the Plans at any time,
although the Board may not, without stockholder approval, increase the
number of shares subject to the Plans, change the class of persons eligible
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<PAGE>
to receive options under the Plans, or amend the provisions for automatic
awards to outside directors.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company does not currently maintain a
Compensation Committee. Accordingly, the Board of Directors, as a whole,
reviews and acts upon personnel policies and executive compensation
matters. Two members of the Board of Directors, Jim G. Brooks and Joe G.
Brooks, also serve as executive officers of the Company; however such
individuals do not participate in compensation decisions or in forming
compensation policies in which they have a personal interest, nor do they
vote on any such matter.
Limited Liability of Officers and Directors
The Delaware Supreme Court has held that a director's duty of care to a
corporation and its stockholders requires the exercise of an informed
business judgment. Having become informed of all material information
reasonably available to them, directors must act with requisite care in the
discharge of their duties. The Delaware General Corporation law permits a
corporation through its Certificate of Incorporation to exonerate its
directors from personal liability to the corporation or its stockholders
for monetary damages for breach of the fiduciary duty of care as a
director, with certain exceptions. The exceptions include a breach of the
director's duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law, improper
declarations of dividends and transactions from which the directors derived
an improper personal benefit. The Company's Certificate of Incorporation
exonerates its directors, acting in such capacity, from monetary liability
to the extent permitted by this statutory provision. The limitation of
liability provision does not eliminate a stockholder's right to seek
nonmonetary, equitable remedies such as injunction or rescission to redress
an action taken by directors. However, as a practical matter, equitable
remedies may not be available in all situations and there may be instances
in which no effective remedy is available.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30 , 1995, certain
information with regard to the beneficial ownership of the Company's
capital stock by each holder of 5% or more of the outstanding stock, by
each director of the Company, and by all officers and directors as a group:
<TABLE>
<CAPTION> Number of Percentage Percentage
Name and Address Title of Shares of of Class of Voting
of Beneficial Owner Class(1) Common Stock(2) Outstanding(2)(9) Power(2)(9)
<S> <C> <C> <C> <C>
Jim G. and Marjorie S. Brooks Class A 11,511,120(3) 39.3% 42.9%
P. O. Box 1237 Class B 837,588(4) 57.2%
Springdale, AR 72764
Joe G. Brooks Class A 132,500(5) * 3.5%
950 North 2nd Street Class B 231,896 15.8%
Rogers, AR 72756
J. Douglas Brooks Class A 10,120(6) * 1.8%
950 North 2nd Street Class B 131,051 8.9%
Rogers, AR 72756
Jerry B. Burkett Class A 84,000(7) * *
1908 Oak Class B 33,311 *
Stuttgart, AR 72160
Sal Miwa Class A 53,000(8) * *
One Blue Hill Plaza, Suite 815
Pearl River, NY 10965-8667
All officers and directors Class A 11,818,740 40.3% 49.1%
as a group (six persons) Class B 1,233,846 84.2%
<FN>
*Less than 1%
(1) The Class B Common Stock is substantially identical to the Class A
Common Stock, except that each share of Class B Common Stock has five votes
per share and each share of Class A Common Stock has one vote per share.
(2) Beneficial ownership of shares determined in accordance with Rule 13d-
3(d)(1) of the Exchange Act and includes shares underlying outstanding
warrants and options which the named individual has the right to acquire
within sixty days of September 30, 1995.
(3) Includes 3,009,040 shares owned directly, 200,000 shares issuable upon
exercise of stock options, 3,000 shares issuable upon exercise of Class B
Warrants, 325,000 shares issuable upon exercise of Class C Warrants issued
in connection with a $225,000 Bridge Note purchased in 1993, 5,974,080
shares issuable upon exercise of Class F and Class G Warrants issued in
connection with a private placement of Class A Common Stock in May of 1994
and 2,000,000 shares issuable upon exercise of Class H Warrants.
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<PAGE>
(4) Includes 403,946 shares owned directly by Mrs. Brooks and 433,642
shares owned by two corporations controlled by Mr. and Mrs. Brooks.
(Razorback Farms, Inc. is the record owner of 312,320 shares and SMF is the
record owner of 121,322 shares, representing approximately 21.3% and 8.3%,
respectively, of the Class B Common Stock). Excludes additional shares
owned by adult children of Mr. and Mrs. Brooks, including Joe G. Brooks and
J. Douglas Brooks, as to which she disclaims a beneficial interest.
(5) Includes 86,000 shares owned directly, 3,000 shares owned as custodian
for Mr. Brook's minor child and 43,500 shares issuable upon exercise of
Class B Warrants owned directly and as custodian for Mr. Brook's minor
child.
(6) Includes 2,500 shares owned directly and 7,620 shares issuable upon
exercise of Class B Warrants.
(7) Includes 3,000 shares owned directly, 2,000 shares owned by Mr.
Burkett as custodian for his minor child, 10,000 shares owned by a
partnership controlled by Mr. Burkett, 19,000 shares issuable upon exercise
of Class B Warrants directly and indirectly owned by Mr. Burkett and 50,000
shares issuable upon exercise of stock options.
(8) Includes 3,000 shares owned directly and 50,000 shares issuable upon
exercise of stock options.
(9) Calculated based on 29,310,638 shares outstanding as of September 30,
1995, which includes 15,251,600 shares which any person has the right to
acquire through the exercise of options and warrants within 60 days of
September 30, 1995.
</TABLE>
At September 30, 1995, there were 14,059,038 shares of Class A Common
Stock and 1,465,530 shares of Class B Common Stock issued and outstanding.
At that date, the directors and officers as a group directly owned shares
representing approximately 42.7% of the votes entitled to be cast upon
matters submitted to a vote of the Company's stockholders, and Jim G. and
Marjorie S. Brooks and corporations controlled by them owned shares
representing approximately 33.7% of the votes entitled to be cast and may
be in a position to control the Company.
Escrow Shares
In connection with the Company's initial public offering, and at the
request of D.H. Blair, the underwriter in such offering, the holders of the
Company's Class B Common Stock agreed with the Company to place in escrow
an aggregate of 5,625,000 shares of the Company's Class B Common Stock (the
"Escrowed Shares") pursuant to an escrow agreement with the Company and
American Stock Transfer & Trust Company as escrow agent. Such shares were
placed in escrow by each holder of Class B Common Stock on a pro rate basis
according to their respective holdings. Upon the occurrence of certain
events, the Escrowed 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 $16 million or (2) the
market price of the Company's Class A Common Stock averaged in excess of
$6.50 per share for twenty 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
cancelled.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Springdale, State of Arkansas, on the 9th day of
October, 1995.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By: /s/ Jim G. Brooks
Jim G. Brooks
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Jim G. Brooks Chief Executive Officer October 9, 1995
Jim G. Brooks and Director
/s/ Joe G. Brooks President and Director October 9, 1995
Joe G. Brooks
/s/ Jerry B. Burkett Director October 9, 1995
Jerry B. Burkett
/s/ Sal Miwa Director October 9, 1995
Sal Miwa
/s/ Majorie S. Brooks Director October 9, 1995
Marjorie S. Brooks
/s/ David C. Chapman Secretary, Treasurer October 9, 1995
David C. Chapman and Chief Financial Officer
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