<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
Commission File Number 1-10367
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
DELAWARE 71-0675758
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 W. Robinson
P.O. Box 1237
Springdale, Arkansas 72765
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (501)750-1299
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES: X NO:
As of May 13, 1996, the number of shares outstanding of the Registrant's Class A
Common Stock, which is the class registered under the Securities Exchange Act of
1934, was 17,402,616 and the number of shares outstanding of the Registrant's
Class B Common Stock was 1,465,530.
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 Financial Statements
Balance Sheets, March 31, 1996 and December 31, 1995 1-2
Statements of Operations,
Three months ended March 31, 1996 and 1995 3
Statements of Cash Flows,
Three months ended March 31, 1996 and 1995 4
Notes to Financial Statements 5-16
Review Report of Arthur Andersen LLP,
Independent Public Accountants 17
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-21
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 21-22
Signatures 22
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
March 31, 1996 December 31,
(Unaudited) 1995
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,566 $ 15,350
Receivables 149,390 48,463
Inventories 476,932 648,211
Prepaid expenses and other 48,051 108,528
---------- ----------
Total current assets 679,939 820,552
---------- ----------
Buildings and equipment,
at cost, including construction
in progress of $24,389 at 3-31-96, and
$22,946 at 12-31-95:
Buildings 675,420 675,420
Machinery and equipment 7,994,875 7,985,870
Transportation equipment 112,411 112,411
Office equipment 170,659 170,659
Leasehold improvements 315,331 315,331
---------- ----------
9,268,696 9,259,691
Less accumulated depreciation
and amortization 3,328,977 3,050,979
---------- ----------
Net buildings and equipment 5,939,719 6,208,712
---------- ----------
Other assets, at cost less accumulated
amortization of $89,175 and $83,058,
respectively 336,961 328,478
---------- ----------
$6,956,619 $7,357,742
========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
1
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, 1996 December 31,
(Unaudited) 1995
-------------- ------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 844,120 $ 755,576
Accounts payable - trade 1,285,209 1,078,243
Payables to related parties 92,085 362,155
Accrued liabilities 188,891 166,779
Notes payable 51,402 14,604
------------ ------------
Total current liabilities 2,461,707 2,377,357
------------ ------------
Long-term debt, less current maturities -
Related parties 1,029,540 1,102,554
Other 29,082 164,088
------------ ------------
Total long-term debt 1,058,622 1,266,642
------------ ------------
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, 16,192,866 (1996)
and 15,692,866 (1995) shares issued and outstanding 161,929 156,929
Class B convertible common stock, $.01 par
value; 7,500,000 shares authorized, 1,465,530
shares issued and outstanding 1996 and 1995 14,655 14,655
Additional paid in capital 19,582,865 19,282,865
Deficit accumulated during the
development stage (16,323,159) (15,740,706)
------------ ------------
Total stockholders' equity 3,436,290 3,713,743
------------ ------------
$ 6,956,619 $ 7,357,742
============ ============
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
2
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
Sales $ 1,601,778 $ 1,171,310
Cost of Goods Sold 1,746,229 1,372,281
----------- -----------
Gross Margin (144,451) (200,971)
Selling and Administrative Costs 377,269 320,874
----------- -----------
Operating Loss (521,720) (521,845)
Other Income (Expense)
Other Income 7 24
Interest Expense (60,740) (58,965)
----------- -----------
Net loss $ (582,453) $ (580,786)
=========== ===========
Net loss per share of
common stock ($.03) ($.04)
=========== ===========
Weighted average number of
common shares outstanding 17,521,033 15,503,568
=========== ===========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
3
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(582,453) $(580,786)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 277,998 258,536
Amortization of other assets 6,117 5,514
Increase in other assets (14,600) (15,693)
Changes in operating assets & operating liabilities 89,837 140,730
--------- ---------
Net cash used in operating activities (223,101) (191,699)
--------- ---------
Cash flows from investing activities:
Additions to buildings and equipment (9,005) (6,975)
--------- ---------
Net cash used in investing activities (9,005) (6,975)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes 75,551 328,000
Payments on notes (158,229) (129,011)
Proceeds from warrant exercises, net 305,000 -
--------- ---------
Net cash provided by financing activities 222,322 198,989
--------- ---------
Increase (Decrease) in cash & cash equivalents (9,784) 315
Cash and cash equivalents:
Beginning of period 15,350 5,977
--------- ---------
End of period $ 5,566 $ 6,292
========= =========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
4
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Unaudited Information
- ------------------------------
The financial statements included herein have been prepared by Advanced
Environmental Recycling Technologies, Inc. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). However, all adjustments have been made to the accompanying financial
statements which are, in the opinion of the Company's management, necessary for
a fair presentation of the Company's operating results. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented herein not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
Note 2: Organization and Description of the Company
- ----------------------------------------------------
Advanced Environmental Recycling Technologies, Inc. (the Company) has developed
and commenced the manufacture of a composite building material from waste
plastic and wood fiber waste for certain specialized applications in the
construction industry. The Company has initially marketed this material as a
substitute for wood and plastic filler materials for standard door frames,
window sills 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 amounts are reflected in the
accompanying financial statements at the contributor's book value.
Prior to March 31, 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 Customer has reclassified certain prior
period amounts to conform to the current period presentation.
5
<PAGE>
Note 3: Future operations
- --------------------------
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At March 31, 1996, the Company had a working capital deficit of
$1,781,768 and had incurred net losses of $582,453 for the three months ended
March 31, 1996. 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 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. 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 13, the outcome
of which is uncertain. There can be no assurance that the Company's financial
resources (which at present are limited to a $433,097 line of credit as
described in Note 6) 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 13 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 March 31, 1996.
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
6
<PAGE>
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. The Company has
restructured 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 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 $5,897,454 at March 31, 1996.
Note 4: Significant Accounting Policies
- ----------------------------------------
Statements of Cash Flows
------------------------
In order to determine net cash used in operating activities, loss from
continuing operations has been adjusted by, among other things, changes in
current assets and current liabilities, excluding changes in cash and cash
equivalents, current maturities of long-term debt, advances from affiliates
included in notes payable - related parties. Those changes, shown as an
(increase) decrease in current assets and an increase (decrease) in current
liabilities, are as follows:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
(unaudited) (unaudited)
--------------- ---------------
<S> <C> <C>
Receivables $(100,927) $ (2,601)
Inventories 171,279 (144,989)
Prepaid expenses and other 60,477 32,146
Accounts payable - (63,104) 273,410
trade & related parties 22,112 (17,236)
Accrued liabilities --------- ---------
$ 89,837 $ 140,730
========= =========
</TABLE>
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
7
<PAGE>
Buildings and Equipment
-----------------------
Buildings and equipment contributed to the Company in exchange for Class B
Common Stock are carried at the contributor's historical book value. Property
additions and betterments include capitalized interest, and acquisition,
construction and administrative costs allocable to construction projects and
property purchases. Gains or losses on sales or other disposition of property
are credited or charged to income.
Provision for depreciation and amortization of buildings and equipment is
provided on a straight-line basis for buildings and leasehold improvements,
transportation equipment and office equipment over the estimated useful lives of
these facilities. Machinery and equipment is depreciated on a straight line
basis over the estimated useful life of the related equipment or on a units of
production basis over the estimated useful production lives of the related
assets. 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>
March 31, 1996 December 31,
(Unaudited) 1995
--------------- ------------
<S> <C> <C>
Raw materials $ 54,421 $ 54,279
Finished goods 422,511 593,932
-------- --------
$476,932 $648,211
======== ========
</TABLE>
Other Assets
------------
Other assets consist primarily of the costs for the preparation of patent
applications ($421,046 and $406,447 at March 31, 1996 and December 31, 1995,
respectively) 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.
8
<PAGE>
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. 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.
Note 5: Receivables
- --------------------
In April 1993, the Company entered into an agreement with an affiliate whereby
the Company agreed to sell certain of its trade receivables which the affiliate
deems acceptable. Upon the acceptance of a sale of a receivable, the affiliate
will remit to the Company 100% of the receivable, as defined in the agreement,
and the Company shall remit to the affiliate .88% as a factoring charge. The
Company will indemnify the affiliate for any loss arising out of rejections or
returns of any merchandise, or any claims asserted by the Company's customers.
During the three months ended March 31, 1996, the Company sold an aggregate of
approximately $1,645,000 in receivables under this agreement. Costs of
approximately $15,487 associated with the factoring agreement are included in
selling, production, general and administrative expenses for the three month
period.
Note 6: 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 the notes
payable to related parties previously discussed and provide working capital for
Company operations. At December 31, 1994, the outstanding balance on the line
of credit was $1,411,903. In February 1995, the line of credit was increased to
$2,000,000 of which approximately $1,566,903 was converted to a term note to be
amortized at 9 3/4% over five years beginning April 1, 1995. The balance of
$433,097 is a revolving credit line to be available as needed by the Company and
as of March 31, 1996, the entire amount was available to the Company.
9
<PAGE>
Note 7: Long-term debt
- -----------------------
Long-term debt as of March 31, 1996 and December 31, 1995, consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Note payable, due in 23-monthly installments
of $10,156 plus interest at prime plus two
percent (10.25% at March 31, 1996) beginning
October 1, 1994 with the remaining balance due
September 1, 1996; secured by certain manufacturing
equipment, inventories and receivables. $ 294,502 $ 324,970
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. 186,759 213,769
Note payable, to a related party, due in 60-monthly
installments of principal and interest, beginning
April 1, 1995, interest at 9.75%. 1,355,607 1,399,245
Other 65,874 84,234
---------- ----------
Total 1,902,742 2,022,218
Less current maturities 844,120 755,576
---------- ----------
Long-term debt, net of
current maturities $1,058,622 $1,266,642
========== ==========
</TABLE>
The fair value of the Company's outstanding debt is approximately equal to its
carrying value at March 31, 1996.
10
<PAGE>
The aggregate maturities of long-term debt as of March 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 844,120
1998 327,683
1999 353,949
2000 376,990
2001 0
----------
$1,902,742
==========
</TABLE>
Note 8: Interest
- -----------------
Interest incurred, capitalized, expensed and cash payments for interest are
summarized as follows:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1996 1995
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Interest incurred $60,740 $58,965
Interest capitalized as
part of the cost of machinery
and equipment - -
------- -------
Interest expensed $60,740 $58,965
------- -------
Cash payments for interest $52,763 $39,180
======= =======
</TABLE>
Note 9: Stockholders' equity
- -----------------------------
The Class A Common Stock and the Class B Common Stock are substantially similar
in all respects except that the Class B Common Stock has five votes per share
while the Class A Common Stock has one vote per share. Each share of Class B
Common Stock is convertible at any time at the holder's option to one share of
Class A Common Stock and, except in certain instances, is automatically
converted into one share of Class A Common Stock upon any sale or transfer.
On November 9, 1989, the Company completed a public offering of 1,250,000 units,
at a price to the public of $4.00 per unit. In December 1989, the Company sold
an additional 100,000 units to the underwriter at the same price. Each unit
consists of three shares of Class A Common Stock and three redeemable Class A
Warrants, which are separable and transferable immediately upon issuance. Each
Class A Warrant entitles the holder to purchase a unit consisting of one share
of Class A Common Stock and one Class B Warrant at an exercise price of $2.00.
Each Class B Warrant entitles the holder to purchase one share of Class A Common
11
<PAGE>
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.
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 continue to vote the escrow shares unless such
shares are canceled. Upon the occurrence of certain events, escrow shares were
to be released from escrow and returned to the Class B Stockholders if during
the calendar year ended December 31, 1994 (1) the Company's minimum pretax
income was at least $16 million or (2) the market price of the Company's Class A
Common Stock averages in excess of $6.50 per share for 20 consecutive trading
days. The Company did not achieve any of the above requirements, and, as such,
the escrowed shares were contributed to the Company's treasury on March 31, 1995
and then canceled.
In March 1992, the Company issued notice of redemption of the aforementioned
Class A Warrants, of which approximately 4.3 million were outstanding on the
redemption date of April 27, 1992. Prior to the redemption date, holders of
4,212,740 Class A Warrants exercised their warrants at $2.00 per warrant which
totalled $8,425,480 in warrant exercise proceeds. Accordingly, the Company
issued 4,212,740 shares of Class A Common Stock and 4,212,740 Class B Warrants
to the exercisers of the Class A Warrants. The remaining unexercised Class A
Warrants were redeemed at $0.05 per warrant. During the fourth quarter of 1992,
holders of 300 Class B Warrants exercised their warrants at $3.00 per warrant.
In August 1995, the Company's Board of Directors approved a resolution extending
the expiration date of the outstanding Class B Warrants to September 1, 1996.
In July 1993, in connection with the increase of $650,000 in Bridge Notes which
matured June 29, 1994, the Company issued 650,000 Class C Warrants which are
exercisable ratably into one share of Class A Common Stock at an exercise price
of $3.00 per share. The Warrants expire on June 29, 1998.
In September 1993, the Company initiated an offering of up to $2,000,000 of
discounted gross offering proceeds of Class A Common Stock to qualified foreign
investors under Regulation S of the Securities Act of 1933. At December 31,
1993, 736,135 shares of such stock had been issued resulting in approximately
$602,000 net offering proceeds to the Company. In January 1994, an additional
450,000 shares were issued, resulting in approximately $344,000 net offering
proceeds to the Company. As a part of the offering, the Company has issued
168,501 Class D Warrants as of December 31, 1993 and an additional 38,250 Class
D Warrants subsequent to year end to the Stock Placement Distributor. The Class
D Warrants expire five years from the date of issue and are exercisable at a
price of $1.50 per share of Class A Common Stock for each Class D Warrant
exercised.
Also in connection with the Regulation S offering, the Company has reserved for
issuance one Class E Warrant for each two shares of Class A Common Stock
purchased by the aforementioned qualified foreign investors. The Class E
Warrants will be issued six months after the Class A Common shareholders' stock
acquisition date, provided that the shares of Class A Common Stock are still
owned by and registered in the name of the original purchaser as of such date.
The Class E Warrant will expire two years from the date of issue and will be
exercisable at $1.50 per share of Class A Common Stock for each Class E Warrant
exercised.
12
<PAGE>
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 6), the Company's Board of Directors authorized the
issuance of up to 2,000,000 Class H Warrants on a one-for-one basis for each
dollar advanced under the loan agreement and having an exercise price equal to
the per share market value of the Company's Class A Common Stock on the date of
such advances. While no warrants have been issued as of the date of this
filing, all authorized Class H Warrants are currently issuable. Upon issue, the
warrants will be exercisable at prices from $.39 to $.49 per share of Class A
Common Stock for each Class H Warrant exercised. The Class H Warrants will
expire in February 2000.
At March 31, 1996, 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 10) 3,050,000
Class C Warrants 650,000
Class D Warrants 206,751
Class E Warrants 128,609
Class F Warrants 1,337,904
Class G Warrants 3,468,400
Class H Warrants 2,000,000
----------
15,054,104
==========
</TABLE>
Note 10: Stock option plans
- ---------------------------
The Company's Stock Option Plans (the "1990 Plan" and the "1989 Plan") authorize
the issuance of a total of 1,500,000 shares of the Company's Class A Common
Stock to its directors, employees, and outside consultants. The option price of
the stock options awarded must be at least equal to the market value of the
Class A Common Stock on the date of grant. Stock options may not be granted to
an individual to the extent that in any calendar year in which options first
become exercisable, the shares subject to options first exercisable in such year
have a fair market value on the date of grant in excess of $100,000. Stock
options may not be granted after March 2000 and May 1999 for the 1990 Plan and
the 1989 Plan, respectively. No option may be outstanding for more than ten
years after its grant. The purpose of the Plans is to enable the Company to
encourage key employees, directors and outside consultants to contribute to the
success of the
13
<PAGE>
Company by granting such persons incentive stock options ("ISOs") and/or non-
incentive stock options ("nonqualified stock options"). The ISOs are available
for employees only.
In order to provide for disinterested administration of the Plans for purposes
of Rule 16b-3 under the Securities Exchange Act of 1934, the 1990 Plan also
provides that outside directors will automatically receive annual awards of
nonqualified stock options.
In June 1994, stockholders of the Company approved the adoption of the Amended
and Restated Stock Option Plan which superceded and replaced the Company's 1990
Stock Option Plan. The new Plan provides for the granting of options to
purchase up to 1,000,000 shares of the Company's Class A Common Stock by
recipients of incentive stock options or non-qualified stock options as granted
by the Company's Board of Directors. 406,000 options were granted from this
plan during 1995.
The Company's stockholders also approved the Non-Employee Director Stock Option
Plan. The Director Plan provides for the issuance of options to purchase up to
an aggregate of 500,000 shares of the Company's Class A Common Stock to eligible
outside directors of the Company. Each eligible outside director will be
granted options to purchase 25,000 shares of common stock annually commencing in
1995 and each year thereafter. In April 1995, 25,000 such options were granted
to each of the three outside directors serving on the Board at that time.
Also in June 1994, stockholders of the Company approved the Chairman Stock
Option Plan. The Chairman Plan provides that Jim G. Brooks, the Company's
Chairman and Chief Executive Officer be awarded a one-time grant, effective May
1, 1994, to purchase 500,000 shares of the Company's Class A Common Stock. The
options granted are exercisable at $.63 per share and are vested at the rate of
20% per year commencing on the first anniversary of the grant date.
A summary of the activity in the Company's Stock Option Plans during the quarter
ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding
December 31, 1995 1,931,668 $.38 - $3.00
Granted - $ .38
Forfeited - -
Exercised - -
---------
Outstanding
March 31, 1996 1,931,668 $.38 - $3.00
Exercisable
March 31, 1996 1,054,668 $.38 - $3.00
=========
</TABLE>
14
<PAGE>
Note 11: Significant customer
- ------------------------------
During the quarter ended March 31, 1996, the Company had $678,450 in sales to a
single customer which represented 42% of total sales. Additionally, the Company
had aggregate sales of $630,700 to three other customers which individually
represent 21%, 9%, and 9% of total sales. During the quarter ended March 31,
1995, the Company had $457,000 in sales to a single customer which represented
39% of total sales.
Note 12: Net loss per share of common stock
- --------------------------------------------
The net loss per share of common stock was based on the combined weighted
average number of shares of Class A and Class B Common Stock outstanding during
the period. For purposes of such calculation, the 5,625,000 shares of Class B
Common Stock which were placed in escrow in connection with the public offering
were not considered as outstanding 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.
Note 13: Commitments and contingencies
- --------------------------------------
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
-----------------------------------------------------------------------
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
- ----
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) The AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by inequitable
conduct. Thereafter, the Judge adopted the jury's advisory
15
<PAGE>
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. In March 1996, the Court
entered an Order which stayed Mobil's Motion for Attorneys' Fees and AERT's
Motion for a New Trial, pending disposition of the appeal. 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.
16
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.
We have reviewed the accompanying balance sheet of Advanced Environmental
Recycling Technologies, Inc. (a Delaware corporation), as of March 31, 1996, and
the related statements of operations and cash flows for the three-month periods
ended March 31, 1996 and 1995. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principals.
San Antonio, Texas
April 30, 1996
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Quarter ended March 31, 1996 compared to quarter ended March 31, 1995
- ---------------------------------------------------------------------
Net sales of $1,601,778 for the quarter ended March 31, 1996 represented an
increase in sales of $430,468 over the first quarter of 1995. Sales by the
composite products division increased from $679,589 in the first quarter of 1995
to $1,558,618 in the first quarter of 1996. This increase was due to increased
production focus on composites and increased product demand from a larger
customer base. Sales by the plastics reclamation unit declined to $13,159 in
1996 vs. $491,721 during the first quarter of 1995. This was due to the Company
phasing out plastic sales to third parties and re-deploying assets of the Rogers
plastic division. As part of that restructuring, certain plastics equipment, no
longer required, was traded for equipment required for a third composite line at
Junction, Texas and equipment for a second plastics reclamation line at the
Rogers facility.
Cost of goods sold was $1,746,229 for the first quarter of 1996 compared to
$1,372,281 for the first quarter of 1995. The overall cost of goods sold to
sales ratio, although still negative, showed improvement over 1995. The
increase in cost of goods sold was primarily attributable increased raw
material, labor costs, and poor operating efficiencies. Significant categories
are as follows:
<TABLE>
<CAPTION>
Expense Category 1996 1995
---------------- ---------- ----------
<S> <C> <C>
Payroll and payroll taxes $ 622,532 $ 536,394
Depreciation 273,519 244,709
Direct material costs 308,125 133,694
Other 542,053 457,484
---------- ----------
Total $1,746,229 $1,372,281
========== ==========
</TABLE>
Selling, general and administrative expenses were $377,269 vs. $320,874 during
the first quarter of 1995. The net loss for the quarter ended March 31, 1996
was $582,453, or a net loss per weighted average common share outstanding of
$.03. The loss compares to a loss of $580,786, or a net loss per weighted
average common share outstanding of $.04 for the three months ended March 31,
1995. The loss was attributable to costs associated with poor operating
efficiencies. The composites facility suffered from high scrap rates and
production down-time primarily attributable to tramp metal again getting into
the extrusion system on several occasions during this quarter. The composites
division has continued to experience unanticipated manufacturing difficulties
over the last two quarters which resulted in poor operating efficiencies and
higher costs. As previously disclosed, local and state law enforcement agencies
are currently investigating whether these problems are intentional. The Company
has recently added additional cleaning equipment and security equipment,
including video surveillance cameras throughout the composite manufacturing
facility in an attempt to prevent and stop these problems which appear to be of
an ongoing nature. In addition, the Company has recently employed security
services for the composites facility. Management intends to continue to take
such action as it deems necessary to resolve and eliminate these manufacturing
problems.
18
<PAGE>
The Company's limited production capacity and output has resulted in a
significant order backlog. To address the Company's current production backlog,
in addition to taking the various above described measures, the Company has
increased its manufacturing capacity through the addition of a third production
line at the Junction, Texas composites manufacturing unit and has started
construction of a fourth line which is scheduled for completion by July 1996.
The increased production 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 in a second plastics reclamation line
to produce raw-materials and which was used in the installation of the third
production line at the Company's composite facility. The Company has also
entered into a letter of intent with an Arkansas based manufacturing company to
add a new composites manufacturing facility in northern Arkansas. Although no
definitive agreement has yet been reached regarding the ownership and operation
of the new facility, it is contemplated that such facility will be owned by a
newly formed entity in which the Company will have a minority interest. The
Company will license its technologies to the new entity and said entity will
manufacture composites materials under an exclusive contract with the Company.
The scheduled completion of the first phase of the new facility is the fourth
quarter of 1996.
The Company believes that the additional production lines at Junction and
Rogers, as well as the construction of the new composites facility should allow
the Company to reduce its existing backlog, thereby significantly increasing
sales to its existing customer base and to improve existing operating
efficiencies as a result of increased economies of scale. However, the
Company's operations remain subject to numerous risks associated with the
continued establishment of its business, including lack of financing sources and
competition from numerous large, well-established and well-capitalized
competitors who manufacture products for the same applications. In addition,
the Company has in the past and may again in the future, encounter unanticipated
problems, including manufacturing, distribution, and marketing difficulties,
some of which may be beyond the Company's financial and technical abilities to
resolve. The occurrence of, or failure to adequately address such difficulties
could have a material adverse effect on the Company's prospects, including its
ability to achieve anticipated sales levels.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1996, the Company had a working capital deficit of $1,781,768
compared to a working capital deficit of $1,566,805 at December 31, 1995. The
increased deficit is primarily attributable to the Company's first quarter 1996
operating loss and an increase in current maturities of long-term debt. Cash
and cash equivalents decreased $9,784 in the first quarter of 1996. Significant
components of that decrease were: (i) cash used in operating activities of
$223,101, which consisted of the net loss for the period of $582,453, reduced by
depreciation and amortization of $284,115, and other uses of cash of $75,237;
(ii) cash used in investing activities of $9,005, and (iii) cash provided by
financing activities of $222,322. Payments on notes during the period were
$158,229 and proceeds from the issuances of notes amounted to $75,551. At March
31, 1996, the Company had notes payable in the amount of $1,954,144, of which
$895,522 were current notes payable or current portion of long-term debt. In
January 1996, a major stockholder, Marjorie S. Brooks (the "Major Stockholder"),
exercised 500,000 Class F Warrants. The proceeds from the exercise of these
warrants,
19
<PAGE>
which amounted to $305,000, reduced the working capital deficit of the Company
and were used to reduce current liabilities.
The Company maintains an accounts receivable factoring agreement for up to
$650,000 through an affiliated company of a related party. The terms of this
agreement call for the factor to advance 99.12% of the total of invoices
presented by the Company and for the Company to indemnify the factor against
loss of the amounts advanced. At March 31, 1996, approximately $65,000 was
available to factor additional receivables. The Company also maintains a line
of credit from the Major Stockholder which consists of a long-term note payable,
which had a balance of $1,355,607 at March 31, 1996, and a $433,097 revolving
line of credit to be available as needed. As of March 31, 1996, the total
amount of the line was available.
Since the completion of the first quarter, the Company has received additional
sources of capital as described below. Historically, revenues have not been
sufficient to support the Company's current operational needs. However, the
Company continues to attempt to improve production rates and efficiencies in an
effort to reduce or eliminate the need for additional future capital to support
existing operations. Further, continued improvements in production efficiency
and capacity will be required for the Company to increase sales to a level that
will allow the Company to attain profitability. There can be no assurance that
such improvements in production efficiency or capacity will be achieved.
As previously disclosed, Management is currently undertaking steps to increase
sales to its existing customer base by expanding its production capacity. The
Company has recently added a third production line at its Composites
Manufacturing Facility and intends to add a fourth production line by the end of
June 1996. To finance existing operations and required capital expenditures, the
following transactions were completed during or subsequent to the first quarter:
(i) the Company traded assets for additional equipment which was deployed as
part of the third production line; (ii) the Company received $305,000 from
Warrant Conversions from the Major Stockholder as described above; (iii) the
Company sold an aggregate of 1,209,750 shares of Class A Common Stock to
accredited overseas investors in a transactions exempt under Regulation S of the
Securities Act of 1933 for an aggregate purchase price of $850,000 and (iv) the
Company sold 338,624 shares to an existing non-affiliated AERT shareholder for a
purchase price of $200,000. In addition to the foregoing, 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 is
September 1, 1996. The Company also has outstanding 1,167,584 Private Placement
Warrants held by non-affiliated entities, which, if exercised by holders, could
generate equity capital for the Company (See Note 9 to the Financial
Statements). The receipt of additional funds by the Company upon exercise of any
such warrants, however, is subject to a number of contingencies, including, but
not limited to, (i) compliance with applicable federal and state securities
laws, (ii) the desire and ability of the holders to exercise their warrants, and
(iii) the market price of the Company's stock.
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
20
<PAGE>
the Mobil legal claims described in Note 13 to the financial statements, it is
likely the Company will be unable to continue as a going concern.
PART II. Other Information
Item 1. Legal Proceedings
--------------------------
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
-----------------------------------------------------------------------
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
- ----
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) The AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by inequitable
conduct. Thereafter, the Judge adopted the jury's advisory findings on
inequitable conduct and held that each of the four AERT patents were
unenforceable for failure to disclose certain alleged prior art to the patent
office during patent prosecution.
Because of the nature of certain of the jury verdict interrogatory responses,
AERT's counsel concluded that the verdict was adversely affected by improper
conduct by Mobil counsel during trial, and false statements of law and fact made
during closing argument, that caused the jury to misapply the law on inequitable
conduct and to render clearly erroneous findings. Consequently, AERT moved for
a new trial. That motion was denied. The Company's additional post-trial
motions were also denied by the Delaware Court. On March 14, 1995, the Company
filed a sealed motion with the Court based upon newly discovered evidence which
alleges prejudicial misconduct by Mobil prior to the trial. The motion also
brings to the Court's attention,evidence which the Company believes was
intentionally withheld from it in direct defiance of the Delaware Court's
January 4, 1994 Motion to Compel, prior to the trial. It also brings to the
Court's attention, an official government safety approval document which was
altered prior to submission to AERT during pre-trial discovery, which also
relates to a portion of the alleged withheld discovery documentation. The
motion seeks
21
<PAGE>
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. In March 1996, the Court
entered an Order which stayed Mobil's Motion for Attorneys' Fees and AERT's
Motion for a New Trial, pending disposition of the appeal. 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.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
--------------------------------------------------
David C. Chapman, Chief Financial Officer
DATE: May 13, 1996
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000849706
<NAME> ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,566
<SECURITIES> 0
<RECEIVABLES> 149,390
<ALLOWANCES> 0
<INVENTORY> 476,932
<CURRENT-ASSETS> 679,939
<PP&E> 9,268,696
<DEPRECIATION> 3,328,977
<TOTAL-ASSETS> 6,956,619
<CURRENT-LIABILITIES> 2,461,707
<BONDS> 0
0
0
<COMMON> 161,929
<OTHER-SE> 3,274,361
<TOTAL-LIABILITY-AND-EQUITY> 6,956,619
<SALES> 1,601,778
<TOTAL-REVENUES> 1,601,778
<CGS> 1,746,229
<TOTAL-COSTS> 2,123,498
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,740
<INCOME-PRETAX> (582,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (582,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (582,453)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
