<PAGE>
As filed June 2, 1998
Registration No. 33-29595
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________
POST EFFECTIVE AMENDMENT NO. 6 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
______________
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3089 71-0675758
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation)
801 N. Jefferson Street
P. O. Box 1237
Springdale, Arkansas 72764
(501) 750-1299
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
______________
JOE G. BROOKS
President
801 N. Jefferson Street
P. O. Box 1237
Springdale, Arkansas 72764
(501) 750-1299
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
______________
Pursuant to Rule 429, the combined prospectus included in this Post-Effective
Amendment No. 6 to Form S-1 Registration Statement No. 33-29595 also relates to
and shall be deemed the current prospectus for Form S-1 Registration Statement
No. 33-29593.
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Post-Effective Amendment to the Registration Statement
becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
[ ] [ ] [ ]
[ ] [x] [ ]
[ ] [ ] [ ]
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
Cross Reference Sheet
(Pursuant to Item 501 of Regulation S-K and Rule 404(a))
<TABLE>
<CAPTION>
Form S-1 Item Number Location or Caption
and Caption in Prospectus
- -------------------- -------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages;
Prospectus Additional Information
3. Summary Information, Risk Factors and Ratio Outside Front Cover Page; Prospectus Summary;
of Earnings to Fixed Charges Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Description of Securities
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Not Applicable
8. Underwriting Selling Agent Agreement
9. Description of Securities To Be Registered Outside Front Cover Page; Description of Securities
10. Interests of Named Experts and Counsel Not Applicable
11. Information With Respect to the Registrant Outside Front Cover Page; Prospectus Summary; Capitalization;
Selected Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations; Business;
Management; Principal Stockholders; Certain Transactions;
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
PROSPECTUS
- ----------
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
Issuable upon exercise of Class B Warrants
4,212,440 SHARES OF CLASS A COMMON STOCK
In November and December 1989, Advanced Environmental Recycling
Technologies, Inc. (the "Company") sold an aggregate of 1,350,000 Units (as
defined hereunder) in its initial public offering. Each unit ("Unit") consisted
of three shares of Class A Common Stock, $.01 par value ("Class A Common Stock")
and three Redeemable Class A Warrants ("Class A Warrants"). A registration
statement covering 80,207 Units, was filed concurrently with the registration
statement relating to the Company's initial public offering in November 1989;
such Units were issuable upon the exercise of options ("Bridge Options") held by
twelve interim lenders ("Bridge Lenders") who acquired such Bridge Options in
connection with a loan transaction completed in April 1989 ("Bridge Financing")
to provide working capital for the Company in the period prior to its initial
public offering. Bridge Options for 43,751 of the Units were exercised by the
Bridge Lenders at $4.00 per Unit, (the "Class A Options"). Bridge Options for
36,456 of the Units were exercised at $4.80 per Unit. Bridge Lenders were
granted 3,125 Class A Bridge Options and 2,604 Class B Bridge Options for each
$50,000 Subordinated Note in the Bridge Financing. As of December 31, 1992, all
Class A Bridge Options and Class B Bridge Options had been exercised and all
Class A Warrants had been either exercised or redeemed.
Each Class A Warrant entitled the registered holder thereof to purchase one
share of Class A Common Stock and one Redeemable Class B Warrant ("Class B
Warrant") at an exercise price of $2.00, subject to adjustment, at any time
through November 8, 1994. Each Class B Warrant, upon issuance, entitles the
registered holder thereof to purchase one share of Class A Common Stock at an
exercise price of $3.00, subject to adjustment, at any time from the date of
issuance through September 30, 1996. Class B Warrants may be redeemed by the
Company at $.05 per Warrant on 30 days' prior written notice if the average
closing bid price (or the last sale price) of the Company's Class A Common
Stock, as reported by NASDAQ, exceeds $4.20 per share for a period of 30
consecutive trading days ending within 15 days of the notice of redemption.
During March 1992, the Company issued notice of redemption of its Class A
Warrants. 4,212,440 of the Class A Warrants were exercised prior to the
redemption date resulting in the issuance of 4,212,440 Class B Warrants. See
"Description of Securities" The Company has extended the expiration date three
times since December of 1994 and the Class B Warrants are currently set to
expire on _________, 1998 (60 days after this amended registration statement
becomes effective).
This Prospectus relates to the continuing offer by the Company of the Class
A Common Stock underlying the Class B Warrants. The exercise of the Class B
Warrants will be reduced to a 20-day market average with the business day
preceding the effective date hereof. Such exercise price is currently estimated
to be $1.28 per share based upon the average of the closing bid and asked prices
for the 20 business days preceding May 21, 1998.. The Company's Class A Common
Stock is traded in the over-the-counter market under the symbol AERTA. The Class
B Warrants, AERTZ, ceased trading on NASDAQ in January of 1998. On May 21, 1998,
the closing bid price of the Class A Common Stock as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") was
$1.28 and the Class B Warrants were no longer traded on NASDAQ under AERTZ. See
"Price Range of Company's Equity Securities".
The Class A Common Stock and the Company's Class B Common Stock, $.01 par
value ("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. The Company's Class B Common Stock is held
exclusively by stockholders who acquired their interests in the Company prior to
its initial public offering, and such Class B Common Stock is held primarily by
the Company's directors and officers. See "Principal Stockholders." The holders
of the Class B Common Stock may be able to elect all of the directors of the
Company and may be able to exercise substantial control over the Company. Except
in certain instances, the Class B Common Stock is automatically converted into
Class A Common Stock upon sale or transfer. See "Description of Securities."
The Company as of March 31, 1998 has had cumulative sales revenues since
inception in December 1988 of $29,426,665 and had a working capital deficit of
$4,269,120. The Company will require additional financing, which may be
satisfied in part by voluntary class B warrants exercises, in order to sustain
and increase manufacturing operations until such time as it can generate
revenues sufficient for profitable operations. See "Risk Factors - Need for
Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 29, 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC") relating to its business,
financial statements, and other matters. Reports, proxy and information
statements filed by the Company with the Commission pursuant to the information
requirements of the Exchange Act may be inspected and copied at public reference
facilities maintained by the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at the following Regional Offices of the Commission:
New York Regional Office, Seven World Trade Center, 13/th/ Floor, New York, New
York 10048; Los Angeles Regional Office, Suite 1100, 5670 Wilshire Boulevard,
Los Angeles, California 90036; and Chicago Regional Office, 500 W. Madison
Street, 4/th/ Floor, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Securities and Exchange
Commission, at 450 Fifth Street, N.W. Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxies and information statements and
other information regarding registrants (including the Company) that file
electronically. In addition, reports, proxy statements and other information
covering the Company can be inspected and copied at the offices of NASDAQ,
Report Section, 1735 K Street, N.W., Washington, DC 20006.
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., Registration Statements on Form S-1 under the Securities Act
of 1933, as amended (the "1933 Act") covering the securities offered by this
Prospectus. For further information with respect to the Company and the
securities offered, reference is made to such Registration Statements and the
exhibits filed as part thereof, which may be examined and copies of such
material can be obtained at prescribed rates from the Public Reference Section
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete. In each instance
reference is made to the copy of such contract or other document filed as an
exhibit to such Registration Statements, each such statement being qualified in
all respects by such reference.
<PAGE>
GLOSSARY
ASTM: A voluntary scientific and technical trade organization that develops
voluntary consensus standards on characteristics and performance of materials,
products, systems and services (formerly known as the American Society for
Testing and Materials).
Compatibilization Agents or Compatibilizers: Certain plastic, rubber or other
materials used to join otherwise incompatible plastic resins through
intermolecular bonding; compatibilizers strengthen the bonds between dissimilar
plastic components and allow certain incompatible plastic materials to be
alloyed.
Compounding: The combination of two or more distinct materials to create a
homogenous substance having properties different from those of its constituent
elements.
Compressive Strength: The maximum compressive stress that a solid material will
sustain, under a gradually applied load, without breaking.
EPA: The Environmental Protection Agency, a federal governmental agency created
to permit coordinated and effective governmental action to protect the
environment.
Extrusion: The process by which a heated material is forced through a specially
designed die.
Modulus of Elasticity: The measure of a material's ability to resist stress
without undergoing permanent deformation.
OEM: Original Equipment Manufacturer, In this case a door or window company,
which utilizes the Company's MoistureShield products as components in the
manufacturer of its finished product.
Polyethylene: One of a broad group of plastics that is resistant to chemicals
and moisture absorption, has good insulating properties, and varies from soft
(e.g., plastic films used in food packaging and garment bags) to hard (e.g.,
molded products such as milk jugs and squeeze bottles).
RCRA: The Resource Conservation and Recovery Act, enacted by Congress in 1976
in response to solid waste disposal problems, establishes a comprehensive system
in which state and local governments, with federal technical and financial
assistance, develop solid waste plans that include materials recovery and energy
conservation.
Reclamation: The process of extracting usable substances from refuse or waste
products.
Recycling: The process by which materials which would otherwise become solid
waste are reclaimed and collected, separated or processed, and returned to the
economic mainstream in the form of useful raw materials or products.
Tensile strength: The maximum longitudinal stress a material can bear without
tearing apart.
Thermoplastic: A type of plastic that melts when heated and solidifies upon
cooling, allowing the material to be processed in a molten state.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed information
and financial statements appearing elsewhere in this Prospectus. Capitalized
terms not defined in the summary are defined elsewhere herein.
THE COMPANY
The Company manufactures and markets a line of engineered composite building
material products that exhibit superior moisture resistance and dimensional
stability, as well as several other unique properties over traditional wood
products. The Company's products have been extensively tested and used by
several leading national companies. The Company primarily utilizes waste wood
fiber and reclaimed polyethylene plastic as its raw material sources. The
Company markets its products under the trade names MoistureShield(TM) and
ChoiceDek(TM) and its sales are now primarily focused towards the following
three market areas which are currently supplied by the Company's composites
manufacturing facility in Junction, Texas: (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 is currently
expanding its manufacturing capabilities with the addition of a second composite
manufacturing and plastic reclamation facility in Springdale, Arkansas.
THE OFFERING
Securities Offered ......... 4,212,440 shares of Class A Common Stock issuable
upon exercise of Class B Warrants. Each Class B
Warrant, upon issuance, entitles the holder to
purchase one share of Class A Common Stock at a
market average price to be set, at any time from
issuance through ___________, 1998 (60 days after
this amended registration statement becomes
effective). The exercise price of the B Warrants
will be adjusted downward to a dollar weighted
average market price on the Company's Class A
Common Stock on the effective date of the amended
registration statement. A collar of 1/4 point
($0.25) is set, 1/8th of a point up and 1/8th of a
point down from the dollar weighted average of the
same day's stock price. A 20-day pricing period
then starts. The dollar-weighted average of each
trading day is used to determine the New Exercise
Price. On the 21st day a New Exercise Price is
set. The New Exercise Price cannot be above the
upper band of the collar, and it cannot be below
the lower band of the collar set on the Effective
Day. The Company reserves the right to extend the
date for conversion beyond 60 days. The estimated
exercise price based upon such average closing
prices over the preceding 20 business days ended
May 21, 1998 was $1.28. The Warrants are subject
to redemption by the Company under certain
circumstances. See "Description of Securities"
Securities Outstanding
at March 31, 1998
Common Stock:
Class A Common Stock ..... 20,530,147 shares(1)
Class B Common Stock...... 1,465,530 shares(2)
----------
Total Common Stock .... 21,995,677 shares
3
<PAGE>
Use of Proceeds ............ Should any of the Class B Warrants, it is
anticipated that the net proceeds therefrom would
be used principally for working capital purposes
and expansion. If any such Class B Warrant
exercises occur in advance of scheduled payments
on Company indebtedness or are not required for
immediate working capital purposes at the time of
exercise, the net proceeds of such Class B Warrant
exercises may also be applied to reduce the
Company's indebtedness, or for expansion of the
Company's facilities, additional capital
expenditures and product development. See "Use of
Proceeds".
Risk Factors ............... An exercise of the Company's Class B Warrants and
the resulting investment in the Company's
securities involves a high degree of risk and
substantial dilution from the Class B Warrant
exercise price. Prospective investors should
carefully review and consider the factors
described under "Risk Factors" and
"Dilution".
NASDAQ Symbols:
Class A Common Stock .... AERTA
Class B Warrants ........ AERTZ*
* No longer listed and traded on NASDAQ SmallCap
Market
- --------------------
(1) Unless otherwise indicated, no effect is given in this Prospectus to the
possible issuance of (i) 17,770,839 shares of Class A Common Stock upon
exercise of other warrants outstanding as of May 29, 1998; (ii) 4,141,500
shares of Class A Common Stock upon the exercise of options granted or
available for grant to employees and directors under the Company's Stock
Option Plans. See "Management-Stock Option Plans," "Description of
Securities"; and, "Risk Factors" - "Notes, Warrants and Options;
Dilution".
(2) The Company's Class B Common Stock is held exclusively by stockholders who
acquired their stock prior to the initial public offering, and such Class B
Common Stock is held primarily by the Company's directors and officers. See
"Principal Stockholders". 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. The holders of the Class A Common Stock and of the
Class B Common Stock vote as a single class on all matters submitted to a
vote of the Company's stockholders, except as otherwise required by law.
The holders of the Class B Common Stock are thus able to exercise
substantial control over the Company. Except in certain instances, the
Class B Common Stock is automatically converted into Class A Common Stock
on a share for share basis upon sale or transfer. See "Description of
Securities".
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993
-------------- -------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 2,507,300 $ 1,747,802 $ 7,982,381 $ 6,950,219 $ 5,581,172 $ 3,675,018 $ 2,043,476
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss before
Extraordinary
Gain (518,941) (619,441) (1,913,664) (2,933,698) (2,756 263) (2,970,135) (3,692,773)
Extraordinary
Gain - - 757,644 36,666 - 879,373 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss (518,941) (619,441) (1,156,020) (2,897,032) (2,756,263) (2,090,762) (3,692,773)
=========== =========== =========== =========== =========== =========== ===========
Net Loss before
Extraordinary gain
per common share (.02) (.03) (.09) (.15) (.17) (.21) (.34)
Extraordinary gain
per common share - - .04 - - .06 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss Per Common
Share/(1)/ (Basic
and Diluted) $ (.02) $ (.03) $ (.05) $ (.15) $ (.17) $ (.15) $ (.34)
=========== =========== =========== =========== =========== =========== ===========
Weighted Average Number
of Shares
Outstanding/(1)/ 21,995,434 20,666,678 21,800,170 19,134,484 15,779,721 14,166,869 10,853,938
<CAPTION>
BALANCE SHEET DATA:
March 31, 1998 March 31, 1997 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
-------------- -------------- ------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
WORKING CAPITAL
(DEFICIT) $(4,269,120) $(1,245,209) $(3,117,649) $ (892,995) $(1,556,805) $ (599,753) $ (701,142)
TOTAL ASSETS 8,656,536 6,881,961 7,641,328 6,725,549 7,357,742 8,781,907 9,146,981
LONG-TERM DEBT
LESS CURRENT
MATURITIES 395,096 799,266 588,412 955,776 1,266,642 1,844,597 892,294
TOTAL LIABILITIES 6,439,458 4,155,024 5,290,970 3,623,170 3,643,999 3,335,459 3,010,529
STOCK SUBSCRIPTION - - - - - - 1,000,000
STOCKHOLDERS' EQUITY $ 2,217,078 $ 2,726,937 $ 2,350,358 $3,102,379 $ 3,713,743 $5,446,448 $5,136,452
</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.
5
<PAGE>
THE COMPANY
The Company manufactures and markets a line of engineered composite
building material products that exhibit superior moisture resistance and
dimensional stability, as well as, several other unique properties over
traditional wood products. The Company's products have been extensively tested
and used by several leading national companies. The Company primarily utilizes
waste wood fiber and reclaimed polyethylene plastic as its raw material sources.
The Company markets its products under the trade names MoistureShield and
ChoiceDek and its sales are now primarily focused towards the following three
market areas which are currently supplied by the Company's composites
manufacturing facility in Junction, Texas: (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 is currently
expanding its manufacturing capabilities with the addition of a second composite
manufacturing and plastic reclamation facility in Springdale, Arkansas.
The Company's Manufacturing Unit, located in Junction, Texas markets its
moisture-resistant composite building materials under the trade names
MoistureShield/TM/, LIFECYCLE/TM/ and ChoiceDek/TM/. 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. The composites are
denser than the straight-grained, clear grades of wood from western United
States forests traditionally used in the building applications for which AERT's
products compete. The composites manufacturing process involves proprietary
technologies and specialized manufacturing equipment, custom-built or modified
for the Company's purposes. It utilizes recycled plastics and wood filler
materials and, in certain cases, special additives or virgin plastics in varying
mixtures, which can be formulated, based on the customer's desired end-product
characteristics. A key advantage of the Company's process is the ability to
utilize plentiful, low-cost raw material components, encapsulate the wood fibers
in the plastic and create 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.
In May 1995, the Company entered into an exclusive marketing and
distribution agreement with a division of Weyerhaeuser ("Weyerhaeuser") for
sales of its LIFECYCLE/TM/ line of extruded decking components, which are
primarily targeted towards the high-end residential housing market. Weyerhaeuser
has marketed 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. To date, Weyerhaeuser decking sales have been
limited primarily by the companies limited ability to produce product.
RISK FACTORS
An investment in the Company's securities involves a high degree of risk. Prior
to making an investment, prospective investors should carefully consider the
following factors, among others, and seek professional advice in analyzing this
offering. In addition, this Prospectus contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act
6
<PAGE>
and Section 21E of the Exchange Act. Such forward-looking statements, which are
often identified by words such as "believes," "anticipates," "expects",
"estimates," "should," "may," "will" and similar expressions, represent the
Company's expectations or beliefs concerning future events. Numerous
assumptions, risks and uncertainties, including the factors set forth below,
could cause actual results to differ materially from the results discussed in
the forward looking statements. Prospective purchasers of the Shares should
carefully consider the factors set forth below, as well as the other information
contained herein or in the documents incorporated herein by reference.
FINANCIAL POSITION OF THE COMPANY, WORKING CAPITAL DEFICIT; REPORT OF
INDEPENDENT AUDITORS
The Company through December 31, 1997 and March 31, 1998 (unaudited) has
generated aggregate sales revenues of $26,919,365 and $29,426,665, respectively,
since inception in December 1988 ($7,982,381 for the year ended December 31,
1997 and $2,507,300 for the quarter ended March 31, 1998). At December 31, 1997
and March 31, 1998, the Company had a working capital deficit of $3,117,649 and
$4,269,120, respectively and had incurred cumulative losses from inception on
December 2, 1988 through December 31, 1997 and March 31, 1998 of $19,793,758 and
$20,312,699 ($1,156,020 for the year ended December 31, 1997 and $518,941 for
the quarter ended March 31, 1998). The Company has not yet generated sufficient
revenues to obtain profitability, nor is there any assurance that the Company
will achieve future revenue levels to support existing operations, generate
positive cash flow from operations or recover its investment in its property,
plant and equipment. The Company expects to continue to incur losses through at
least the second quarter of 1998 and there can be no assurance that such losses
will not continue thereafter. The success of the Company's operations are
largely dependent upon its ability to maintain and improve operating
efficiencies and overall production capacity, generate substantial sales
revenues and generate adequate cash-flows from operations, as to which there can
be no assurance. The Company has recently increased its manufacturing efforts
through expanded production and addition of a second manufacturing facility, and
is currently experiencing a backlog in purchase orders and projects pending
already received from certain composite customers. However, the Company's
operations are subject to numerous risks associated with the continued
establishment of its business, including lack of adequate financing sources,
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, marketing difficulties, some of
which may be beyond the Company's financial and technical abilities to resolve.
The failure to adequately address such difficulties could have a material
adverse effect on the Company's prospects.
The independent public accountant's report on the Company's financial statements
for the year ended December 31, 1997, contains an explanatory paragraph
regarding the Company's ability to continue as a going concern and regarding the
outcome of certain ongoing litigation. See Report of Independent Public
Accountant's contained in, and Notes 2 and 11 to the Financial Statements for
the year ended December 31, 1997.
NEED FOR ADDITIONAL FINANCING
Substantially all of the Company's working capital and capital improvement needs
for the preceding twelve months have been met from proceeds of additional debt
financing of approximately $1.3 million and $1.51 million obtained during 1997
and 1998, respectively, and of $2,260,000 obtained from equity private
placements during 1996 and 1997. Substantially all of the proceeds from such
financings have been expended by the Company. The Company has been primarily
dependent, until recently, on financing from a major
7
<PAGE>
stockholder, and there is no assurance that such support can continue. In
particular the Company has been dependent over the last twelve months on the
fund raising efforts of its President with accredited investors. The Company
maintains an accounts receivable factoring agreement for up to $700,000 through
Marjorie S. Brooks, a major stockholder. 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. The Company as of March 31, 1998 and December 31, 1997, also owed
$825,942 and $852,112, respectively, to Marjorie S. Brooks, a major stockholder
which was classified as long-term debt.
The Company secured a bridge loan from certain of the Selling Stockholders, all
of whom were accredited investors, during October 1997, which provided
approximately $1.3 million of additional cash for expansion and limited
corporate purposes through November 1997. Pursuant to the Placement Agreement,
the Company granted to the Placement Agent a two-year option to offer and place
on behalf of the Company an additional $2,200,000 in aggregate principal amount
of promissory notes (the "Additional Notes"), $1,210,000 of which has been
issued and sold in February and April 1998 on substantially similar terms; the
terms of any further Additional Notes, which may be issued, may vary from the
terms of the Notes, but shall provide that, unless extended by the Company at
its option, the Additional Notes shall mature and become payable on a date 270
days from the date of initial issuance thereof. In addition, subject to certain
exceptions, the Placement Agent has rights to approve and/or participate in
future debt or equity financings by the Company for a two-year term. Such
rights could have an adverse effect on the Company's ability to obtain
additional financing. In the event that the Placement Agent exercises its
option to offer and place the Additional Notes, the Placement Agent will be
entitled to receive a 10% placement agent fee and 3% nonaccountable expense
allowance based on the aggregate gross proceeds to the Company from the sale of
the Additional Notes and the Placement Agent and the Consultant will be entitled
to receive additional warrants. See "Risk Factors" - "Notes, Warrants and
Options-Dilution".
The Company is also currently pursuing low interest bond financing from a state
economic development agency, and a working capital line of credit with a major
financial institution. There can be no assurance that the Company will be
successful in its efforts to secure additional financing.
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. Although the Company believes that if
it can maintain its current production rates and efficiencies, it will be able
to achieve a level of operations sufficient to support its operations for the
next twelve months, there can be no assurance that such production rates or
efficiencies will be maintained or that the Company will not encounter
unanticipated difficulties in its manufacturing processes which adversely
affects such rates or efficiencies. Further, continued improvements in
production efficiency and capacity 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, approximately $2.5
million of which represent short-term indebtedness.
Proceeds from the Company's financing sources have been largely expended.
Accordingly, if the Company cannot generate sufficient cash flow from existing
operations, it could be dependent in the near future on additional debt or
equity financing, as to which there can be no assurance. Should the Company be
unable to secure additional financing, the Company's ability to pay it's
existing debt obligations and the Company's operations would be materially
adversely affected, and in particular the Company's operations might be delayed
or discontinued until such time, if ever, as funds are generated in
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order to resume operations. There can be no assurance that current or
prospective creditors or purchasers of the Company's products would accept any
such delay or that such purchasers would not locate alternative supply sources.
Accordingly, the long-term success of its operations hereafter may depend upon
cash flow from operations and the Company's success in raising additional funds,
if necessary, through equity or debt financing. There is no assurance that
required additional financing can be obtained, or obtained on terms satisfactory
to the Company.
LEGAL PROCEEDINGS
In June 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.
In December 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
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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. The March 14, 1995 Motion is currently stayed
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. In June 1996, the U.
S. Court of Appeals reversed a portion of the earlier ruling that two of the
patents were invalid, and that Mobil did not infringe. The Company did not
further appeal this issue to the Supreme Court. 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 attorney's 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 Attorney's Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
stayed. The Company will vigorously defend against Mobil's claim for attorney's
fees and costs; however, there can be no assurances as to the outcome of this
litigation. The Company at present cannot predict when the Mobil motion for
attorney's fees and the AERT prejudicial misconduct motion for a new trial will
be addressed by the Delaware Court. The Company has not recorded any liability
related to such litigation at December 31, 1997 or March 31, 1998. Mobil Oil
divested its composites business in 1996 and no longer directly competes with
the Company.
In a related matter, the Company recently received a formal notice of allowance
from the United States Patent and Trademark Office concerning a related product
by process patent application, which has been pending throughout the litigation.
This is an application, which was filed on the same date as those currently in
litigation, although substantial additional disclosures have been made.
REDUCTIONS IN CONSTRUCTION ACTIVITY
AERT engineered 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 to periodic downturns caused by general
economic conditions. Single housing construction starts were steady over the
proceeding year and there was good demand for door and window components from
the Company. Reductions in construction activity could have an adverse effect
on the demand for AERT composites in the door and window market. The Company's
decking line is primarily targeted to the remodeling market. The Company
believes significant demand now exists for its products and by broadening its
composites sale base it can reduce the effects that reductions in construction
activity would have on the Company.
LIMITED MANUFACTURING CAPABILITIES
Although the Company has exited the development stage and has completed
development of its commercial manufacturing processes at its Junction, Texas
facility, the long-term success of the Company's operations will depend upon the
manufacture of AERT composite products on a substantially greater commercial
scale than the Company has engaged in to-date. The Company currently has one
composite manufacturing facility, although the Company is currently constructing
a second composite manufacturing facility in Springdale, Arkansas. There can
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be no assurance the Company will prove able to expand its operations to the
extent required or achieve improved operational efficiencies, and in particular,
increased throughputs and or capacities in order to realize profitable
operations, even assuming the availability of adequate financing and customer
demand for its products. The Company's primary customers and markets are large
and increased sales growth will require significant capital expenditures. There
can be no assurance that financing can be obtained to expand existing or build
additional manufacturing facilities or that, if obtained, they could become
operational in a timely manner.
DEPENDENCE ON KEY CUSTOMERS AND CURRENT BACKLOG
The Company limited its initial marketing to prospective customers that are
major industrial companies with large market shares nationwide in the plastics
and door and window construction industries. A few large door and window
manufacturing companies have purchased substantially all of the Company's
MoistureShield/TM/ product since inception. Additional customers for the
Company's MoistureShield/TM/ and ChoiceDek/TM/ products are now coming on-line
or are in the early stages of their commercial use of such products. The
Company is also currently under a backlog of orders, in excess of one million
dollars, to its decking, industrial flooring and window customers. There can be
no assurance that production delays will not negatively affect additional
purchase commitments to the Company. A division of Weyerhaeuser, one of the
world's largest forest products companies is engaged with the Company and is the
marketing and distribution channel of ChoiceDek/TM/, the residential decking
material produced from the Company's composite manufacturing facility. These
customers may be key to the Company's success. Although the Company's
composites customers have indicated to the Company that it is their intention to
purchase products from the Company on a regular basis and in substantial
volumes, assuming current product quality and pricing levels can be achieved
commercially and that volume requirements can be met, none of such key customers
is contractually obligated to purchase a substantial amount of additional
products from the Company. These companies and other prospective customers with
which the Company has dealt have high quality standards, and require elaborate
and extensive testing for new products, component parts, and/or services. The
Company could be materially adversely affected if it were to lose one or more of
its existing large customers.
PATENTS AND PROTECTION OF TECHNOLOGY
The Company's composite materials manufacturing process and its waste plastics
reclamation technologies involve many proprietary trade secrets, as well as
certain methods, processes and equipment designs for which the Company has
sought and received patent protection. Although the Company has taken measures
to safeguard its trade secrets by limiting access to its manufacturing facility
and requiring confidentiality and nondisclosure agreements of employees and
third parties, there can be no assurance that its trade secrets will not be
disclosed or that others will not independently develop comparable or superior
technology. The Company has filed seventeen patent applications and has
received issuance from the United States Patent and Trademark Office for
thirteen patents, five of which relate to the Company's composite materials
manufacturing operations and eight of which relate to its waste plastics
reclamation technologies. However, four composite patents have been challenged
by Mobil Oil Corporation and found invalid. (See "Legal Proceedings"). Two were
later restored upon appeal. The cost of litigation to preserve proprietary
rights is high and in the past has strained the financial resources of the
Company as well as impeded sales growth. Further, to the extent that employees,
consultants or other third parties working with the Company develop new
technology, disputes may arise as to the proprietary rights to such technology
which may not be resolved in favor of the Company.
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GOVERNMENT REGULATION
The Company at present is able to incorporate a substantial majority of the
waste plastic feedstocks it receives into its composite materials manufacturing
and plastic reclamation processes without significant waste disposal problems of
its own. However, its current supply sources are relatively homogeneous and
consistent, and there can be no assurance that in the future continuing
regulations will not adversely affect the Company's operations or require the
introduction of costly additional manufacturing or waste disposal processes.
Certain customers have expressed interest in the Company's products because use
of the Company's products could reduce the sawdust or other solid waste
generated by such customers' operations. The Company believes that the demand
for its products and technology could be decreased if there is a lessening of
public concern or government pressure on private industries and municipal solid
waste disposal authorities to deal with solid waste disposal problems. Further,
the Company believes that a lessening of environmental concerns could reduce the
rate at which plastics are recycled, which ultimately could have the effect of
increasing the Company's cost of raw materials for its manufacturing operations.
Although state and federal legislation currently provide for certain procurement
preferences for recycled materials, such preferences for materials containing
waste plastics are dependent upon the eventual promulgation of product or
performance standard guidelines by state or federal regulatory agencies. Such
guidelines for recycled plastic building materials may not be released or, if
released, the product performance standards required by such guidelines may be
incompatible with the Company's manufacturing capabilities.
COMPETITION
In seeking to market AERT 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 and aluminum fabricating 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. Although the Company has recently entered into a national
marketing and distribution agreement with Weyerhaeuser, there are many
additional large competitors in this market.
Many large competitors also have research and development budgets, marketing
staffs and financial and other resources, which far surpass the resources of the
Company. Several such competitors are currently attempting to develop and
introduce similar recycled composite materials. Competitive products currently
entering the market include Trex(R), TimberTech(TM) and Strandex. 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, has achieved significant commercial
acceptance to-date.
The Company competes for certain 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
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processes it has developed for its composites manufacturing business are able to
source raw materials from industrial waste, plastic film waste and other plastic
waste generators whose potential as a recycling source is not being
significantly utilized by conventional plastics recyclers who primarily rely on
post-consumer, source-separated plastic container recycling processes such as
HDPE milk containers. The Company expects new entrants into the 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. Such entrants may include beverage bottlers, distributors and
retailers as well as forestry product, petrochemical and other companies.
FIRE DISRUPTIONS
The Company experienced a series of fires over the past several years, which has
severely disrupted its manufacturing operations. In 1996, the Company
experienced two fires at its Rogers, Arkansas plastic reclamation facility,
which were ruled arson by authorities. The pattern of continued fires caused
the Company's fire insurance to be cancelled. The Company was able to renew its
fire insurance, but at a substantially higher rate. The Company has increased
security and added armed guards at its facilities. However, another major fire
or similar disruptions could materially adversely affect the Company.
RELIANCE UPON MANAGEMENT AND QUALIFIED TECHNICAL ASSISTANCE
The Company is substantially dependent upon the personal efforts and abilities
of Joe G. Brooks, its President, Grant Martin, its Chief Operating Officer, J.
Douglas Brooks, its Vice President of Recycled Plastics, Steve Brooks, its CEO,
and a limited number of corporate and technical staff who devote all of their
business time to the affairs of the Company. The Company has also obtained a
$1,000,000 "key man" life insurance policy on the life of Joe G. Brooks. The
loss of the services of one or more of these persons could have a material
adverse effect upon the Company's activities. The Company is also dependent
upon the continuing availability of capable independent engineering services and
other technical assistance. There is no assurance that it will be able to
locate, maintain, and/or obtain such necessary technical assistance from time to
time.
VOTING CONTROL BY MANAGEMENT
At March 31, 1998, the Company's directors and officers in the aggregate
beneficially owned 14,743,388 shares of Class A Common Stock (which amount
includes shares underlying outstanding options and warrants which such directors
and officers have the right to acquire within sixty days) and 1,345,657 shares
of Class B Common Stock, which constituted approximately 36.1% and 91.8% of the
Class A Common Stock and Class B Common Stock, respectively, and approximately
44.6% of the combined general voting power of the Company. Accordingly, such
persons may be able to elect all of the Company's directors and otherwise
control the Company. Holders of Class B Common Stock and Class A Common Stock
will generally vote together as a single class upon matters submitted to a vote
of stockholders, though the holders of Class B Common Stock will be entitled to
five votes per share of Class B Common Stock while holders of Class A Common
Stock will be
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entitled to only one vote per share. Although no voting agreement exists among
the holders of Class B Common Stock, because of the family and prior business
relations among such stockholders it may be anticipated that Class B
stockholders will often vote the same way on matters requiring stockholder
approval or authorization. The Class B stockholders have entered into a Right of
First Refusal Agreement among themselves granting such stockholders a right to
purchase Class B Common Stock on a pro rata basis from any Class B stockholder
desiring to sell such shares.
NOTES, WARRANTS AND OPTIONS; DILUTION
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. Each unit consisted of three shares
of Class A Common Stock and three redeemable Class A Warrants. Each Class A
Warrant entitled 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 entitled the holder to purchase one share of Class A Common Stock at
an exercise price of $3.00. As a result thereof the Company has issued and
outstanding 4,212,440 shares of Class B Warrants. The Board of Directors has
extended the expiration date of the outstanding Class B Warrants to July 1,
1998.
In July 1993, the Company completed a $1.2 million private placement by issuing
$650,000 in short-term notes, due June 29, 1994 and 650,000 Class C Warrants.
Certain of such notes and Class C Warrants were issued to related parties,
including the Company's major stockholder. The Class C Warrants, which are
exercisable ratably into one share of Class A Common Stock at an exercise price
of $3.00 per share, expire on June 29, 1998. In consideration of other
financing and support provided by Marjorie S. Brooks, the expiration date of
325,000 Class C Warrants was extended by the Board of Directors to June 2003.
In May 1994, $600,000 of such notes were converted into Class A Common Stock as
a portion of the consideration for May 1994 private placement offering described
below.
In May 1994, the Company completed a private placement offering at market price
to certain affiliated stockholders and noteholders 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
were received by the Company, consisting 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 consideration of other financing and support provided by Marjorie S. Brooks,
the expiration dates of 856,094 Class F Warrants and 2,986,590 Class G Warrants
were extended by the Board of Directors to June 2004.
In 1995, in connection with an extension of a line of credit to the Company by
its major stockholder, the Company's Board of Directors authorized the issuance
of up to 2,000,000 of 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. The Class H Warrants for 2,000,000 shares are exercisable at prices
from $0.39 to $0.49 per share of Class A Common Stock. The Class H Warrants will
expire in February 2005.
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In May 1996, the Company completed a private placement offering with the
issuance of 338,624 shares of Class A Common Stock to an accredited investor for
$200,000 in cash.
Between April and December of 1996, the Company issued 2,956,396 shares of Class
A Common Stock in Regulation S transactions for $1,831,000, and issued 295,608
warrants as part of the transactions at exercise prices ranging from $0.375 to
$1.125. Between January and March of 1997, the Company issued 977,367 shares of
Class A Common Stock in Regulation S transactions for $229,000, and issued
97,736 warrants as part of the transactions at exercise prices ranging from
$0.31 to $0.375.
In December 1996, in connection with a note payable of $100,000 the Company
authorized and issued two sets of Warrants, Class J for 200,000 shares and Class
K for 150,000 shares. Each Class J and Class K Warrant is exercisable on a
one-for-one basis with common stock. Each Class J Warrant is exercisable at
$0.50 per share and each Class K Warrant is exercisable at $0.75 per share. Both
Class J and Class K Warrants expire five years from the date of issuance.
In October 1997, the Company issued $1.3 million aggregate principal amount of
12% promissory notes due July 27, 1998 (extendable at the Company's option to
October 30, 1998) in a private placement to certain of the Selling Stockholders.
Pursuant to the Placement Agreement, the Company also issued similar 12% Notes
for $800,000 in February 1998 and $410,000 in April 1998, which mature November
2, 1998 and January 2, 1999, respectively, (extendable at the Company's option
to January 31, 1999 and April 2, 1999, respectively). Quarterly interest on the
Notes is payable in shares of Common Stock valued at the average closing bid
price over the ten days trading prior to each such interest payment date, or
cash at the Company's option. Pursuant to the Placement Agreement executed
concurrently with the October 1997 Note Purchase Agreement, the Company also
granted to the Placement Agent a two-year option to offer and place on behalf of
the Company an additional $2,200,000 in aggregate principal amount of promissory
notes, $1,210,000 of which has been issued and sold in February and April 1998
on substantially similar terms; the terms of any Additional Notes, which may be
issued may vary from the terms of the Notes, but will provide that, unless
extended by the Company at its option, the Additional Notes will mature and
become payable on a date 270 days from the date of initial issuance thereof. In
the event that the Placement Agent exercises its option to offer and place the
Additional Notes, the Company is required to deliver to the Placement Agent
warrants, in substantially the form of the Private Placement Warrants, to
purchase such number of shares of the Company's Common Stock as is equal to 12%
of the aggregate purchase price of the Additional Notes (as expressed in
numerical rather than dollar terms) or in the event that the term of the
Additional Notes is extended, at the Company's option from 270 days to 365 days,
such number of shares of Common Stock as is equal to 18% of the aggregate
purchase price of the Additional Notes (as expressed in numerical rather than
dollar terms) (in either case the "Additional Placement Warrants"). In addition,
in the event of the sale of such Additional Notes, the Consultant becomes
entitled under the Consulting Agreement to additional warrants, in substantially
the form of the Consulting Warrants, to purchase such number of shares of the
Company's Common Stock as is equal to 200% of the aggregate purchase price of
the Additional Notes (as expressed in numerical rather than dollar terms) or in
the event that the term of the Additional Notes is extended, such number of
shares as is equal to 250% of the aggregate purchase price of the Additional
Notes (the "Additional Consulting Warrants"). The Additional Placement Warrants
and Additional Consulting Warrants will be exercisable for a period of five
years from the date of issuance at a price of $0.375 per share. The warrant
shares issuable upon exercise of the Additional Placement Warrants and
Additional Consulting Warrants will be considered "Registrable Securities" under
the Registration Rights Agreement executed with the Placement Agent and
Consultant. Concurrently with the Note Purchase Agreements, the Company issued
Private Placement Warrants to the Placement Agent, 301,200 of which Private
Placement Warrants were outstanding as of May 21, 1998. The Private Placement
Warrants are exercisable at a price of $0.375 per share for a five year term and
are subject to customary anti-dilution provisions for stock splits, stock
dividends, reverse stock splits, mergers or consolidations, below-market stock
issuances and similar events. Also, in October 1997, the Company entered into
the Consulting Agreement with the Consultant pursuant to which the Consultant
will provide investment banking and general financial and strategic advisory
services during a five-year term. In consideration thereof, the Company granted
to the Consultant and one affiliated Selling Stockholder, 5,020,000 of which
Consulting Warrants were outstanding as of May 21, 1998. The Consulting
Warrants are exercisable at a price of $0.375 per share for a five year term and
are subject to customary anti-dilution adjustments similar to the Private
Placement Warrants.
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In January 1998, in consideration of renewal of the Company's $700,000
receivable line the Company issued 700,000 warrants at market ($0.875) to the
major shareholder.
In addition to the Warrants described above, the Company has various stock
option plans which authorize the issuance of up to an aggregate of 5,600,000
shares of Class A Common Stock. At March 31, 1998, the Company had outstanding
stock options under such plans which provided for the purchase of up to
4,141,500 shares of Common Stock at exercise prices ranging from $0.375 to $3.00
per share, of which 1,941,500 were currently exercisable.
For the term of each of the warrants discussed herein, the holders thereof will
have, at a fixed cost, and in some cases a nominal cost, the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership, with a resulting dilution in the interest of the other
security holders. As long as such warrants and options remain unexercised, the
Company's ability to obtain additional capital might be adversely affected.
Moreover, the holders of such warrants and options may be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital through a new offering of its securities on terms more favorable
than those provided by warrants.
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POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK RESERVED.
Out of an authorized capitalization of 62,500,000 shares of capital stock,
including 50,000,000 of Class A Common Stock, as of March 31, 1998, there were
20,530,147 shares of Class A Common Stock and 1,465,530 shares of Class B Common
Stock outstanding (which shares of Class B Common Stock are convertible into
Common Stock and for which 1,465,530 shares of authorized but unissued Common
Stock have been reserved). In addition, the Company has reserved a total of
28,297,902 shares of Common Stock for issuance as follows: (i) 12,618,839 shares
for issuance upon exercise of the Series B through Series K Warrants described
above; (ii) 4,950,668 shares for issuance pursuant to the stock option plans
described above; (iii) 648,395 shares for potential issuance of Interest Shares;
(iv) 700,000 shares for potential issuance pursuant to Financing Warrants (v)
630,000 shares for potential issuance pursuant to Private Placement Warrants or
Additional Private Placement Warrants, and (vi) 8,750,000 shares for potential
issuance pursuant to Consulting Warrants or Additional Consulting Warrants. The
Company also has contractual commitments for the issuance of options or warrants
for an additional 293,579 shares of Class A Common Stock, for which no
reservation has been made, subject to stockholder approval of an increase in the
authorized capital stock, consummation of a previously authorized reverse stock
split or expiration of sufficient outstanding options or warrants without
exercise. The existence of the warrants and options described herein and the
unavailability of additional shares of authorized Class A Common Stock, may
adversely affect the Company's ability to consummate future equity financing.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company.
POTENTIAL INFLUENCE ON THE MARKET AND THE COMPANY.
A significant amount of the Shares offered hereby will be held by, and may be
sold to customers of the Placement Agent. If the Placement Agent participates
in the market, as a market maker or otherwise, the Placement Agent may exert a
dominating influence on the market for the Shares described in this Prospectus.
Such market making activity may be discontinued at any time. The price and
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Placement Agent's participation in such market.
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED SECURITIES;
RISK OF APPLICATION OF PENNY STOCK RULES.
The Board of Governors of the National Association of Securities Dealers, Inc.
has established certain standards for the initial listing and continued listing
of a security on the NASDAQ SmallCap Market. The standards for initial listing
require, among other things, that an issuer have total assets of $4,000,000 and
capital and surplus of at least $2,000,000; that the minimum bid price for the
listed securities be $3.00 per share; that the minimum market value of the
public float (the shares held by non-insiders) be at least $2,000,000; and that
there be at least two market makers for the issuer's securities. The
maintenance standards require, among other things, that an issuer have total
assets of at least $2,000,000 and capital and surplus of at least $1,000,000;
that the minimum bid price for the listed securities be $1.00 per share; that
the minimum market value of the "public float" be at least $1,000,000; and that
there be at least two market makers for the issuer's securities. A deficiency
in either the market value of the public float or the bid price maintenance
standard will be deemed to exist if the issuer fails the individual stated
requirement for ten consecutive trading days. If an issuer falls below the bid
price maintenance standard, it may remain on the NASDAQ SmallCap Market if the
market value of the public float is at least $1,000,000 and the issuer has
$2,000,000 in equity. The NASDAQ SmallCap Market has recently adopted new
maintenance criteria, which eliminates the exception to the $1.00 per share
minimum bid price and require, among other things, $2,000,000 net tangible
assets, $1,000,000 market value of the public float and adherence to certain
corporate governance provisions. The Company has been formally
18
<PAGE>
notified by NASDAQ that it had until May 28, 1998 to bring the price of its
stock up to a minimum $1.00 bid. As of December 31, 1997, the Company's bid
price was below $1.00. As of May 21, 1998, the Company's closing bid price was
$1.28. The Company on April 14, 1998, was notified by NASDAQ that it had
regained minimum bid price compliance. The Company's stockholders, in August
authorized up to a 1 for 6 reverse stock split, which has not yet been
implemented. There can be no assurance that the Company will continue to satisfy
the requirements for maintaining a NASDAQ SmallCap Market listing. If the
Company's securities were to be excluded from the NASDAQ SmallCap Market, it
would adversely affect the prices of such securities and the ability of holders
to sell them, and the Company would then be required to comply with the more
difficult initial listing requirements to be re-listed on the NASDAQ SmallCap
Market. The Company as of March 31, 1998, had net assets of $2,217,078 and is
currently implementing a plan to recapitalize and raise a minimum of an
additional $2 million in equity capital to maintain its minimum NASDAQ listing.
There can be no assurance that its recapitalization efforts will be successful
or that it can maintain the minimum $2 million asset value for continued
listing.
If the Company is unable to satisfy maintenance requirements and the price per
share were to continue below $1.00, then unless the Company satisfied certain
net tests, the Company's securities would become subject to certain penny stock
rules promulgated by the SEC (the "Commission"). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks of penny stock market securities. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior
to a transaction in a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock. If the Common Stock becomes subject to
the penny stock rules, investors may find it more difficult to sell their
shares.
Unaudited information subsequent to December 31, 1997 and March 31, 1998
indicates that losses are continuing. Due to continuing net losses, the Company
is unable to determine if the Company will be able to maintain compliance with
the net asset requirement or if necessary to correct any deficiencies in the net
asset requirement in the future.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock,
$1.00 par value, none of which have been issued. The Board of Directors of the
Company is empowered to fix the terms of the Preferred Stock without stockholder
approval, which terms may adversely affect the rights of holders of the Class A
Common Stock. The Company has no current plans to issue any shares of its
Preferred Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends in the past and expects to retain
any future earnings for expansion of its business rather than to pay cash
dividends in the foreseeable future.
19
<PAGE>
NON-REGISTRATION IN CERTAIN JURISDICTIONS
Although the Shares have been registered for sale with the SEC under the
Securities Act, action has only been taken in a very limited number of state
jurisdictions to register or qualify the Shares for sale to prospective
purchasers. Accordingly, in the absence of any specific registration or
qualification, any purchasers of the Shares from the Selling Stockholders will
be required to rely upon applicable exemptions from registration in such state
jurisdictions. Purchasers should inquire of the Selling Stockholders to
determine what action, if any, has been taken to qualify the Shares for sale in
a particular state jurisdiction and should consult their own legal counsel prior
to effecting sales of Shares in any jurisdiction.
DILUTION
As of March 31, 1998, the net tangible book value per share of the Company's
Class A and Class B Common Stock was $.09. "Net tangible book value per share"
represents the amount of the Company's tangible assets, less the amount of its
liabilities, divided by the number of shares of stock outstanding.
Assuming the exercise of all of the outstanding 4,212,440 Class B Warrants as of
such date, at an assumed exercise price of *$1.28 per share (based upon the
average closing bid and asked prices over the preceding 20-business days ended
May 21, 1998), the pro forma net tangible book value at March 31, 1998, would
have been $7,267,084 or $0.28 per share, representing an immediate increase in
net tangible book value of $0.19 per share to existing stockholders and an
immediate dilution of $1.00 per share to holders exercising such Class B
Warrants. Assuming 1,000,000 of the Class B Warrants were exercised as of such
date, the pro forma net tangible book value at March 31, 1998 would have been
$3,155,161 or $0.14 per share, representing an immediate increase in net
tangible book value of $0.05 per share to existing stockholders and an immediate
dilution of $1.14 per share to holders exercising such Class B Warrants.
Assuming one-half of the outstanding Class B Warrants were exercised as of such
date, the pro forma net tangible book value at March 31, 1998 would have been
$4,571,123 or $0.19 per share, representing an immediate increase in net
tangible book value of $0.10 per share to existing stockholders and an immediate
dilution of $1.09 per share to holders exercising such Class B Warrants. The
following table illustrates such dilution on a per share basis:
<TABLE>
<CAPTION>
Number of Class B Warrants
Assumed to be Exercised(1)
---------------------------------------
4,212,440 2,106,220 1,000,000
Warrants Warrants Warrants
---------- ---------- ----------
<S> <C> <C> <C>
Warrant exercise price per share of
Class A Common Stock underlying
Class B Warrant(2)................................. $ 1.28 $ 1.28 $ 1.28
Net tangible book value per share before
Warrant exercise(2)................................ .09 .09 .09
Increase per share attributable to holders
exercising such Class B Warrants................... .19 .10 .05
Pro forma net tangible book value per
share after Warrant exercise(1).................... .28 .19 .14
Dilution per share to holders exercising
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
such Class B Warrants ............................. 1.00 1.09 1.14
Gross proceeds to Company upon exercise $5,391,923 $2,695,962 $1,280,000
</TABLE>
______________________
(1) Assumes the exercise of Class B Warrants only for purposes of illustrating
dilution in certain cases. There can be no assurance that any Class B
Warrants will be exercised at any time hereafter.
(2) Before deducting estimated offering expenses.
(3) Does not assume any exercise of 17,989,239 shares underlying other
warrants. See "Risk Factors" - "Notes, Warrants and Options; Dilution"
(4) Does not assume exercise of 4,141,500 shares underlying stock option plans.
USE OF PROCEEDS
Should any of the Class B Warrants be exercised, it is anticipated that the net
proceeds therefrom would be used principally for working capital purposes. If
any such Class B Warrant exercises occur in advance of scheduled payments on
Company indebtedness or are not required for immediate working capital purposes
at the time of exercise, the net proceeds of such exercises may also be applied
to reduce the Company's indebtedness, or for expansion of the Company's
facilities, additional capital expenditures and further product development.
The Company's indebtedness at March 31, 1998, consisted of a note to the City of
Rogers, Arkansas, pursuant to a $400,000 loan funded through the State of
Arkansas Industrial Development Commission, with a principal amount due of
$60,315 at March 31, 1998, a term note to the major shareholder for $852,943, a
series of bridge notes totaling $2,185,000 (subsequent to March 31, 1998, an
additional $410,000 has been borrowed pursuant to bridge note arrangements), a
note payable for $100,000, plus other various notes with balances at March 31,
1998 of $122,790. In addition, short term payables and advances from an
affiliated company were $946,164 at March 31, 1998.
Subsequent to March 31, 1998, the Company entered into a pledge and security
agreement with one if its shareholders for a loan in the principal amount of
$300,000. In lieu of interest on said principal, the lender has agreed to accept
options to purchase up to 100,000 shares of the company's common stock, having
such terms as shall be mutually agreed upon between the Company and the lender.
Also, subsequent to March 31, 1998, the Company entered in a capital lease
relating to a piece of equipment. The lease contains a bargain purchase option
of $1 at the end of the lease term. The capital lease obligation is $110,000.
The success of the Company's continuing operations will depend upon the
availability of cash flow from operations and the Company's success in raising
additional funds through equity or debt financing. The expenses that might be
incurred in manufacturing further developing and marketing the Company's
products cannot be predicted with certainty. There is no assurance that
additional financing can be obtained, or obtained on terms satisfactory to the
Company.
PRICE RANGE OF COMPANY'S EQUITY SECURITIES
On November 9, 1989, the Company's Units, Class A Common Stock and Class A
Warrants commenced trading on the NASDAQ over-the-counter market under the
symbols AERTU, AERTA and AERTW, respectively. Prior to November 9, 1989, there
was no public market for such securities. During March 1992, the Company issued
notices of redemption for its Class A Warrants. Upon the exercise of Warrants
prior to the redemption date, the Company issued 4,212,740 Class B Warrants,
(AERTZ) from the resulting exercise of the Class A Warrants. Accordingly, the
Class A Warrants (AERTA) and Units (AERTU) (of which the Class A Warrants were
an integral component) were delisted from trading at that time. The Company's
Class B warrants, (AERTZ), traded until January 1998, and were delisted at that
time due to a lack of market makers and trading activity.
21
<PAGE>
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 Class B Warrants,
for the years ended December 31, 1996 and 1997 and the first quarter of 1998.
The quotations represent prices between dealers, 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 1996
First Quarter 1.31 .75 .19 .13
Second Quarter 1.63 .97 .38 .13
Third Quarter 1.00 .75 .13 .06
Fourth Quarter .94 .34 .25 .06
Fiscal 1997
First Quarter .56 .31 .* .*
Second Quarter .44 .28 .* .*
Third Quarter .63 .34 .* .*
Fourth Quarter .59 .25 .* .*
Fiscal 1998
First Quarter 1.94 .38 .* .*
</TABLE>
* - No established public trading market in 1997. Securities were delisted due
to lack of trading requirements in 1998.
As of March 31, 1998, there were 1,569 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 31, 1998 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 31, 1998 was in excess of 5,000.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The payment
of dividends in the future is within the discretion of the Board of Directors
and will depend upon the Company's earnings, its capital requirements, financial
condition, and other relevant factors. The Board does not presently intend to
declare any dividends in the foreseeable future, but instead intends to retain
all earnings, if any, for use in the Company's business operations. The Class A
Common Stock and the Class B Common Stock have identical rights per share with
respect to cash dividend and liquidation payments (See "Description of
Securities").
22
<PAGE>
CAPITALIZATION
The following table sets forth certain short-term indebtedness and the
capitalization of the Company at March 31, 1998 (unaudited) and December 31,
1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31,
(unaudited) 1997
-------------- ----
<S> <C> <C>
Short-term indebtedness:
Current portion of long-term indebtedness $ 628,952 $ 494,910
Short-term notes payable 1,914,428 1,189,097
------------ ------------
Total short-term indebtedness 2,543,380 1,684,007
------------ ------------
Long-term indebtedness, net of current maturities 395,096 588,412
------------ ------------
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, 20,530,147 (1998)
and 20,312,969 (1997) issued and outstanding 205,302 203,130
Class B convertible common stock, $.01 par value;
7,500,000 shares authorized, 1,465,530 issued and
outstanding 1998 and 1997 14,655 14,655
Additional paid-in capital 22,309,820 21,926,331
Accumulated deficit (20,312,699) (19,793,758)
------------ ------------
Total stockholders' equity 2,217,078 2,350,358
------------ ------------
Total capitalization $ 5,155,554 $ 4,622,777
------------ ------------
</TABLE>
_________________________
(1) Does not reflect possible issuance of (i) 4,212,440 shares of Class A
Common stock upon exercise of the Class B Warrants; and (ii) 4,141,500
shares of Class A Common Stock upon exercise of options granted or
available for grant to employees and directors under the Company's Stock
Option Plan. (See "Management-Stock Option Plan" and "Description of
Securities") or (iii) 17,770,839 shares of Class A Common Stock underlying
additional warrants.
SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years from December
31, 1993 to December 31, 1997, are derived from the financial statements of the
Company. The financial statements of the Company for the year ended December 31,
1997 have been audited by Arthur Andersen LLP, independent public accountants,
whose report thereon contains an explanatory paragraph regarding the Company's
ability to continue as a going concern, and is included elsewhere in this
Prospectus.
23
<PAGE>
SUMMARY FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
QUARTER QUARTER YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, DEC 31, DEC 31, DEC 31, DEC 31, DEC 31,
1998 1997 1997 1996 1995 1994 1993
-------------- ------------ ------------- ------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 2,507,300 $ 1,747,802 $ 7,982,381 $ 6,950,219 $ 5,581,172 $ 3,675,018 $ 2,043,476
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss before
Extraordinary
Gain (518,941) (619,441) (1,913,664) (2,933,698) (2,756 263) (2,970,135) (3,692,773)
Extraordinary
Gain - - 757,644 36,666 - 879,373 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss (518,941) (619,441) (1,156,020) (2,897,032) (2,756,263) (2,090,762) (3,692,773)
=========== =========== =========== =========== =========== =========== ===========
Net Loss before
Extraordinary gain per
common share (.02) (.03) (.09) (.15) (.17) (.21) (.34)
Extraordinary gain per - - .04 - - .06 -
common share ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss Per Common
Share/(1)/ (Basic and
Diluted) $ (.02) $ (.03) $ (.05) $ (.15) $ (.17) $ (.15) $ (.34)
=========== =========== =========== =========== =========== =========== ===========
Weighted Average Number of
Shares Outstanding/(1)/ 21,995,434 20,666,678 21,800,170 19,134,484 15,779,721 14,166,869 10,853,938
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
March 31, March 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
1998 1997 1997 1996 1995 1994 1993
-------------- ------------ ------------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
WORKING CAPITAL (DEFICIT) $(4,269,120) $(1,245,209) $(3,117,649) $ (892,995) $(1,556,805) $ (599,753) $ (701,142)
TOTAL ASSETS 8,656,536 6,881,961 7,641,328 6,725,549 7,357,742 8,781,907 9,146,981
LONG-TERM DEBT
LESS CURRENT MATURITIES 395,096 799,266 588,412 955,776 1,266,642 1,844,597 892,294
TOTAL LIABILITIES 6,439,458 4,155,024 5,290,970 3,623,170 3,643,999 3,335,459 3,010,529
STOCK SUBSCRIPTION - - - - - - 1,000,000
STOCKHOLDERS' EQUITY $ 2,217,078 $ 2,726,937 $ 2,350,358 $3,102,379 $ 3,713,743 $5,446,448 $5,136,452
</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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 Compared To Quarter Ended March 31, 1997
The Company set a quarter net sales record of $2,507,300 for the quarter ended
March 31, 1998. This was an increase of $759,498 or 43% over the $1,747,802
reported for the comparable period ended March 31, 1997. First quarter 1998
composite sales consisted of door and window component sales of $1,552,428,
decking material sales of $701,387 and industrial flooring sales of $253,485.
This compares with first quarter 1997 composite sales of $1,213,065 for door and
window components, $357,073 for decking sales, and $177,664 for industrial
flooring sales. There can be no assurance that the Company will be successful in
its efforts to restructure its bridge loans and or outstanding debt and
recapitalize, or if it does that it can be done on terms which are favorable to
the Company.
Cost of goods sold was $2,222,490 for the first quarter of 1998 compared to
$1,993,546 for the first quarter of 1997. Increases were experienced in all
major expense categories. Payroll costs and depreciation increased due to the
start-up of the new plant in Springdale, Arkansas. Material costs increased
primarily due to the loss to fire of the Rogers, Arkansas plastics facility
forcing the Company to continue to purchase a large portion of its raw materials
from outside sources. The Company also experienced higher overhead during the
first quarter compared to the comparable period a year ago for insurance
premiums, security costs, and lease payments for the new Springdale, Arkansas
multi-purpose manufacturing facility. The Company continued to improve in
operations and generated a positive gross margin of $284,810 for the quarter
compared to a negative gross margin of $245,744 for the comparable quarter a
year ago due to increased emphasis on production efficiencies and cost control.
The Company's material and labor costs were still adversely impacted by the
quality and consistency of the outside vendor raw material plastic and less than
desired extrusion rates, although significant improvements were attained.
Downtime associated with changeovers and the large number of products run also
restricted extrusion efficiencies.
25
<PAGE>
Significant operating expense categories generally increased in line with
increased revenues and were as follows:
<TABLE>
<CAPTION>
Expense Category 1998 1997
---------------- ---- ----
<S> <C> <C>
Payroll and payroll taxes $ 771,215 $ 684,354
Depreciation 270,021 260,158
Direct material costs 483,854 428,699
Other 697,400 620,335
---------- ----------
Total $2,222,490 $1,993,546
========== ==========
</TABLE>
Selling, general and administrative expenses were $645,184 for the first quarter
of 1998, compared to $338,138 for the first quarter of 1997. The costs reflect
increased marketing expenses as the Company has for the first time commenced an
advertising, marketing and distribution program aimed at substantially
increasing decking sales for 1998. In addition, these costs increased due to
administrative salaries, lease expense, and other costs relating to the start-up
of the Springdale facility. However, the largest portion of the increase was
legal costs and amortization of debt issuance costs for the recent bridge loan
financing activities for the Notes to finance ongoing plant and manufacturing
expansion.
Operating loss for the quarter ended March 31, 1998, was $360,374, a 38%
reduction over the $583,882 loss reported for the comparable period in 1997.
Net loss (basic and diluted) per average common share outstanding was $.02.
This compares to a net loss (basic and diluted) per average common share
outstanding of $.03 for the three months ended March 31, 1997. The Company is
currently implementing a production plan, which management believes, will
provide for better operating efficiencies and streamline the production
limitations encountered in the past. The Company has added a second composite
facility in conjunction with rebuilding its internal plastic reclamation
capabilities. Such plan includes increasing production capacity, to streamline
production runs and reduce line changeovers, further automation and process
control of the production processes, improved plastic raw material sourcing,
lower raw material costs, and better utilization of regrindable scrap and
increased security.
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 efficiencies and manufacturing sales levels.
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Net sales increased to $7,982,381 for the year ended December 31, 1997, which
represented an increase of $1,032,162 or 15% over the year ended December 31,
1996. 1997 composite sales consisted of door and window component sales of
$5,588,679, decking material sales of $1,836,961, and industrial flooring sales
of $556,741. This compares with 1996 composite sales of $4,633,720 for door and
window components, $1,935,849 for decking sales, and $367,490 for industrial
flooring sales. Increased decking sales were limited
26
<PAGE>
during 1997 due to production restraints.
Although overall composite sales increased, primarily attributable to the
addition of a third extrusion line and related manufacturing equipment expansion
which started production during mid 1996; plastic raw material disruptions
caused by the 1996 Rogers fires and delays in starting up a fourth extrusion
line and new paint and finishing system limited further composites sales growth
for the year. Although production and sales increased slightly over prior
years, the Company was constrained in its attempt to further increase sales and
supply its existing customer commitments. The Junction, Texas composites
facility also experienced less than desired efficiencies due to the large number
of products run during the past year. The Company experienced significant raw
material problems in addition to negative cost variances with its plastic raw
material supplies when the Company had to purchase all plastic from outside
vendors and further process it at the Junction facility due to the extensive
fires experienced at the Rogers plastic reclamation facility. Both fires were
deemed arson by authorities. The exceptionally wet 1997 spring also disrupted
fiber supplies to the Company's cedar mill suppliers and the Company lost
significant production time due to flooding in the Central Texas area. The
Company's raw material costs increased from $1,077,054 in 1996 to $1,937,400 in
1997, even with increased utilization of composite regrind.
The claim relating to the September fire was settled in late 1996 for
approximately $379,000 and the Rogers plastic reclamation operation recommenced
in late November 1996. On December 15, 1996, the undamaged portion of the Rogers
facility then suffered a second major fire and the manufacturing portion
experienced extensive damages, closing the facility. The Company's rebuilding
efforts were delayed for most of the first half of 1997 due to the ongoing fire
investigation and insurance settlement delays. The December fire claim was
finally settled in June 1997 for $1.9 million.
Cost of goods sold decreased from $7,822,154 in 1996 compared to $7,639,708 for
1997. The decrease in cost of goods sold was primarily attributable to reduced
payroll and payroll expenses, which were primarily attributable to the shut-down
of the Rogers facility, combined with the Junction plant's, increased
utilization of regrindable scrap. Further improvements in efficiencies were
limited due to the above mentioned obstacles which the Company encountered.
Significant operating expense categories were as follows:
<TABLE>
<CAPTION>
Expense Category 1997 1996
---------------- ---- ----
<S> <C> <C>
Payroll and payroll taxes $2,594,056 $3,043,797
Depreciation 1,076,570 1,194,406
Raw Materials 1,937,400 1,077,054
Other 2,031,682 2,506,897
---------- ----------
Total $7,639,708 $7,822,154
========== ==========
</TABLE>
Payroll and payroll taxes in 1996 for Rogers were approximately $450,000, which
were not applicable during 1997. However, this overall labor, (payroll)
reduction was offset by an increased raw material cost of $1,937,400, or
$860,346 over 1996 in conjunction with higher amounts of regrind used during
this period. Other expenses were reduced somewhat in 1997 compared to 1996, with
the exception of increases in insurance premiums, security costs, and millwork
tooling.
27
<PAGE>
Selling, general and administrative expenses during 1996 were $1,687,697
compared to $2,090,049 for 1997. The increase in selling, general and
administrative expenses was primarily attributable to increased professional
fees and additional insurance and overhead which the Company had to obtain. The
Company also acquired a second manufacturing facility in August 1997 and
lease facility payments also contributed to the overhead increase. In addition,
the Company began a more extensive marketing program for its ChoiceDek/TM/
products with the goal of increasing distribution and sales. As decking
distribution increases, additional marketing expenses will be incurred to
further support increased sales levels.
The composites division showed significant improvement under difficult
conditions and recorded a positive gross margin of $342,673 compared to a
$871,935 negative margin for the comparable period a year earlier. This amounted
to a $1,214,608 improvement over the prior period; however further improvement
was limited by negative raw material variances, reduced throughputs, and delays
associated with bringing on-line the fourth extrusion line and introducing the
Company's new line of primed window components which restricted additional
sales. The Company originally planned on placing its fourth extrusion line at
its Junction, Texas facility. However, the loss of raw materials from the Rogers
fire, combined with the start up of the new Springdale facility prompted the
Company to move the fourth extrusion line equipment to Springdale, and order
equipment for a fifth extrusion line.
The net loss for 1997 was $1,156,020 or a net loss per weighted average common
share outstanding of $0.05. This compares to a loss of $2,897,032 or a net loss
per weighted average common share outstanding of $0.15 for 1996. The 1996 loss
did include a one-time charge of $129,767, related to a write-off of damaged
equipment and leasehold improvements lost in the December fire in Rogers. The
loss before extraordinary item for 1997 was $1,913,664 or $0.09 per share, which
was reduced by a one time extraordinary gain of $757,644 relating to a fire
insurance settlement.
The Company during 1997 struggled to hold onto its existing customer base, while
it worked to reestablish its raw material sourcing and manufacturing focus. With
the loss of its primary raw material source, the Company struggled with
manufacturing and throughput problems associated with excessive contamination
and inconsistency in its plastic materials. This, coupled with management's
objective to grow the business and hold onto the customer base, led to a large
number of products, which resulted in less than desired sales volumes and
limited operating efficiencies. Establishing large OEM customer sales is a
long-time consuming, and elaborate process and several of the Company's door and
window customers had completed years of testing prior to introducing AERT
components into their product lines. Component changeover is difficult for these
types of customers and after years of development work, AERT management was
determined not to lose its customer base, even when faced with the Rogers fires.
To date, the Company has been successful in its efforts to hold onto its
customer base during this difficult period and is now ready to grow and begin
expanding again.
The Company has taken additional security measures, including installation of
surveillance cameras, and the addition of on-site security personnel, which are
intended to better protect the Company's facilities.
28
<PAGE>
The Company is currently adding a second multipurpose manufacturing facility in
Springdale, Arkansas. The Company's capital expansion program involves adding
additional plastic processing production, an upgraded painting and finishing
facility, a second millwork facility, and a fifth extrusion line (in addition to
the fourth line already on hand). Projected expansion costs are $2.1 million
and when all phases are fully operational by mid year 1998, are intended to
increase the Company's manufacturing capacity to the 30 million dollar
annualized sales level, from both manufacturing facilities. Once completed and
operational and based upon customer forecasts and demands, the Company may
implement additional expansion during the third quarter of 1998, as the new
Springdale facility will currently accommodate four additional extrusion lines.
This could require significant additional capital expenditures.
The Company's main focus in conjunction with this expansion is to improve
operating efficiencies, and reduce unit production costs to levels required for
strong gross margins and sustained profitability. By shifting MoistureShield
OEM products to what management believes will be a newer, more cost efficient
manufacturing facility, in conjunction with reduced raw material costs and
increased extrusion throughputs; the Company believes it can reduce its
MoistureShield production costs while also increasing sales volumes in
conjunction with increased ChoiceDek throughputs at its Texas facility. This in
conjunction with other efficiency enhancements at the Texas facility are
designed and intended to also enhance gross margins and attain strong
profitability for the ChoiceDek/TM/ line.
Although the Company believes that 1998 first quarter sales will increase
significantly over the previous period of 1997, reduced operating losses will
continue into the first quarter of 1998, while the new Springdale manufacturing
plant is started up and streamlined. The Company believes substantial
reductions of unit production costs will result from increased automation and
streamlining the amount of products run at the Company's operation in Junction,
Texas. There can be no assurance that the Company can attain its anticipated
continued operating improvements or that its additional production efficiencies
and resultant unit cost reductions required for sustained profitability will
occur.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Net sales increased to $6,950,219 for the year ended December 31, 1996, which
represented an increase of $1,369,047 or 25% over the year ended December 31,
1995. 1996 composite sales consisted of door and window component sales of
$4,633,720, decking material sales of $1,935,849, industrial flooring sales of
$367,490, and other sales of $13,160. This compares with 1995 composite sales
of $3,770,569 for door and window components, $762,179 for decking sales,
$395,252 for industrial flooring sales, and other sales of $653,102.
The increase in composite sales was primarily attributable to the addition of a
third extrusion line and related manufacturing equipment expansion which started
production during mid 1996. Although production and sales increased over prior
years, the company was constrained in its attempt to further increase sales and
supply its customer commitments due to production limitations and inefficiencies
at the Junction, Texas composites facility. In addition, the Company experienced
significant raw material problems with its plastic supplies, created when the
Company had to purchase all plastic from outside vendors due to the extensive
fires experienced at the Rogers plastic reclamation facility in September and
December of 1996.
29
<PAGE>
The claim regarding the September fire was settled in late 1996 for
approximately $379,000 and the Rogers plastic reclamation operation recommenced
in late November. On December 15, 1996 the undamaged portion of the Rogers
facility was then set fire and the manufacturing portion experienced extensive
damage closing the facility. As of this date, the Company has submitted a claim
for damages of $1.95 million dollars and has received a $350,000 advance from
the insurance company. The Company intends to on rebuilding the Rogers facility
and resume operations during the first half of 1997 and hopes to settle the
second fire claim in the near future. Although the Company has established
alternate supply sources and is currently meeting its customers minimum
requirements, it will require the Rogers facility to come back on line or find
additional external supply sources to provide the quality, consistency, and the
volume of plastic required for the Company to continue to increase composite
sales to a level required to attain profitability.
Cost of goods sold was $7,822,154 for 1996 compared to $6,183,924 for 1995.
The increase in cost of goods sold was primarily attributable to increased sales
and increased raw material and labor costs associated with the less than
desirable operating efficiencies at the Junction facility. The Company's
material and labor costs were adversely impacted by the quality and consistency
of the outside vendor raw material plastic that it had to utilize due to the
Rogers fires. In addition, these costs increased in both real dollars and as a
percent of sales due to the excessive scrap rates and the inefficient
utilization of the regrindable scrap.
Significant operating expense categories were as follows:
<TABLE>
<CAPTION>
Expense Category 1996 1995
---------------- ---- ----
<S> <C> <C>
Payroll and payroll taxes $3,043,797 $2,169,987
Depreciation 1,194,406 1,043,804
Raw Materials 1,077,054 858,058
Other 2,506,897 2,112,075
---------- ----------
Total $7,822,154 $6,183,924
========== ==========
</TABLE>
Selling, general and administrative expenses during 1996 were $1,687,697
compared to $1,356,244 for 1995. The increase in selling, general and
administrative expenses was primarily attributable to increased salaries and
professional fees. In addition, the Company began a more extensive marketing
program for its ChoiceDek/TM/ products with the goal of increasing distribution
and sales.
The net loss for 1996 was $2,897,032 or a net loss per weighted average common
share outstanding of $.15. This compares to a loss of $2,756,263 or a net loss
per weighted average common share outstanding of $.17 for 1995. The 1996 loss
did include a one-time charge of $129,767, which related to a write-off of
damaged equipment and leasehold improvements lost in the December fire in
Rogers.
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 efficiencies of scale were
never attained. This, coupled with increased sales of the Company's composite
products and the composites division's increased raw material requirements
prompted the Company, in the first quarter of 1996, to
30
<PAGE>
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 was 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.
Composites sales for 1996 were limited by equipment and manufacturing problems
caused by tramp metal getting into both the extrusion systems and raw material
processing systems during the second half of 1996. This evaded the Company's
cleaning and safety systems and resulted in downtime, maintenance and repair
costs, and increased scrap rates. Law enforcement agencies are currently
investigating whether these incidents were intentional.
31
<PAGE>
Liquidity and Capital Resources
At March 31, 1998, the Company had a working capital deficit of $4,269,120
compared to a working capital deficit of $3,117,649 at December 31, 1997.
Interest expense also increased during the first quarter $158,567 compared
to $35,559 for the prior year's comparable period. Also, the Springdale facility
did not produce significant amounts of saleable products during the quarter
ended March 31, 1998. The Company has continued with reduced composite extrusion
production at the Springdale facility during May 1998 but intends to further
increase production levels with the addition and startup of a fifth composite
extrusion line during the second quarter 1998, which will complete its $2.1
million phase one expansion plan. Management's strategy will then be to attempt
to significantly reduce or eliminate the negative working capital deficit,
through a combination of debt restructuring and equity financing. Coupled with
hopefully improved cash flows from operations attributable in part to additional
sales from the new Springdale production. There can be no assurance the Company
will be successful in these efforts.
At December 31, 1997, the Company had a working capital deficit of $3,117,649
compared to a working capital deficit of $892,995 at December 31, 1996. The
deficit is primarily attributable to the Company's delays in obtaining positive
cash flows from operations, in conjunction with expenditures for ongoing
manufacturing expansion. Of such deficit, involving total liabilities of
approximately $5.2 million as of December 31, 1997, $1.9 million was to the
Company's major shareholder, $1.3 million was a short-term bridge loan
attributable to the Notes (which liabilities has increased to $2.51 million at
May 21, 1998), and approximately $1.5 million was in payables, of which a
significant portion reflects the ongoing construction in
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<PAGE>
progress of the Springdale facility. Trade payables were $346,887, or 28% higher
than a year ago also due to the Company's $2.1 million capital expenditure
program.
Cash and cash equivalents decreased $37,328 in 1997. Significant components of
that decrease were: (i) cash used in operating activities of $466,548, which
consisted of the net loss for the period of $1,156,020 reduced by depreciation
and amortization of $1,192,785, increased by the extraordinary gain of $757,644
and reduced by other sources of cash of $254,331; (ii) cash used in investing
activities of $376,423, and (iii) cash provided by financing activities of
$805,643. Payments on notes during the period were $727,585 and proceeds from
the issuance's of notes amounted to $1,304,229. At December 31, 1997, the
Company had notes payable, net of debt discount, in the amount of $2,272,419, of
which $1,684,007 were current notes payable, net of debt discount, or current
portion of long-term debt. Of such $1,684,007, $1,550,345 or 92% was to the
major shareholder and other investors closely associated with the Company.
During the second quarter of 1996 the Company began an expansion project at the
Junction, Texas facility and added a third extrusion line in an attempt to
positively address increasing sales and a growing customer order backlog. The
Company expended approximately $800,000, which was completed in 1997. The
Company also initiated a new paint system, and the addition of a second
extrusion facility during 1997, in conjunction with rebuilding a portion of its
plastic processing functions. To finance these expansions, in addition to
providing additional working capital, the Company completed a private offering
in January and March 1997 to qualified foreign investors under Regulation S
of the Securities Act of 1933 with the issuance of 977,367 shares of Class A
Common Stock. Net offering proceeds consisted of $228,999 in cash. As part of
the offering, the Company issued 150,466 Class I Warrants to the placement
agent. The Class I Warrants expire three years from the date of issue and are
exercisable at prices from $0.31 to $0.56 per share of Class A Common Stock for
each Class I Warrant exercised.
In November 1997, the Company issued $1.3 million in Notes. Net offering
proceeds consisted of $1,131,000 in cash. Interest is at 12% and payable in cash
or Class A Common Stock, at the Company's option. The bridge loan also allows
for warrants to acquire 2,600,000 shares of Class A Common Stock for five years
at $0.375. The Company also issued 156,000 warrants to The Zanett Securities
Corporation as the placement agent and entered into a right of first refusal
loan financing agreement for up to an additional $2.2 million for two years.
In February and April 1998 the Company borrowed an additional $800,000 and
$410,000, respectively, under such agreement in order to maintain its complete
in construction and expansion program. Interest was at 12% and 2,420,000
consulting warrants were issued at $0.375 and 145,200 warrants were issued to
the placement agent.
The Company is also currently pursuing up to a $2.5 million, low interest job
creation financing through a state economic development agency for acquisition
of and further expansion of the new Springdale
33
<PAGE>
facility. The Company's current and ongoing capital expansion program to
complete the startup of the new Springdale facility with two additional
extrusion lines and a second moulding department is estimated at $2.1 million,
of which 959,060 had been expended as of December 31, 1997.
The Company maintains an accounts receivable factoring agreement for up to
$700,000 through Marjorie S. Brooks, a major stockholder. 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. In January 1998 the major stockholder, which
finances the factor, was granted 700,000 consulting warrants (the "Financing
Warrants") at market ($0.875) for renewing and continuing the financing for the
Company.
The Company believes that if it can further improve and streamline the extrusion
production rates and efficiencies it is currently experiencing as it adds
additional production capacity at its new Springdale facility, it should be able
to achieve a level of operations in periods subsequent to the first quarter of
1998 which will generate positive cash flows from operations and which will
significantly reduce or eliminate the need for additional sources of capital to
support its operations, although it will require additional financial resources
to fund maturities of debt which are due within the next twelve months. There
can be no assurance that such improvements in production efficiency or capacity
will be achieved in a timely manner by the Company.
34
<PAGE>
If the Company is unable to achieve and maintain a successful level of
operations in the near future or unable to secure additional debt or equity
financing to provide support to ongoing operations, or were it to be assessed
the Mobil legal claims described in Note 11 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)
35
<PAGE>
BUSINESS
GENERAL
Advanced Environmental Recycling Technologies, Inc., ("AERT" or the "Company")
was founded in 1988, by the Brooks family and associates of Springdale,
Arkansas. Since inception, the Company has developed, patented, and
commercialized several new technologies and products, which significantly
advances state-of-the-art reclamation of polyethylene plastic scrap and related
manufacturing processes. AERT produces an innovative line of composite building
materials, which are primarily marketed to the national door and window
component market, the heavy industrial flooring market, and the residential
decking market. The Company utilizes its proprietary and patented technologies
to produce a growing line of moisture-resistant and dimensionally stable,
engineered composite building materials which were marketed under the trade
names MoistureShield/TM/ and ChoiceDek/TM/. Since inception to March 31, 1998,
the Company has generated net sales of $29,426,665, as component parts primarily
into the U.S. residential homebuilding market. The Company is currently
comprised of two separate, yet interrelated manufacturing facilities; the
Composites Manufacturing Units located in Junction, Texas, and Springdale,
Arkansas, which manufactures and markets its engineered composite building
materials made from reclaimed plastics and by-product wood fibers, and the
Plastics Reclamation Unit located in Springdale, Arkansas, which reclaims waste
plastics, processing various LDPE and HDPE materials that are used as feedstocks
in the composite manufacturing process. The Company also utilizes outside
contract processors for a portion of its recycled plastic requirements.
AERT's advanced composite materials recently received United States patent
allowance and exhibit numerous advantages over traditional wood and synthetic
materials. These engineered composite materials are competitively priced, and
through independent testing, have been shown not to rot, crack, warp or absorb
moisture as compared to wood. In addition, the products are impervious to
insects, do not require chemical or preservative treatments, and exhibit
superior fire retardancy as compared to competitive grades of wood. They can be
welded and fused by heat, nailed, screwed, sawed, or drilled, and with minimal
additional machining, can be formed into any desired shape. The Company markets
its engineered composite building materials under the trade names
MoistureShield/TM/, LIFECYCLE/TM/, and ChoiceDek/TM/ and markets these 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. The Company's MoistureShield/TM/ and ChoiceDek/TM/ products are
now rapidly gaining increased market acceptance in the growing field of
engineered wood products.
The Company employs a four-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; (3) it
maintains a high level of technical and product support for its customers and
places a major emphasis on quality control and consistency in regard to its
products; and (4) its marketing program identifies and sells to niche markets
with defined needs in which the Company believes it can be prominent or
dominant. The Company markets its products through direct customer
relationships utilizing management and internal sales personnel, and places a
high emphasis on maintaining strong working relationships with its customers.
The Company's decking products are marketed through an exclusive North American
marketing agreement with Weyerhaeuser Building Materials Distribution in certain
markets. In early 1998, AERT was awarded "Preferred Supplier Status" by
Weyerhaeuser BMD for its ChoiceDek/TM/ decking line.
36
<PAGE>
THE COMPOSITES UNIT
The Company's initial Composites Manufacturing Unit is located in Junction,
Texas, and the Company recently opened the initial phases of a second facility
in Springdale, Arkansas. The Company uses cedar fiber at the Texas facility and
will use hardwood fiber at the Arkansas unit. The composite materials are hard,
dense, short-grained substances with a dark, speckled surface appearance
depending on the wood fiber. 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, AERT 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, which are traditionally used in the building
applications for which AERT's products compete.
The composites manufacturing process involves proprietary and patented
technologies and specialized manufacturing equipment, custom-built or modified
for the Company's purposes. It utilizes recycled plastics and wood-filler
materials and, in certain cases, special additives or virgin plastics in varying
mixtures, which can be formulated, based on the customer's desired end-product
characteristics. A key advantage of the Company's process is the ability to
utilize plentiful, low-cost raw material components, encapsulate the wood fibers
in the plastic and create a consistent material, free of foreign matter, which
can be extruded and or machined into a desired shape while the end product
maintains many properties similar to traditional wood materials.
The Composite Manufacturing Units are comprised of a wood fiber raw material
processing department, a composite extrusion department, a millwork and
fabrication department, and a priming and paint department. Most of the milling
and painted MoistureShield products will be shifted over the next 12 months to
the new Arkansas facility, which is intended to allow the Texas facility to
increase ChoiceDek/TM/ production. The raw materials processing department
consists of wood fiber cleaning, drying, grinding and storage equipment; the
extrusion departments will shortly each consist of three extrusion and
downstream production lines (although the Arkansas lines will have larger
capacities); the millwork departments will also shortly each consist of two
moulding and end-work lines; and the new Springdale painting department consists
of inspection, preparation and a painting and drying line. The Company has
recently upgraded the painting department with a larger and improved painting
system at the Springdale facility, which was started up during the first quarter
of 1998. This line is designed to enhance the quality of the surface finish and
allow the Company to introduce an additional high end product line in the near
future which will be marketed as MoistureShield Plus.
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 currently
markets the product under the Company's trade name, ChoiceDek/TM/, in a limited
number of its 80 distribution and reload centers primarily in the southwest,
West Coast, and western mountain regions of the United States. During the past
year, the Company has not been able to increase its decking sales due to
production limitations. The Company intends to continue to grow and add
additional Weyerhaeuser distribution as production increases, and to expand its
distribution within its established markets.
37
<PAGE>
Due to increased composite sales demands, the Company is currently working to
expand its composite manufacturing capacity by the addition of up to 3
additional larger extrusion lines in the near future at the Springdale facility.
THE PLASTICS RECLAMATION UNITS
The Plastics Reclamation Unit was originally located in Rogers, Arkansas and was
initially established to develop and commercialize plastic recycling technology
primarily to serve as a dependable, cost-effective source of plastic raw
materials for the Composites Manufacturing Unit. The Rogers facility suffered
two extensive fires in 1996 and ceased operations in December 1996. The Company
began activities at its Plastics Reclamation Unit in 1990. Since that time, the
Company has further developed and patented its proprietary waste plastics
reclamation technologies which allows 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 pounds market
development order from Dow in 1992 for recycled plastic. However, when federal
recycling legislation and market development waned for recycled plastic that
order was restructured in 1994 allowing the Company to significantly reduce
indebtedness. Pursuant to the restructuring, Dow forgave approximately $879,000
in debt from the Company in lieu of purchasing the remaining portion of the
recycled plastic. Following the restructuring and completion of the Dow
contract, the Company began utilizing production capacity not required for
processing raw materials for the Composites Manufacturing Unit to produce other
types of materials for sale to manufacturers of grocery bags, trash bags, and
other manufacturers of plastic goods desiring recycled content in their
products.
Through 1995, the Company's plastic 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 sufficient efficiencies of
scale were never attained. This, coupled with increased sales of the Company's
composite products, and the composites division's increased raw-material
requirements, 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 its Junction composites
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 was 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.
The Company experienced a series of extensive fires that caused substantial
damage during the last half of 1996 at its Rogers, Arkansas plastic reclamation
facility. These fires in September and December of 1996 set back
38
<PAGE>
the Company's plastic reclamation program and limited composite sales growth.
The facility is currently being rebuilt and the Company has begun establishing a
national supply network for polyethylene. The Company is also currently
negotiating with several large waste polyethylene generating plants to enter
into long term supply commitments. These fires have been determined to be arson
by authorities and an investigation is ongoing. The Company moved its LDPE
plastic processing function to a new facility in Springdale, Arkansas, and
commenced operations in late 1997. The Company intends to further increase
internal LDPE production during 1998.
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 as well as other sources of
consistent polyethylene waste products. In addition, the Arkansas facility will
shortly utilize hardwood fiber as its wood source. AERT has entered informal
supply agreements for the cedar fiber and a portion of the waste plastics used
in its composite manufacturing process, although it is the Company's intention
to enter into additional supply agreements in the future. The Company currently
purchases raw materials from sources, which it believes are dependable and
adequate for its short-term manufacturing requirements and the Company believes
suitable alternative sources are available. Additional raw material supply
sources of both plastic and wood fiber will be required for the Company to
continue to increase composite production and sales. The Company is currently
working to enter formal supply agreements for both additional plastic and fiber
supplies. However, a significant disruption of supply arrangements, a reduction
in raw material consistency or quality or significant increases in raw material
prices could have a material adverse effect on AERT's operations as recently
experienced with the Rogers, Arkansas fires.
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. It is also sold by said mills
in some instances as a horse stable bedding, or a drilling mud bridging agent.
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 to supply its initial customer
requirements; the Company has manufactured its composite material with other
types of wood fibers. The Company has commenced a testing program with hardwood
waste, and believes that a number of substitute wood fibers could be
satisfactorily used in its manufacturing process and that other sources are
currently available. The Company intends to begin manufacturing a portion of its
OEM products with wood fibers other than cedar at the new Springdale facility.
As the Company's ChoiceDek/TM/ product line continues to grow, additional cedar
fiber will be required of which there is no commitment at this time.
Hardwood Fiber. The Springdale facility is located in the Ozark Mountain
area with numerous hardwood mills and manufacturers. The Company has currently
established a minimum of two hardwood suppliers for the Springdale facility.
Recycled Plastics. The cost of recycled waste plastics for use in the
composites manufacturing process has been subject to significant market and
quality fluctuations over the past several years and the Company has experienced
supply problems associated with contaminated plastics in the past. In an effort
to reduce its exposure to price volatility, inconsistent quality, and potential
supply disruptions, the Company in 1990 developed its own patented plastic
recycling technologies and established the waste Plastics Reclamation Unit
39
<PAGE>
in Rogers, Arkansas to assure itself of a cleaner, more dependable, and
consistent supply of plastic raw material for its composite manufacturing
operations. The Company recently commenced its LDPE processing function at a new
facility in Springdale, Arkansas. The Company has also recently established
several additional plastic supply sourcing relationships in order to broaden its
sources of supply.
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 Linear Low 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, the
contaminated plastics are acquired by the Company at minimal costs, primarily
only the freight charges. 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 near future once its internal
plastic reclamation facilities recommence full-scale operations. 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.
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. The Company also markets a
growing line of primed and painted window parts that substitute for wood and
wood clad components. The Company has developed an extensive customer base in
the national door and window market, and with Weyerhaeuser BMD, primarily
through members of management, and strives to maintain strong customer
relationships.
To the extent a prospective customer currently uses wood for such component
pieces, the Company emphasizes the "value-added" potential of its
MoistureShield/TM/ 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 and much of the millwork required in the customer's finished
product. In addition, the Company emphasizes the customer's avoidance of the
chemical treatments and in plant volatile organic compounds requirements often
necessary to give competing wood products rot resistance and durability
40
<PAGE>
and the customer's avoidance of the substantial scrap wood or sawdust waste-
product typically generated in the sawing and milling process. The Company also
stresses the additional durability and performance of its products, which allows
its customers to extend the lifetime or warranties of their products.
MoistureShield/TM/ 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
focuses heavily on products for the home improvement market, which often tends
to increase in activity when housing starts decline, and the Company is further
expanding its marketing focus and increasing its decking distribution with its
ChoiceDek/TM/ products through Weyerhaeuser 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 was primarily targeted towards the high-end
residential housing market. Weyerhaeuser currently markets the product under the
Company's trade name, ChoiceDek/TM/, in a limited number of its distribution and
reload centers throughout the United States and Canada. The Company intends to
further increase distribution and add additional markets during 1998 while
continuing to increase sales in its initial decking markets. Weyerhaeuser
markets ChoiceDek/TM/ primarily through independent contractor oriented lumber
dealers. Additional home center distribution is planned for limited markets in
1998. ChoiceDek/TM/ is promoted through displays at regional and local home,
lawn and garden shows as well as store demonstration displays and marketed via a
web site on the Internet. The address is www.choicedek.com. The Internet site
targets high-end contractors and architects.
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 and decking customers.
REDUCTIONS IN CONSTRUCTION ACTIVITY; INTEREST RATE SENSITIVITY
AERT composites will be 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 to periodic downturns caused by general economic
conditions. Increased interest rates can lead to reduced homebuilding activity.
Reductions in construction activity could necessarily have an adverse effect on
the demand for AERT composites. The Company, therefore, places a major emphasis
on components for customers in the home improvement market. However, the
Company has
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<PAGE>
recently expanded its marketing focus to accommodate a wider range of products
and applications, and is continuing to increase market distribution.
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. In regard to decking, many areas require
independent testing of specific test criteria in order to qualify for building
code approval. The Company has generated a substantial amount of independent
test data regarding its products and has developed an extensive field history in
conjunction with positive customer satisfaction for its components through its
large OEM customers. In addition, the Company has submitted its decking
products to extensive independent testing by certified laboratories. The
Company has submitted its decking to and successfully passed numerous extensive
testing parameters. The Company is currently finalizing such independent
testing for submission to an evaluation service in order to receive a formal
BOCA (blanket building code approval) rating for its decking products. The
Company currently submits its testing data and allows the user to determine
suitability for the application. The lack of such a standard (and the
independent 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 decking materials in certain areas
and make potential purchasers of such building materials reluctant to use them
until independent certification is granted by a universally recognized approval
agency.
The Company has accumulated significant product test data and begun the internal
preparation of proposed guidelines for wood-plastic composite materials for
certain decking construction applications for submission and evaluation for an
independent BOCA approval rating. The Company intends to submit its application
in the near future. The consideration and evaluation of proposed testing
standards for BOCA is sometimes a lengthy process, typically requiring several
months at a minimum. The Company may also have to submit to additional
independent testing to gain approval. Management believes the Company's decking
products can meet and conform to nationally recognized BOCA performance
standards and intends to obtain an independent BOCA approval rating in the
future for its decking products.
COMPETITION
In seeking to introduce MoistureShield/TM/ and ChoiceDek/TM/ 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
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<PAGE>
recyclers, to the Company's knowledge, have achieved significant commercial
acceptance to date, however, Mobil Oil Company entered the market in 1992 with a
new composite products division and a decking and fencing product called
Timbrex, which was recently renamed Trex. Mobil initiated a large national
marketing and advertising program and attained significant distribution in the
decking market. Mobil divested this division in 1996 to a group of Trex
managers. The new company is called The Trex Co., LLC. Therefore, as of this
date, Mobil Oil is no longer in this business, nor is it a direct competitor of
the Company.
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, however the increasing market
demand for composite products is now changing and several additional competitors
are starting to show interest in poly waste. Further, the Company believes that
the plastics reclamation processes it has developed for composite manufacturing
business are targeted to the waste management needs of particular industrial
waste generators, to plastic film wastes and to other plastic waste generators,
whose potential as a recycling source is not being utilized to a significant
extent by current plastics recyclers, rather than to post-consumer, source-
separated plastic containers recycling processes, in which a substantially
greater number of plastics recyclers compete for plastic waste materials. As it
grows, the Company now expects to 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, The Trex Co., LLC is now competing with the Company for
certain raw materials in connection with the production of its Trex product
described above. This competition may cause the price of the Company's raw
materials to rise somewhat in the future.
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
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
eighteen patent applications and has received issuance from the United States
Patent and Trademark Office for thirteen patents, five of which relate to the
Company's composite materials manufacturing operations and eight 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 down streaming cooling and forming conveyor system, and its plastic
reclamation process and equipment. The Company recently received a formal notice
of allowance for its fourteenth patent. 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 "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
43
<PAGE>
additional patents will be allowed, or if allowed that they will not be
challenged and invalidated. The cost of patent protection, and in particular,
patent litigation is extremely high. 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
On March 31,1998, the Company employed 184 full-time personnel, 17 are executive
or office personnel and 167 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 and factory personnel.
PROPERTY
The Company conducts its composite products manufacturing operations from a
49,000 square foot manufacturing and storage 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 that expires April
30, 2001. The Company owns the building 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 composite capacity.
The Company's original plastic reclamation facility was located in Rogers,
Arkansas, where the Company leased 17,000 square feet for its manufacturing and
warehouse facility and adjacent office space. This facility was being occupied
under the provisions of a production lease that expired January 1, 1997 and
contained five automatic renewal options of one year each. The lease agreement
did not require any minimum lease payments, but required payments based on plant
production at a rate of $.02 per pound. The Company paid no rent for this
facility during the year ended December 31, 1997. The Rogers facility is
currently being rebuilt and the Company intends to renegotiate and enter into a
revised lease and manufacturing agreement during 1998.
The Company's Springdale, Arkansas manufacturing facility consists of 103,000
square feet and is located on 10 acres with a rail siding in the Springdale
Industrial District. The facility has dual sprinkler systems and houses the
Company's corporate offices. The Company currently leases the facility for
$19,000 per month and has an option to purchase for $1.8 million. The Company
is currently evaluating buying said facility during 1998.
LEGAL PROCEEDINGS
In June 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
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<PAGE>
of its attorneys' fees.
In December 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. The
March 14, 1995 Motion is currently stayed 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. In June 1996, the U. S. Court of Appeals reversed a
portion of the earlier ruling that two of the patents were invalid, and that
Mobil did not infringe. The Company did not further appeal this issue to the
Supreme Court. 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 attorney's 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 Attorney's Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
stayed. The Company will vigorously
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<PAGE>
defend against Mobil's claim for attorney's fees and costs; however, there can
be no assurances as to the outcome of this litigation. The Company at present
cannot predict when the Mobil motion for attorney's fees and the AERT
prejudicial misconduct motion for a new trial will be addressed by the Delaware
Court. The Company has not recorded any liability related to such litigation at
December 31, 1997 or March 31, 1998. Mobil Oil divested its composites business
in 1996 and no longer directly competes with the Company.
In a related matter, the Company recently received a formal notice of allowance
from the United States Patent and Trademark Office concerning a related product
by process patent application, which has been pending throughout the litigation.
This is an application, which was filed on the same date as those currently in
litigation, although substantial additional disclosures have been made.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Sal Miwa 41 Chairman of the Board
Stephen W. Brooks 41 Chief Executive Officer and Director
Joe G. Brooks 42 President and Director
J. Douglas Brooks 38 Vice President of Plastics
Grant Martin 49 Chief Operating Officer
Marjorie S. Brooks 62 Secretary, Treasurer and Director
Jerry B. Burkett 41 Director
Peter Lau 43 Director
Dr. James H. Culp 52 Director
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.
Stephen W. Brooks was appointed to the Board of Directors of the Company on
January 30, 1996 and elected Chief Executive Officer on August 26, 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 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.
J. Grant Martin joined the Company on February 24, 1997. As Chief Operating
Officer, he assumes day-to-day control and operating responsibilities over the
Company's composite manufacturing facility in Junction, Texas. Mr. Martin has
extensive technical and manufacturing experience with companies in the United
States and overseas. Mr. Martin was previously employed as Vice-President of
operations of a large Texas manufacturing facility and prior to that served as a
Vice-President of Operations for a national engineering testing company.
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J. Douglas Brooks is currently Vice President of Recycled Plastics and manages
the plastic supply and processing side of the Company. Mr. Brooks also served
as an independent consultant to Juniper Industries, Inc. from April 1987 to the
present and as Vice President of SMF from September 1984 to April 1987.
Marjorie S. Brooks served as Secretary, 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 but rejoined in 1995.
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.
James H. Culp received a B.S. Degree in Chemistry from the University of Alabama
and Ph.D. Degree in Analytical and Nuclear Chemistry from Texas A&M University.
Dr. Culp was an Assistance Professor at Texas A&M University Chemical
Oceanography for two years before joining The Dow Chemical Company. Dr. Culp
worked at Dow in research, manufacturing, business development, and supply chain
for 23 years. His last responsibility at Dow was North American Supply Chain
Director for Engineering Thermoplastics and North American Recycle Plastics
Director. Dr. Culp retired from Dow in April 1996. He joined the AERT Board as
Director of Technology in July 1996 and joined AERT as Special Board Assistant
to the Chief Executive Officer in October 1996.
Peter S. Lau was appointed an outside director to the Board of Directors of the
Company in April 1997. Mr. Lau is currently an associate of Heng Fung Capital,
Inc. and Heng Fung Equities, Inc. (subsidiary of Heng Fung Holdings Company
Limited, a Hong Kong public traded company and serves on the Board of
Directors). Heng Fung Capital, Inc. is a Merchant Banking/Investment Banking
Group, which focus on investments in the U. S. Prior to his association with
Heng Fung Capital, Mr. Lau was the managing director for Ridgewood Partners, a
New York based merchant banking group. Mr. Lau was also previously employed
with Touche Ross & Co., certified public accounts, as a senior EDP Auditor. Mr.
Lau is a graduate of the University of Hartford with a B.S. and M.S. in
accounting. He is a member of the American Institute of Certified Public
Accountants, New York Society of Certified Public Accountants, and Asian
Financial Society.
Joe G. Brooks, Stephen W. Brooks and J. Douglas Brooks are brothers and are sons
of Marjorie S. Brooks. There are no other familial relationships between the
current directors and executive officers.
Each of the Company's directors has 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 Peter Lau (Chairman),
James H. Culp, 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
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Stock Option Committee administers the Company's stock option plans on behalf of
the Board of Directors and approves stock options granted thereunder.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company during the three years ended December 31, 1997 to each executive officer
of the Company whose aggregate cash compensation exceeded $100,000, and to the
chief executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Restricted Securities Long-term
Name and Other AnnualStock Underlying Incentive All Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
- ------------------ ---- ------ ----- ------------ ------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen W. Brooks 1997 $0 $0 $0 $0 250,000 $0 $0
Stephen W. Brooks 1996 $0 $0 $0 $0 0 $0 $0
Jim G. Brooks, 1995 $0 $0 $0 $0 0 $0 $0
Chief Executive
Officer (9/28/93)
and Chairman of
the Board of
Directors
</TABLE>
AGGREGATED OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997
AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares At December 31, 1997 at December 31, 1997
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Stephen W. Brooks 0 $0 275,000/275,000 $0/$0
</TABLE>
STOCK OPTION PLANS
In order to provide for disinterested administration of the Plans for purposes
of Rule 16b-3 under the Securities Exchange Act of 1934, the 1990 Plan also
provides that outside directors will automatically receive annual awards of
nonqualified stock options.
The Plans will be administered by a committee (the "Option Committee") of three
or more directors to be appointed by the Board of Directors. Members of the
Option Committee are not eligible to participate in the Plans except pursuant to
the automatic award provisions for directors contained in the 1990 Plan. The
Option Committee
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<PAGE>
determines, among other things, the recipients of grants, whether a grant will
consist of ISOs or nonqualified stock options or a combination thereof, and the
number of shares to be subject to such options.
The Plans provide for the granting of stock options to purchase shares of the
Company's Class A Common Stock at a price per share not less than the fair
market value on the date of the option grant. ISOs may not be granted to an
individual to the extent that in any calendar year in which options first became
exercisable, the shares subject to ISOs first exercisable in such year have a
fair market value on the date of grant in excess of $100,000; any excess number
of options first becoming exercisable in such a calendar year will be deemed
nonqualified options. No option may be granted under the Plans after the
expiration of ten years from the date of Board approval of such Plan and no
option may be outstanding for more than ten years after its grant.
Upon exercise of an option, the holder must make payment of the full exercise
price. Such payment may be made in cash or in shares of the Company's Class A
Common Stock, or in a combination of both. The Plans permit the Company to lend
to the holder of an option funds sufficient to pay the exercise price, subject
to certain limitations. Generally, options may be exercised while the recipient
is an employee or director, or within three months after termination of such
status.
In accordance with the terms of the 1990 Plan, each of the outside directors
received options for 25,000 Class A Common Shares and, on the fifth business day
following the filing of the Company's annual report on Form 10-K for fiscal
years ending thereafter, each of such outside directors received or may receive
options for an additional 25,000 Class A Common Shares.
The federal income tax treatment of ISOs is generally more favorable to
employees that the treatment accorded other options. Upon the exercise of an
ISO, the employee does not recognize any income. Instead, upon disposition of
the stock received, the employee is entitled to capital gain or loss treatment
on the difference between the sales proceeds and the amount paid to exercise the
ISO, provided certain required holding periods as described in section 422(a)(1)
of the Internal Revenue Code of 1986, as amended, have been met. The tax
treatment of an ISO is less favorable to the Company because the Company is not
entitled to a tax deduction with respect to the grant or exercise of an ISO or
with respect to any disposition of such shares after the required holding
periods. The Company is entitled to a tax deduction for an amount equal to the
ordinary income realized by an optionee in the event shares purchased under the
Plans are sold before the end of the relevant holding periods.
In the case of nonqualified stock options, an optionee will not recognize income
for federal income tax purposes when a nonqualified stock option is granted to
him pursuant to the Plans. Generally, upon exercise of such option, he
recognized ordinary income in an amount equal to the difference between the fair
market value on the date of exercise of the stock he receives and the amount he
pays to exercise the option. The Company is entitled to a tax deduction for an
equal amount.
The Board of Directors may amend or terminate the Plans at any time, although
the Board may not, without stockholder approval, increase the number of shares
subject to the Plans, change the class of persons eligible to receive options
under the Plans, or amend the provisions for automatic awards to outside
directors.
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LIMITED LIABILITY OF OFFICERS AND DIRECTORS
The Delaware Supreme Court has held that a director's duty of care to a
corporation and its stockholders requires the exercise of an informed business
judgment. Having become informed of all material information reasonably
available to them, directors must act with requisite care in the discharge of
their duties. The Delaware General Corporation law permits a corporation
through its Certificate of Incorporation to exonerate its directors from
personal liability to the corporation or its stockholders for monetary damages
for breach of the fiduciary duty of care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violations of law, improper declarations of dividends and transactions from
which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors, acting in such capacity,
from monetary liability to the extent permitted by this statutory provision.
The limitation of liability provision does not eliminate a stockholder's right
to seek nonmonetary, equitable remedies such as injunction or rescission to
redress an action taken by directors. However, as a practical matter, equitable
remedies may not be available in all situations and there may be instances in
which no effective remedy is available.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1997, 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>
Name and Address Title of Number of Shares Percentage of Percentage of
of Beneficial Owner Class (1) of Common Class Voting Power
- ------------------- -------- Stock(2) Outstanding ------------
------- ----------- (2)(12)
(2)(12)
<S> <C> <C> <C> <C>
Marjorie S. Brooks Class A 9,773,665 (3) 25.8% 30.9%
P.O. Box 1237 Class B 837,588 (4) 57.2%
Springdale, AR 72764
Joe G. Brooks Class A 649,642 (5) 1.7% 4.6%
HC 10, Box 116 Class B 284,396 19.4%
Junction, TX 76849
J. Douglas Brooks Class A 596,333 (6) 1.6% 2.8%
P. O. Box 1237 Class B 131,051 8.9%
Springdale, AR 72764
Jerry B. Burkett Class A 134,000 (7) * *
1908 Oak Class B 3,311 *
Stuttgart, AR 72160
Sal Miwa Class A 328,000 (8) * *
One Blue Hill Plaza, Suite 815
Pearl River, NY 10965-8667
Stephen W. Brooks Class A 645,116 (9) 1.7% 2.4%
P.O. Box 291 Class B 89,311 6.1%
Springdale, AR 72765
Grant Martin Class A 200,000(10) * *
P. O. Box 1237
Springdale, AR 72764
Peter Lau Class A 25,000(10) * *
30 Wall Street, 11/th/ Floor
New York, NY 10005
R. A. Mackie & Co., L.P. Class A 1,809,765(11) 4.8% 4.0%
And Robert Mackie
P. O. Box 380
Irvington, NY 10533
All officers and directors Class A 14,161,521 37.5% 46.3%
as a group (six persons) Class B 1,345,657 91.8%
* Less than 1%
====================================================================================================
</TABLE>
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<PAGE>
(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, 1997.
(3) Includes 2,602,940 shares owned directly, 493,645 in trusts controlled by
Mrs. Brooks, 375,000 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, 3,974,080 shares issuable upon exercise of Class F and Class
G Warrants issued in connection with a private placement of Class A Common Stock
in May of 1994 and 2,000,000 shares issuable upon exercise of Class H Warrants.
(4) Includes 403,946 shares owned directly by Mrs. Brooks and 433,642 shares
owned by two corporations controlled by 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 Mrs.
Brooks, including Joe G. Brooks and J. Douglas Brooks, as to which she disclaims
a beneficial interest.
(5) Includes 403,192 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 355,692 shares owned directly, 33,021 shares owned indirectly,
shares issuable upon exercise of Class B Warrants and 200,000 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 100,000 shares issuable upon
exercise of stock options.
(8) Includes 3,000 shares owned directly and 325,000 shares issuable upon
exercise of stock options.
(9) Includes 370,116 shares owned directly, 20,000 shares owned indirectly,
and 275,000 shares issuable upon exercise of stock options.
(10) Represents shares issuable upon exercise of stock options.
(11) 420,000 shares of Class A common stock and 880,000 Class B Warrants owned
by Mr. Mackie were purchased with his own personal funds in open market
transactions. 7,000 shares of Class A common stock and 502,765 Class B warrants
owned by R. A. Mackie & Co., L.P. were purchased with its working capital in
open market transactions.
(12) Calculated based on 39,256,338 shares outstanding as of December 31, 1997,
which includes 17,477,839 shares which any person has the right to acquire
through the exercise of options and warrants within 60 days of December 31,
1997.
At December 31, 1997, there were 20,312,969 shares of Class A Common Stock and
1,465,530 shares of Class B Common Stock issued and outstanding. At that date,
the directors, officers and 5% shareholders, as a group directly owned shares
representing approximately 46.3% of the votes entitled to be cast upon matters
submitted to a vote of the Company's stockholders, and Marjorie S. Brooks and
corporations controlled by her owned shares representing approximately 30.9% of
the votes entitled to be cast and may be in a position to control the Company.
53
<PAGE>
CERTAIN TRANSACTIONS
In July 1993, the Company completed a $1.2 million private placement by issuing
$650,000 in short-term notes, due June 29, 1994 and 650,000 Class C Warrants.
Certain of such notes and Class C Warrants were issued to related parties,
including the Company's major stockholder. The Class C Warrants, which are
exercisable ratably into one share of Class A Common Stock at an exercise price
of $3.00 per share, expire on June 29, 1998. In consideration of other
financing and support provided by Marjorie S. Brooks, the expiration date of
325,000 Class C Warrants was extended by the Board of Directors to June 2003.
In May 1994, $600,000 of such notes were converted into Class A Common Stock as
a portion of the consideration for May 1994 private placement offering described
below.
In May 1994, the Company completed a private placement offering at market price
to certain affiliated stockholders and noteholders 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
were received by the Company, consisting 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 consideration of other financing and support provided by Marjorie S. Brooks,
the expiration dates of 856,094 Class F Warrants and 2,986,590 Class G Warrants
were extended by the Board of Directors to June 2004.
In 1995, in connection with an extension of a line of credit to the Company by
its major stockholder, the Company's Board of Directors authorized the issuance
of up to 2,000,000 of 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, Class H warrants have been issued as of the date of this
Prospectus, all authorized Class H Warrants are currently issuable and are
expected to be issued in the near future. Upon issue, the Class H Warrants are
exercisable at prices from $0.39 to $0.49 per share of Class A Common Stock for
each Class H Warrant exercised. The Class H Warrants will expire in February
2005.
The Company has an agreement with an affiliate whereby the Company has agreed to
transfer certain of its trade receivables as collateral, which the affiliate
deems acceptable, up to $700,000 at any one time. Upon acceptance of a transfer
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 first quarter of 1998 the Company
transferred an aggregate of approximately $2,590,070 in receivables under this
agreement. During 1997, 1996, and 1995, the Company transferred an aggregate of
approximately $9,090,477, $7,317,000, and $5,852,000, respectively, in
receivables under this agreement. Costs of approximately $73,718, $61,555 and
$51,000 associated with the factoring agreement were included in selling and
administrative costs at December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997, accounts payable-related parties included the $533,796
discussed above and $602,476 relating to factoring charges and other
miscellaneous items owed to related parties.
The Company has made various purchases from an affiliated company, which is also
primarily owned by the majority shareholder, in the first quarter of 1998
totaling $84,721 (unaudited). In 1997, 1996, and 1995, purchases
54
<PAGE>
from the affiliated company totaled $121,020, $56,973, and $7,162, respectively.
The purchases were primarily composed of labor and transportation expenses,
which were at rates comparable to or below those in the market.
In April 1996, the Company issued 338,624 shares to an accredited investor for
$200,000.
In January 1998, in consideration of renewal of the Company's $700,000 factor
and receivable line, the Company issued 700,000 warrants at market ($0.875) to
the major shareholder.
At March 31, 1998, the Company was obligated under a non-cancelable lease with a
principal stockholder for land and building where a production facility is
located. The lease has an expiration date of April 30, 2001, and rental
payments of $1,519 per month.
In April 1998, an affiliated accredited investor loaned the Company $300,000 on
a 6 month basis. Said investor received 100,000 consulting warrants and may
convert said amount into equity via voluntary Class B warrant conversion in the
near future.
In 1997 and 1998, an officer of the Company purchased two pickups for the
Company's sales force utilizing his personal credit of which the balance
remaining for such transactions of $16,889.30 and $9,056.21 and the officer
realized no gain or compensation from this transaction.
DESCRIPTION OF SECURITIES
DESCRIPTION OF CLASS A COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Class A Common Stock,
$.01 par value. The holders of shares of Class A Common Stock are entitled to
receive dividends out of funds legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine. Each
share of Class A Common Stock entitles the holder thereof to one vote on all
matters submitted to a vote of stockholders of the Company. Upon liquidation or
dissolution, holders of Class A Common Stock are entitled to share equally with
holders of Class B Common Stock in the assets of the Company legally available
for distribution to stockholders after satisfaction of any liquidation
preferences of Preferred Stock. Shares of Class A Common Stock are not
redeemable and have no preemptive, conversion or cumulative voting rights. All
outstanding shares of Class A Common Stock are, and shares issuable upon
exercise of the Warrants in accordance with their terms will be, upon issuance,
fully paid and nonassessable.
DESCRIPTION OF CLASS B COMMON STOCK
The Company is authorized to issue 7,500,000 shares of Class B Common Stock, $.0
1 par value, all of which have been issued; 7,103,655 shares of Class B Common
Stock are outstanding as of April 15, 1993 and 396,345 shares of Class B Common
Stock had been converted to Class A Common Stock as of such date and are not
available for reissuance. Each share of the Class B Common Stock will convert
at any time at the option of the holder thereof into one share of the Company's
Class A Common Stock. Each share of Class B Common Stock will convert
automatically into one share of Class A Common Stock upon its sale or transfer
to any person other than another holder of Class B Common Stock, and upon the
death of the holder thereof if not transferred by bequest or inheritance to
another holder of Class B Common Stock. The Class B Common Stock is identical in
all other
55
<PAGE>
respects to the Class A Common Stock of the Company except that on every matter
submitted to a vote of the Company's stockholders each share of Class A Common
Stock entitles the registered holder to one vote, while each share of Class B
Common Stock entitles the registered holder to five votes. An aggregate of
5,625,000 shares of the Class B Common Stock were escrowed by the holders
thereof at the time of the Company's initial public offering in November 1989
and are subject to forfeiture if certain Company earnings levels or Class A
Common Stock price levels are not attained. (See "Principal Stockholders -Escrow
Shares.") Upon liquidation or dissolution, holders of Class B Common Stock are
entitled to share equally with holders of Class A Common Stock in the assets of
the Company legally available for distribution to stockholders after
satisfaction of any liquidation preferences of Preferred Stock. Shares of Class
B Common Stock are not redeemable and have no preemptive, conversion or
cumulative voting rights. All outstanding shares of Class B Common Stock are
fully paid and nonassessable. The holders of Class B Common Stock have entered
into a Right of First Refusal Agreement among themselves granting such
stockholders a right to purchase Class B Common Stock on a pro rata basis from
any Class B stockholder desiring to sell such shares.
On April 1, 1994 the remaining 5,625,000 Class B shares held in escrow were
cancelled and forfeited.
DIVIDEND POLICY
The holders of shares of Class A Common Stock and Class B Common Stock are
entitled to receive dividends out of funds legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Dividends per share, if any, will be equal in amount on the
Company's Class A Common Stock and Class B Common Stock The Company has never
paid any cash dividends on Class B Common Stock or Class A Common Stock and the
Board of Directors of the Company has no present intention of declaring any cash
dividends. The declaration and payment of dividends in the future will be
determined by the Board of Directors in light of conditions then existing,
including the Company's earnings, financial condition, capital requirements and
other factors.
DESCRIPTION OF WARRANTS
Class B Warrants
Each Class B Warrant represented the right to purchase one share of Class A
Common Stock at an exercise price of $3.00. In March of 1998, the Company's
Board of Directors voted to allow the exercise price of the B warrants to be
lowered to a 20 day market average which is currently estimated to be between
$1.25 - $1.50 per share until July 1, 1998, at which time the warrants will
expire. The Class B Warrants may be exercised at any time after the date of
issuance through July 1, 1998 or 60 days after this amended registration
statement becomes effective. Assuming all Class B Warrants are exercised, the
holders will be entitled to purchase 4,212,440 shares of Class A Common Stock.
The Company has reserved an adequate number of shares of Class A Common Stock
for issuance upon exercise of such Class B Warrants.
Redemption
The Class B Warrants are redeemable by the Company on 30 days written notice
at a redemption price of $.05 per warrant, if the average closing bid price (or
the last sale price) of the Company's Class A Common Stock, as reported by
NASDAQ, for any 30 consecutive trading days ending within 15 days of the notice
of redemption
56
<PAGE>
exceeds $4.20 per share in the case of Class B Warrants. All Class B Warrants
must be redeemed if any are redeemed once called. The Company intends to reduce
the exercise price to a 20-day market average and allow voluntary conversions up
until July 1, 1998 or 60 days after this amended registration statement becomes
effective.
General
The Class B Warrants are issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company, D. H. Blair, and American Stock Transfer &
Trust Company (the "Warrant Agent"), and are evidenced by warrant certificates
in registered form. The Warrants provide for adjustment of the exercise price
and for a change in the number of shares issuable upon exercise to protect
holders against dilution in the event of a stock dividend, stock split,
combination or reclassification of the Class A Common Stock or, under certain
circumstances, upon issuance of shares of Class A Common Stock at prices lower
than the then current market price, other than issuances upon exercise of
options granted to employees and directors of the Company. Additionally, an
adjustment would be made upon the sale of all or substantially all of the assets
of the Company so as to enable holders of Warrants to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable in such event by a holder of the number of shares of Class A Common
Stock that might otherwise have been purchased upon exercise of such Warrants.
No adjustment for previously paid cash dividends, if any, will be made upon
exercise of the Warrants.
The Warrants do not confer upon the holder any voting or any other rights of a
stockholder of the Company. Upon notice to the Warrant holders, the Company has
the right to reduce the exercise price or extend the expiration date of the
Warrants.
The Warrants may be exercised upon surrender of the warrant certificate on or
prior to the respective expiration date (or earlier redemption date) of such
Warrants at the offices of the Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the Warrant certificate completed and executed
as indicated, accompanied by payment of the full exercise price (by certified
check payable to the order of the Warrant Agent) for the number of Warrants
being exercised.
The Class B Warrants (AERTZ) may be traded separately although a NASDAQ listed
public trading market no longer exists. Although the Warrants will not
knowingly be sold to purchasers in jurisdictions in which the Warrants are not
registered or otherwise qualified for sale, purchasers may buy Warrants in the
aftermarket or may move to jurisdictions in which the securities underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Class B Warrants unless and until the
shares and Warrants could be qualified for sale in jurisdictions in which such
purchasers reside, or unless an exemption from qualification exists in such
jurisdiction. In addition, investors will not be able to exercise their
Warrants unless at the time of exercise the Company has a current prospectus
covering the securities underlying the Warrants. No assurances can be given
that the Company will be able to effect any such required registration or
qualification or maintain a current prospectus.
Class C Warrants
- ----------------
Each Class C Warrant is exercisable into one share of Class A Common Stock at an
exercise price of $3.00 per share. The warrants expire on June 29, 1998.
57
<PAGE>
Class D Warrants
- ----------------
The Class D Warrants expire during November 1998 and are exercisable at a price
of $1.50 per share of Class A Common Stock for each Class D Warrant exercised.
Class F and G Warrants
- ----------------------
The Class F and Class G Warrants expire during 1999 and are exercisable at a
price of $0.61 and $0.92, respectively, per share of Class A Common Stock for
each Class F or Class G Warrant exercised.
Class H Warrants
- ----------------
In 1995, in connection with the note payable to Marjorie S. Brooks and the
accounts payable-related parties (See Notes 4 and 5), 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 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 $0.39 to
$0.49 per share of Class A Common Stock for each Class H Warrant exercised. The
Class H Warrants will expire in February 2005.
Class I Warrants
- ----------------
In June 1996, the Company completed an offering to qualified foreign investors
under Regulation S of the Securities Act of 1933 with the issuance of 1,666,893
shares of Class A Common Stock. Net offering proceeds consisted of $1,146,000
in cash. As part of the offering, the Company has issued 242,878 Class I
Warrants to the Stock Placement Distributor. The Class I Warrants expire three
years from the date of issue and are exercisable at prices ranging from $0.9375
to $1.125 per share of Class A Common Stock for each Class I Warrant exercised.
In May 1997, 150,446 warrants were issued in connection with the December 1996
Regulation S Offering, as described below, at exercise prices ranging from $0.31
to $0.56 per share of Class A Common Stock for each Class I Warrant exercised.
The Class I Warrants expire on January 15, 2000.
Class J and K Warrants
- ----------------------
In December 1996, in connection with a note payable of $100,000 (See Note 5),
the Company authorized and issued two sets of Warrants, Class J for 200,000 and
Class K for 150,000. Each Class J and Class K Warrant is exercisable on a
one-for-one basis with common stock. Each Class J Warrant is exercisable at
$0.50 per share and each Class K Warrant is exercisable at $0.75 per share. Both
Class J and Class K Warrants expire five years from the date of issuance.
58
<PAGE>
Consulting and Placement Warrants
- ---------------------------------
In October 1997, February 1998 and April 1998 the Company issued 301,200 private
placement warrants and 5,020,000 consulting warrants resulting from bridge
financing and are exercisable at $0.375 per share of Class A Common Stock for
each Warrant exercised.
Financing Warrants
- ------------------
In January 1998, in consideration of renewal of the Company's $700,000
receivables line (See Note 4), the Company issued 700,000 warrants at market
($0.875) to the major shareholder.
DESCRIPTION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of 5,000,000
shares of Preferred Stock, $1.00 par value, none of which are outstanding. The
shares of Preferred Stock may be issued in one or more series with such
designations, powers, preferences, and relative, optional, participating or
other rights and qualifications, limitations and restrictions (including number
of votes for each share of Preferred Stock) as shall be fixed by resolution of
the Board of Directors, subject to the Delaware General Corporation law. As of
the date hereof, no shares of Preferred Stock have been issued and the Company
has no present plans to issue such Preferred Stock.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company serves as transfer and warrant agent for
the Class A Common Stock and Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
The shares of outstanding Class B Common Stock (1,465,000 of which are held in
escrow) are "restricted securities" within the meaning of Rule 144 and, upon
conversion into Class A Common Stock, are eligible for sale in the public market
in reliance upon Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including persons who may be deemed to be "affiliates"
of the Company as that term is defined under the 1933 Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding number of shares of common stock or (ii) the average weekly trading
volume in the common stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
of sale, notice and the availability of current public information about the
Company. However, a person who is not an affiliate and has beneficially owned
such shares for at least three years is entitled to sell such shares without
regard to the volume or other resale requirements.
Sales of substantial amounts of Common Stock in the public market under Rule
144, pursuant to registration statements or otherwise, could adversely affect
the prevailing market prices of the Company's securities.
59
<PAGE>
DELAWARE ANTI-TAKEOVER LAW
The Company will be governed by the provisions of Section 203 of the General
Corporation law of the State of Delaware. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
EXPERTS
The audited financial statements at December 31, 1997 and for the period then
ended appearing in this Prospectus and Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report (which contains an explanatory paragraph with respect to the Company's
ability to continue as a going concern and with respect to certain ongoing
litigation, as discussed in Notes 2 and 11 to the Financial Statements for the
year ended December 31, 1997) with respect thereto, and are included herein in
reliance upon the report of said firm and upon the authority of said firm as
experts in auditing and accounting in giving said report.
60
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements:
Report of Independent Public Accountants F-2
Balance Sheets F-3 - F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6 - F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-9 - F-27
<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, 1997
and 1996, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 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 incurred net losses since inception, has a
working capital deficit at December 31, 1997, and is subject to certain claims
in litigation as discussed in Note 11. Further, unaudited information subsequent
to December 31, 1997 indicates that losses are continuing. These factors, among
others, as discussed in Note 2, raise substantial doubt concerning the ability
of the Company to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
March 13, 1998
(F-2)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31, December 31,
1998 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 25,397 $ 45,428 $ 82,756
Receivables:
Insurance - - 1,001,657
Trade 807,867 540,739 9,280
Note receivable 67,571 81,571 -
Inventories 693,866 735,697 593,325
Prepaid expenses and other 180,541 181,474 87,381
----------- ---------- ----------
Total current assets 1,775,242 1,584,909 1,774,399
----------- ---------- ----------
Buildings and equipment:
Buildings 915,454 692,781 687,509
Machinery and equipment 6,710,958 6,209,614 5,953,000
Transportation equipment 91,524 98,242 135,527
Office equipment 55,833 156,064 172,597
Construction in progress 3,023,725 2,586,483 838,709
----------- ---------- ----------
10,797,494 9,743,184 7,787,342
Less accumulated depreciation
and amortization 4,312,940 4,093,031 3,182,679
----------- ---------- ----------
Net buildings and equipment 6,484,554 5,650,153 4,604,663
----------- ---------- ----------
Other assets, at cost less
accumulated amortization of
$250,108 (March 31, 1998), $242,999 (1997) and
$107,798 (1996) 396,740 406,266 346,487
----------- ---------- ----------
Total assets $ 8,656,536 $7,641,328 $6,725,549
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
(F-3)
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31, December 31,
1998 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable - trade $ 2,018,557 $ 1,571,598 $ 1,224,711
Accounts payable - related parties 1,116,509 1,136,272 468,715
Current maturities of long-term debt:
Related parties 448,952 386,456 374,726
Other 180,000 108,454 330,618
Accrued liabilities 365,916 310,681 207,065
Notes payable, net of debt discount of
$270,572 (March 31, 1998) and $136,111
(1997) 1,914,428 1,189,097 61,559
------------ ------------ ------------
Total current liabilities 6,044,362 4,702,558 2,667,394
------------ ------------ ------------
Long-term debt, less current maturities:
Related parties 376,990 465,656 799,554
Other 18,106 122,756 156,222
------------ ------------ ------------
Total long-term debt 395,096 588,412 955,776
------------ ------------ ------------
Commitments and contingencies (Note 11)
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, 20,530,147
(1998), 20,312,969 (1997) and 19,201,148
(1996) issued and outstanding 205,302 203,130 192,012
Class B convertible common stock, $.01 par
value; 7,500,000 shares authorized, 1,465,530
issued and outstanding 14,655 14,655 14,655
Additional paid-in capital 22,309,820 21,926,331 21,533,450
Accumulated deficit (20,312,699) (19,793,758) (18,637,738)
------------ ------------ ------------
Total stockholders' equity 2,217,078 2,350,358 3,102,379
------------ ------------ ------------
Total liabilities and stockholders' equity $ 8,656,536 $ 7,641,328 $ 6,725,549
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
(F-4)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Year ended Year ended Year ended
Ended Ended December 31, December 31, December 31,
March 31, 1998 March 31, 1997 1997 1996 1995
-------------- -------------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 2,507,300 $ 1,747,802 $ 7,982,381 $ 6,950,219 $ 5,581,172
Cost of Goods Sold 2,222,490 1,993,546 7,639,708 7,822,154 6,183,924
----------- ----------- ----------- ----------- -----------
Gross Margin 284,810 (245,744) 342,673 (871,935) (602,752)
Loss on Disposal of Assets - - - 178,061 528,538
Selling and Administrative Costs 645,184 338,138 2,090,049 1,687,697 1,356,244
----------- ----------- ----------- ----------- -----------
Operating Loss (360,374) (583,882) (1,747,376) (2,737,693) (2,487,534)
Interest Expense, net (158,567) (35,559) (166,288) (196,005) (268,729)
Loss Before Extraordinary Item (518,941) (619,441) (1,913,664) (2,933,698) (2,756,263)
Extraordinary Gain - - 757,644 36,666 -
----------- ----------- ----------- ----------- -----------
Net Loss $ (518,941) $ (619,441) $(1,156,020) $(2,897,032) $(2,756,263)
=========== =========== =========== =========== ===========
Loss per share of common stock
before extraordinary gain (Basic and
Diluted) ($.02) ($.03) ($.09) ($.15) ($.17)
=========== =========== =========== =========== ===========
Extraordinary gain per share of
common stock - - $.04 - -
----------- ----------- =========== =========== ===========
Net loss per share of
common stock (Basic and Diluted) ($.02) ($.03) ($.05) ($.15) ($.17)
=========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding 21,995,434 20,666,678 21,800,170 19,134,484 15,779,721
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
(F-5)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Common Stock
--------------------
<S> <C> <C>
Shares Amount
------ ------
Balance - December 31, 1994 14,038,038 $140,380
Cancellation of 5,625,000
Shares of Class B Common Stock - -
Exercise of Stock Options 24,332 244
Exercise of Class F Warrants 1,630,496 16,305
Net loss for the year ended
December 31, 1995 - -
---------- --------
Balance - December 31, 1995 15,692,866 $156,929
========== ========
Exercise of Class F Warrants 500,000 5,000
Net Proceeds from issuance of
Class A Common Stock 2,996,282 29,963
Exercise of Stock Options 12,000 120
Net loss for the year ended
December 31, 1996 - -
---------- --------
Balance - December 31, 1996 19,201,148 $192,012
========== ========
Net Proceeds from issuance of Class A Common Stock 1,111,821 11,118
Issuance of Detachable Stock Warrants - -
Net loss for the year ended
December 31, 1997 - -
---------- --------
Balance - December 31, 1997 20,312,969 $203,130
========== =========
Issuance of stock for interest payments 47,178 472
Exercise of Stock Options 170,000 1,700
Issuance of Detachable Stock Warrants - -
Net loss for the quarter ended March 31, 1998 - -
---------- --------
Balance - March 31, 1998 (unaudited) 20,530,147 $205,302
========== ========
</TABLE>
These accompanying notes are an integral part of these financial statements.
(F-6)
<PAGE>
<TABLE>
<CAPTION>
Class B Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C>
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
========== ======== =========== ============ ===========
- - 300,000 - 305,000
- - 1,942,785 - 1,972,748
- - 7,800 - 7,920
- - - (2,897,032) (2,897,032)
- ---------- -------- ----------- ------------ -----------
1,465,530 $ 14,655 $21,533,450 $(18,637,738) $ 3,102,379
========== ======== =========== ============ ===========
- - 217,881 - 228,999
- - 175,000 - 175,000
- - - (1,156,020) (1,156,020)
- ---------- --------- ----------- ------------ -----------
1,465,530 $ 14,655 $21,926,331 $(19,793,758) $ 2,350,358
========== ======== =========== ============ ===========
- - 39,395 - 39,867
- - 115,800 - 117,500
- - 228,294 - 228,294
- - - (518,941) (518,941)
- ---------- -------- ----------- ------------ -----------
1,465,530 $ 14,655 $22,309,820 $(20,312,699) $ 2,217,078
========== ======== =========== ============ ===========
</TABLE>
(F-7)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months Three months Year ended Year ended Year ended
ended March 31, ended March 31, December 31, December 31, December 31,
1998 (unaudited) 1997 (unaudited) 1997 1996 1995
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (518,941) $(619,441) $(1,156,020) $(2,897,032) $(2,756,263)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 272,993 264,661 1,088,577 1,212,323 1,084,280
Amortization of other assets 87,908 6,192 65,319 24,740 23,257
Amortization of debt discount 80,911 - 38,889 - -
Interest paid through issuance of stock warrants 39,867 - - - -
Extraordinary gain - - (757,644) (36,666) -
Loss on disposition of equipment 1,964 - - 178,061 527,804
Decrease (increase) in other assets 2,417 (4,385) (125,098) (42,749) (38,130)
Changes in operating assets and operating
liabilities 204,190 46,638 379,429 400,246 671,536
----------- --------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 171,309 (306,335) (466,548) (1,161,077) (487,516)
----------- --------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to buildings and equipment (1,097,181) (86,730) (2,134,067) (1,073,409) (248,603)
Proceeds from disposition of equipment 4,722 - - - 5,000
Insurance recoveries, net of fire related expenses - 250,000 1,757,644 379,080 -
----------- --------- ----------- ----------- -----------
Net cash used in investing activities (1,092,459) 163,270 (376,423) (694,329) (243,603)
----------- --------- ----------- ----------- -----------
Cash flows from financing activities:
Prepaid stock subscriptions 53,750 244,000 - 85,000 -
Proceeds from issuance of notes (with detachable
warrants in 1998 and 1997) 885,000 - 1,304,229 369,155 1,068,210
Payments on notes (101,381) (154,560) (727,585) (732,011) (1,351,276)
Proceeds from issuance of common stock - - 228,999 1,887,748 -
Proceeds from exercise of stock options and
warrants, net 63,750 - - 312,920 1,023,558
----------- --------- ----------- ----------- -----------
Net cash provided by financing activities 901,119 89,440 805,643 1,922,812 740,492
----------- --------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents (20,031) (53,625) (37,328) 67,406 9,373
Cash and cash equivalents:
Beginning of period 45,428 82,756 82,756 15,350 5,977
----------- --------- ----------- ----------- -----------
End of period $ 25,397 $ 29,131 $ 45,428 $ 82,756 $ 15,350
=========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
(F-8)
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to all information provided as of March 31, 1998 and
1997)
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 Springdale, 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.
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 March 31, 1998 and December 31, 1997, the Company had a working
capital deficit of $4,269,120 and $3,117,649, respectively, and had incurred net
losses of $518,941 for the quarter ended March 31, 1998 and $1,156,020 for the
year ended December 31, 1997. The Company has incurred operating losses in each
year since its inception and has never operated at successful manufacturing
levels over an extended period. Further, unaudited information subsequent to
December 31, 1997 and March 31, 1998, indicates that losses are continuing.
Such continuing losses have primarily been caused by problems in maintaining
significant production volumes of products and in producing products at
economically feasible operating cost levels. There is no assurance that the
Company will be able to improve its manufacturing process and operating costs to
the extent necessary to reach successful operating levels. Further, the Company
has limited additional financial resources available to support its operations
and fund substantial maturities of debt which are due within the next twelve
months. The Company, in the past few years has, in large part, been supported
by certain major shareholders and several accredited investors. There is no
commitment for such shareholders and investors to continue such support. The
Company also has claims in litigation outstanding against it as described in
Note 11. The outcome of the litigation is uncertain. There can be no assurance
that the Company's financial resources will be adequate to support existing
operations until such time, if ever, sales and manufacturing levels
(F-9)
<PAGE>
are sufficient to generate income from operations. Further, if the litigated
claims discussed in Note 11 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 financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable 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 products at economically feasible levels.
The Company has developed, and is currently implementing, a production plan,
which Management believes, will provide for better operating efficiencies and
correct the production problems encountered in the past. Such plan includes
increasing production capacity, changing production management, further
automating the production process and better utilizing regrindable scrap.
However, completion of the production plan will require additional debt or
equity financing beyond those resources currently available to the Company.
Also, additional financial resources will be necessary to fund maturities of
debt and other obligations as they come due in 1998. There is no assurance the
Company will be able to correct prior production problems and improve operating
efficiencies or that the Company will be successful in securing sufficient
capital resources to complete its production plan, fund maturities of debt and
other obligations as they become due in 1998 or to support the Company until
such time, if ever, that the Company is able to generate income from operations.
The Company has entered into a non-binding agreement on the part of the lenders
to borrow up to $3.5 million in a series of bridge loans from accredited
institutional investors. As of March 31, 1998, approximately $2.2 million had
been borrowed under said agreement. In addition, the Company is also pursuing
an additional $2.5 million financing package through a State Economic
Development Agency for acquisition and further expansion of the Arkansas
facility. The Company is also evaluating additional financial sources including
both equity and conventional long-term debt to fund future expansion as well as
to refinance the bridge loans within the next twelve months. It is probable
additional financial resources will be necessary to fund maturities of debt and
other obligations including bridge loans, as they come due. There is no
assurance the Company will be able to continue to improve operating efficiencies
beyond current levels or that the Company will be successful in securing
sufficient capital resources to support the Company until such time as the
Company is able to generate positive cash flow sufficient to support its
operations, capital expansion plan and fund maturities of debt and other
obligations as they become due.
Note 3: Significant Accounting Policies
Unaudited Information
The financial statements included herein as of March 31, 1998 and 1997 have been
prepared by Advanced Environmental Recycling Technologies, Inc. (the Company or
AERT), 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
(F-10)
<PAGE>
disclosures are adequate to make the information presented herein not
misleading. The Company has reclassified certain prior period amounts to conform
to the current period presentation.
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, current maturities
of long-term debt and current notes payable. 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 Year ended Year ended Year ended
ended ended December 31, December 31, December 31,
March 31, 1998 March 31, 1997 1997 1996 1995
-------------- -------------- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Receivables $(267,128) $(669,273) $ (529,802) $ 39,186 $ 12,457
Note receivable 14,000 - (81,571) - -
Inventories 41,831 42,575 (142,372) (2,114) 62,483
Prepaid expenses and other (66,944) (13,078) 15,114 69,860 4,990
Accounts payable -
Trade and related parties 427,196 599,607 1,014,444 253,028 568,718
Accrued liabilities 55,235 86,807 103,616 40,286 22,888
--------- --------- ---------- -------- --------
$ 204,190 $ 46,638 $ 379,429 $400,246 $671,536
========= ========= ========== ======== ========
Cash paid for interest $ 22,291 $ 35,522 $ 141,320 $168,322 $301,192
Cash paid for income taxes - - - - -
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Insurance proceeds due for fire losses of buildings and equipment $ - $1,001,660
Additions to buildings and equipment paid directly by insurance company - 83,842
Note payable for financing of insurance policies 109,207 48,713
</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.
Provision for depreciation of buildings and equipment is provided on a straight-
line basis for buildings, transportation equipment and office equipment over the
lesser of the estimated useful life of the asset or the term of the lease.
Estimated useful lives are: buildings - 5 to 19 years, transportation equipment
- - 3 to 5 years,
(F-11)
<PAGE>
office equipment - 5 years and machinery and equipment - 3 to 8 years.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 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
No. 121 and has determined that no impairment loss was required as of December
31,1997 or March 31, 1998. 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
Springdale 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.
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
subsequent to the completion of its production plan 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 Springdale and
Junction manufacturing facilities which was $6,484,554 at March 31, 1998 and
$5,650,153 at December 31, 1997.
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, December 31, December 31,
1998 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Raw materials $291,990 $257,114 $210,483
Work in process 343,452 319,034 351,477
Finished goods 58,424 159,549 31,365
-------- -------- --------
$693,866 $735,697 $593,325
======== ======== ========
</TABLE>
(F-12)
<PAGE>
Other Assets
Other assets consist primarily of the costs for the preparation of patent
applications of $341,917 and $345,662, net, at March 31, 1998 and December 31,
1997, respectively, which are amortized using the straight-line method over 17
years. Also included in other assets are deposits of $54,823 and $60,604 at
March 31, 1998 and December 31, 1997, respectively.
Prepaid Expenses and Other
Prepaid expenses and other consist primarily of loan acquisition costs of
$167,569 and $131,444, net, at March 31, 1998 and December 31, 1997 which are
being amortized using the straight-line method over 9 months.
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.
SFAS No. 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for, among other things, the transfer and servicing of
financial assets, such as transfers of receivables with recourse, and provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Company presently transfers, with
recourse, receivables to a related party. Based on the requirements of SFAS No.
125, the receivables transferred to the related party with recourse are
accounted for as a secured borrowing because the Company is not considered to
have surrendered control over the transferred assets. Accounts receivable and
accounts payable-related parties at March 31, 1998 and December 31, 1997 were
increased by $747,056 and $533,796, respectively, to reflect these requirements.
(See Note 4)
SFAS No. 128
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 replaces the presentation of Primary Earnings Per Share with Basic EPS and
requires dual presentation of Basic and Diluted EPS on the face of the
statements of operations and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of the
Diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. Diluted EPS is
computed similarly to Fully Diluted EPS pursuant to Accounting Principles Board
Opinion No. 15, "Earnings Per Share." SFAS No. 128 requires restatement of all
prior-period EPS data presented. Implementation of SFAS No. 128 had no effect on
prior-period EPS data presented.
(F-13)
<PAGE>
In computing Diluted EPS, only potential common shares that are dilutive--those
that reduce earnings per share or increase loss per share--are included.
Exercise of options and warrants or conversion of convertible securities is not
assumed if the result would be antidilutive, such as when a loss from continuing
operations is reported. The "control number" for determining whether including
potential common shares in the Diluted EPS computation would be antidilutive is
income from continuing operations. As a result, if there is a loss from
continuing operations, Diluted EPS would be computed in the same manner as Basic
EPS is computed, even if an entity has net income after adjusting for
discontinued operations, an extraordinary item, or the cumulative effect of an
accounting change. The Company has incurred losses from continuing operations
and net losses for the three months ended March 31, 1998 and 1997 and the years
ended December 31, 1997, 1996 and 1995. Therefore, Basic EPS and Diluted EPS
are computed in the same manner. Although such financial instruments were not
included due to being antidilutive, the Company does have potentially dilutive
financial instruments in the form of warrants and options (See Notes 6 and 7).
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. The Company extends unsecured credit to its customers. This
industry concentration has the potential to impact the Company's exposure to
credit risk because changes in economic or other conditions in the construction
industry may similarly affect the customers.
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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation. These reclassifications did
not impact the net loss.
Note 4: Related Party Transactions
The Company has an agreement with an affiliate whereby the Company has agreed to
transfer certain of its trade receivables as collateral, which the affiliate
deems acceptable, up to $700,000 at any one time. Upon acceptance of a transfer
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 unaudited first quarter of 1998 and the
year ended
(F-14)
<PAGE>
December 31, 1997, the Company transferred an aggregate of approximately
$2,590,070 and $9,090,477, respectively, in receivables under this agreement, of
which $747,056 and $533,796 remains to be collected as of March 31, 1998 and
December 31, 1997, respectively. During 1996 and 1995, the Company transferred
an aggregate of approximately $7,317,000 and $5,852,000, respectively, in
receivables under this agreement, none of which remains to be collected. Costs
of approximately $73,718, $61,555 and $51,000 associated with the factoring
agreement are included in selling and administrative costs at December 31, 1997,
1996 and 1995, respectively.
At December 31, 1997, accounts payable-related parties included the $533,796
discussed above and $602,476 relating to factoring charges and other
miscellaneous items owed to related parties.
(F-15)
<PAGE>
Note 5: Long-term debt
Long-term debt as of March 31, 1998, December 31, 1997 and December 31, 1996,
consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
1998 ---- ----
----
(unaudited)
<S> <C> <C> <C>
10.75% note payable, due in monthly installments of $15,354,
secured by certain manufacturing equipment, inventories and
receivables. $ - $ 30,286 $ 200,999
12% notes payable ("the bridge financing"), net of debt discount
of $77,778 and $136,111 at March 31, 1998 and December 31,
1997, respectively, interest payable quarterly in shares of the
Company's Class A Common Stock, principal due in cash on July
27, 1998. The effective interest rate on the debt is 33.2%./(1)/ 1,222,222 1,163,889 -
12% notes payable ("the bridge financing"), acquired February 5,
1998, net of debt discount of $192,794, interest payable quarterly
in shares of the Company's Class A Common Stock or cash on
November 2, 1998. The effective interest rate on the debt is
65.2%./(1)/ 607,206 - -
8% note payable, due in monthly installments of principal and
interest of $5,247, secured by unescrowed shares of Class B
Common Stock owned by certain officers of the Company and
certain manufacturing equipment. 60,315 74,656 130,536
9.75% note payable, to Marjorie S. Brooks (a related party), due
in monthly installments of principal and interest of $33,100,
secured by substantially all of the assets of the Company. 825,943 852,119 1,174,283
12% note payable, accrued interest and principal are due and
payable on January 1, 1999. 100,000 100,000 100,000
Other 122,790 51,469 55,302
----------- ----------- ----------
Total 2,938,476 2,272,419 1,661,120
Less current maturities, net of debt discount (2,543,380) (1,684,007) (705,344)
----------- ----------- ----------
Long-term debt, net of current maturities $ 395,096 $ 588,412 $ 955,776
=========== =========== ==========
</TABLE>
(F-16)
<PAGE>
(1) Through March 31, 1998, the Company had completed two bridge financing
agreements. The date of the first agreement was October 30, 1997. The Company
issued notes payable totaling $1.3 million, due and payable on July 27, 1998
unless the notes are extended, at the option of the Company, to October 30, 1998
with the same terms as above. Interest on the notes is payable every three
months at 12% in the Company's Class A Common Stock. In connection with the
notes, the Company issued 2,600,000 consulting warrants and 156,000 placement
warrants. If the notes are extended, an additional 650,000 consulting warrants
and 78,000 placement warrants will be issued. The warrants expire October 30,
2002, and are exercisable at a price of $0.375 per share of Class A Common Stock
for each warrant exercised.
The date of the second financing agreement was February 5, 1998. The Company
issued notes payable totaling $800,000, due and payable on November 2, 1998
unless the notes are extended, at the option of the Company, to January 31,
1999. Interest on the notes is payable every three months at 12% in either cash
or the Company's Class A Common Stock, at the option of the Company. In
connection with the notes, the Company issued 1,600,000 consulting warrants and
96,000 placement warrants. If the notes are extended, an additional 400,000
consulting warrants and 48,000 placement warrants will be issued. The warrants
expire February 5, 2003, and are exercisable at a price of $0.375 per share of
Class A Common Stock for each warrant exercised.
A third bridge financing was completed on April 7, 1998. The Company issued
notes payable totaling $410,000, of which $85,000 was collected in March 1998,
due and payable on January 2, 1999 unless the notes are extended, at the option
of the Company, to April 2, 1999. Interest on the notes is payable every three
months at 12% in either cash or the Company's Class A Common Stock, at the
option of the Company. In connection with the notes, the Company issued 820,000
consulting warrants and 49,200 placement warrants. If the notes are extended,
an additional 205,000 consulting warrants and 24,600 placement warrants will be
issued. The warrants expire April 7, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised.
In regard to the warrant shares issued under the bridge financing agreements, if
the resale of the warrant shares by the holders is not then registered pursuant
to an effective registration statement under the Securities Act, the warrant
holders may effect a cashless exercise at any time after the first anniversary
of the respective dates of the note agreements until the end of the respective
exercise periods. In the event of a cashless exercise, in lieu of paying the
exercise price in cash, the warrant holder shall surrender his warrant to the
Company for a certain number of shares of Class A Common Stock, based on the
market value of the stock at the time of exercise.
Under a placement agency agreement entered into concurrently with the October
30, 1997 bridge financing agreement, the placement agent has a two year option
to "put" up to an additional $990,000 aggregate principal amount of notes to the
Company. If the additional notes are issued, then the Company will issue
1,980,000 consulting warrants and 118,800 placement warrants in connection with
the notes. If the notes are extended, an additional 495,000 consulting warrants
and 59,400 placement warrants will be issued. Both the additional notes and
related consulting and placement warrants will have terms and provisions similar
to those of previous bridge financings.
The Company has agreed that for the two-year period ending on October 30, 1999,
it will not, without the prior written consent of the Placement Agent, negotiate
or obtain certain types of additional financing. If the common stock is
suspended from trading or is delisted for trading for ten trading days during a
nine month period, the principal plus accrued and unpaid interest is immediately
due and payable upon demand. See Note 6 for information concerning Consulting
and Placement Warrants
(F-17)
<PAGE>
issued in connection with the bridge financing.
The aggregate maturities of long-term debt, net of debt discount, as of December
31, 1997 are as follows:
1998 $1,684,007
1999 489,148
2000 99,264
----------
$2,272,419
==========
The aggregate maturities of long-term debt, net of debt discount, as of March
31, 1998 are as follows:
Year ended March 31, 1999 $2,543,380
Year ended March 31, 2000 385,524
Year ended March 31, 2001 9,572
----------
$2,938,476
==========
Note 6: 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.
Class B Warrants
Each Class B Warrant entitles the holder to purchase one share of Class A Common
Stock at an exercise price of $3.00. The Class B Warrants are redeemable at
$.05 per Warrant at the option of the Company if certain public stock trading
prices are achieved.
Class C Warrants
Each Class C Warrant is exercisable into one share of Class A Common Stock at an
exercise price of $3.00 per share. The warrants expire on June 29, 1998.
Class D Warrants
The Class D Warrants expire during November 1998 and are exercisable at a price
of $1.50 per share of Class A Common Stock for each Class D Warrant exercised.
Class F and G Warrants
The Class F and Class G Warrants expire during 1999 and are exercisable at a
price of $0.61 and $0.92, respectively, per share of Class A Common Stock for
each Class F or Class G Warrant exercised.
(F-18)
<PAGE>
Class H Warrants
In 1995, in connection with the note payable to Marjorie S. Brooks and the
accounts payable-related parties (See Notes 4 and 5), 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 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 $0.39 to
$0.49 per share of Class A Common Stock for each Class H Warrant exercised. The
Class H Warrants will expire in February 2005.
Class I Warrants
In June 1996, the Company completed an offering to qualified foreign investors
under Regulation S of the Securities Act of 1933 with the issuance of 1,666,893
shares of Class A Common Stock. Net offering proceeds consisted of $1,146,000
in cash. As part of the offering, the Company has issued 242,878 Class I
Warrants to the Stock Placement Distributor. The Class I Warrants expire three
years from the date of issue and are exercisable at prices ranging from $0.9375
to $1.125 per share of Class A Common Stock for each Class I Warrant exercised.
In May 1997, 150,446 warrants were issued in connection with the December 1996
Regulation S Offering, as described below, at exercise prices ranging from $0.31
to $0.56 per share of Class A Common Stock for each Class I Warrant exercised.
The Class I Warrants expires on January 15, 2000.
Class J and K Warrants
In December 1996, in connection with a note payable of $100,000 (See Note 5),
the Company authorized and issued two sets of Warrants, Class J for 200,000 and
Class K for 150,000. Each Class J and Class K Warrant is exercisable on a
one-for-one basis with common stock. Each Class J Warrant is exercisable at
$0.50 per share and each Class K Warrant is exercisable at $0.75 per share. Both
Class J and Class K Warrants expire five years from the date of issuance.
Financing Warrants
In January 1998, in consideration of renewal of the Company's $700,000
receivables line (See Note 4), the Company issued 700,000 warrants at market
($0.875) to the major shareholder.
Consulting and Placement Warrants
(F-19)
<PAGE>
In October 1997, the Company obtained bridge financing of $1.3 million (See Note
5). In connection with the financing obtained, 2,756,000 in stock warrants were
issued. The stock warrants expire October 30, 2002, and are exercisable at a
price of $0.375 per share of Class A Common Stock for each warrant exercised.
The debt and stock warrants were recorded at their estimated fair market value
at the date of the transaction. The value of the stock warrants has been treated
as a debt discount. The debt discount is being amortized over the life of the
loan as interest expense.
In February 1998, the Company obtained bridge financing of $800,000. In
connection with the financing obtained, 1,696,000 in stock warrants were issued.
The stock warrants expire on February 5, 2003 and are exercisable at a price of
$0.375 per share of Class A Common stock for each warrant exercised. The debt
and stock warrants were recorded at their estimated fair value at the date of
the transaction. The value of the stock warrants has been treated as a debt
discount. The debt discount is being amortized over the life of the loan as
interest expense.
In May 1996, the Company completed a Private Placement Offering with the
issuance of 338,624 shares of Class A Common Stock. Net offering proceeds
consisted of $200,000 in cash.
In September 1996, the Company received $500,000 in cash relating to an offering
to qualified foreign investors under Regulation S of the Securities Act of 1933
with the issuance of 762,194 shares of Class A Common Stock completed in October
1996.
In December 1996, the Company received $185,000 in cash relating to an offering
to qualified foreign investors under Regulation S of the Securities Act of 1933
with the issuance of 228,571 and 134,454 shares of Class A Common Stock in 1996
and 1997, respectively. Also, in 1997, $228,999 was received and 977,367 shares
of Class A Common Stock were issued.
At December 31, 1997 and March 31, 1998, the Company had Class A Common Stock
reserved for warrant issuances as follows:
Class A Weighted
Common Stock Average
Reserved Exercise
------------ Price
--------
Class B Warrants 4,212,440 $ 3.00
Class C Warrants 650,000 $ 3.00
Class D Warrants 206,751 $ 1.50
Class F Warrants 1,337,904 $ 0.61
Class G Warrants 3,468,400 $ 0.92
Class H Warrants 2,000,000 $ 0.47
Class I Warrants 393,344 $ 0.75
Class J Warrants 200,000 $ 0.50
Class K Warrants 150,000 $ 0.75
1997 Consulting Warrants 2,600,000 $0.375
1997 Placement Warrants 156,000 $0.375
---------- ------
Total as of December 31, 1997 15,374,839 $ 1.39
Financing Warrants 700,000 $0.875
1998 Consulting Warrants 1,600,000 $0.375
1998 Placement Warrants 96,000 $0.375
---------- ------
Total as of March 31, 1998 17,770,839 $ 1.27
========== ======
(F-20)
<PAGE>
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED SECURITIES;
RISK OF APPLICATION OF PENNY STOCK RULES.
The Board of Governors of the National Association of Securities Dealers, Inc.
has established certain standards for the initial listing and continued listing
of a security on the NASDAQ Small Cap Market. The standards for initial listing
require, among other things, that an issuer have total assets of $4,000,000 and
capital and surplus of at least $2,000,000; that the minimum bid price for the
listed securities be $3.00 per share; that the minimum market value of the
public float (the shares held by non-insiders) be at least $2,000,000; and that
there be at least two market makers for the issuer's securities. The
maintenance standards require, among other things, that an issuer have total
assets of at least $2,000,000 and capital and surplus of at least $1,000,000;
that the minimum bid price for the listed securities be $1.00 per share; that
the minimum market value of the "public float" be at least $1,000,000; and that
there be at least two market makers for the issuer's securities. A deficiency
in either the market value of the public float or the bid price maintenance
standard will be deemed to exist if the issuer fails the individual stated
requirement for ten consecutive trading days. If an issuer falls below the bid
price maintenance standard, it may remain on the NASDAQ Small Cap Market if the
market value of the public float is at least $1,000,000 and the issuer has
$2,000,000 in equity. The NASDAQ Small Cap Market has recently adopted new
maintenance criteria, which eliminates the exception to the $1.00 per share
minimum bid price and require, among other things, $2,000,000 net tangible
assets, $1,000,000 market value of the public float and adherence to certain
corporate governance provisions. The Company has been formally notified by
NASDAQ that it had until May 28, 1998 to bring the price of its stock up to a
minimum $1.00 bid. As of December 31, 1997, the Company's bid price was below
$1.00. As of May 21, 1998, the Company's closing bid price was $1.28. NASDAQ
notified the Company on April 14, 1998, that it had regained minimum bid price
compliance. The Company's stockholders, in August 1997, authorized up to a 6 for
1 reverse stock split, which has not yet been implemented. There can be no
assurance that the Company will continue to satisfy the requirements for
maintaining a NASDAQ SmallCap Market listing. If the Company's securities were
to be excluded from the NASDAQ SmallCap Market, it would adversely affect the
prices of such securities and the ability of holders to sell them, and the
Company would then be required to comply with the more difficult initial listing
requirements to be re-listed on the NASDAQ SmallCap Market. The Company as of
March 31, 1998, had net assets of $2,217,078 and is currently implementing a
plan to recapitalize and raise a minimum of an additional $2 million in equity
capital to maintain its minimum NASDAQ listing. There can be no assurance that
its recapitalization efforts will be successful or that it can maintain the
minimum $2 million asset value for continued listing.
If the Company is unable to satisfy maintenance requirements and the price per
share were to continue below $1.00, then unless the Company satisfied certain
net tests, the Company's securities would become subject to certain penny stock
rules promulgated by the SEC (the "Commission"). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the SEC that provides information about penny stocks and the nature and level
(F-21)
<PAGE>
of risks of penny stock market securities. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from such rules, the broker-
dealer must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock. If the Common Stock becomes subject to
the penny stock rules, investors may find it more difficult to sell their
shares.
Unaudited information subsequent to December 31, 1997 and March 31, 1998
indicates that losses are continuing. Due to continuing net losses, the Company
is unable to determine if the Company will be able to maintain compliance with
the net asset requirement or if necessary to correct any deficiencies in the net
asset requirement in the future.
Note 7: Stock option plans
The Company's Stock Option Plans (the "1990 Plan" and the "1989 Plan") authorize
the issuance of a total of 1,500,000 shares of the Company's Class A Common
Stock to its directors, employees, and outside consultants. The option price of
the stock options awarded must be at least equal to the market value of the
Class A Common Stock on the date of grant. Stock options may not be granted to
an individual to the extent that in any calendar year in which options first
become exercisable, the shares subject to options first exercisable in such year
have a fair market value on the date of grant in excess of $100,000. Stock
options may not be granted after March 2000 and May 1999 for the 1990 Plan and
the 1989 Plan, respectively. No option may be outstanding for more than ten
years after its grant. The purpose of the Plans is to enable the Company to
encourage key employees, directors and outside consultants to contribute to the
success of the Company by granting such persons incentive stock options ("ISOs")
and/or non-incentive stock options ("nonqualified stock options"). The ISOs are
available for employees only.
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 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.
The Company's stockholders also approved the Non-Employee Director Stock Option
Plan (the "Director 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 Plan provided
(F-22)
<PAGE>
for a grant of 500,000 shares of the Company's Class A Common Stock.
In July 1997, stockholders of the Company approved the adoption of the Advanced
Environmental Recycling Technologies, Inc. 1997 Securities Plan (the "1997
Plan"). The 1997 Plan provides for certain awards to be given to senior and
executive management of the Company to encourage and reward superior
performance. The awards can be in the form of stock options, restricted stock
and other performance awards to be given. The aggregate number of Shares which
may be offered pursuant to Incentive Stock Options under the 1997 Plan shall not
exceed 3,000,000 while the aggregate number of Shares which may be offered for
purchase pursuant to Non-Qualified Stock Options shall not exceed 500,000
Shares. The Stock Options may not be granted with an exercise price less than
the fair market value of a share on the date the option is granted, unless
granted to a 10% shareholder, then the exercise price must be at least 110% of
the fair market value per share on the date such option is granted. The
Incentive Stock Options may not be exercised after ten years from the date the
option is granted unless the option is given to a 10% shareholder, then the
expiration date is five years from the date the option is granted. The options
must be exercised within three months after termination of employment.
A summary of the activity in the Company's Stock Option Plans during the years
ended December 31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,329,000 $1.30 1,506,668 $1.21 1,068,000 $1.56
Granted 3,300,000 $0.51 145,000 $0.84 481,000 $0.40
Exercised - $ - (12,000) $0.66 (24,332) $1.19
Forfeited (626,000) $1.21 (310,668) $0.70 (18,000) $0.72
--------- ----- --------- ----- --------- -----
Outstanding at end of year 4,003,000 $0.66 1,329,000 $1.30 1,506,668 $1.21
</TABLE>
The weighted-average fair value of options granted during 1997, 1996 and 1995
was $0.32, $0.73, and $0.22, respectively. The following table summarizes
information about stock options outstanding under the Company's Stock Option
Plans as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Range Number Wtd Avg Wtd Avg Number Wtd Avg
Of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contract Life Price at 12/31/97 Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.38 - $0.48 1,981,000 9.2 years $0.41 1,314,332 $0.38
$0.56 - $1.00 1,578,334 8.9 years $0.66 278,334 $0.83
$1.13 - $1.63 262,000 4.0 years $1.37 262,000 $1.37
$1.88 - $3.00 181,666 2.9 years $2.35 181,666 $2.35
-----------------------------------------------------------------------
$0.38 -$3.00 4,003,000 8.4 years $0.66 2,036,332 $0.75
</TABLE>
SFAS No. 123, "Accounting for Stock-Based-Compensation," issued by the FASB in
October 1995, encourages but does not require companies to measure and recognize
in their financial statements a compensation cost for stock-based employee
compensation plans based on the 'fair value' method of accounting set forth in
the
(F-23)
<PAGE>
statement. The Company continues to account for its stock option plans and
other stock-based compensation using the "intrinsic value" method of accounting
set forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock.
Had compensation cost for the Company's stock option plans and other stock-based
compensation been determined consistent with SFAS No. 123, the Company's net
loss and net loss per share of common stock would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net Loss As Reported $(1,156,020) $(2,897,032) $(2,756,263)
Pro Forma (1,536,041) (4,140,251) (3,217,929)
Net Loss per share of common stock As Reported (.05) (.15) (.17)
(Basic and Diluted) Pro Forma (.07) (.22) (.20)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to awards
granted prior to January 1, 1995, the resulting pro forma compensation cost
might not be representative of that expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.7, 6.2 and 7.3 percent; expected lives of 10, 3 and 3.8
years; and expected volatility of 88.6, 92.7 and 71.3 percent. Since no
dividends are expected to be paid by the Company during the expected lives of
the options, a dividend yield of zero was used for purposes of computing the
fair value of the options.
Note 8: Leases
At December 31, 1997, the Company was obligated under a non-cancelable lease
with a principal stockholder for land and building where a production facility
is located. This lease has an expiration date of April 30, 2001, and rental
payments of $1,519 per month. In 1997, the Company entered into a non-
cancelable sublease for a production facility, which expires August 31, 2002.
The sublease contains an option to purchase the facility for $1.8 million,
exercisable at any time during the sublease and a renewal option to lease the
property for an additional five years at an increased rate. At December 31,
1997, the Company was obligated under various operating leases covering certain
equipment. Rent expense under operating leases for the years ended December 31,
1997, 1996 and 1995 was $273,265, $200,652 and $200,417, respectively. Future
minimum lease payments required under operating leases are as follows:
1998 $ 265,865
1999 255,361
2000 254,556
2001 238,785
Thereafter 152,437
----------
Total minimum payments required $1,167,004
==========
(F-24)
<PAGE>
Note 9: Income taxes
The Company records income taxes in accordance with Statement of Financial
Accounts Standards No. 109, "Accounting for Income Taxes", which requires the
asset and liability method of accounting for income taxes. Under this method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The Company has generated book and tax losses for the period and
since inception.
As of December 31, 1997, the Company had net operating loss carry forwards of
approximately $18 million for federal income tax purposes which are available to
reduce future taxable income and will expire in 2003 through 2011 if not
utilized and approximately $20 million 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 five
years.
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred income tax assets-
Deferred start-up costs $ 605,000 $ 1,540,000 $ 2,200,000
Net operating loss carry forward 6,355,000 4,885,000 3,300,000
Valuation allowance (6,247,000) (5,845,000) (4,800,000)
----------- ----------- -----------
Total deferred income tax assets $ 713,000 $ 580,000 $ 700,000
=========== =========== ===========
Deferred income tax liabilities-
Depreciation $ 713,000 $ 580,000 $ 700,000
----------- ----------- -----------
Total deferred income tax
Liabilities $ 713,000 $ 580,000 $ 700,000
=========== =========== ===========
</TABLE>
As the Company has generated net operating losses since its inception and there
is no assurance of future income, a valuation allowance of $6,247,000 has been
established at December 31, 1997 to recognize its deferred tax assets only to
the extent of its deferred tax liabilities. The Company will continue to
evaluate the need for such valuation allowance in the future.
Note 10: Significant customers
During the quarter ended March 31, 1998 and the year ended December 31, 1997,
the Company had sales of approximately $760,000 and $2.8 million, respectively,
to a single customer, which represented 30% and 35% of total sales,
respectively. Sales to this customer for the years ended December 31, 1996 and
1995 were approximately $2.2 million (32%) and $2.2 million (39%), respectively.
Additionally, the Company had sales of approximately $714,000 and $1.8 million
to another customer, which represents 28% and 23% of total sales
(F-25)
<PAGE>
for the quarter ended March 31, 1998 and year ended December 31, 1997,
respectively. Sales to this customer in 1996 and 1995 were approximately $1.9
million (28%) and $.7 million (12%), respectively.
Note 11: Commitments and contingencies
In June 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.
In December 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. The
March 14, 1995 Motion is currently stayed 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
(F-26)
<PAGE>
before the U.S. Court of Appeals. In June 1996, the U. S. Court of Appeals
reversed a portion of the earlier ruling that two of the patents were invalid,
and that Mobil did not infringe. The Company did not further appeal this issue
to the Supreme Court. 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 attorney's 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 Attorney's Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
stayed. The Company will vigorously defend against Mobil's claim for attorney's
fees and costs; however, there can be no assurances as to the outcome of this
litigation. The Company at present cannot predict when the Mobil motion for
attorney's fees and the AERT prejudicial misconduct motion for a new trial will
be addressed by the Delaware Court. The Company has not recorded any liability
related to such litigation at December 31, 1997 or March 31, 1998. Mobil Oil
divested its composites business in 1996 and no longer directly competes with
the Company.
In a related matter, the Company recently received a formal notice of allowance
from the United States Patent and Trademark Office concerning a related product
by process patent application, which has been pending throughout the litigation.
This is an application, which was filed on the same date as those currently in
litigation, although substantial additional disclosures have been made.
Note 12: Accounting for Rogers Plastic Reclamation Facility Fires
During 1996, the Company experienced two fires at the Rogers Plastic Reclamation
Facility. In September 1996, the Company experienced an extraordinary gain of
$67,100 relating to the insurance proceeds for the loss of finished goods
inventory destroyed. In addition, the final settlement of the insurance claim
relating to the capital equipment destroyed in the September fire resulted in a
gain of $167,034. The impact of the extraordinary gain on the net loss per
share of common stock was immaterial.
In connection with the December 1996 fire, the Company recorded an extraordinary
loss at December 31, 1996, of $130,368 and a receivable from the insurance
company in the amount of $1,001,657 which represented the difference between the
net book value of equipment lost in the December fire which the Company expected
to be reimbursed for by insurance proceeds.
During 1997, the Company recognized an extraordinary gain of $757,644 from the
insurance proceeds received relating to the fire at the Rogers facility.
Note 13: Subsequent Events
In April 1998, the Company obtained additional bridge financing of $410,000. In
connection with the financing obtained, 869,200 in stock warrants were issued.
The stock warrants expire on April 7, 2003 and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. The debt
and stock warrants were recorded at their estimated fair market value at the
date of the transaction. The value of the stock warrants has been treated as a
debt discount. The debt discount is being amortized over the life of the loan as
interest expense.
Subsequent to March 31, 1998, the Company entered into a pledge and security
agreement with one of its shareholders for a loan in the principal amount of
$300,000. In lieu of interest on said principal, the lender has agreed to
accept options to purchase up to 100,000 shares of the Company's common stock,
having such terms as shall be mutually agreed upon between the Company and the
lender.
(F-27)
<PAGE>
Also, subsequent to March 31, 1998, the Company entered in a capital lease
relating to a piece of equipment. The lease contains a bargain purchase option
of $1 at the end of the lease term. The capital lease obligation is $110,000.
(F-28)
<PAGE>
<TABLE>
<S> <C>
=============================================================== ============================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED
IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE ADVANCED ENVIRONMENTAL
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER RECYCLING TECHNOLOGIES, INC.
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE
COMPANY OR THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
____________________
TABLE OF CONTENTS Issuable upon exercise of outstanding
Class B Warrants:
PAGE 4,212,440 SHARES OF CLASS A
---- COMMON STOCK
Prospectus Summary 3
The Company 6
Risk Factors 6
Dilution 20
Use of Proceeds 21
Price Range of Company's
Equity Securities 21
Dividend Policy 22
Capitalization 23
Selected Financial Data 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 25
Business 36
Management 47
Principal Stockholders 52
Certain Transactions 54
Description of Securities 55
Experts 60
Index to Financial Statements F-1 _______________
PROSPECTUS
_______________
May 29, 1998
=============================================================== ============================================================
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 6 to the
Registration Statement on Form S-1 to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Springdale, and the State of Arkansas,
on the 29th day of May, 1998.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
BY: /S/ Joe G. Brooks
- --------------------------------------
JOE G. BROOKS,
President
Date: May 29, 1998
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 6 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ Sal Miwa Chairman of the Board May 29, 1998
- ------------------------------
SAL MIWA
/S/ Joe G. Brooks President and Director May 29, 1998
- ------------------------------
JOE G. BROOKS
/S/ Stephen W. Brooks Chief Executive Officer and Director May 29, 1998
- ------------------------------
STEPHEN W. BROOKS
/S/ Marjorie S. Brooks Secretary, Treasurer and Director May 29, 1998
- ------------------------------
MARJORIE S. BROOKS
/S/ Jerry B. Burkett Director May 29, 1998
- ------------------------------
JERRY B. BURKETT
/S/ Peter Lau Director May 29, 1998
- ------------------------------
PETER LAU
/S/ James H. Culp Director May 29, 1998
- ------------------------------
JAMES H. CULP
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 13, 1998 (and to all references to our Firm) included in or made a
part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
May 15, 1998
