<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 1-10367
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
DELAWARE 71-0675758
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 N. Jefferson Street
P. O. Box 1237
Springdale, Arkansas 72765
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (501) 750-1299
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES: X NO:
As of March 31, 1998, the number of shares outstanding of the Registrant's Class
A Common Stock, which is the class registered under the Securities Exchange Act
of 1934, was 20,530,147 and the number of shares outstanding of the Registrant's
Class B Common Stock was 1,465,530.
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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 Financial Statements
Balance Sheets, March 31, 1998 and December 31, 1997 1-2
Statements of Operations,
Three Months Ended March 31, 1998 and 1997 3
Statements of Cash Flows,
Three Months Ended March 31, 1998 and 1997 4
Notes to Financial Statements 5-14
Review Report of Arthur Andersen LLP,
Independent Public Accountants 15
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-22
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 22-23
Signatures 24
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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
1998 1997
(unaudited) ----
-----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,397 $ 45,428
Accounts receivable 807,867 540,739
Note receivable 67,571 81,571
Inventories 693,866 735,697
Prepaid expenses and other 180,541 181,474
----------- ----------
Total current assets 1,775,242 1,584,909
----------- ----------
Buildings and equipment, at cost:
Buildings 915,454 692,781
Machinery and equipment 6,710,958 6,209,614
Transportation equipment 91,524 98,242
Office equipment 55,833 156,064
Construction in progress 3,023,725 2,586,483
----------- ----------
10,797,494 9,743,184
Less accumulated depreciation
and amortization 4,312,940 4,093,031
----------- ----------
Net buildings and equipment 6,484,554 5,650,153
----------- ----------
Other assets, at cost less accumulated
amortization of $250,108 at March 31,
1998 and $242,999 at December 31,
1997 396,740 406,266
----------- ----------
$ 8,656,536 $7,641,328
=========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
1
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, 1998 December 31,
(unaudited) 1997
----------- ----
<S> <C> <C>
Current liabilities:
Accounts payable-trade $2,018,557 $1,571,598
Accounts payable-related parties 1,116,509 1,136,272
Current maturities of long-term debt:
Related parties 448,952 386,456
Other 180,000 108,454
Accrued liabilities 365,916 310,681
Notes payable, net of debt discount
of $270,572 (1998) $136,111 (1997) 1,914,428 1,189,097
---------- ----------
Total current liabilities 6,044,362 4,702,558
---------- ----------
Long-term debt, less current maturities:
Related parties 376,990 465,656
Other 18,106 122,756
---------- ----------
Total long-term debt 395,096 588,412
---------- ----------
Commitments and contingencies (Note 6)
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) shares issued and outstanding 205,302 203,130
Class B convertible common stock, $.01 par
value; 7,500,000 shares authorized, 1,465,530
shares issued and outstanding 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
---------- ----------
$8,656,536 $7,641,328
========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
2
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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Sales $2,507,300 $1,747,802
Cost of Goods Sold 2,222,490 1,993,546
---------- ----------
Gross Margin 284,810 (245,744)
Selling and Administrative Costs 645,184 338,138
---------- ----------
Operating Loss (360,374) (583,882)
Interest Expense, net (158,567) (35,559)
---------- ----------
Net Loss $ (518,941) $ (619,441)
========== ==========
Net loss per share of
common stock (basic and diluted) $ (.02) $ (.03)
========== ==========
Weighted average number of
common shares outstanding 21,995,434 20,666,678
========== ==========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
3
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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (518,941) $(619,441)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 272,993 264,661
Amortization of other assets 87,908 6,192
Amortization of debt discount 80,911 -
Interest paid through issuance of Class A
Common Stock 39,867 -
Loss on disposition of equipment 1,964 -
Decrease (increase) in other assets 2,417 (4,385)
Changes in operating assets and operating
liabilities 204,190 46,638
----------- ---------
Net cash provided by (used in) operating activities 171,309 (306,335)
----------- ---------
Cash flows from investing activities:
Additions to buildings and equipment (1,097,181) (86,730)
Insurance recoveries 4,722 250,000
----------- ---------
Net cash (used in) provided by investing activities (1,092,459) 163,270
----------- ---------
Cash flows from financing activities:
Prepaid stock subscriptions 53,750 244,000
Proceeds from issuance of notes 885,000 -
Payments on notes (101,381) (154,560)
Proceeds from exercise of stock options and
warrants 63,750 -
----------- ---------
Net cash provided by financing activities 901,119 89,440
----------- ---------
Decrease in cash and cash equivalents (20,031) (53,625)
Cash and cash equivalents:
Beginning of period 45,428 82,756
----------- ---------
End of period
$ 25,397 $ 29,131
=========== =========
</TABLE>
The accompanying notes to the financial statements should be read in conjunction
with these statements.
4
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Unaudited Information
The financial statements included herein have been prepared by Advanced
Environmental Recycling Technologies, Inc. (the Company 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 disclosures are adequate to make the information presented herein not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. Accordingly, the Company has
reclassified certain prior period amounts to conform to the current period
presentation.
Note 2: Organization and Description of the Company
The Company manufacturers a line of composite building materials from reclaimed
plastic and wood fiber waste for certain specialized applications in the
construction industry and is comprised of two separate, yet interrelated
manufacturing facilities located in Junction, Texas and Springdale, Arkansas. A
second composite-manufacturing operation in Springdale, Arkansas recently
commenced operations in the second quarter of 1998. The Company's customer base
consists of a number of regional and national door and window manufacturers,
industrial flooring 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.
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Note 3: Future Operations
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At March 31, 1998, the Company had a working capital deficit of
$4,269,120 and had incurred operating losses of $360,374 for the three months
ended March 31, 1998. For the quarter ending March 31, 1998, the Company showed
operations improvement and generated cash flows from operations, but still
yielded a net loss of $518,941. 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
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 in the past few
years has, in large part, been supported by certain major shareholders in
conjunction with several accredited investors. The Company has recently drawn
interim bridge financing of $2.5 million. There is no commitment for such
shareholders to continue such support. The Company also has claims in litigation
outstanding against it as described in Note 6. 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 are sufficient to generate income from operations. Further,
if the litigated claims discussed in Note 6 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 that
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
6
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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 and believes that such capital will be sufficient to
support the Company for the remainder of 1998 and until such time as the Company
consistently generates positive cash flow from operations. 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 4: Statements of Cash Flows
In order to determine net cash provided by (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:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
(UNAUDITED) (UNAUDITED)
-------------- --------------
Receivables $(267,128) $(669,273)
Note receivable 14,000 -
Inventories 41,831 42,575
Prepaid expenses and other (66,944) (13,078)
Accounts payable -
trade and related parties 427,196 599,607
Accrued liabilities 55,235 86,807
--------- ---------
$ 204,190 $ 46,638
========= =========
7
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Cash paid for interest $ 22,291 $ 35,522
Cash paid for income taxes - -
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents.
Note 5: Significant Accounting Policies
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of the following:
March 31, 1998 December 31,
(unaudited) 1997
-------------- ------------
Raw materials $291,990 $257,114
Work in process 343,452 319,034
Finished goods 58,424 159,549
-------- --------
$693,866 $735,697
======== ========
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. 121
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 March 31,
1998. Such assessment required the
8
<PAGE>
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.
9
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Note 6: Commitments and Contingencies
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) the AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents,
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by
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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 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 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
11
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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 7: NASDAQ Listing Requirements
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 requires, 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 its minimum bid price as of February 23, 1998 was below $1.00 and it
had until May 28, 1998 to bring the price of its stock up to a minimum $1.00
bid. As of May 1, 1998, the Company's closing bid price was $1.5625. 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. The Company is
currently evaluating a reduced 1 for 2 reverse stock split although no final
decision has been made as to if or when it might be 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 approximately $2,217,078 and is currently
implementing a plan to recapitalize and raise a minimum of an additional $2
million in equity capital to expand its business, as well as, 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 net
asset value for continued listing.
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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.
Note 8: Bridge Financing
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. 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
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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 the previous bridge financings.
Note 9: Subsequent Events
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.
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.
14
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.
We have reviewed the accompanying balance sheet of Advanced Environmental
Recycling Technologies, Inc. (a Delaware corporation) as of March 31, 1998, and
the related statements of operations and cash flows for the three-month periods
ended March 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/S/ Arthur Andersen LLP
Dallas, Texas
May 8, 1998
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
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 and to-
date, the Company has received 14 United States Patents on its technologies and
processes and additional patent applications are currently pending. (See Note
6: Commitments and Contingencies) 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 experienced during the last half of 1996, a series of extensive
fires that caused substantial damage at its Rogers, Arkansas plastic reclamation
facility. These fires in September and December of 1996 restricted the
Company's plastic raw material supplies, which disrupted manufacturing
operations and thus limited composite sales growth. The Company has received
$1.95 million in settlement of this claim. The Company resumed initial plastic
reclamation operations during December of 1997 at a new location in Springdale,
Arkansas and intends to further increase production during 1998. The initial
Rogers, Arkansas facility was leased, and the company added additional leasehold
improvements to the site. The lease rate was on a per pound of product produced
basis. The facility was a converted feed mill and had scales, a railroad spur,
extensive storage bins, and over 60,000 square feet of manufacturing area. The
two fires severely damaged both the leased portion as well as the Company's
leasehold improvements. The Company's manufacturing equipment was also
extensively damaged in the fires. The Company has used insurance proceeds to
rebuild the initial part of the facility destroyed in the first September fire,
and has recently rebuilt the Company's leasehold improvements damaged in the
December fire. However, the Company has not yet concluded a formal written
lease agreement with its landlord. Although the Company has established
alternate supply sources for plastic and is currently meeting its customers
minimum requirements, it will require its own plastics production capabilities
to continue to improve and come back on-line at increased efficiencies to
further provide the quality, consistency, price, and additional volumes of
plastic required for the Company to increase and maintain composite sales to
levels required to attain and sustain positive cash flows and profitability.
The Company has expanded its production capacity by adding a composites facility
in Springdale, Arkansas, and has commenced operations in phases during early
1998. In
16
<PAGE>
addition to plastic reclamation and composite extrusion, a moulding and millwork
operation and a new paint facility has recently commenced operations at the
Springdale site. The new paint line has experienced startup and equipment delays
and has caused the Company to miss and backup some orders during the first
quarter. The Company has implemented interim processes for painting while the
equipment problems are ironed out. A substantial amount of the Company's
MoistureShield product line is currently being shifted in phases to the new
facility to allow the existing Texas facility to increase and improve efficiency
and to focus more on ChoiceDek. The Company has experienced increased customer
demand for its engineered composite products and the Company's efforts are now
primarily directed towards increasing production capacity, improving production
efficiencies, and promptly attaining positive cash flows and profitability. With
its internal plastic reclamation facilities now coming back on-line, management
believes that sufficient raw materials will shortly become available so it will
be able to further increase production and sales to sufficient levels to sustain
positive cash flows and profitability.
The Company has commenced an expansion program intended to increase production
capacity of its residential decking for Weyerhaeuser and its other OEM
customers. The Company has to-date experienced production limitations regarding
its ability to increase supply for the residential decking market and has only
been able to supply its ChoiceDek line to a limited number of distribution
centers in markets primarily in the Southwest and West. The Company also has
several additional large MoistureShield OEM projects pending with existing and
new customers, which it intends to commence during late second quarter 98 to
bring on-line in conjunction with upcoming increased capacity. The Company also
intends to obtain substantial manufacturing efficiencies and lower raw material
costs at the new facility.
The Company currently operates three extrusion lines at the Junction facility.
A fourth extrusion line recently commenced operation at the new Springdale
facility. Due to increased composite sales demands the Company is working to
expand its composite manufacturing capacity by the addition of a fifth and sixth
extrusion line in the near future at the new Arkansas facility. The Company
also intends to further upgrade the Junction facility with an increased focus on
its decking products.
The Company is currently unable to predict the future size of the markets for
its composite building products, however, the Company believes that the national
door and window and residential decking material markets are significant. The
Company believes that it can further 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. In addition, the
Company's marketing focus utilizes outside commissioned sales representatives
for a portion of its sales accounts.
17
<PAGE>
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. Cost of goods sold
increased to $2,222,490 for 1998 vs. $1,993,546 for the comparable period in
1997. Gross margin increased to a positive $284,810 in 1998 vs. a negative
($245,744) for 1997, a $530,554 improvement. Thus gross margin improved from a
minus (14%) of net sales to a positive 11% of net sales for the first quarter of
1998. However, the Company reported an operating loss of ($360,374) for 1998
vs. a ($583,882) operating loss for the first quarter of 1997, an improvement of
$223,508. The net loss for the quarter was ($518,941) or ($.02) per share vs. a
net loss of ($619,441) or ($.03) per share for the comparable period in 1997.
Of the first quarter in 1998 ($518,941) loss, the majority of the loss was due
to a substantial increase in SG&A, plus interest costs i.e.: $645,185 SG&A for
1998, vs. $338,138 for 1997, of which such increase was primarily attributable
to startup of the new Springdale plant in conjunction with one time fees in
regard to professional and legal expenses and debt acquisition costs in regard
to the short-term bridge loans. This combined with increased interest expense
for the first quarter 1998 of $158,567 vs. $35,559 for 1997 constitutes the
majority of the loss. The Company has expanded its Springdale plant with short-
term debt and intends to restructure said debt and recapitalize during the
second and third quarters of 1998, thus reducing these extraordinary expenses in
subsequent periods while continuing to increase and improve gross margins in
order to obtain positive cash flows and profitability from operations, in
conjunction with what it hopes to be minimal dilution to its shareholders.
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.
The net sales of $2,507,300 for the quarter ended March 31, 1998, represented a
significant increase over the first quarter of 1997, and affirms that the
Company continues to have strong demand for its products, and is continuing to
increase production.
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 of the Rogers, Arkansas plastics facility and the
Company having to continue to purchase a large portion of its raw materials from
outside sources. The Company also experienced higher overhead during the first
quarter vs. the comparable period a year ago regarding insurance premiums,
security costs, and lease payments involving the new Springdale, Arkansas
manufacturing facility. The Company continued to improve in operations and
generated a positive gross margin of $284,810 for the quarter vs. a negative
gross margin of $245,744 for the comparable quarter a year ago. Real dollars
and the overall cost of goods sold to sales ratio decreased from 1997 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
18
<PAGE>
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.
Significant categories are as follows:
Expense Category 1998 1997
---------------- ---- ----
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
========== ==========
Selling, general and administrative expenses were $645,184 compared to $338,138
for the first quarter of 1997. The costs also 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 acquisitions costs relating to the recent bridge
loan financing activities in regard to financing ongoing plant and manufacturing
expansion.
Operating loss for the quarter ended March 31, 1998, was $360,374, a significant
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 change overs, 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
19
<PAGE>
have a material adverse effect on the Company's prospects, including its ability
to achieve anticipated efficiencies and manufacturing sales levels.
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. The
increased deficit is partly attributable to the Company's expansion and
construction program into the Springdale site and construction of a new paint
line at the Springdale facility with short-term debt. Losses from operations
were in conjunction with short term financing costs while the Company maintained
its customer base and recovered from the fires is the primary reason for the
deficit. Cash and cash equivalents decreased $20,031 in the first three months
of 1998. Significant components of that decrease were: (i) cash used in
operating activities of $171,309, which consisted of a net loss for the period
of $518,941, decreased by depreciation and amortization of $441,812, and other
uses of cash of $248,438 (ii) cash used in investing activities of $1,092,459,
and (iii) cash provided by financing activities of $901,119. Payments on notes
during the period were $101,381. At March 31, 1998, the Company had notes
payable in the amount of $2,938,476, of which $2,543,380 were current notes
payable or current portion of long-term debt.
The Company has commenced a substantial expansion program at its Springdale
facility, which is intended to substantially increase composite manufacturing
capabilities and production through the addition of a second extrusion and
millwork facility. The payables increase during the quarter ended March 31,
1998 is directly attributable to this expansion program. This expansion will
continue through second quarter 1998, as additional extrusion lines are added.
The Company maintains an accounts receivable factoring agreement for up to
$700,000 through an affiliated company of a related party. The terms of this
agreement call for the factor to advance 99.12% of the total of invoices
presented by the Company and for the Company to indemnify the factor against
loss of the amounts advanced. The Company also maintains a line of credit from
the major stockholder, which consists of a long-term note payable, which had a
balance of $825,942 at March 31, 1998.
Beginning in the fourth quarter of 1997 and through April 7, 1998, the Company
entered into a loan agreement and received bridge loans totaling $2.51 million
from a group of institutional and accredited investors for ongoing operations
and expansion of the Springdale facility. In addition, under terms of the
agreement the Company can obtain additional bridge funding for expansion
purposes, from the same source for up to $1.3 million although there is no
formal guarantee that said funders must continue to fund the Company. Said
Bridge loans are at 12% and interest can be paid in cash or Class A common
stock. In addition, the funders have received two warrants to acquire Class A
common stock for a period of five years for each dollar they loan the Company.
Historically, revenues have not been sufficient to support the Company's current
operational needs. However, the Company has continued to
20
<PAGE>
improve and has generated positive cash flows from operations during the
quarter. Furthermore, the Company continues to attempt to improve production
rates and efficiencies in an effort to reduce or eliminate the need for
additional future capital to support existing operations and its expansion
program. Further, continued improvements in production efficiency and capacity
along with consistent and reliable raw material supplies will be required for
the Company to increase and maintain sales to levels that will allow the Company
to attain and sustain profitability. There can be no assurance that such
improvements in production efficiency or capacity will continue to improve or
can be sustained. The Company is also evaluating additional equity sources of
capital, including possible conversion of existing and outstanding warrants.
Although, there is no guarantee warrant holders would convert to help re-
capitalize the Company, proceeds would be used to further expand production
capabilities of the Springdale facility. In addition, the Company is also
pursuing an additional $2.5 million financing package through a State Economic
Development Agency for acquisition, additional manufacturing equipment and
further production expansion of the Arkansas facility.
There can be no assurance that the Company will be able to achieve increased
production volumes to support increasing customer requirements or sales levels
or that the Company can continue to obtain additional capital resources to
support manufacturing operations if required.
If the Company is unable to achieve and maintain a successful level of operation
in the near future or unable to secure additional debt or equity financing to
support its expansion program in conjunction with ongoing operations, or were it
to be assessed the Mobil legal claims described in Note 6 to the financial
statements, it is likely the Company will be unable to continue as a going
concern.
The foregoing discussion contains certain estimates, predictions, projections
and other forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)
that involve various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based, are made in good
faith and reflect the Company's current judgment regarding the direction of its
business, actual results will almost always vary, sometimes materially, from any
estimates, predictions, projections, assumptions, or other future performance
suggested herein. Some important factors (but not necessarily all factors) that
could affect the Company's sales volumes, growth strategies, future
profitability and operating results, or that otherwise could cause actual
results to differ materially from those expressed in any forward-looking
statement include the following: market, political or other forces affecting the
pricing and availability of plastics and other raw material accidents or other
unscheduled shutdowns affecting the Company's, its suppliers or its customers
plants, machinery, or equipment; competition from products and services offered
by other enterprises; state and federal environmental, economic, safety and
other policies and regulations, any changes therein, and any legal or regulatory
delays or other factors beyond the Company's control; execution of planned
capital projects; weather conditions affecting the Company's operations or the
areas in which the Company's products are marketed; adverse rulings, judgments,
or settlements
21
<PAGE>
in litigation or other legal matters. The Company undertakes no obligation to
publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
PART II. Other Information
Item 1. Legal Proceedings
On June 9, 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling Technologies,
Inc. In its complaint, Mobil sought entry of a declaratory judgment that: (a)
AERT is without right or authority to threaten suit against Mobil or its
customers for alleged infringement of AERT patents; (b) the AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
On December 8, 1992, the Company answered Mobil's Complaint. In its Answer, the
Company denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for: (1) an illegal combination or contract in restraint of
trade in violation of federal antitrust laws; (2) a pattern of intentional
misconduct constituting an attempt to monopolize in violation of federal
antitrust laws; (3) breach of a confidential relationship between Mobil and the
Company; and (4) unfair competition. The Company sought monetary damages,
punitive damages and injunctive relief. Mobil filed an answer to AERT's
counterclaims, denying any liability. The Delaware Court then bifurcated the
trial into patent and non-patent issues and ordered the patent issues tried
first.
In February 1994, after a trial on the patent issues, a Delaware jury returned a
verdict that four AERT patents on its composite product technology were invalid.
The jury also determined that Mobil had not infringed two of the four patents,
which AERT had asserted against Mobil. The jury verdict answered a number of
interrogatories on the factual issues, and rendered advisory findings for the
Court on Mobil's allegation that AERT had obtained its patents by inequitable
conduct. Thereafter, the Judge adopted the jury's advisory findings on
inequitable conduct and held that each of the four AERT patents were
unenforceable for failure to disclose certain alleged prior art to the patent
office during patent prosecution.
Because of the nature of certain of the jury verdict interrogatory responses,
AERT's counsel concluded that the verdict was adversely affected by improper
conduct by Mobil counsel during trial, and false statements of law and fact made
during closing argument, that caused the jury to misapply the law on inequitable
conduct and to render clearly erroneous findings. Consequently, AERT moved for
a new trial. That motion was denied. The Company's additional post-trial
motions were also denied by the Delaware Court. On March 14, 1995, the
22
<PAGE>
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 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 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.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BY: /S/ Joe G. Brooks BY: /S/ David Sparks
- -------------------------------------- ---------------------------------------
JOE G. BROOKS DAVID SPARKS
President Corporate Controller
Date: May 14, 1998 Date: May 14, 1998
24
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,397
<SECURITIES> 0
<RECEIVABLES> 875,438
<ALLOWANCES> 0
<INVENTORY> 693,866
<CURRENT-ASSETS> 1,775,242
<PP&E> 10,797,494
<DEPRECIATION> 4,312,940
<TOTAL-ASSETS> 8,656,536
<CURRENT-LIABILITIES> 6,044,362
<BONDS> 0
0
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<COMMON> 219,957
<OTHER-SE> 2,217,078
<TOTAL-LIABILITY-AND-EQUITY> 8,656,536
<SALES> 2,507,300
<TOTAL-REVENUES> 2,507,300
<CGS> 2,222,490
<TOTAL-COSTS> 645,184
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<INTEREST-EXPENSE> 158,567
<INCOME-PRETAX> (518,941)
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