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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A (No. 1)
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1995 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
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 September 21 , 1995, the number of shares outstanding of the
Registrant's Class A Common Stock, which is the class registered under the
Securities Act of 1934, was 14,059,038 and the number of shares outstanding
of the Registrant's Class B Common Stock was 1,465,530.
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Advanced Environmental Technologies, Inc. ("AERT" or the "Company")
hereby amends and restates the following Items of its Form 10-Q for the
Quarterly Period ended June 30, 1995:
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
During the second quarter of 1995, the Company substantially completed
development of its commercial manufacturing processes and further defined
the principal markets for certain of the Company's products. The Company,
therefore, exited the development stage and has reclassified certain prior
period amounts to conform to current period reporting presentation. While
the Company will continue to expend amounts related to the research and
development of new products, such amounts are not expected to be material
in relation to prior periods. The Company's efforts are now primarily
directed towards increasing production capacity and efficiency and
expanding its customer base.
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.
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 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 in
the short-term continue to utilize excess capacity from the Rogers Facility
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, 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.
The Company currently maintains a concentrated customer base with
approximately 62% of its sales during the six months ended June 30,
1995 directed to three customers. (See Note 11 to Financial
Statements.) 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
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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.
Results of Operations
Quarter ended June 30, 1995 compared to quarter ended June 30, 1994
Net sales increased to $1,395,664 for the quarter ended June 30, 1995 which
represented an increase of $287,523, or 26% over the second quarter of
1994. Sales from the composites manufacturing unit were $997,965 in the
second quarter of 1995 compared to $959,499 in the second quarter of 1994.
Although the Company was able to increase production volume at the Junction
Facility, such increased volume was significantly offset by an approximate
5% decrease in certain composite product prices. Further, demand for the
Company's door and window products decreased as a result of an approximate
22% national decrease in new housing starts. Sales of recycled plastics
were $397,699 in the second quarter of 1995 compared to $148,682 in the
second quarter 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
virgin resin prices have remained high, thus creating continued short-term
sales opportunities for recycled plastics, it is anticipated that such
sales will significantly decrease throughout the remainder of the year as
the Company has recently terminated its relationship with a significant
plastics customer. See "Legal Proceedings." Management believes, however,
that the loss of plastics revenues attributable to this customer will be
replaced in the third quarter by increased sales from the composites
unit.
Of total second quarter net composites sales, 87% were to the door and
window segment, 5% were to the industrial flooring segment, and 8% were to
the decking segment. Since shipment under the Company's exclusive
marketing agreement with Weyerhaeuser did not begin until June of 1995, the
Company expects the contribution from such sales to increase in future
periods. The Company is currently experiencing an order back-log primarily
due to the Weyerhaeuser agreement.
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 quarters. Management believes
that by broadening its composites sales base, it can reduce the overall
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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.
Cost of goods sold was $1,541,314 for the second quarter of 1995 compared
to $1,282,332 for the comparable quarter in 1994. The increase in cost of
goods sold was primarily attributable to 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. The Company is currently working to finalize various upgrades to
equipment necessary to increase and sustain an acceptable throughput level
at the Rogers Facility.
Selling, General and Administrative expenses during the second quarter of
1995 were $351,695 compared to $373,298 during the second quarter of 1994.
The decrease in Selling, General and Administrative expenses was primarily
attributable to reduced overhead expenses.
The net loss for the quarter ended June 30, 1995 was $571,154, or a net
loss per weighted average common share outstanding of $.04. The loss
compares to a loss of $590,307 or a net loss per weighted average common
share outstanding of $.04 for the three months ended June 30, 1994.
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 at the Junction Facility.
Six Months ended June 30, 1995 compared to six months ended June 30, 1994.
Net sales increased to $2,566,974 for the six months ended June 30, 1995
which represented an increase of $1,739,550 or 48% over the six months
ended June 30, 1994. Sales from the composites manufacturing unit were
$1,667,554 in the first six months of 1995 compared to $1,514,461 for the
first six months of 1994. Although the Company was able to increase
production volume at the Junction Facility, such increased volume was
significantly offset by an approximate 5% decrease in certain composite
product prices. Further, demand for the Company's door and window decreased
as a result of an approximate 22% national decrease in new housing starts.
Sales of recycled plastics were $889,420 in the first six months of 1995
compared to $225,089 in the first six 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. 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 dropoff 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.
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Cost of goods sold was $2,913,595 for the first six months of 1995 compared
to $2,418,593 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. 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 to 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. The Company is currently working to finalize various
upgrades to equipment necessary to increase and sustain an acceptable
throughput level.
Selling, General and Administrative expenses during the first six months of
1995 were $672,569 compared to $973,310 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 six months ended June 30, 1995 was $1,151,940 or
a net loss per weighted average common share outstanding of $.07. This
compares to a loss of $865,701 or a net loss per weighted average common
share outstanding of $.07 for the six months ended June 30, 1994 which
included an extraordinary gain in the amount of $879,373.
Liquidity and Capital Resources
At June 30,1995, the Company had a working capital deficit of $1,425,141
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 six months of 1995 were not sufficient to support
such costs. Cash and cash equivalents increased $2,721 in the six
months ended June 30, 1995. Significant components of that increase were:
(i) cash used in operating activities of $668,563, which consisted of the
net loss for the period of $1,151,940 reduced by depreciation and
amortization of $505,072, plus other uses of cash of $21,695; (ii) cash
used in investing activities of $10,257 and (iii) cash provided by
financing activities of $681,541. Payments on notes during the period
were $272,281 and proceeds from the issuance of notes amounted to $953,922.
$822,000 of such proceeds were provided by the Company's major stockholders
Jim and Marjorie Brooks under the line of credit described below (see
also Note 6 to accompanying Financial Statements) (the "Major
Stockholders"). At June 30, 1995, the Company had notes payable in the
amount of $2,334,429 , of which $628,771 were current notes payable
or current portion of long-term debt.
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 June 30, 1995,
approximately $243,000 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
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of June 30, 1995, the total amount had been drawn against the line and
additional advances of approximately $234,000 had been made by the Major
Shareholders 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 maintain the production rates and
efficiencies it is experiencing as of the date of this filing, it will be
able to achieve a level of operations in the third quarter and the
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 1,298,080 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.
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.)
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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 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 sought 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 counsel have 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. The 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
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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.
In August 1995, the Company initiated suit in the District Court for the
Western District of Arkansas to collect $148,678 in past due receivables
from a former plastics customer. Sales to such customer during the six
months ended June 30, 1995 were approximately $425,000. On September 12
1995, the Court ruled that the Company lacked jurisdiction in Arkansas and
the lawsuit was dismissed. On September 14, 1995, the Company was notified
that such customer had filed a counterclaim against the Company in State
Court in Louisiana alleging breach of contract and requesting an injunction
for protection of confidential proprietary information, declaratory relief,
unspecified dollar damages, offset and attorney's fees. The Company has an
agreement extending the time to respond to the claims in Louisiana and is
in the process of preparing counterclaims to be filed. Although there can
be no assurance as to the ultimate outcome of this action, the Company
believes the customer's claims are without merit and that it will collect
the entire amount of the past due receivable. Therefore, the Company has
not recorded a reserve or otherwise provided for a loss of such
receivable.
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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: October 9, 1995
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