<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Year Ended December 31, 1995
Commission File Number 1-10367
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
DELAWARE 71-0675758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 W. ROBINSON
P.O. BOX 1237 72765
SPRINGDALE, ARKANSAS (Zip Code)
(Address of Principal Executive Office)
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 March 5, 1996: $10,149,194
Number of shares of the common stock outstanding at March 5, 1996:
Class A - 16,192,866
Class B - 1,465,530
<PAGE>
PART I
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. The Company markets its moisture-
resistant and dimensionally stable composite building materials under the trade
names Moistureshield(TM), Lifecycle(TM), and CHOICEDEK(TM). The Company markets
its products into three areas; 1) the door and window component market, 2) the
heavy industrial flooring market, and 3) the high-end residential and commercial
decking market. AERT was founded in December of 1988 and since inception, has
completed research and development resulting in the receipt of twelve 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), LIFECYCLE(TM), and CHOICEDEK(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
1
<PAGE>
create 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
end-work lines; and the painting department consists of inspection, preparation
and a painting and drying line.
Due to increased composite sales demands, the Company is expanding its composite
manufacturing facility by adding a third extrusion line, and is also
evaluating establishing additional composite manufacturing capability. In the
first quarter of 1996, the Company discontinued plastics sales to third parties
and intends to utilize all plastics produced by its plastics division internally
for composite production.
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 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 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
2
<PAGE>
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.
Through 1995, the Company's plastics reclamation facility was involved in sales
of recycled plastics to third-party film manufacturers. The materials desired
by these customers required substantial processing beyond that necessary to
produce raw-materials for the composites facility and were never efficiently
produced. This, coupled with increased sales of the Company's composite
products and accordingly, the composites division's increased raw-material
requirements has prompted the Company, in the first quarter of 1996, to
discontinue reclamation of plastics for sale to third-parties and dedicate all
of the plastic facility's production to providing materials to the Junction
operation. In connection with this restructuring of the plastics reclamation
plant, the Company exchanged certain equipment, previously utilized to produce
plastics for sale to third-parties, for other equipment which will be utilized
to produce raw-materials and for additional equipment necessary to complete the
installation of a third production line at the Company's composite facility.
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.
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.
3
<PAGE>
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.
The Company has negotiated an informal supply agreement with one national
company which operates a fiber recovery mill. The Company takes the plastic
by-products generated by this mill for minimal freight thereby reducing the
supplier disposal costs. The Company has identified numerous sources of this
material. The Company's goal is to reprocess this LDPE plastic for around .20c
per pound, which compares with a current virgin price of LDPE coating material
of approximately .35c per pound.
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.
4
<PAGE>
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 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 its
market diversification program will reduce the effects that fluctuations 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 further
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 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.
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 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.
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
5
<PAGE>
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 competes 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 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
6
<PAGE>
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 twelve patents, five of which relate to
the Company's composite materials manufacturing operations and seven 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 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
At December 31, 1995, the Company employed 125 full-time personnel, 12 of whom
are executive or office personnel and 113 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.
7
<PAGE>
ITEM 2. PROPERTY
The Company conducts its composite products manufacturing operations from a
33,000 square foot facility on a seven-acre site in Junction, Texas. The
grounds and a 10,500 square foot building are leased from Marjorie S. Brooks, a
major shareholder, under an agreement which expires April 30, 2001. The Company
owns the building and other improvements located on the site and currently pays
a monthly rent of $1,519 for the lease. The Company believes that the Junction
facility is currently suitable for its composite materials manufacturing
requirements, however, the Company is evaluating ways to establish additional
composites capacity.
The Company's plastic reclamation facility is located in Rogers, Arkansas, where
the Company leases 17,000 square feet for its manufacturing and warehouse
facility and adjacent office space. This facility is being occupied under the
provisions of a production lease which expires January 1, 1997 and contains five
automatic renewal options of one year each. The lease agreement does not
require any minimum lease payments, but requires payments based on plant
production at a rate of $.02 per pound. This rental arrangement will remain in
effect for any such renewal periods as well. The Company paid rent of $105,717
for this facility during the year ended December 31, 1995.
The Company's corporate offices are located in a leased office-warehouse complex
in Springdale, Arkansas. The facility consists of a 20,000 square foot building
with an adjoining 10,000 square feet of paved and covered storage and rail spur
access. The lease provides for a rental amount of $5,000 per month, a term of
four years beginning June 15, 1992, with a renewal option for two additional
years. The Company is currently subleasing portions of the space to third
parties for $4,450 per month.
ITEM 3. 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.
8
<PAGE>
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. In
December 1995, the Company also moved to supplement its pending March 14, 1995
Motion with additional tampered evidence and discovery misconduct by
Mobil.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. In January 1996, oral arguments were
presented before the U.S. Court of Appeals. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of security holders
during the quarter ended December 31, 1995.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 6, 1996, the Company's Class A Common Stock and the Company's
Redeemable Class B Warrants are traded in the over-the-counter market and are
listed on NASDAQ under the symbols AERTA and AERTZ, respectively.
The following table sets forth the ranges of high and low bid prices (as
reported by NASDAQ) of the Company's Class A Common Stock and Redeemable Class B
Warrants, for the years ended December 31, 1993, 1994 and 1995. The quotations
represent prices between dealers and do not include retail markup, markdown or
commission, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Warrants
High Low High Low
----- ----- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1993
First Quarter 1.94 1.25 .44 .25
Second Quarter 1.81 .81 .38 .16
Third Quarter 1.50 1.00 .19 .16
Fourth Quarter 1.50 1.12 .19 .12
Fiscal 1994
First Quarter 2.19 .50 .13 .03
Second Quarter .88 .44 .03 .03
Third Quarter .50 .19 .03 .03
Fourth Quarter .56 .25 .06 .03
Fiscal 1995
First Quarter .53 .32 .06 .03
Second Quarter 2.06 .34 .* .*
Third Quarter 2.00 1.00 .56 .13
Fourth Quarter 1.50 .94 .25 .09
* - No established public trading market.
</TABLE>
As of March 5, 1996, there were 1,479 record holders of Class A Common Stock and
11 record holders of Class B Common Stock. The number of beneficial owners of
the Class A Common Stock at March 5, 1996 is not known; however, based on
inquiries to certain brokers, management believes the number of the beneficial
owners of Class A Common Stock at March 5, 1996 was in excess of 5,000.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical data for the Company for the
years ended December 31, 1991 through 1995. For the year ended December 31,
1995, 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, 1995 was obtained from Item 6 of the Company's Annual Report or Form 10-K
for the year ended December 31, 1994.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA:
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993 DEC. 31, 1992 DEC. 31, 1991
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales $ 5,581,172 $ 3,675,018 $ 2,043,476 $ 559,886 $ 127,213
------------ ----------- ----------- ----------- -----------
Net Loss before
extraordinary
gain
(2,756 263 ) (2,970,135) - - -
Extraordinary
gain
- 879,373 - - -
------------ ----------- ----------- -----------
Net Loss (2,756,263) (2,090,762) (3,692,773) (3,241,158) (1,655,290)
============ =========== =========== =========== ===========
Net Loss before
extraordinary gain
per common share (.17) (.21) - - -
Extraordinary gain
per common share - .06 - - -
-----------
Net Loss Per
common
share/(1)/ (.17) (.15) (.34) (.34) (.26)
============ =========== =========== =========== ===========
Weighted Average
Number of Shares
Outstanding/(1)/ 15,779,721 14,166,869 10,853,938 9,579,858 6,346,877
</TABLE>
11
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
WORKING CAPITAL
(DEFICIT) $(1,556,805) $ (599,753) $ (701,142) $ 812,199 $ (875,295)
TOTAL ASSETS 7,357,742 8,781,907 9,146,981 9,925,393 5,148,531
LONG-TERM DEBT 1,266,642 1,844,597 892,294 598,129 746,134
TOTAL LIABILITIES 3,643,999 3,335,459 3,010,529 1,698,484 1,833,195
STOCK SUBSCRIPTION 1,000,000
STOCKHOLDERS' EQUITY $ 3,713,743 $5,446,448 $5,136,452 $8,226,909 $3,315,336
</TABLE>
- -------------
(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 did not occur. On March 31,
1995, all shares of Class B common stock held in escrow were cancelled.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994
- ---------------------------------------------------------------------
Net sales increased to $5,581,172 for the year ended December 31, 1995 which
represented an increase of $1,906,154 or 52% over the year ended December 31,
1994. Sales from the composites manufacturing unit were $4,532,748 in 1995
compared to $3,049,013 for 1994 a 48% increase. 1995 composites sales consisted
of door and window component sales of $3,770,569, decking material sales of
$762,179 and industrial flooring sales of $395,252.
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.
Sales of recycled plastics were $1,048,424 in 1995 compared to $626,005 in 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 during the first half of 1995. Sales dropped
significantly beginning in the third quarter of 1995 due to the loss of a
substantial customer.
Cost of goods sold was $6,183,924 for 1995 compared to $4,921,378 for 1994. The
overall cost of goods sold to sales ratio, although still negative, showed
improvement over 1994. The increase in cost of goods sold was primarily
attributable increased raw material, labor costs, and poor operating
efficiencies at the Rogers Facility. Significant categories are as follows:
<TABLE>
<CAPTION>
Expense Category 1995 1994
- --------------------------- ---------- ----------
<S> <C> <C>
Payroll and payroll taxes $2,169,987 $2,016,990
Depreciation 1,043,804 865,194
Raw Materials 858,058 545,509
Other 2,112,075 1,493,685
---------- ----------
Total $6,183,924 $4,921,378
========== ==========
</TABLE>
Selling, General and Administrative expenses during 1995 were $1,356,244
compared to $1,513,234 for 1994. The decrease in Selling, General and
Administrative expenses is primarily attributable to decreased legal expenses.
The net loss for 1995 was $2,756,263 or a net loss per weighted average common
share outstanding of $.17. This compares to a loss of $2,090,762 or a net loss
per weighted average common share outstanding of $.15
13
<PAGE>
for 1994 which included an extraordinary gain in the amount of $879,373. The
operating loss before the gain was $2,970,135 or $.21 per share.
Composites sales for the 4th Quarter of 1995 were limited by equipment and
manufacturing problems caused by tramp metal getting into both extrusion systems
during that quarter. This evaded the Company's cleaning and safety systems and
resulted in down-time, maintenance, repair costs, and bad scrap rates. Law
enforcement agencies are currently investigating whether these incidents were
intentional. The Company has taken additional security measures, including
installation of surveillance cameras, which are intended to better protect the
Company's facilities, however there can be no assurance that such incidents will
not continue to adversely impact the Company's operations.
Through 1995, the Company's plastics reclamation facility was involved in sales
of recycled plastics to third-party film manufacturers. The materials desired
by these customers required substantial processing beyond that necessary to
produce raw-materials for the composites facility and were never efficiently
produced. This, coupled with increased sales of the Company's composite
products and accordingly, the composites division's increased raw-material
requirements has prompted the Company, in the first quarter of 1996, to
discontinue reclamation of plastics for sale to third-parties and dedicate all
of the plastic facility's production to providing materials to the Junction
operation. In connection with this restructuring of the plastics reclamation
plant, the Company exchanged certain equipment, previously utilized to produce
plastics for sale to third-parties, for other equipment which will be utilized
to produce raw-materials and for additional equipment necessary to complete the
installation of a third production line at the Company's composite facility.
Although Management believes that operating losses will continue into the
1st Quarter of 1996, substantial reductions of unit production costs at the
Rogers facility are expected as a result of discontinuing those processes
associated with the reclamation of plastics for outside sales. Further, sales of
the Company's composite products are expected to increase as a result of this
increased production capacity to be provided by the installation of the third
line at the Junction facility, which is scheduled for completion during the 2nd
Quarter of 1996. However, management continues to believe that for the Company
to ultimately attain profitability, it must, in addition to increasing plant
capacity, improve efficiencies and reduce overhead.
Year Ended December 31, 1994 Compared To Year Ended December 31, 1993
- ---------------------------------------------------------------------
Net sales increased 80% from $2,043,476 for the year ended December 31, 1993 to
$3,675,018 for the year ended December 31, 1994. This increase is attributable
to significant increases in sales of the Company's Composite Product division.
Composite product sales of $3,049,013 for 1994 represented a 158% increase over
the $1,181,804 in sales for 1993. This increase is attributable to additions to
the Company's customer base and increased sales to existing customers. This
increase was achieved despite problems associated with raw materials and the
interruption in production resulting from a major fire at the Junction, Texas
facility during August of 1993. Limited production capabilities in the facility
resumed in September 1993, although only one extrusion line produced product
through August 1994. The damage to its composites facility also restricted the
Company's ability to supply certain composite products to its customers.
Plastic reclamation sales decreased from $861,672 in 1993 to $626,005 in 1994.
14
<PAGE>
Cost of goods sold for the year-ended December 31, 1994 was $4,921,378 compared
to $4,021,901 for 1993 which reflects an increase of $899,477. The most
significant reason for this increase was increased production and sales of the
composite products division. Significant expense categories were as follows:
<TABLE>
<CAPTION>
Expense Category 1994 1993
- --------------------------- ---------- ----------
<S> <C> <C>
Payroll and payroll taxes $2,016,991 $1,732,298
Depreciation 865,195 664,009
Raw Materials 545,507 416,526
Other 1,493,685 1,209,063
---------- ----------
Total $4,921,378 $4,021,901
========== ==========
</TABLE>
Selling and Administrative Costs decreased slightly from $1,567,899 for the
year-ended December 31, 1993 to $1,513,254 for 1994. While payroll-related
expenses, depreciation and other expenses decreased significantly, this decrease
was offset by substantial legal expenses related to the Mobil lawsuit.
In March 1994, Dow Chemical and the Company reached an agreement whereby Dow
Chemical's obligation to purchase material from the Company (10 million pounds
of the Company's recycled plastic bag film resins) 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 a loan agreement between Dow Credit and the Company.
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.
The net loss for the year ended December 31, 1994 was $2,090,762, or $.15 per
share. This compares with a loss of $3,692,773, or $.34 per share, for the year
ended December 31, 1993.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1995, the Company had a working capital deficit of $1,566,805
compared to a working capital deficit of $599,753 at December 31, 1994. The
increased deficit is primarily attributable to the Company's 1995 operating loss
and an increase in current maturities of long-term debt. Cash and cash
equivalents increased $9,373 in 1995. Significant components of that increase
were: (i) cash used in operating activities of $487,516, which consisted of the
net loss for the period of $2,756,263 reduced by depreciation and amortization
of $1,107,537, loss on disposition of equipment of $527,804, and other uses of
cash of $633,406; (ii) cash used in investing activities of $243,603, and (iii)
cash provided by financing activities of $740,492. Payments on notes during the
period were $1,351,276 and proceeds from the issuances of notes amounted to
$1,068,210. $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 Financial Statements). At
December 31, 1995, the Company had notes payable in the amount of $2,036,822, of
which $770,180 were current notes payable or current portion of long-term debt.
On November 1, 1995,
15
<PAGE>
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 $994,603, reduced the working capital deficit of the Company
and were used to reduce current liabilities. In January 1996, the major
stockholder exercised 500,000 Class F Warrants which provided an additional
$305,000.
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 December 31, 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 December 31, 1995, the total amount of the line was available.
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 Unit and
streamlining overhead, it will be able to achieve a level of operations in
periods subsequent to the first quarter of 1996 and thereafter which will
significantly reduce or eliminate the need for additional sources of capital to
support its operations. Management believes that increased sales obtained with a
third composites line in conjunction with reduced plastics division costs will
allow it to attain profitability. 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. There can be no assurance that
such improvements in production efficiency or capacity will be achieved by the
Company.
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. Therefore, the
Company is currently evaluating a potential licensing or joint-venture
arrangement for additional composite manufacturing capacity. The Company is
also evaluating potential debt financing for additional manufacturing expansion.
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 10 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
16
<PAGE>
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 17 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)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The response to this item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosures with
accountants during the periods reported upon herein.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sal Miwa 38 Chairman of the Board
Joe G. Brooks 40 President and Director
David C. Chapman 52 Secretary, Treasurer and Chief Financial Officer
Robert D. Gorsche 44 Chief Operating Officer
J. Douglas Brooks 36 Vice President
Marjorie S. Brooks 60 Director
Jerry B. Burkett 40 Director
Steve W. Brooks 39 Director
</TABLE>
Chairman of the Board and Chief Executive Officer Jim G. Brooks passed away
unexpectedly on January 16, 1996.
On January 30, 1996, Sal Miwa was elected as its Chairman by the Company's Board
of Directors to serve the remaining term of the late Jim Brooks. Mr. Miwa has
been an outside director of the Company for the past two years. Sal Miwa is
President of Optro-Mechanics (USA) Corporation, an import-export firm located in
Pearl River, New York. For the past 15 years he has been engaged in various
international businesses and serves as a director and an officer of various
other family owned businesses located in U.S., Japan, and Europe. He received
his Science Master degree in Aerospace Engineering from the Massachusetts
Institute of Technology.
Joe G. Brooks has served as President, Chief Executive Officer (until September
28, 1993) and a director since the Company's inception in December 1988. From
July 1985 to December 1988, Mr. Brooks also served as President and a director
of Juniper Products, Inc. (July 1985 - February 1987) and served as an
independent consultant to Juniper Industries, Inc. (February 1987 - December
1988), artificial firelog manufacturing entities in Junction, Texas. See
"Certain Transactions." From October 1984 to July 1985, Mr. Brooks served as
President of Southern Minerals and Fibers, Inc. ("SMF"), a producer of drilling
mud and fluid additives.
David C. Chapman joined the Company on October 18, 1993 as Chief Financial
Officer, and on June 17, 1994, was also elected as the Company's Secretary and
Treasurer. A Certified Public Accountant since 1973, Mr. Chapman has extensive
public accounting experience and has served as controller or chief financial
officer in both privately held and publicly owned companies in the
transportation and financial industries.
Robert D. Gorsche joined the Company on February 13, 1995. As Chief Operating
Officer, he assumes day-to-day control and operating responsibilities over the
Company's composite manufacturing facility in Junction, Texas, and the plastics
reclamation facility in Rogers, Arkansas. Mr. Gorsche has extensive technical
and
18
<PAGE>
manufacturing experience, including a Bachelor of Science degree from MIT in
Cambridge, Massachusetts. His educational background also includes graduate
studies at Northeastern University. Mr. Gorsche was previously employed at
Therma-Tru Corporation of Maumee, Ohio, where he served as General Manager of
the Indiana manufacturing operations and later as Vice President of
Manufacturing.
J. Douglas Brooks has served as Vice President and a director of the Company
from inception in December 1988 until June 17, 1994, and continues to serve as
Vice President of Recycled Plastics. Mr. Brooks also served as an independent
consultant to Juniper Industries, Inc. from April 1987 to December 1988 and as
Vice President of SMF from September 1984 to April 1987.
Marjorie S. Brooks served as Secretary and Treasurer and a director since the
Company's inception in December 1988. On March 9, 1993, Mrs. Brooks submitted
her resignation as a director for personal health reasons. Mrs. Brooks also
serves as a director of Juniper Industries, Inc. and Razorback Farms, Inc., has
served as Secretary and Treasurer of the Brooks Investment Co., a holding
company for the Brooks' family investments, for more than the past thirty years,
and has served as President of Haskell Foods, Inc. from 1981 to the present.
Jerry B. Burkett was appointed to the Board of Directors of the Company on May
17, 1993. Mr. Burkett has been a rice and grain farmer since 1979 and has been
a principal in other closely held businesses. He is currently the President of
the Arkansas County Farm Bureau.
Steven W. Brooks was appointed to the Board of Directors of the Company on
January 30, 1996. Mr. Brooks is President of Razorback Farms, Inc., a
Springdale, Arkansas based firm that specializes in vegetables for processing.
Mr. Brooks also serves on the Boards of Razorback Farms, Inc. and The Ozark Food
Processors Association.
Joe G. Brooks, Steven W. Brooks, and J. Douglas Brooks are brothers and are sons
of Jim G. and Marjorie S. Brooks. There are no other familial relationships
between the current directors and executive officers.
Each of the Company's directors have been elected to serve until the next annual
meeting of stockholders or until their successors are elected and qualified.
Officers serve at the discretion of the Board of Directors.
The Audit Committee of the Board of Directors consists of Jerry B. Burkett
(Chairman), Joe G. Brooks, and Sal Miwa. The Audit Committee recommends
engagement of the Company's independent accountants and is primarily responsible
for approving the services performed by the Company's independent accountants
and for reviewing and evaluating the Company's accounting principles and its
system of internal accounting controls.
The Stock Option Committee, consists of Jerry B. Burkett (Chairman), Sal Miwa,
and Marjorie S. Brooks. The Stock Option Committee administers the Company's
stock option plans on behalf of the Board of Directors and approves stock
options granted thereunder.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company during the three years ended December 31, 1995 to each executive officer
of the Company whose aggregate cash compensation exceeded $100,000, and to the
chief executive officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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, 1995 $ 0 $0 $ 0 $0 0 $0 $0
Chief Executive 1994 0 0 0 0 500,000 0 0
Officer (9/28/93) 1993 0 0 0 0 25,000 0 0
and Chairman of
the Board of
Directors
Joe G. Brooks, 1993 $70,919 $0 $1,200 $0 $ 0 $0 $0
Chief Executive
Officer (to 9/28/
93) and President
</TABLE>
AGGREGATED OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1995
AND OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares at December 31, 1995 at December 31, 1995
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jim G. Brooks 0 $0 125,000/400,000 $0/$0
</TABLE>
20
<PAGE>
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.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 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 11,025,795 (3) 37.4% 41.3%
P.O. Box 1237 Class B 837,588 (4) 57.2%
Springdale, AR 72764
Joe G. Brooks Class A 166,385 (5) * 4.1%
950 North 2nd Street Class B 266,896 18.2%
Rogers, AR 72756
J. Douglas Brooks Class A 75,450 (6) * 2.0%
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
Steven W. Brooks Class A 10,000 * 1.2%
P.O. Box 291 Class B 89,311 6.1%
Springdale, AR 72765
All officers and directors Class A 11,506,296 39.0% 49.7%
as a group (six persons) Class B 1,358,157 92.7%
* Less than 1%
</TABLE>
(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 December 31, 1995.
22
<PAGE>
(3) Includes 4,023,715 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, 5,036,304 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.
(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 86,552 shares owned directly, 3,000 shares owned as custodian for
Mr. Brook's minor child, 43,500 shares issuable upon exercise of Class B
Warrants owned directly and as custodian for Mr. Brook's minor child and 33,333
shares issuable upon exercise of stock options.
(6) Includes 34,997 shares owned directly, 7,620 shares issuable upon
exercise of Class B Warrants and 33,333 shares issuable upon exercise of stock
options.
(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 29,484,970 shares outstanding as of December 31, 1995,
which includes 13,792,104 shares which any person has the right to acquire
through the exercise of options and warrants within 60 days of December 31,
1995.
At March 5, 1996, there were 16,192,866 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 48.7% 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 36.6% 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
23
<PAGE>
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.
ITEM 13. CERTAIN TRANSACTIONS
In June and September, 1993 the Company secured short-term financing from Jim G.
and Marjorie Brooks resulting in notes payable totaling $136,000. The notes
accrued interest at a rate of 8.0% per annum and were repaid in October, 1993.
On October 13, 1993, Jim G. and Marjorie S. Brooks placed a $1,000,000 non-
refundable stock subscription prepayment with the Company in relation to the
offering previously discussed. See "Liquidity and Capital Resources" in Item 7.
The prepayment bears interest at the rate of 8% per annum which is payable on
demand.
On June 29, 1993 the Company circulated a private placement offering of up to
$1,200,000 in Bridge Notes and Class C Warrants. The Notes are secured by
certain equipment of the Company's composite production division, bear interest
at the rate of 8% per annum, and mature June 29, 1994. The face amount of each
Bridge Note is accompanied with an equal number of 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. Jim G. and Marjorie
Brooks participated in the Bridge Offering in the amount of $225,000.
In April 1994, the Company renewed an agreement with an affiliate whereby the
Company agreed to sell certain of its trade receivables which the affiliate
deems acceptable, up to $650,000 at any one time. Upon 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 1995, the Company sold an aggregate of approximately
$5,852,000 in receivables under this agreement, of which $241,723 remains to be
collected. During 1994 and 1993, the Company sold an aggregate of approximately
$3,726,000 and $1,018,000, respectively, in receivables under this agreement,
none of which remains to be collected. Costs of approximately $51,000, $32,800
and $9,000 associated with the factoring agreement are included in selling,
production, general and administrative expenses at December 31, 1995, 1994 and
1993, respectively.
In July 1994, the Company obtained a $1,000,000 secured line of credit bearing
interest at the rate of 8.5% per annum from Jim G. and Marjorie S. Brooks at
December 31, 1994 the Brooks had advanced the $1,000,000 plus an additional
$411,903. In February 1995, the line of credit was increased to $2,000,000 of
which $1,566,903 is a term-note to be amortized at 9.75% over five years
beginning April 1, 1995 and the balance of $433,097 is a revolving credit line
expiring in February 2000 available as needed by the Company.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1,2 and (d). The Financial Statements listed in the accompanying Index to
Financial Statements are filed as part of this report and such Index is hereby
incorporated by reference. All schedules for which provision is made in the
applicable accounting regulation on the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3 and (c). The exhibits listed in the accompanying Index to Exhibits are
filed or incorporated by reference as part of this report and such Index is
hereby incorporated by reference.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
25
<PAGE>
SIGNATURES
Pursuant to 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 29th day of March, 1996.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
BY: /S/ Joe G. Brooks /S/ David C. Chapman
- ------------------------------ -------------------------------
JOE G. BROOKS, DAVID C. CHAPMAN,
President Secretary, Treasurer and Chief
Financial Officer
Date: March 29, 1996 March 29, 1996
------------------------ -------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Sal Miwa Chairman of the Board March 29, 1996
-------------------------
SAL MIWA
/S/ Joe G. Brooks President and Director March 29, 1996
-------------------------
JOE G. BROOKS
/S/ Jerry B. Burkett Director March 29, 1996
-------------------------
JERRY B. BURKETT
/S/ Steven W. Brooks Director March 29, 1996
-------------------------
STEVEN W. BROOKS
/S/ Marjorie S. Brooks Director March 29, 1996
-------------------------
MARJORIE S. BROOKS
26
<PAGE>
INDEX TO EXHIBITS
Sequential
Exhibit No. Description of Exhibit Page Number
- ----------- ---------------------- -------------
3.1 Certificate of Incorporation, including Certificate of
Amendment filed on June 12, 1989(a), and Certificate of
Amendment filed on August 22, 1989.(b)
3.2 Certificate of Designation of Class B Common Stock.(a)
3.3 Bylaws of Registrant.(a)
4.1 Form of Class A Common Stock Certificate.(c)
4.2 Form of Class B Common Stock Certificate.(a)
4.3 Form of Warrant Agreement with American Stock Transfer
& Trust Company, including Class A and Class B Common
Stock Purchase Warrants.(a)
4.7 Form of Redeemable Class B Warrant Certificate.(c)
4.8 Form of Class C Warrant Certificate.(h)
4.9 Form of Class D Warrant Certificate.(h)
4.10 Form of Class E Warrant Certificate.(h)
4.11 Form of Class F Warrant Certificate.(i)
4.12 Form of Class G Warrant Certificate.(i)
10.9 Form of Right of Refusal Agreement among Class B
Common Stockholders.(a)
10.10 1989 Stock Option plan.(a)
10.11 Form of Escrow Agreement with American Stock Transfer &
Trust Company.(c)
10.15 Lease Agreement dated June 1, 1990 between the Registrant
and J's Feed, Inc. for the Registrant's plastics reclamation
facility.(e)
10.16 Loan Agreement dated June 13, 1991 with Dow Credit
Corporation.(f)
10.16 Loan Agreement dated October 22, 1991 with Dow Credit
Corporation.(f)
10.16 Loan Agreement with City of Rogers, arranged through
Arkansas Industrial Development Commission.(f)
10.17 Lease Agreement dated June 15, 1992 between the Registrant and
George's, Inc. for the Registrant's corporate office facility.(g)
10.18 Factoring Agreement dated April 30, 1993 between the Registrant and
Brooks Investment Company.(h)
10.23 Private Placement Distribution Agreement dated September 23, 1993
between the Registrant and Berkshire International Finance,
Inc.(h)
10.26 Lease Agreement dated June 16, 1994 between Registrant and Marjorie
S. Brooks.(i)
10.27 Line of Credit Promissory Note payable to Jim G. Brooks and Marjorie
S. Brooks.(i)
27
<PAGE>
10.28 Amended and Restated Stock Option Plan.(i)
10.29 Non-Employee Director Stock Option Plan.(i)
10.30 Chairman Stock Option Plan.(i)
10.31 Factoring Agreement dated April 30, 1994 between the Registrant and
Brooks Investment Company.(i)
__________
* The Registrant has no exhibits corresponding to Exhibits 1, 2, 5, 6, 7, 8,
9, 11, through 23, or 26 through 29.
(a) Contained in Exhibits to Registration Statement on Form S-1, No. 33-29595,
filed June 28, 1989.
(b) Contained in Exhibits to Amendment No. 1 to Registration Statement on Form
S-1, No. 33-29595, filed August 24,1989.
(c) Contained in Exhibits to Amendment No. 2 to Registration Statement on Form
S-1, No. 33-29595, filed November 8, 1989.
(d) Filed with Form 10-K for December 31, 1989.
(e) Filed with Form 10-K for December 31, 1990.
(f) Contained in Exhibits to Post Effective Amendment No. 1 to Registration
Statement on Form S-1, No. 33- 29593, filed December 24, 1991.
(g) Filed with Form 10-K for December 31, 1992.
(h) Filed with Form 10-K for December 31, 1992.
(i) Filed herewith with Form 10-K for December 31, 1994.
28
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1995
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SPRINGDALE, ARKANSAS
29
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Financial statements:
Report of Arthur Andersen LLP, Independent Auditors F-2 - F-3
Balance sheets F-4 - F-5
Statements of operations F-6
Statements of stockholders' equity F-7 - F-8
Statements of cash flows F-9
Notes to financial statements F-10 - F-24
</TABLE>
30 (F-1)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.:
We have audited the accompanying balance sheets of Advanced Environmental
Recycling Technologies, Inc. (a Delaware corporation), as of December 31, 1995
and 1994, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Environmental
Recycling Technologies, Inc., as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has not generated significant operating
revenues, has incurred net losses since inception, has a working capital
deficit at December 31, 1995, and is subject to certain claims in litigation
as discussed in Note 17. Further, unaudited information subsequent to
December 31, 1995, indicates that losses are continuing. These factors, among
others, as discussed in Note 2, raise a substantial doubt about the ability of
the Company to continue as a going concern. Management's plans in regards to
those matters are also described in Note 2. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
ARTHUR ANDERSEN LLP
San Antonio, Texas
March 8, 1996
31 (F-2)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
--------------------------
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,350 $ 5,977
Receivables 48,463 60,920
Inventories 648,211 710,694
Prepaid expenses and other 108,528 113,518
---------- ----------
Total current assets 820,552 891,109
---------- ----------
Buildings and equipment,
at cost, including construction
in progress of $22,946 (1995) and
$201,608 (1994):
Buildings 675,420 675,009
Machinery and equipment 7,985,870 8,405,688
Transportation equipment 112,411 112,411
Office equipment 170,659 166,278
Leasehold improvements 315,331 347,155
---------- ----------
9,259,691 9,706,541
Less accumulated depreciation
and amortization 3,050,979 2,129,348
---------- ----------
Net buildings and equipment 6,208,712 7,577,193
---------- ----------
Other assets, at cost less
accumulated amortization of
$83,058 (1995) and $59,801 (1994) 328,478 313,605
---------- ----------
$7,357,742 $8,781,907
========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
32 (F-3)
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 755,576 $ 381,860
Accounts payable - trade 1,078,243 813,265
Accounts payable - related parties 362,155 58,415
Accrued liabilities 166,779 143,891
Notes payable 14,604 93,431
------------ ------------
Total current liabilities 2,377,357 1,490,862
------------ ------------
Long-term debt, less current maturities
Related parties 1,102,554 1,241,249
Other 164,088 603,348
------------ ------------
Total long-term debt 1,266,642 1,844,597
------------ ------------
Commitments and contingencies
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, 15,692,866 (1995)
and 14,038,038 (1994) issued and outstanding 156,929 140,380
Class B convertible common stock, $.01 par value;
7,500,000 shares authorized, 1,465,530 (1995) and
7,090,530 (1994) issued and outstanding 14,655 70,905
Additional paid-in capital 19,282,865 18,219,606
Accumulated deficit (15,740,706) (12,984,443)
------------ ------------
Total stockholders' equity 3,713,743 5,446,448
------------ ------------
$ 7,357,742 $ 8,781,907
============ ============
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
33 (F-4)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 5,581,172 $ 3,675,018 $ 2,043,476
Cost of Goods Sold 6,183,924 4,921,378 4,021,901
------------ ------------ ------------
Gross Margin (602,752) (1,246,360) (1,978,425)
Loss on Disposal of Assets 528,538 - -
Selling and Administrative Costs 1,356,244 1,513,254 1,567,899
------------ ------------ ------------
Operating Income (Loss)
(2,487,534) (2,759,614) (3,546,324)
Other Income (Expense)
Other Income (Expense) 1,098 (19,716) (11,269)
Interest Expense (269,827) (190,805) (135,180)
------------ ------------ ------------
Loss before extraordinary item (2,756,263) (2,970,135) (3,692,773)
Extraordinary Gain - 879,373 -
------------ ------------ ------------
Net loss $(2,756,263) $(2,090,762) $(3,692,773)
============ ============ ============
Loss per share of common stock
before extraordinary gain ($.17) ($.21) ($.34)
============ ============ ============
Extraordinary gain per share of common stock
- ($.06) -
============ ============ ============
Net loss per share of common stock ($.17) ($.15) ($.34)
============ ============ ============
Weighted average number of
common shares outstanding 15,779,721 14,166,869 10,853,938
============ ============ ============
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
34 (F-5)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Common Stock
--------------------
Shares Amount
---------- --------
<S> <C> <C>
Balance - December 31, 1992 9,343,006 $ 93,430
Net proceeds from issuance of
Class A Common stock 736,135 7,361
Conversion of Class B Common
Stock to Class A Common Stock 13,125 132
Net loss for the year
ended December 31, 1993 - -
---------- --------
Balance - December 31, 1993
10,092,266 100,923
Issuance of Class A
Common stock
Net loss for the year 3,945,772 39,457
ended December 31, 1994
- -
Balance - December 31, 1994 ---------- --------
Cancellation of 5,625,000 14,038,038 $140,380
Shares of Class B Common Stock ========== ========
Exercise of Stock Options
Exercise of Class F Warrants
Net loss for the year ended - -
December 31, 1995 24,332 244
1,630,496 16,305
Balance - December 31, 1995
- -
---------- --------
15,692,866 $156,929
========== ========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
35 (F-6)
<PAGE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
Class B Common Stock ----------- ------------ -----------
- ------------------------
Shares Amount
- ---------- ---------
<S> <C> <C> <C> <C>
7,103,655 $ 71,037 $15,263,350 $ (7,200,908) $ 8,226,909
- - 594,955 - 602,316
(13,125) (132) - - -
- - - (3,692,773) (3,692,773)
- ---------- --------- ----------- ------------ -----------
7,090,530 70,905 15,858,305 (10,893,681) 5,136,452
- - 2,361,301 - 2,400,758
- - - (2,090,762) (2,090,762)
- ---------- --------- ----------- ------------ -----------
7,090,530 $ 70,905 $18,219,606 $(12,984,443) $ 5,446,448
========== ========= =========== ============ ===========
(5,625,000) (56,250) 56,250 - -
- - 28,711 - 28,955
- - 978,298 - 994,603
- - - (2,756,263) (2,756,263)
- ---------- --------- ----------- ------------ -----------
1,465,530 $ 14,655 $19,282,865 $(15,740,706) $ 3,713,743
========== ========= =========== ============ ===========
</TABLE>
36 (F-7)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,756,263) $(2,090,762) $(3,692,773)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,084,280 938,126 716,676
Amortization of other assets 23,257 20,223 35,859
Fire loss, net - - 9,747
Loss on disposition of equipment 527,804 19,736 6,980
Increase in other assets (38,130) (49,624) (85,144)
Changes in operating assets & operating liabilities 671,536 223,648 403,943
Extraordinary gain - (879,373) -
----------- ----------- -----------
Net cash used in operating activities (487,516) (1,818,026) (2,604,712)
----------- ----------- -----------
Cash flows from investing activities:
Additions to buildings and equipment (248,603) (835,921) (1,192,783)
Proceeds of sale of equipment 5,000 22,000 17,250
Insurance recoveries, net of fire related expenses - 543,305 231,061
----------- ----------- -----------
Net cash used in investing activities (243,603) (270,616) (944,472)
----------- ----------- -----------
Cash flows from financing activities:
Prepaid Stock Subscriptions - - 1,000,000
Proceeds from issuance of notes 1,068,210 2,269,763 1,067,872
Payments on notes (1,351,276) (747,866) (503,257)
Proceeds from issuance of common stock - 380,341 614,189
Proceeds from warrant exercises, net 994,603 - -
Offering and warrant exercise costs - - (11,873)
Proceeds from exercise of stock options, net 28,955 - -
----------- ----------- -----------
Net cash provided by financing activities 740,492 1,902,238 2,166,931
----------- ----------- -----------
Increase (Decrease) in cash & cash equivalents 9,373 (186,404) (1,382,253)
Cash and cash equivalents:
Beginning of period 5,977 192,381 1,574,634
----------- ----------- -----------
End of period $ 15,350 $ 5,977 $ 192,381
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
37 (F-8)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Organization and description of the Company
- ----------------------------------------------------
Advanced Environmental Recycling Technologies, Inc. (the Company or AERT) 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. The Company is comprised of two separate, yet interrelated
manufacturing facilities located in Junction, Texas and Rogers, Arkansas. The
Company's customers primarily consist of a number of regional and national door
and window manufacturers and Weyerhaeuser, the Company's primary decking
customer.
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 such contributed amounts are reflected
in the accompanying financial statements at the contributor's book value.
For periods prior to 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 2: 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 December 31, 1995, the Company had a working capital deficit of
$1,556,805 and had incurred net losses of $2,756,263, $2,090,762, and $3,692,773
for the years ended December 31, 1995, 1994, and 1993, respectively. The
Company, since inception, has not achieved a successful level of operations 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 available borrowing capacity
under its line of credit with a major shareholder is adequate to support its
operations until successful production and sales levels are attained, but that
it is likely the Company will need additional financing to fund payment of the
Company's current maturities of long-term debt due in 1996. The Company has
recently restructured its
38 (F-9)
<PAGE>
business in order to reduce its plastics division losses and is continuing in
its efforts to increase composite sales to a level sufficient to obtain positive
cash-flows and overall profitability. However, there can be no assurance that
such production and sales levels will actually be reached. The Company is
currently negotiating financing to allow for additional composite expansion and
working capital which would be in addition to existing support from its major
shareholders. Further, in January 1996, certain affiliated shareholders
exercised 500,000 Class F Warrants. The proceeds from the exercise of these
warrants, which amounted to $305,000, reduced the working capital deficit of the
Company. The Company has limited additional financial resources available to
support its 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 beyond the current line of credit. The
Company also has claims in litigation outstanding against it as described in
Note 17, the outcome of which is uncertain. There can be no assurance that the
Company's financial resources (which at present are limited to a $433,000 line
of credit as described in Note 7) will be adequate to support existing
operations until such time, if ever, sales levels are sufficient to generate
positive cash flow from operations. Further, if the litigated claims discussed
in Note 17 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.
Effective October 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, (SFAS 121). SFAS 121 requires an
assessment of the recoverability of the Company's investment in long-lived
assets to be held and used in operations whenever events or circumstances
indicate that their carrying amounts may not be recoverable. Such assessment
requires that the future cash-flows associated with the long-lived assets be
estimated over their remaining useful lives and an impairment loss recognized
when the future cash-flows are less than the carrying value of such assets.
The Company has assessed the recoverability of its investment in long-lived
assets to be held and used in operations under the guidelines set forth in SFAS
121 and determined that no impairment loss was required as of December 31, 1995.
Such assessment required the Company to make certain estimates of future
production volumes and costs and future sales volumes and prices which are
expected to occur over the remaining useful lives of its long-lived assets.
(Such long-lived assets primarily consist of the Company's Rogers and Junction
manufacturing facilities.) The Company's estimates of these factors are based
upon management's belief that future production volumes will significantly
increase over previous historical production levels achieved by the Company's
manufacturing facilities and that future production costs per unit will also
significantly decrease below previous historical cost levels. As disclosed in
Note 18, the Company is restructuring its Rogers plastics reclamation facility
and believes that no significant production problems will recur at its Junction
composite manufacturing facility. As such, management of the Company believes a
reasonable basis exists for the use of such future estimates which are
significantly better than past historical performance.
Although the Company believes it has a reasonable basis for its estimates of
future production volumes and costs and future sales volumes and prices, it is
reasonably possible that the Company's actual performance could materially
differ from such estimates. Management expects that the Company's performance
during the
39 (F-10)
<PAGE>
last nine months of 1996 will provide additional evidence to confirm or disprove
such future estimates. Management also believes that if such estimates are not
confirmed, revisions to such estimates could result in a material impairment
loss on its long-lived assets constituting all or a material portion of the
carrying value of the Company's Rogers and Junction manufacturing facilities
which was $6,161,968 at December 31, 1995.
Note 3: Significant accounting policies
- ----------------------------------------
Statements of Cash Flows
------------------------
In order to determine net cash used in operating activities, net loss has been
adjusted by, among other things, changes in operating assets and operating
liabilities, excluding changes in cash and cash equivalents, insurance claim
advances receivable, current maturities of long-term debt, and 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>
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Receivables $ 12,457 $ 83,709 $ (38,469)
Inventories 62,483 (266,964) (265,107)
Prepaid expenses and other 4,990 (11,198) (39,911)
Accounts payable -
trade & related parties 568,718 273,795 173,978
Accrued liabilities 22,888 147,164 114,436
Deferred revenue - (2,858) 459,016
-------- --------- ---------
$671,536 $ 223,648 $ 403,943
======== ========= =========
</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 dispositions of property
are credited or charged to income.
40 (F-11)
<PAGE>
Provision for depreciation of buildings and equipment is provided on a straight-
line basis for buildings and leasehold improvements, transportation equipment
and office equipment over the lesser of the estimated useful life of the asset
or the term of the lease. Machinery and equipment is depreciated on a straight-
line basis over the estimated useful life of the asset or on a units of
production basis over the estimated useful production life of the asset.
Estimated useful lives are; buildings and leasehold improvements - 6 to 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:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Raw materials $ 54,279 $ 78,302
Finished goods 593,932 632,392
-------- --------
$648,211 $710,694
======== ========
</TABLE>
Other assets
------------
Other assets consist primarily of the costs for the preparation of patent
applications ($406,447 at December 31, 1995) which are amortized using the
straight-line method over 17 years. Also included in other assets are deposits
of $5,089.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This statement encourages entities to adopt the fair value
method of accounting for employee stock compensation plans for fiscal years
beginning after December 15, 1995, but allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No.
41 (F-12)
<PAGE>
25, "Accounting for Stock Issued to Employees." The Company intends to continue
to measure compensation cost for its employee stock compensation plans in
accordance with APB Opinion No. 25.
Concentrations of Credit Risk
- -----------------------------
The Company's revenues are derived principally from a number of regional and
national door and window manufacturers and Weyerhaeuser, the Company's primary
decking customer. This industry concentration has the potential to impact the
Company's exposure to credit risk because the customers may be similarly
affected by changes in economic or other conditions in the construction
industry.
Disclosure About Fair Value of Financial Instruments
- ----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates fair
value due to the short maturity of those items.
Long-term debt: The fair value of the Company's long-term debt has been
estimated by the Company based upon each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral and amortization
schedule. The carrying amount approximates fair value.
Note 4: Receivables
- --------------------
The Company historically has experienced no bad debt expense and therefore has
recorded no allowance for doubtful accounts at December 31, 1995 and 1994.
In April 1994, the Company renewed an agreement with an affiliate whereby the
Company agreed to sell certain of its trade receivables which the affiliate
deems acceptable, up to $650,000 at any one time. Upon 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 1995, the Company sold an aggregate of
approximately $5,852,000 in receivables under this agreement, of which $241,723
remains to be collected. During 1994 and 1993, the Company sold an aggregate of
approximately $3,726,000 and $1,018,000, respectively, in receivables under this
agreement, none of which remains to be collected. Costs of approximately
$51,000, $32,800 and $9,000 associated with the factoring agreement are included
in selling, production, general and administrative expenses at December 31,
1995, 1994 and 1993, respectively.
42 (F-13)
<PAGE>
Note 5: Deferred revenue
- -------------------------
During the second quarter of 1993, the Company received a $500,000 advance
payment from The Dow Chemical Company (Dow) toward future purchases by Dow of
recycled plastic bag film resins from the Company's Rogers, Arkansas plastic
reclamation facility. At December 31, 1993, the Company had $459,016 of such
advance payment outstanding. In March 1994, this advance payment was forgiven
by Dow. (See Note 15).
Note 6: Bridge notes payable
- ----------------------------
On June 29, 1993, the Company circulated a private placement offering up to
$1,200,000 in Bridge Notes and Class C Warrants. The notes were secured by
certain equipment of the Company's composite products division, with accrued
interest at the rate of 8% per annum, and matured June 29, 1994. The face
amount of each Bridge Note was accompanied with an equal number of 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.
The Company raised $650,000 and issued 650,000 Class C Warrants in connection
with this private placement offering which is included in notes payable and
notes payable-related party at December 31, 1993. In May 1994, $600,000 of the
Bridge Notes were converted into Class A Common Stock as a portion of the
Private Placement Offering discussed in Note 10. In July 1994, the remaining
$50,000 plus accrued interest was paid by the Company.
Note 7: Notes payable - related parties
- ----------------------------------------
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 certain
outstanding notes payable to related parties 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 $1,566,903 is a term note to be amortized at 9 3/4% over
five years beginning April 1, 1995 and the balance of $433,097 is a revolving
credit line to be available as needed by the Company. At December 31, 1995, the
Company had no amounts outstanding under this line and $433,097 was available
for future borrowings. This revolving line of credit expires in February, 2000.
Current maturities of long-term debt as of December 31, 1994 reflect the
conversion of the line of credit to a long-term obligation as described above.
43 (F-14)
<PAGE>
Note 8: Long-term debt
- -----------------------
Long-term debt as of December 31, 1995 and December 31, 1994, consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Note payable, due in 23-monthly installments
of $10,156 plus interest at prime plus two
percent (10.5% at December 31, 1995) beginning
October 1, 1994 with the remaining balance due
September 1, 1996; secured by certain manufacturing
equipment, inventories and receivables. (See Note 15) $ 324,970 $ 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. 213,769 258,823
Note payable, to a related party, due in 60-monthly
installments of principal and interest, beginning
April 1, 1995, interest at 9.75%. 1,399,245 1,411,903
Other 84,234 98,733
---------- ----------
Total 2,022,218 2,226,457
Less current maturities (755,576) (381,860)
Long-term debt, net of ---------- ----------
current maturities $ 1,266,642 $1,844,597
=========== ==========
</TABLE>
44 (F-15)
<PAGE>
The fair value of the Company's outstanding debt is approximately equal to its
carrying value at December 31, 1995.
The aggregate maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 755,576
1997 451,194
1998 348,542
1999 369,199
2000 97,707
Thereafter -
--------
$2,022,218
==========
</TABLE>
Note 9: Interest
- -----------------
Interest incurred, capitalized, expensed and cash payments for interest are
summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Interest incurred $269,827 $190,805 $135,180
Interest capitalized as part of the
cost of machinery and equipment - - -
-------- -------- --------
Interest expensed $269,827 $190,805 $135,180
======== ======== ========
Cash payments for interest $301,192 $ 35,794 $ 67,333
======== ======== ========
</TABLE>
Note 10: 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
45 (F-16)
<PAGE>
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 A
and 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.
The underwriter received a selling commission of 10% and a nonaccountable
expense allowance of 3% of the gross offering proceeds. In addition, for $125,
the Company sold to the underwriter a unit purchase option to acquire up to
125,000 units for $5.20 per unit. The units to be issuable upon exercise of the
unit purchase option are identical to the public offering unit, except that
warrants are not redeemable. The unit purchase option expired unexercised on
November 8, 1994.
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. The Class B Stockholders will continue to vote the escrow shares unless
such shares are canceled. Upon the occurrence of certain events, escrow shares
will be released from escrow and returned to the Class B Stockholders if during
the calendar year ending December 31, 1994 (1) the Company's minimum pretax
income is 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 and then canceled
on March 31, 1995.
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.
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 during 1994 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
46 (F-17)
<PAGE>
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.
In 1995, in connection with an extension of a line of credit to the Company by a
related party (see Note 7), 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 December 31, 1995, the Company had Class A Common Stock reserved for issuance
as follows:
<TABLE>
<CAPTION>
Class A
Common Stock
equivalent shares
-----------------
<S> <C>
Class B Warrants 4,212,440
Stock option plans (Note 11) 3,050,000
Class C Warrants 650,000
Class D Warrants 206,751
Class E Warrants 128,609
Class F Warrants 1,837,904
Class G Warrants 3,468,400
Class H Warrants 2,000,000
----------
15,554,104
==========
</TABLE>
47 (F-18)
<PAGE>
Note 11: 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 April 1994, 25,000 such options were granted to
each of the four outside directors serving on the Board at that time.
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. 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.
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.
48 (F-19)
<PAGE>
A summary of the activity in the Company's Stock Option Plans during the year
ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Shares Per Share
---------- -------------
<S> <C> <C>
Outstanding
December 31, 1994 1,568,000 $1.00 - $3.00
Granted 406,000 $ .38
Forfeited (18,000) $ .72
Exercised (24,332) $1.19
---------
Outstanding
December 31, 1995 1,931,668 $ .38 - $3.00
Exercisable
December 31, 1995 1,054,688 $ .38 - $3.00
=========
</TABLE>
Note 12: Leases
- ---------------
At December 31, 1995, the Company was obligated under a non-cancelable sublease
with a principal stockholder for land on which a production facility is located.
This lease, has an expiration date of April 30, 2001, and rental payments of
$1,519 per month. The Company also leases a production facility under an
operating lease which expired January 1, 1995 and contains five automatic
renewal options of one year each. The Company has executed the third of the
renewal options. This lease agreement does not require any minimum lease
payments but requires payments based on product shipments at a rate of $.02 per
pound. Additionally, the Company is obligated under a non-cancelable lease for
office space at $5,000 per month which expires on June 14, 1996 and contains a
two-year renewal option. The Company is currently subleasing portions of the
space for $4,450 per month. At December 31, 1995, the Company was obligated
under various operating leases covering certain equipment. Rent expense under
operating leases for the years ended December 31, 1995, 1994, and 1993 was
$200,417, $189,611 and $199,715, respectively. Future minimum lease payments
required under operating leases are as follows:
<TABLE>
<S> <C>
Fiscal Year
1996 $ 58,651
1997 29,144
1998 27,170
1999 19,554
2000 18,232
thereafter 6,077
--------
Total minimum payments required $158,828
========
</TABLE>
49 (F-20)
<PAGE>
Note 13: Income taxes
- ----------------------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No.109 "Accounting for Income Taxes" (SFAS No. 109). The adoption of
SFAS No. 109 had no effect on the Company's financial position or results of
operations, as the Company has generated book and tax losses for the period from
inception.
As of December 31, 1995, the Company had net operating loss carryforwards of
approximately $9.7 million for federal income tax purposes which are available
to reduce future taxable income and will expire in 2003 through 2010 if not
utilized and approximately $15,800,000 for financial reporting purposes. For
federal income tax purposes, the Company deferred for future amortization start-
up costs in the amount of $9.4 million. Such costs, which have been expensed
for financial reporting purposes, are being amortized for tax purposes over
future years.
The tax effects of significantly temporary differences representing deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Deferred income tax assets-
Deferred start-up costs $ 2,200,000 $ 2,550,000 $ 2,884,000
Net operating loss carry forward 3,300,000 1,244,000 851,000
Valuation allowance (4,800,000) (3,130,000) (3,105,000)
----------- ----------- -----------
Total deferred income tax assets $ 700,000 $ 664,000 $ 630,000
=========== =========== ===========
Deferred income tax liabilities-
Depreciation $ 700,000 $ 664,000 $ 630,000
----------- ----------- -----------
Total deferred income tax
liabilities $ 700,000 $ 664,000 $ 630,000
=========== =========== ===========
</TABLE>
As the Company has generated net operating losses since its inception and there
is no assurance of future income, a valuation allowance of $4,800,000 has been
established at December 31, 1995 to recognize its deferred tax assets only to
the extent of its deferred tax liabilities. The Company will continue to
evaluate the necessity for such valuation allowance in the future.
50 (F-21)
<PAGE>
Note 14: Significant customer
- ------------------------------
During the year ended December 31, 1995, the Company had $2,189,073 in sales to
a single customer which represented 39% of total sales. Sales to this customer
for the years ended December 31, 1994 and 1993 were $2,487,802 (68%) and
$861,672 (42%), respectively. Additionally, the Company had sales of $653,412
to another customer which represents 12% of total sales for the year ended
December 31, 1995. There were no sales to this customer in 1994 or 1993.
Note 15: Extraordinary Gain
- ---------------------------
On March 18, 1994, Dow Chemical and the Company reached an agreement whereby Dow
Chemical's obligation to purchase material from the Company (10 million pounds
of the Company's recycled plastic bag film resins) 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 8).
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 accompanying statement of operations.
Note 16: 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
and subsequently cancelled were not considered as outstanding after the date of
the public offering as the effect of such inclusion would be dilutive to the net
loss per share calculation. 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.
Had the May 1994 conversion of the various debt instruments into 3,468,400
shares of Class A Common Stock as discussed in Note 10 occurred effective at the
later of the original issue date of the converted debt instruments or January 1,
1994, the net loss per share of common stock would have been $(.13) for the year
ended December 31, 1994.
51 (F-22)
<PAGE>
Note 17: 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 discovery documentation. The
motion seeks further discovery into Mobil's misconduct, and a new trial. In
December 1995, the Company also moved to supplement its pending March 14, 1995
Motion with additional tampered evidence and discovery misconduct by
Mobil.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. In January 1996, oral arguments were
presented before the U.S. Court of Appeals. Should the Delaware Court deny the
Company's pending Prejudicial Misconduct Motion, the Company intends to follow-
up with an additional
52 (F-23)
<PAGE>
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 18: Loss on Disposal of Equipment
- --------------------------------------
In connection with a restructuring of the Company's Rogers plastics reclamation
plant, wherein the Company will discontinue reclamation of plastics for sale to
third parties, the Company exchanged certain equipment, previously utilized to
produce such plastics, for other equipment which will be utilized to produce raw
materials for the manufacture of the Company's composite wood product and for
additional manufacturing equipment for the composite production facility. The
Company has accrued a loss at December 31, 1995, of $528,538 which constitutes
the difference between the net book value of the Company's investment in
equipment and leasehold improvements dedicated to produce plastics for sale to
third parties ($666,038) and the fair value of the equipment received.
Sales of plastics to third parties were $1,048,424, $626,005, and $861,672 for
each of the years ended December 31, 1995, 1994, and 1993, respectively.
53 (F-24)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 15,350
<SECURITIES> 0
<RECEIVABLES> 48,463
<ALLOWANCES> 0
<INVENTORY> 648,211
<CURRENT-ASSETS> 820,552
<PP&E> 9,259,691
<DEPRECIATION> 3,050,979
<TOTAL-ASSETS> 7,337,742
<CURRENT-LIABILITIES> 2,337,357
<BONDS> 0
0
0
<COMMON> 171,584
<OTHER-SE> 3,542,159
<TOTAL-LIABILITY-AND-EQUITY> 7,357,742
<SALES> 5,581,172
<TOTAL-REVENUES> 5,581,172
<CGS> 6,183,924
<TOTAL-COSTS> 8,068,706
<OTHER-EXPENSES> 1,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269,827
<INCOME-PRETAX> (2,756,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,756,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,756,263)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
