<PAGE> 1
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 September 30, 1999
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)
914 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) 756-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES: X NO:
As of September 30, 1999 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 23,515,497 and the number of shares outstanding of the
Registrant's Class B Common Stock was 1,465,530.
<PAGE> 2
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
<S> <C>
ITEM 1 Financial Statements
Balance Sheets, September 30, 1999 (unaudited)
and December 31, 1998 1-2
Statements of Operations, (unaudited)
Three Months and Nine Months Ended
September 30, 1999 and 1998 3
Statements of Cash Flows, (Unaudited)
Nine Months Ended September 30, 1999 and 1998 4
Notes to Financial Statements 5-12
Review Report of Independent Public Accountants 13
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
ITEM 3 Quantitative and Qualitative Disclosure about Market Risk 20
ITEM 4 Year 2000 Update 20-21
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 22
Signatures 23
</TABLE>
<PAGE> 3
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 December 31,
(unaudited) 1998
------------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 505,024 $ 614,494
Trade receivables, net of allowance of
$10,150 (1999) and $20,000 (1998) 1,683,038 712,894
Inventories 892,217 846,571
Prepaid expenses and other 178,835 89,266
----------- -----------
Total current assets 3,259,114 2,263,225
----------- -----------
Buildings and equipment:
Buildings and leasehold improvements 1,015,167 1,041,035
Machinery and equipment 13,321,037 10,937,425
Transportation equipment 162,017 108,355
Office equipment 192,210 159,295
Construction in progress 2,448,906 1,502,520
----------- -----------
17,139,337 13,748,630
Less accumulated depreciation
and amortization 6,844,324 5,452,638
----------- -----------
Net buildings and equipment 10,295,013 8,295,992
Other assets, at cost less accumulated
amortization of $293,017 (1999)
and $271,570 (1998) 444,160 382,710
----------- -----------
$13,998,287 $10,941,927
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 December 31,
(unaudited) 1998
------------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 3,985,190 $ 2,606,034
Accounts payable - related parties 1,570,335 895,170
Current maturities of long-term debt:
Related parties 522,878 648,425
Other 93,440 199,873
Current maturities of capital lease obligation 21,768 19,263
Accrued liabilities 581,370 435,070
Notes payable - related parties 300,000 --
Notes payable - other, net of debt discount
of $45,255 (1998) 1,969,026 2,085,325
------------ ------------
Total current liabilities 9,044,007 6,889,160
------------ ------------
Long-term debt, less current maturities:
Related parties -- 97,707
Other 7,032 52,747
------------ ------------
Total long-term debt 7,032 150,454
------------ ------------
Capital lease obligation 60,092 76,922
------------ ------------
Accrued dividends payable on convertible
preferred stock 264,794 47,890
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $1 par value; 5,000,000
shares authorized, 2,900 shares issued and
outstanding 2,900 2,900
Class A common stock, $.01 par value;
75,000,000 shares authorized, 23,515,497 (1999)
and 22,245,639 (1998) shares issued and
outstanding 235,155 222,456
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 28,086,342 26,984,318
Accumulated deficit (23,716,690) (23,446,828)
------------ ------------
Total stockholders' equity 4,622,362 3,777,501
------------ ------------
Total liabilities and stockholders' equity $ 13,998,287 $ 10,941,927
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,794,834 $ 3,286,357 $ 15,135,817 $ 8,586,980
Cost of goods sold 4,593,646 3,186,944 12,221,812 8,231,051
------------ ------------ ------------ ------------
Gross margin 1,201,188 99,413 2,914,005 355,929
Selling and administrative costs 1,050,311 745,632 2,632,635 2,212,663
------------ ------------ ------------ ------------
Operating income (loss) 150,877 (646,219) 281,370 (1,856,734)
Interest expense, net (109,539) (344,004) (334,328) (847,887)
------------ ------------ ------------ ------------
Income (loss) before dividends on
convertible preferred stock 41,338 (990,223) (52,958) (2,704,621)
Accrued dividends on convertible
preferred stock (73,096) -- (216,904) --
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (31,758) $ (990,223) $ (269,862) $ (2,704,621)
============ ============ ============ ============
Net loss per share of common
stock (Basic and Diluted) $ .00 $ (.04) $ (.01) $ (.12)
============ ============ ============ ============
Weighted average number of common shares
outstanding 24,981,027 22,323,319 24,382,523 22,636,210
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (269,862) $(2,704,621)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,391,686 1,009,949
Amortization of other assets 68,984 329,314
Amortization of debt discount 45,255 528,248
Dividends accrued on convertible
preferred stock 216,904 --
Interest paid through issuance of Class A
common stock 124,115 188,519
Provision for doubtful accounts (9,850) --
Loss on disposition of equipment -- 1,964
Increase in other assets (82,897) (516)
Changes in current assets and current liabilities (394,625) 385,913
----------- -----------
Net cash provided by (used in) operating activities 1,089,710 (261,230)
----------- -----------
Cash flows from investing activities:
Additions to buildings and equipment (1,831,719) (2,796,063)
Insurance proceeds -- 4,722
----------- -----------
Net cash used in investing activities (1,831,719) (2,791,341)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes 300,000 1,380,842
Payments on notes (643,744) (261,674)
Payments on capital lease obligations (14,325) (11,227)
Proceeds from issuance of preferred stock -- 100,000
Proceeds from exercise of stock options and
warrants 990,608 1,869,732
----------- -----------
Net cash provided by financing activities 632,539 3,077,673
----------- -----------
(Decrease) increase in cash and cash equivalents (109,470) 25,102
Cash, beginning of period 614,494 45,428
----------- -----------
Cash, end of period $ 505,024 $ 70,530
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
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. The Company has reclassified
certain prior period amounts to conform to the current period presentation.
Note 2: Description of the Company
The Company manufactures a line of composite building materials from reclaimed
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 components, windowsills,
brick mould, fascia board, industrial flooring and decking. The Company is
comprised of two 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, industrial flooring
companies and Weyerhaeuser, the Company's primary decking customer.
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. The Company has incurred net losses since its inception and has
never operated over an extended period at successful manufacturing levels. The
losses have primarily been caused by problems in maintaining significant
production volumes of products and in producing products at economically
feasible operating cost levels. Also at September 30, 1999, the Company had a
working capital deficit of $5,734,893.
In July 1999, Nasdaq sent the Company correspondence stating its "concerns over
the Company's ability to sustain compliance with the Nasdaq's continuing
inclusion requirements" and asked the Company about the bond closing delays, its
negative working capital position, its plans to remedy its auditor's going
concern opinion and concerns about potential issuance of more shares. Nasdaq
also requested certain information from the Company for it to evaluate. The
Company submitted information in late July, and awaits further correspondence
from Nasdaq.
5
<PAGE> 8
Delisting of the Company's common stock results in a redemption event under the
preferred stock agreements. However, the holders of the preferred stock have no
right to deliver a redemption notice following the occurrence of a redemption
event relating to delisting of the Company's stock, if the Company pays to each
preferred stock holder within five business days after the occurrence of such
redemption event, as liquidated damages for the decrease in the value of the
preferred stock, which will result from the occurrence of such event, an amount
equal to 10% of the aggregate stated value of the shares of preferred stock then
held by each holder. The amount shall be payable, at the Company's option, in
cash or shares of common stock (based upon a price per share of common stock
equal to 90% of the variable conversion price in effect (or which would have
been in effect if a milestone failure had previously occurred) as of the date of
such redemption event). If such a redemption event were to occur, it is the
Company's intention to pay the above penalty in shares of the Company's common
stock. Delisting of the Company's stock also results in an event of default
under the bridge financing agreements. An event of default results in all the
then outstanding principal amounts and unpaid interest becoming due and payable
immediately. It is unlikely that the Company would have the financial resources
to pay its obligations under the bridge financing agreements under an event of
default. Delisting would also result in the Company's stock being moved to
over-the-counter bulletin board, which could result in less liquidity for the
holders of the Company's stock.
In the past few years, the Company has been supported, in large part, by certain
major shareholders in conjunction with several accredited investors. As of
September 30, 1999, approximately $3.16 million had been initially borrowed in a
series of bridge loans, and the Company had converted and/or repaid
approximately $1,050,000 of said amount as of November 10, 1998, through a
placement of preferred stock. The Company paid down an additional $104,615 as of
March 31, 1999, and an additional $95,385 in April 1999, in lieu of any penalty
warrants. The bridge note holders have extended the remaining $1.9 million until
December 1, 1999. During the second quarter, the majority shareholder loaned the
Company $300,000, which is due on demand. There is no commitment for such
shareholders to continue such support or for the bridge holders to restructure
their remaining notes.
The Company is currently completing a $16.5 million tax-exempt bond-financing
package through the City of Springdale, Arkansas, in conjunction with the
Arkansas Development Finance Authority for acquisition and further expansion of
the Arkansas facility. On October 14, 1999, $16.5 million tax-exempt bonds were
closed into escrow. The financing package was recently approved by the City
Council of Springdale, Arkansas. Bond proceeds of $10.4 million are dedicated to
be used to expand output capacity. Bond proceeds of $1,750,000 must be used to
acquire the existing Springdale plant, which is currently leased. Bond proceeds
are also allocated to be used to refinance up to $2,000,000 of bridge financing.
The remaining proceeds would be used for a debt service reserve fund, one year
of construction period interest and financing costs. The Company is working to
finalize and complete this bond-financing package during the fourth quarter of
1999, with the pending completion of a $5 million government guaranteed loan
package in conjunction with an Arkansas based bank. The Company's current
financing and operating plan is dependent upon closure of the $16.5 million bond
financing package, and, to a lesser extent, closure of the $5 million government
guaranteed loan package. There is no assurance that the Company will be
successful in its efforts to complete the above described bond financing in a
timely manner or complete the process and receive the bond proceeds out of
escrow.
6
<PAGE> 9
The Company also has claims in litigation outstanding against it as described in
Note 6. The outcome of the litigation is still uncertain. 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 continue to improve efficiencies and mass produce and market its
products at economically feasible levels, while sustaining positive cash flows
and increasing profitability.
The Company began implementing a production plan in 1998, which was designed to
focus and streamline production at two plants and increase sales to levels
sufficient to support operations. Although the Company is nearing completion of
its initial production plan as it works to finish construction of the third
Arkansas extrusion line and implement additional plastic recycling and material
transfer equipment, it will require an additional $700,000 to complete this
work. Additional financial resources will be necessary to fund maturities of
debt and other obligations as they come due late in 1999, if the $16.5 million
bond issue is not successfully released from escrow in a timely manner.
There is no assurance that the Company will be able to successfully complete the
above mentioned refinancing plan or continue to improve and sustain operating
efficiencies beyond current levels. There is no assurance 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 for a sustained period of time, reduce its current
payables or 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 operating activities, net loss has
been adjusted by, among other things, changes in operating assets and operating
liabilities, excluding changes in cash and
7
<PAGE> 10
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>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
(unaudited) (unaudited)
------------------ ------------------
<S> <C> <C>
Receivables $ (960,294) $ (384,031)
Note receivable -- 15,000
Inventories (45,646) (22,249)
Prepaid expenses and other (30,317) (125,870)
Accounts payable -
trade and related parties 495,332 731,210
Accrued liabilities 146,300 171,853
----------- -----------
$ (394,625) $ 385,913
=========== ===========
Cash paid for interest $ 131,131 $ 34,374
Cash paid for income taxes -- --
</TABLE>
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents.
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(unaudited) (unaudited)
------------------ ------------------
<S> <C> <C>
Notes payable for financing
of insurance policies $ 106,788 $104,027
Accounts/notes payable for equipment 1,558,989 140,006
Capital lease obligation for equipment -- 110,000
Class A common stock issued in payment
of accounts payable -- 11,033
Series B preferred stock issued in payment
of accounts payable - related parties -- 400,000
Series B preferred stock issued in payment
of notes payable -- 100,000
</TABLE>
8
<PAGE> 11
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:
<TABLE>
<CAPTION>
September 30, 1999 December 31,
(unaudited) 1998
------------------ ------------
<S> <C> <C>
Raw materials $543,860 $486,068
Work in process 238,975 263,573
Finished goods 109,382 96,930
-------- --------
$892,217 $846,571
======== ========
</TABLE>
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 September
30, 1999. 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.
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<PAGE> 12
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 $10,295,013 at September 30, 1999.
Note 6: 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 the complaint, Mobil sought entry of a declaratory
judgment that:
o AERT was without right or authority to threaten suit against Mobil or
our customers for alleged infringement of AERT patents;
o certain AERT patents were invalid and unenforceable; and
o Mobil had not infringed the AERT patents through any products or
method.
Mobil sought no monetary damages in that suit, but did seek reimbursement of
its attorneys' fees.
The Company denied Mobil's claims and asserted counterclaims against Mobil and
three Mobil executives for:
o an illegal combination or contract in restraint of trade in violation
of federal antitrust laws;
o a pattern of intentional misconduct constituting an attempt to
monopolize in violation of federal antitrust laws;
o breach of a confidential relationship between Mobil and AERT; and
o unfair competition.
The Company sought monetary damages, punitive damages and injunctive relief.
In February 1994, after a trial on the patent issues, the court held that four
AERT patents on the Company's composite product technology were invalid and that
Mobil had not infringed the patents.
In March 1995, the Company filed a motion with the Court alleging prejudicial
misconduct by Mobil prior to the trial. The Company also filed an appeal with
the U.S. Court of Appeals in July 1995. In June 1996, the U. S. Court of Appeals
reversed a portion of the earlier ruling which had held that two of the patents
were invalid, and that Mobil did not infringe but nevertheless ruled that Mobil
did not infringe such patents. The Company did not further appeal this ruling.
In August 1994, Mobil filed a motion seeking an award of attorneys' fees and
costs for $2.7 million. In September 1999, the Delaware Court dismissed the
Mobil Motion for Attorneys' Fees, for a second time. The Court also dismissed
AERT's Motion for New Trial Based Upon Discovery Misconduct and AERT's Motion to
Supplement Record.
10
<PAGE> 13
The Company have evaluated this recent development and after consultation with
legal counsel, have filed a notice of appeal on dismissal of the prejudicial
misconduct motion; however, there can be no assurance that the Company will
receive a more favorable outcome upon appeal.
Mobil has also filed a notice of appeal on denial and dismissal of the
attorneys' fees motion. The AERT counterclaims are still pending although Mobil
is no longer in the composite products business.
Note 7: NASDAQ Listing Requirements
The Company's Class A Common Stock is traded in the over-the-counter market and
is listed on The Nasdaq Stock Market(R) under the symbol AERTA. In order to
remain listed on Nasdaq, the Company is required to meet certain criteria
(maintenance standards) established by Nasdaq. One such maintenance standard is
a minimum bid price of $1.00 per share. The Company has been formally notified
by Nasdaq of increased listing and maintenance standards for both the Nasdaq
National and SmallCap Markets. The increased Nasdaq listing standards went into
effect on February 23, 1998. The increased listing and maintenance standards
include a minimum bid $1.00 common stock price and a $2 million net asset value.
On October 13, 1998, the Company was notified that it did not meet the $1.00
minimum bid price for continued listing. The Company was given ninety days,
until January 13, 1999, to regain compliance. The Company did not achieve
compliance during the grace period and subsequently requested a hearing. On
March 12, 1999, the Company attended a hearing in the matter of the continued
listing of the Company's stock in The Nasdaq Stock Market, presented its plan to
regain compliance, and requested additional time to comply. On May 7, 1999,
after a review of the Company, Nasdaq decided to continue listing the Company's
stock if the Company could maintain a closing bid price of at least $1 per share
beginning May 17, 1999, and for the ten subsequent trading days. The Company was
also required to file its first quarter report on Form 10-Q by May 17, 1999. In
June 1999, Nasdaq informed the Company that it had complied with all of the
necessary terms, and that its stock will continue to be listed on the Nasdaq
SmallCap Market.
Based upon this Nasdaq notification, the Board of Directors voted unanimously to
cancel a pending proposed reverse stock split earlier this year. In July 1999,
Nasdaq sent the Company correspondence stating its concerns over the Company's
ability to sustain compliance with the Nasdaq's continuing inclusion
requirements. Nasdaq also requested certain information from the Company for it
to evaluate. The Company submitted information in late July, and awaits further
correspondence from Nasdaq.
Note 8: Other Litigation
The Company, along with its officers and directors, was previously a defendant
in an action in federal court in Texas brought against it by a former manager
involving an employment termination and dispute. The suit was recently dismissed
in Federal Court in Texas. The Company then filed a motion in state court
requesting a summary judgment that it has met its obligations and only seeking
its attorney's fees. The former employee then filed a motion to move
jurisdiction back to federal court with a counterclaim for damages. The Company
views this action as without merit.
Note 9: Bond Financing
If the Company completes the bond financing, it will incur associated fees of
approximately $1,080,000, which will be paid from bond proceeds, and the
underwriter will be entitled to 300,000
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<PAGE> 14
shares of Class A Common Stock at $.01 per share under terms of the financing
agreement. The underwriter will then also have a right of first refusal for any
future tax-exempt bond financings for up to 5 years.
Note 10: Preferred Stock Milestone Failure
The preferred stock agreements require that the Company meet certain milestones
relating to sales volume and cash flows. The sales volume required for the first
quarter of 1999 was $4,500,000 and sales for the first quarter were $4,534,274.
The sales volume required for the second and third quarters of 1999 was
$6,000,000. Sales for the second and third quarters were $4,806,709 and
$5,794,834, respectively. Therefore, a milestone failure has occurred in both
the second and third quarters. The other milestone relates to a requirement for
positive cash flow from operations beginning with the fourth quarter of 1998.
The Company met this requirement for the fourth quarter of 1998 and the first
three quarters of 1999.
The above milestone failure gives the holders of the preferred stock the right
to convert the preferred stock at the lower of the fixed conversion price or the
variable conversion price.
Note 11: Issuance of Options
During the second quarter, the Company granted 750,000 options at an exercise
price of $1.00 per share to an officer, and major shareholder of the Company,
who also serves as the Secretary. Such options expire five years from their date
of issuance and are vested based upon continued association and employment. No
compensation expense has been recognized as the market price of the related
common stock on the date of grant was less than or equal to the granted exercise
price.
Note 12: New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended by Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS 133. This statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. SFAS 133, as amended, applies to all entities and is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000 and should
not be applied retroactively to financial statements of prior periods.
Management has not assessed the impact of adopting SFAS 133, but does not
believe the impact will be significant to the financial statements.
12
<PAGE> 15
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 September 30, 1999,
and the related statements of operations for the three-month and nine-month
periods ended September 30, 1999 and 1998, and the statement of cash flows for
the nine-month periods ended September 30, 1999 and 1998. 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
November 15, 1999
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC., (AERT or the Company) has
commercialized and manufactures a growing line of low-maintenance composite
building materials which are increasingly sold into several significant segments
of the $190 billion plus U. S. Homebuilding Industry. AERT is a unique customer
driven entity, which utilizes low cost waste materials such as recycled
polyethylene plastics and waste wood fibers as its primary raw material sources
to produce several value added products, which favorably compete in the national
door and window, industrial flooring and residential decking markets. The
products are marketed under the trade names MoistureShield(R), LifeCycle(TM),
ChoiceDek(TM) and DreamWorks(TM) and exhibit superior moisture-resistance and
dimensional stability when compared to traditional wood products. AERT products
do not require toxic chemical or preservative treatments and have been
extensively tested.
The Company's impressive and growing customer base includes such national brands
as Therma Tru Doors, Peach Tree Doors and Windows, Crestline and Vetter Windows,
Carolina Builders and Weyerhaeuser BMD. Since inception (1988) to September 30,
1999, AERT has sold in excess of $54.4 million of composite building materials
into the U. S. market. A second composite extrusion and manufacturing plant is
currently nearing initial completion, which has resulted in increased net
quarterly sales to a level of $5.79 million. With two manufacturing plants
nearing completion and a third preparing to commence construction, AERT is
positively positioned to grow and meet the ever-increasing needs of the
marketplace for low-maintenance building materials.
With one plastic recycling and two composite extrusion plants in operation, the
Company is focusing production and product lines, in order to attain improved
efficiencies and increased production. With a pending $16.5 million Industrial
Revenue Bond financing nearing completion, the Company intends to further expand
its production capabilities with the upcoming additions of a second plastic
recycling facility to be followed by a third composite manufacturing facility
over the next 18 months. This additional recycling and manufacturing capacity
consisting of initially four additional extrusion lines (designed for up to six)
is designed to further increase production and sales over the next 18 months to
the $75 million annualized level and yield increased net income once completed.
Results of Operations
Quarter Ended September 30, 1999 Compared To Quarter Ended September 30, 1998
The Company's production plan implemented during 1998 began to yield results and
substantially increased production during the quarter and resulted in an
all-time quarterly net sales record of $5.79 million for the quarter ended
September 30, 1999.
Sales increased for decking products from $971,311 for the quarter ended
September 30, 1998 to $2,824,782 for the quarter ended September 30, 1999,
yielding a $1,853,471 or 190% increase. MoistureShield(R) industrial component
sales increased from $2,315,046 for the quarter ended
14
<PAGE> 17
September 30, 1998 to $2,970,052 in the comparable period in 1999, resulting in
a $655,006 increase. The sales increase was accomplished with construction still
ongoing and not yet completed at the Springdale plant.
The Company believes that as additional decking production increases in Texas
and as the MoistureShield(R) production switch to Arkansas is completed, sales
for both product lines will continue to increase, gross margins will continue to
improve and positive cash flows and profitability will further improve during
subsequent quarters, at both plants and divisions once construction is
completed.
Of said third quarter net sales of $5.79 million, $3.07 million was generated
from the initial Texas plant while $2.72 million was produced from the Arkansas
plant. The Texas plant produced a positive gross margin of $932,278 or 30.3%,
while the Arkansas plant, still under construction, produced a gross margin of
9.8%. Operating income was $493,866 or 16.0% for Texas, compared to a loss of
$342,989 or (12.6%) for Arkansas. The net loss was $451,018 for Arkansas
compared to a positive $492,356 profit for Texas which overall yielded a net
profit (before dividend) of $41,338 for the quarter.
Cost of goods sold was $4,593,646 for the quarter ended September 30, 1999
versus $3,186,944 for the comparable period in 1998. Gross margin increased to a
positive $1,201,188 in 1999 versus $99,413 for 1998, a $1,101,775 improvement.
The overall gross margin as a percent of sales increased significantly in 1999
versus 1998, to 20.7% vs. 3.0%. Further operations improvement was restricted
due to increased administrative costs and construction inefficiencies
experienced at both plants during the quarter. The Company also experienced raw
material cost increases during the quarter.
Gross margin improved to 20.7% of net sales for the third quarter of 1999. The
Company reported operating income of $150,877 for 1999 versus an operating loss
of $646,219 for the third quarter of 1998, an improvement of $797,096. With
interest costs of $109,539, income before dividends on convertible preferred
stock for the quarter was $41,338 or $.00 per share versus a loss of $990,223 or
($.04) per share for the comparable period in 1998 yielding a $1,031,561
improvement. Accrued dividends for preferred stock totaled $73,096 for the
quarter. This accrual resulted in a net loss for reporting purposes of $31,758
for the quarter. Interest expense for the quarter ended September 30, 1999, was
reduced to $109,539 compared to $344,004 for the comparable period in 1998. The
decreased interest expense was attributable to a reduction in debt discount
amortization related to the bridge financing, as well as a principal reduction
by the Company in regard to the bridge notes.
The Company expanded its Springdale plant in 1998 with $3.1 million in
short-term debt and intends to restructure the remaining $1.9 million debt, plus
purchase its existing manufacturing facility for $1.75 million (assuming
successful completion of the pending bond financing) during the fourth quarter
of 1999. Legal issues delayed completion of the bond financing until the third
quarter. The bond financing is intended to further reduce the current interest
expenses associated with the bridge notes in conjunction with reducing monthly
lease payments by purchasing the existing Springdale facility over a longer
term. It is also intended to help reduce the current negative working capital
position. The new Springdale extrusion facility consists of two lines with a
third nearing completion. These lines are in addition to three extrusion lines
at the original Texas facility. The Company believes successful completion of
these transactions will greatly reduce its current working capital deficit by
shifting short-term payables and debt into long-term debt in subsequent periods
while continuing to
15
<PAGE> 18
increase and improve gross margins in order to further increase positive cash
flows and profitability from operations.
The net sales of $5.79 million for the quarter ended September 30, 1999,
represented a significant increase over the third quarter of 1998, up $2.5
million or 76%. This increase affirms that the Company continues to have strong
customer demand for its products and that the Company's plan, in regards to the
addition of the Springdale plant, is beginning to demonstrate overall increased
production, improved gross margins, and positive cash flows from operations.
Cost of goods sold was $4,593,646 for the third quarter of 1999 compared to
$3,186,944 for the third quarter of 1998. Overall cost of goods sold as a
percentage of sales decreased. Increases were experienced in all major expense
categories, due to increased production volumes, increased sales and operating
costs associated with the second plant. Payroll costs and depreciation increased
due to the start-up of the new plant in Springdale, Arkansas. Material costs
increased primarily due to increased production and sales volumes and increased
raw material plastic costs. The overall cost of goods sold to sales ratio
decreased significantly from 1998 due to increased emphasis on production
efficiencies, cost controls and execution of the production plan.
Significant categories are as follows:
<TABLE>
<CAPTION>
Expense Category 1999 1998
---------------- ---------- ----------
<S> <C> <C>
Payroll and payroll taxes $1,625,621 $1,135,806
Depreciation 475,019 401,436
Direct material costs 1,475,763 753,324
Other 1,017,243 896,378
---------- ----------
Total $4,593,646 $3,186,944
========== ==========
</TABLE>
Selling, general and administrative expenses were $1,050,311 compared to
$745,632 for the third quarter of 1998. Although sales increased approximately
$2.5 million or 76%, SG&A expenses rose only 40.9% or $304,679 in the quarter
ended September 30, 1999 over 1998. Approximately $103,000 of the increase was
attributable to increased sales commission and factoring costs, which was a
direct result of the increased sales of $5.79 million for the quarter.
Professional fees, primarily legal, increased to $98,812 for the quarter,
primarily due to settling issues with a bad receivable account, a former
employee lawsuit and a non-performing paint system.
Operating income for the quarter ended September 30, 1999, was $150,877; a
$797,096 improvement from the $646,219 loss reported for the comparable period
in 1998. Net loss (basic and diluted) per weighted average common share
outstanding was $.00 for the quarter ended September 30, 1999. This compares to
a net loss (basic and diluted) per weighted average common share outstanding of
$.04 for the quarter ended September 30, 1998. The Company is currently
completing construction on the initial phases of the Springdale plant
implemented last year to provide for better operating efficiencies, streamlining
and increasing the production of both facilities.
16
<PAGE> 19
With the Company's initial production plan nearing completion and assuming
successful completion of the pending bond financing, the Company could soon be
in a rapid expansion and growth mode. Building plants, starting up machinery,
hiring and training qualified people is a difficult task. In preparation of and
in order to accomplish this, the Company has retained several experienced
professionals to help manage its aggressive construction schedule, as well as
streamline and train additional people for its operations. Hiring, training and
retaining quality people will be an essential part of the Company's success. The
ability to manage growth while also attaining positive earnings will also be
crucial to success.
The initial plastic reclamation facility was also recently expanded and is
designed to allow the Company to internally produce a substantial portion of its
recycled plastic feed stocks. With these improvements primarily completed, the
Company believes it can further increase production capacity, attain further
efficiency improvements, streamline production runs and reduce line changeovers.
In addition, further automation and process control of the production processes,
increased plastic raw material sourcing, increased plastic throughputs and
increased security is planned. The Company believes it will successfully
complete the initial phases of its production plan, including the addition of
the third extrusion line at the Springdale facility in the fourth quarter of
1999. Management currently believes the Company is in a sustainable positive
cash flow position from operations and should continue to improve during
subsequent periods.
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, marketing difficulties,
construction delays and/or construction cost overruns, 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 further anticipated efficiencies and manufacturing sales levels.
Liquidity and Capital Resources
At September 30, 1999, the Company had a working capital deficit of $5,734,893
compared to a working capital deficit of $4,625,935 at December 31, 1998. The
deficit is mainly attributable to the Company's expansion and construction
program at the Springdale facility with short-term debt and its efforts to
complete and start-up the third extrusion line and further increase plastic
processing capacity at that facility. The Company increased production by
utilizing short-term financing to maintain its diversified customer base in
order to increase its production and manufacturing capabilities above the $30
million annualized sales levels for the 1999 summer building and construction
season. The Company expended approximately $3.7 million in construction and
plant expansion costs during 1998. The Company expended an additional $1.1
million, $1.35 million and $459,000 for construction and plant expansion during
the first, second and third quarters, respectively, of 1999. These expansions
were designed to substantially complete the new Springdale facility and add
additional extrusion and moulding capacity.
17
<PAGE> 20
The Company during the second quarter of 1999, in response to pending zoning
requirements for a proposed bond financed manufacturing expansion, accelerated
completion of air quality and pollution control equipment at the Springdale
facility. This was done by management, as a condition of the pending bond
financing and required approximately $400,000 in resources to be utilized and
diverted from the previous allocation for completion of the third Springdale
extrusion line. Completion of the third extrusion line was then slowed and
financed out of ongoing cash flow while the bond financing was pending
completion. The lack of production from a third extrusion line at Springdale
also limited further sales increases during the third quarter and will not
contribute significantly in the fourth quarter.
With the air quality work complete at the Springdale plant, the Company recently
submitted its emission data to a state regulatory agency and received formal
notification of full compliance of air quality regulations. The third Springdale
extrusion line is now nearing completion and will require an additional $100,000
to complete and bring on-line by year-end.
The initial construction was financed in part by short-term bridge loans of $3.1
million, of which approximately $1.2 million had been repaid or converted to
preferred stock by March 31, 1999. In addition, the Company received $1.54
million from the voluntary B and C warrant exercises and $2.9 million from the
issuance of preferred stock to close associates of the Company. Of said
preferred stock issuance, $1,050,000 of the bridge loan was converted or paid
down with the remaining balances extended until December 1, 1999. The Board of
Directors allowed a voluntary warrant conversion period until February 12,
1999, at which time 3,224,776 B and C Warrants were allowed to expire. In
addition, 42,866 Class I warrants were allowed to expire as of June 30, 1999.
The Company has also purchased a key-man life insurance policy for $4 million
on Joe G. Brooks during this interim construction period and is seeking an
additional $2.5 million policy on J. Douglas Brooks. The Company intends to
maintain these policies as a condition of the corporate financing package.
Cash and cash equivalents were $505,024 as of September 30, 1999, a decrease of
$109,470 compared to December 31, 1998. Significant components of that decrease
were: (i) cash provided by operating activities of $1,089,710, which consisted
of a net loss for the period of $269,862, increased by depreciation and
amortization of $1,391,686, and decreased by other sources of cash of $32,114;
(ii) cash used in investing activities of $1,831,719; and (iii) cash provided by
financing activities of $632,539, which consisted of proceeds from the exercise
of options and warrants of $990,608, proceeds from note issuances of $300,000
and payments on notes and capital lease obligations of $658,069. At September
30, 1999, the Company had notes payable in the amount of $2,892,376, of which
$2,885,344 were current notes payable or current portion of long-term debt. Of
said notes, $1,907,464 was to the bridge noteholders and $822,878 was to the
majority shareholder.
The Company successfully completed on October 14, 1999, an escrow closing of
$16.5 million in tax-exempt bonds with an institutional investor. With the
addition of two additional operating production lines at the Springdale
facility, in addition to the one that operated for 8 months in 1998, the Company
believes it can attain profitability and increase cash flows from operations
during subsequent quarters. In fact, positive cash flow from operations exceeded
$1 million for the nine months ended September 30, 1999, an improvement of
$1,350,940 over the $261,230 negative cash flow from operations during
18
<PAGE> 21
the first nine months of 1998. Excluding the increases and decreases in current
assets and current liabilities, the cash provided by operating activities
approximated $1.48 million. Based upon this, and upon increased extrusion
operating efficiencies and throughputs, which are currently meeting management's
expectations, the Company believes that sufficient sales and earnings capacity
is in place to reduce payables and restructure debt conventionally if the bond
issue were to be further delayed. This would require refinancing the remaining
$1.9 million in bridge notes along with approximately $3 million in construction
payables as of September 30, 1999.
Therefore, management is currently working to successfully finalize the bond
offering of $16.5 million tax-exempt in conjunction with a $5 million taxable
government guaranteed loan package. Of said financing, $1.75 million is to be
used to purchase the existing 10 acre and 103,000 sq. ft. Springdale site, $2
million to refinance existing equipment and repay the remaining bridge notes and
$1.78 million for current construction in progress. In addition, of said bond
proceeds $1,270,150 has been allocated for acquisition of an additional 18.6
acres plus site improvements, $2,802,450 for additional plastic recycling
equipment and capacity and $7,910,625 for additional extrusion and manufacturing
capacity. It is anticipated that of said $5 million government guaranteed loan,
$2.5 million will be paid back once the bonds break escrow and said amount may
be reserved to finance additional extrusion equipment later next year.
A significant portion of the new extrusion capacity is planned for the new
DreamWorks(TM) decking line. Management has increased production capacity in
order to address the Company's customers' demands. With what it believes will be
a successful bond completion during the fourth quarter of 1999, a significant
amount of short-term debt ($1.9 million) plus interim construction payables of
$3 million as of September 30, 1999, will be restructured into longer-term
obligations. The aforementioned conditions combined with the Company's improved
operating status has the Company working to eliminate the negative working
capital deficit in the near future. Successful completion of the bond financing
would significantly reduce the current working capital deficit by up to $5
million.
Once the bond offering is completed, this expansion will continue through first
quarter 2000, as a fourth extrusion line or additional extrusion throughput
capacity is added and the Springdale composite plant is completed. This
expansion is designed and intended to increase overall manufacturing
capabilities and sales above the $50 million annualized sales level. The Company
does not intend to further expand beyond the third extrusion line in Springdale
until the pending bond financing is complete.
The Company previously maintained an accounts receivable factoring agreement for
up to $900,000 through an affiliated company of a related party. The terms of
this initial agreement called 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 March 1999, the Company's majority
shareholder increased the Company's factoring line to $2 million. The new terms
allow the factor to charge up to 2% per invoice, and the Company must guarantee
the receivables. It is currently estimated that the factor charges will average
around 1.5% during 1999. The Company has three notes payable to the majority
shareholder, which had a total balance of $822,878 at September 30, 1999. In
November 1999, the Company requested and received an increase its factor line to
$2.5 million.
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<PAGE> 22
The Company has continued to improve and has generated positive cash flows from
operations during the first, second and third quarters. 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. Further, continued improvements in production efficiency
and capacity, consistent and reliable raw material supplies, and hiring,
training and retaining qualified people will be required for the Company to
increase and to maintain sales levels that will allow the Company to grow and
increase sales. There can be no assurance that such improvements in production
efficiencies or capacities will continue to improve or can be sustained.
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 materials; accidents, other
unscheduled shutdowns affecting the Company, 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; or adverse rulings,
judgments, or settlements 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material exposures relating to its long-term debt due to
virtually all of the Company's long-term debt bearing interest at fixed rates.
The Company depends on the market for favorable long-term mortgage rates to help
generate sales of its product to its customers for use in the residential
construction industry. Should mortgage rates increase substantially, the Company
could be impacted by a reduction in the residential construction industry.
Important raw materials purchased by the Company are recycled plastic and wood
fiber, which are subject to price fluctuations. The Company attempts to limit
the impact of price increases on these materials by negotiating with each of its
suppliers on a term basis.
ITEM 4. YEAR 2000 UPDATE
The Company has been and is currently conducting an evaluation of the potential
effects of the Year 2000 issue on its operations. The evaluation is ongoing,
however at this time, management of the
20
<PAGE> 23
Company is not aware of any problems that will occur within the Company's plant
operations. The Company has contacted the two major manufacturers of its
operating equipment and has been informed by them that they are not aware of
Year 2000 issues with the equipment. The Company plans to finalize contacting
the remaining equipment manufacturers during the fourth quarter of 1999. The
Company has been in contact with some of its significant vendors and customers
to determine their Year 2000 status and plans to continue to contact others
during the fourth quarter of 1999. In assessing the impact of the Year 2000 on
administration, including accounting and financial reporting, the Company has
updated its financial accounting software and was provided documentation that
the software is Year 2000 compliant. The Company upgraded its telephone system
in Springdale and it is now Year 2000 compliant. Based on the information above,
the Company does not anticipate a material financial impact as a result of the
Year 2000 issue. However, the Company has no control over Year 2000 compliance
by its customers and vendors. If the Company's customers and vendors are not
prepared for the Year 2000 issue, this could result in a material adverse
financial impact to the Company, however, the Company believes it is unlikely
based on the nature of its business, customers and vendors. The Company will be
developing a contingency plan in the fourth quarter to deal with any Year 2000
issues that may occur.
21
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. 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 the complaint, Mobil sought entry of a declaratory
judgment that:
o AERT was without right or authority to threaten suit against Mobil or
our customers for alleged infringement of AERT patents;
o certain AERT patents were invalid and unenforceable; and
o Mobil had not infringed the AERT patents through any products or
method.
Mobil sought no monetary damages in that suit, but does seek reimbursement of
its attorneys' fees.
We denied Mobil's claims and asserted counterclaims against Mobil and three
Mobil executives for:
o an illegal combination or contract in restraint of trade in violation
of federal antitrust laws;
o a pattern of intentional misconduct constituting an attempt to
monopolize in violation of federal antitrust laws;
o breach of a confidential relationship between Mobil and AERT; and
o unfair competition.
We sought monetary damages, punitive damages and injunctive relief.
In February 1994, after a trial on the patent issues, the court held that four
AERT patents on our composite product technology were invalid and that Mobil had
not infringed the patents.
In March 1995, we filed a motion with the Court alleging prejudicial misconduct
by Mobil prior to the trial. We also filed an appeal with the U.S. Court of
Appeals in July 1995. In June 1996, the U. S. Court of Appeals reversed a
portion of the earlier ruling which had held that two of the patents were
invalid, [and that Mobil did not infringe] [but nevertheless ruled that Mobil
did not infringe such patents]. We did not further appeal this ruling.
In August 1994, Mobil filed a motion seeking an award of attorney's fees and
costs for $2.7 million. In September 1999, the Delaware Court dismissed the
Mobil Motion for Attorney's Fees, for a second time. The Court also dismissed
AERT's Motion for New Trial Based Upon Discovery Misconduct and AERT's Motion to
Supplement Record.
We have evaluated this recent development and after consultation with legal
counsel, have filed a notice of appeal on dismissal of the prejudicial
misconduct motion, however there can be no assurance that we will receive a more
favorable outcome upon appeal.
Mobil Oil has also filed a notice of appeal on denial and dismissal of the
attorney's fees motion. The AERT counterclaims are still pending although Mobil
Oil is no longer in the composite products business.
22
<PAGE> 25
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/ Edward J. Lysen
------------------------ --------------------------
JOE G. BROOKS EDWARD J. LYSEN
Chairman Chief Financial Officer
Date: November 15, 1999 Date: November 15, 1999
23
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 505,024
<SECURITIES> 0
<RECEIVABLES> 1,683,038
<ALLOWANCES> 0
<INVENTORY> 892,217
<CURRENT-ASSETS> 3,259,114
<PP&E> 17,139,337
<DEPRECIATION> 6,844,324
<TOTAL-ASSETS> 13,998,287
<CURRENT-LIABILITIES> 9,004,007
<BONDS> 0
0
2,900
<COMMON> 235,155
<OTHER-SE> 4,384,307
<TOTAL-LIABILITY-AND-EQUITY> 13,998,287
<SALES> 5,794,834
<TOTAL-REVENUES> 5,794,834
<CGS> 4,593,646
<TOTAL-COSTS> 5,643,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,539
<INCOME-PRETAX> (31,758)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,758)
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
