<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 June 30, 2000
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 72764
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 June 30, 2000 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 24,248,193 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, June 30, 2000 (unaudited)
and December 31, 1999 1-2
Statements of Operations, (unaudited)
Three Months and Six Months Ended June 30, 2000 and 1999 3
Statements of Cash Flows, (unaudited)
Six Months Ended June 30, 2000 and 1999 4
Notes to Financial Statements 5-11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
ITEM 3 Quantitative and Qualitative Disclosure about Market Risk 18
ITEM 4 Information Systems and the Impact of the Year 2000 19
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 19-20
ITEM 6 Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
<PAGE> 3
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 794,586 $ 187,173
Restricted bond escrow fund 17,082,369 16,593,696
Trade receivables, net of allowance of $20,000 2,099,866 1,587,368
Inventories 883,599 1,274,771
Prepaid expenses and other 246,981 93,982
----------- -----------
Total current assets 21,107,401 19,736,990
----------- -----------
Buildings and equipment:
Land 876,028 --
Buildings and leasehold improvements 1,063,113 1,044,096
Machinery and equipment 14,678,197 13,981,153
Transportation equipment 175,385 162,400
Office equipment 248,217 210,024
Construction in progress 3,672,870 2,747,290
----------- -----------
20,713,810 18,144,963
Less accumulated depreciation
and amortization 8,222,515 7,227,875
----------- -----------
Net buildings and equipment 12,491,295 10,917,088
Other assets, at cost less accumulated
amortization of $314,447 (2000)
and $300,161 (1999) 1,052,876 801,715
----------- -----------
$34,651,572 $31,455,793
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 3,209,681 $ 5,110,787
Accounts payable - related parties 1,928,721 1,535,997
Current maturities of long-term debt:
Related parties 286,147 494,265
Other 78,655 46,824
Current maturities of capital lease obligation 26,321 23,189
Accrued liabilities 1,667,120 933,543
Notes payable - related parties 400,000 550,000
Notes payable - other 2,351,516 2,354,944
Bond Payable 16,500,000 16,500,000
------------ ------------
Total current liabilities 26,448,161 27,549,549
------------ ------------
Total long-term debt, less current maturities 4,450,608 5,923
------------ ------------
Capital lease obligation 39,740 53,733
------------ ------------
Accrued dividends payable on convertible
preferred stock 482,664 337,890
------------ ------------
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, 24,496,532 (2000)
and 24,251,497 (1999) shares issued and outstanding 244,965 242,515
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 28,659,347 28,459,192
Accumulated deficit (25,691,468) (25,210,564)
------------ ------------
Total stockholders' equity 3,230,399 3,508,698
------------ ------------
Total liabilities and stockholders' equity $ 34,651,572 $ 31,455,793
============ ============
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 7,545,771 $ 4,806,709 $ 13,815,015 $ 9,340,983
Cost of goods sold 5,947,405 4,003,424 11,184,043 7,628,166
------------ ------------ ------------ ------------
Gross margin 1,598,366 803,285 2,630,972 1,712,817
Selling and administrative costs 1,460,143 867,476 2,576,864 1,582,324
------------ ------------ ------------ ------------
Operating income (loss) 138,223 (64,191) 54,108 130,493
Interest expense, net (232,416) (108,742) (390,238) (224,789)
------------ ------------ ------------ ------------
Loss before dividends on
convertible preferred stock (94,193) (172,933) (336,130) (94,296)
Accrued dividends on convertible
preferred stock (72,500) (72,301) (144,774) (143,808)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (166,693) $ (245,234) $ (480,904) $ (238,104)
============ ============ ============ ============
Net loss per share of common
stock (Basic and Diluted) $ (.01) $ (.01) $ (.02) $ (.01)
============ ============ ============ ============
Weighted average number of common shares
outstanding 25,868,785 24,328,586 25,818,457 24,078,311
============ ============ ============ ============
</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>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (480,904) $ (238,104)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,021,973 1,023,363
Dividends accrued on convertible
preferred stock 144,774 143,808
Expenses paid through issuance of stock options 9,896 --
Provision for doubtful accounts -- (10,000)
(Increase) decrease in other assets 59,293 (54,273)
Changes in current assets and current liabilities (2,819,322) 247,962
----------- -----------
Net cash provided by (used in) operating activities (2,064,290) 1,112,756
----------- -----------
Cash flows from investing activities:
Additions to buildings and equipment (1,769,240) (2,595,415)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes 4,500,000 300,000
Payments on notes (385,030) (460,143)
Payments on capital lease obligations (10,862) (9,689)
Increase (decrease) in accounts payable-related parties 481,912 479,557
Debt acquisition costs (337,787) (12,919)
Interest paid through issuance of Class A
common stock -- 124,115
Proceeds from exercise of stock options and
warrants 192,710 990,608
----------- -----------
Net cash provided by financing activities 4,440,943 1,411,529
----------- -----------
Net increase (decrease) in cash 607,413 (71,130)
Cash, beginning of period 187,173 614,494
----------- -----------
Cash, end of period $ 794,586 $ 543,364
=========== ===========
</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. (AERT, the Company or "we"), 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
AERT 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 other
alternative plastic materials for standard door components, windowsills, brick
mould, fascia board, decking and heavy industrial flooring. 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 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. At June 30, 2000, the Company had a substantial working capital
deficit of $5,340,760. The Company has incurred net losses in each year since
its inception and has never operated at successful manufacturing levels over an
extended period. 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. There is no commitment for such shareholders or accredited
investors to continue such support. As discussed in the following paragraphs,
the Company will require additional financial resources in order to complete its
production plan and fund maturities of debt and other obligations as they become
due.
The Company also has litigation outstanding against it as described in Notes 7
and 8, the outcome of which is uncertain. If the litigated claims were to be
assessed against the Company, the Company would likely be unable
5
<PAGE> 8
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 is currently implementing a production plan, which management
believes will provide better operating efficiencies and correct the production
problems encountered in the past. The plan includes increasing production
capacity, further automating the production process and better utilizing
regrindable scrap. The Company anticipates reducing its working capital deficit
by paying off the bridge notes payable and being reimbursed for significant
working capital from the bond fund proceeds discussed below. During April 2000,
the Springdale plant's third extrusion line commenced operation with a new
material transfer system. Furthermore, in March 2000, the Company obtained $4.5
million of additional bank financing, the proceeds of which were used to acquire
land adjacent to the Springdale facility and reduce accounts payable.
The Company closed a $16.5 million tax-exempt industrial bond financing into
escrow in October 1999, which is intended to refinance and shift its
construction related accounts payable into long-term financing. In order for the
Company to receive the bond financing, the Company must meet certain financial
and operating criteria unless waived by the holder of 100% of the bonds. These
include delivering to the trustee satisfactory evidence that for any consecutive
12 month period commencing on or after the date of the issuance of the bonds,
the long-term debt service coverage ratio, as defined, has been not less than 2
to 1, and the projected long-term debt service coverage ratio for the 24 month
period subsequent to the first disbursement shall not be less than 2 to 1. There
is no assurance the Company will be successful in meeting the standards required
to receive the bond financing proceeds or in obtaining necessary financial
resources from other sources.
Completion of the production plan will require that the Company receive the
proceeds from the bond financing or obtain 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 2000. There is no assurance the Company will be
able to correct prior production problems and improve operating efficiencies or
that the Company will be successful in securing capital resources to complete
its production plan, fund maturities of debt and other obligations as they
become due in 2000 or to support the Company until such time, if ever, that the
Company is able to consistently generate income from operations.
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 current assets and
current liabilities, excluding changes in cash and cash equivalents, current
maturities of long-term debt, capital lease obligations, current notes payable
and selected payables to related parties.
6
<PAGE> 9
Those changes, shown as an (increase) decrease in current assets and an increase
(decrease) in current liabilities, are as follows:
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 2000 June 30, 1999
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Receivables $ (512,498) $ (685,810)
Inventories 391,172 (29,296)
Prepaid expenses and other (152,999) (51,838)
Accounts payable -
trade and related parties (2,789,901) 1,017,898
Accrued liabilities 244,904 (2,992)
----------- -----------
$(2,819,322) $ 247,962
=========== ===========
Cash paid for interest $ 174,937 $ 59,879
Cash paid for income taxes -- --
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Notes payable for financing of insurance policies $278,457 $106,788
Accounts / notes payable for equipment 799,607 --
Interest on restricted bond escrow fund 488,673 --
</TABLE>
7
<PAGE> 10
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>
June 30, 2000 December 31, 1999
(unaudited) (unaudited)
------------- -----------------
<S> <C> <C>
Raw Materials $538,795 $ 565,259
Work in process 125,435 323,268
Finished goods 219,369 386,244
-------- ----------
$883,599 $1,274,771
======== ==========
</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.
NOTE 6: LONG-TERM DEBT
The Company obtained bridge financing from a bank in the amount of $4.5 million
in March of 2000. The debt is due on demand, however if no demand is made, it is
due in 176 equal monthly payments of $49,156 including interest at a fixed rate
of 9.75%, beginning June 23, 2000, and maturing February 23, 2015. The Company
has obtained a permanent waiver of the due on demand clause. The note is
collateralized by real estate and improvements, fixed assets, assignment of a
life insurance policy, personal guarantees of certain stockholders and an 80%
USDA Department of Rural Development guarantee. The note contains certain
financial covenants including a minimum debt to net worth ratio, as defined, of
no more than 3 to 1; a minimum current ratio of 1 to 1 by August 2000; and a
minimum current ratio of 2 to 1 by February 2001 and thereafter. The Company was
in compliance or had received waivers with respect to these covenants at June
30, 2000.
NOTE 7: 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;
8
<PAGE> 11
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 its 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, 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
the Company's motion for new trial based upon discovery misconduct and the
Company's motion to supplement record.
Mobil recently filed an appeal brief regarding denial and dismissal of the
attorneys' fees motion by the Delaware Court. The Company recently answered
Mobil's appeal and cross-appealed the dismissal of its prejudicial misconduct
motion by the Delaware Court in March of 2000. The Company retained new legal
counsel for said appeal, which has extensive experience and specializes in
appellate actions. The Company's cross-appeal involves allegations of tampering
with, altering and withholding critical evidence by Mobil prior to trial. It
seeks a final denial of Mobil's request for attorneys' fees and a new trial for
prejudicial discovery misconduct. The Company's counterclaims are still pending,
although Mobil is no longer in the composite products business.
The Company has accrued $40,000 for anticipated court costs related to the Mobil
litigation. There can be no assurance that the Company can prevail on these
issues or that if it prevails, Mobil will not further appeal to a higher court.
Furthermore, there can be no assurance that the Company will be awarded a new
trial upon appeal, or if it receives a new trial that the outcome will be
favorable to the Company.
NOTE 8: OTHER LITIGATION
The Company is a counterclaim defendant in a federal action in Texas, involving
allegations from a former employee and officer of the Company that the Company
breached an employment agreement by terminating employment. The Company believes
this action is without merit.
9
<PAGE> 12
We were also sued in May 2000 in federal court in Texas for back royalty
payments allegedly due to a successor to a licensor of firelog extrusion
technology. That licensor licensed technology to a firelog manufacturing company
operated by our founders in 1986-1987. A dispute and lawsuit arose at that time
between our founders and that licensor that was settled by an agreement that our
founders and their affiliates would pay the licensor a royalty of $10.00 per ton
of material, if any material was produced using the licensor's technology. As
described in our December 1989 IPO prospectus and for many years thereafter, we
have always contended that we did not use such technology and no royalty was
paid nor, prior to this year, did that licensor ever pursue any claim for such
royalties. We believe numerous defenses are available and intend to vigorously
defend ourselves against what we consider a matter related to the current suit
in Delaware. Mobil was also a successor and licensee from affiliates of that
firelog technology licensor.
NOTE 9: NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 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 FASB Statement No. 133". SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement. Companies must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000; however, companies may implement the statement as of the
beginning of any fiscal quarter beginning on or after June 16, 1998.
SFAS No. 133 cannot be applied retroactively and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). The Company
has not yet quantified the impact of adopting SFAS No. 133 on its financial
statements and has not determined the timing of or method of the adoption of
SFAS No. 133.
NOTE 10: SEGMENT INFORMATION
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information", (SFAS 131), establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Reportable operating
segments are defined as a component of an enterprise:
o That engages in business activities from which it may earn revenues
and expenses,
10
<PAGE> 13
o Whose operating results are regularly reviewed by the enterprise's
chief operating decision maker,
o For which discrete financial information is available.
As of June 30, 2000, the Company does not have available discrete financial
information to disclose gross margin by product line. All operating expenses are
allocated primarily on capacity. Corporate overhead is not allocated by product
line, neither are selected assets. Net revenue is segregated by product line as
follows:
<TABLE>
<CAPTION>
Three months Three months
ended ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Exterior door and window components $2,498,487 $2,702,864
Commercial and residential decking surface components 5,047,284 2,103,845
---------- ----------
$7,545,771 $4,806,709
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Exterior door and window components $ 4,253,279 $ 5,123,050
Commercial and residential decking surface components 9,561,736 4,217,933
----------- -----------
$13,815,015 $ 9,340,983
=========== ===========
</TABLE>
Revenues, cost of goods sold and gross margin by plant is as follows:
<TABLE>
<CAPTION>
Three months Three months
ended ended
June 30, 2000 June 30, 1999
------------------------- -------------------------
Springdale Junction Springdale Junction
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $4,001,409 $3,544,362 $2,368,812 $2,437,897
Cost of goods sold 3,444,500 2,502,905 2,085,632 1,917,792
---------- ---------- ---------- ----------
Gross margin $ 556,909 $1,041,457 $ 283,180 $ 520,105
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 2000 June 30, 1999
------------------------- -------------------------
Springdale Junction Springdale Junction
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $7,124,280 $6,690,735 $4,189,317 $5,151,666
Cost of goods sold 6,339,854 4,844,189 3,670,332 3,957,834
---------- ---------- ---------- ----------
Gross margin $ 784,426 $1,846,546 $ 518,985 $1,193,832
========== ========== ========== ==========
</TABLE>
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. (AERT, the Company or "we")
manufacture and market composite building materials that can be used as an
alternative to traditional wood products for exterior applications in building
and remodeling homes. We use waste wood fibers and reclaimed polyethylene
plastics as our raw materials. Our products are comprised of approximately equal
amounts of wood and plastic, have been extensively tested and have been used by
several leading national companies, such as the Weyerhaeuser Company and Therma
Tru Corporation. Our products are marketed under the LifeCycle(R),
MoistureShield(R), and ChoiceDek(R) tradenames. We recently introduced a new
decking line called DreamWorks(TM), which is marketed as ChoiceDek(R) Plus.
Our sales are primarily in the following two markets:
o exterior door, window and housing trim components and
o commercial and residential decking surface components.
We currently operate two manufacturing and recycling facilities. We recently
expanded into nationwide decking distribution with Weyerhaeuser BMD. Our decking
components and a limited amount of door and window components are currently
manufactured by our facility in Junction, Texas on three extruder lines. Most of
our door and window components are manufactured at our Springdale, Arkansas
facility, along with our ChoiceDek(R) Plus line of decking products. We now have
three extruder lines and a plastic facility in operation at our Springdale
location. The third extrusion line became operational in April 2000, and the
initial construction in our second manufacturing facility was mostly completed
during the quarter ended June 30, 2000. A fourth composite extrusion line may be
added at our initial Springdale manufacturing facility in late 2000. A second
plastic recycling facility and a third composite extrusion facility are planned
for Springdale later in 2000 or the first quarter of 2001, once financing
becomes available.
Because of their wood fiber content, our composites are less subject to thermal
contraction or expansion and display greater dimensional stability than
conventional plastic materials. Because of their plastic content, our composites
will not absorb moisture, rot or swell like wood and do not require preservative
treatments, such as yearly sealing or staining, however our manufactured
products maintain many properties similar to traditional wood materials.
The composites manufacturing process involves proprietary and patented
technologies and specialized manufacturing equipment, custom-built or modified
for us. The process uses plentiful, lower cost, raw materials, such as recycled
plastics and wood-filler materials and, in certain cases, special additives or
virgin plastics in varying mixtures. The mixtures can be specifically formulated
based on our customers' desired end-product specifications. The encapsulation of
wood fibers in plastic creates a consistent material, free of foreign matter,
which can be extruded into a desired shape. Our composite building material
became a patented product in June 1998 (U. S. Patent No. 5,759,680).
12
<PAGE> 15
RESULTS OF OPERATIONS
Quarter Ended June 30, 2000 Compared To Quarter Ended June 30, 1999
Net sales increased significantly to $7,545,771 for the quarter ended June 30,
2000, which represented an increase of $2,739,062 or 57% over the quarter ended
June 30, 1999. The second quarter 2000 composite sales consisted of
MoistureShield(R) net sales of $2,498,487 and decking products (ChoiceDek(R)
Classic and ChoiceDek(R) Plus) net sales of $5,047,284. These figures compare
with second quarter 1999 MoistureShield(R) sales of $2,702,864 and decking
product sales of $2,103,845. MoistureShield(R) sales growth was limited due to
construction delays which limited extrusion capacity; in conjunction with the
Company honoring its decking contract with Weyerhaeuser BMD. The Company has
several large MoistureShield(R) projects pending that it intends to initiate
once additional production capacity comes on-line.
The Texas plant increased net sales to $3,544,362 in the second quarter of 2000
from $2,427,897 in the second quarter of 1999, a 45% increase. The Texas plant
now produces primarily the ChoiceDek(R) Classic product line. The production
upgrades initiated late last year helped boost productivity. This move
streamlined and focused the products produced at the Texas plant and helped make
it more efficient. We believe that in 2000, with the investment made at the end
of 1999 and in the first quarter of 2000 to the extruding equipment, the Texas
plant will be producing its increased annualized capacity of $17 million. The
Springdale plant reported composite sales of $4,001,409 in the second quarter of
2000 compared to $2,368,812 in the second quarter of 1999, a 69% increase.
Although the Springdale plant increased production, we were starting up and
lining out the new transfer system in conjunction with a new extrusion line, and
this resulted in less than desired production efficiencies and higher production
costs at Springdale during the quarter. With the additional capacity now
increasing from its third extrusion line, the Springdale plant will initially
have a first year capacity in 2000 of $20 million. This capacity is intended to
increase to $33 million as improved efficiencies are realized. The Springdale
plant will produce the Company's MoistureShield(R) lines for its door and window
and industrial OEM customers, as well as the ChoiceDek(R) Plus line of decking.
Cost of goods sold increased $1,943,981, from $4,003,424 for the quarter ended
June 30, 1999 to $5,947,405 in 2000. This increase in cost of goods sold was
primarily attributed to increased raw material costs, payroll and payroll
expenses, and utility and operating costs associated with operating the
Company's composites manufacturing units and increasing sales. The Company
completed start-up of an upgraded material handling and blending system during
the first half of July 2000.
Significant cost categories were as follows for the quarter ended June 30:
<TABLE>
<CAPTION>
Expense Category 2000 1999
---------------- ---------- ----------
<S> <C> <C>
Payroll and payroll taxes $2,082,994 $1,424,374
Depreciation 492,309 442,155
Raw Materials 2,025,857 1,091,972
Other 1,346,245 1,044,923
---------- ----------
Total $5,947,405 $4,003,424
========== ==========
</TABLE>
Payroll and payroll taxes increased due to the start-up associated with
production at the Springdale plant in the second quarter of 2000 as production
capacity increased. Raw material costs increased as a result of the increase
13
<PAGE> 16
in sales and an increase in raw material plastic costs. In particular, raw
material costs as a percent of sales increased 4.3% for the second quarter of
2000 as compared to the same period a year ago. These increased costs accounted
for approximately $332,914 of the $2 million in raw material costs for the
second quarter 2000. To offset the higher raw material costs, the Company is
implementing price increases on its products. As a percentage of sales,
manufacturing overhead decreased to 33% in 2000 from 38% in 1999. The
manufacturing overhead did not grow as fast as the sales were increasing.
Additional decreases in manufacturing overhead as a percent of sales are
expected as efficiencies improve.
Selling, general and administrative expenses increased $592,667 in the second
quarter of 2000 to $1,460,143, compared to $867,476 for 1999. The increase was
due to an increase in salaries, professional fees and commissions. The Company
incurred additional marketing expenses associated with increasing decking into
nationwide distribution and into Canada. Other than the additional legal and
marketing expenses these expenses are normally associated with growing sales.
However, extraordinary expenses were incurred due to increased legal and
professional costs experienced during the quarter. This was primarily associated
with its appeal of the Mobil litigation and costs associated with completing
testing for and filing its BOCA application. As a percentage of sales, SG&A
increased to 19% from 17% in 1999. The Company initiated a limited national
advertising program for decking in late 1999, which included print, trade shows
and limited cable television advertising. This marketing strategy was initiated
with the goal of significantly increasing sales of its ChoiceDek(R) Classic and
ChoiceDek(R) Plus decking products into national distribution in conjunction
with Weyerhaeuser BMD, its North American decking distributor.
The loss for the quarter ended June 30, 2000 was $166,693 or a loss per weighted
average common share outstanding of $.01. This compares to a net loss of
$245,234 for the second quarter of 1999. Of the increase in the second quarter
2000 expenses, approximately $333,000 was directly attributable to increased raw
material costs and $138,500 was attributable to the corporate support and
litigation when compared on a percentage basis to the second quarter of 1999.
Marketing expenses increased to $257,010 for the quarter ended June 30, 2000 as
compared to $80,073 for quarter ended June 30, 1999.
There can be no assurance that the Company can attain its anticipated continued
operating improvements, that raw material costs will not continue to increase,
that it can receive a more favorable legal ruling on appeal and get a new trial
in Delaware and that additional sales price increases will be possible or that
its additional production efficiencies and resultant unit cost reductions
required for sustained profitability will occur.
RECENT DEVELOPMENTS
AERT entered into a purchase agreement with Weyerhaeuser for 1,200 trucks of its
residential and commercial decking products, which are marketed under the brand
name ChoiceDek(R), for the year 2000. This purchase agreement will approximate
$22,000,000 in gross sales for the year, providing the Company can reach this
volume of production. Through the first six months of 2000, decking sales
amounted to $9,561,736. That sales amount is an increase over 1999 of
approximately 127%, or more than double 1999 decking sales. AERT will also be
increasing distribution of decking through Weyerhaeuser into Canada during the
summer of 2000. This
14
<PAGE> 17
increase in sales opportunities for the Company is driven primarily by the
increasing market acceptance of low-maintenance decking materials by consumers
over traditional decking materials like wood that require maintenance and can
rot, splinter and warp over time when exposed to external environments.
Additionally, in the first quarter of 2000, AERT and Weyerhaeuser started a
national TV advertising campaign on TNN Outdoors. The ads run four times per
week with an exposure to over 72 million households. These ads are to build
product identification and brand awareness. The Company will begin additional
print and TV advertising during the third quarter, as well as focus on
exhibiting at many fall home and garden shows. For 2000, the anticipated amount
to be expended for national and regional advertising and promotion on decking is
approximately $900,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company, in conjunction with its major shareholder, contractors and
suppliers, conducted a major capital expansion during 1999 at the Springdale
plant. Although this capital expansion contributed to the working capital
deficit, the completion of the $4.5 million government guaranteed loan helped to
reduce the deficit to $5,340,760 from $7,756,859 at December 31, 1999. The
deficit is primarily attributable to the Company's delays in completing
construction and starting up its additional extrusion lines in a timely manner,
and the resultant negative cash flow from the Springdale plant. Management's
decision to finance significant capital expenditures with short-term bridge
loans also contributed to the increased deficit. Of such deficit involving total
liabilities of approximately $26.4 million as of June 30, 2000, $16.5 million
was for bonds payable, which is currently escrowed and offset by a $16.5 million
restricted bond escrow fund, $2.4 million was payable to the Company's major
shareholder, $1.8 million was in short term bridge loans, and approximately $3.5
million was in payables of which a significant portion reflects the construction
at the Springdale facility. Construction payables have been reduced by
approximately $1.5 million since December 31, 1999.
The Company also successfully closed a $16.5 million tax-exempt bond financing
into escrow during the fourth quarter of 1999, which is intended to refinance
and shift its construction and expansion related accounts payable into long-term
financing. The Company started up the third Springdale production line in April
2000 and it commenced commercial production in July 2000. The Company plans to
further increase production on its additional lines through efficiencies and
significantly increase positive cash flows, and then work to break a portion of
the bonds from escrow once sufficient debt service coverage can be consistently
maintained. Certain requirements must be met in order for the Company to break
escrow. These include delivering to the trustee such general items as project
plans and specifications, cost estimates, construction contracts and insurance
coverage. Furthermore, unless waived by the holder of 100% of the Bonds, the
Company must also deliver to the trustee satisfactory evidence that for any
consecutive 12 month period commencing on or after the date of the issuance of
the bonds, the long-term debt service coverage ratio, as defined, has been not
less than 2 to 1, and the projected long-term debt service coverage ratio for
the 24 month period subsequent to the first disbursement from the project fund
shall be not less than 2 to 1. At June 30, 2000, the Company had not met the
aforementioned criteria and there are no assurances the Company will be
successful in meeting the standards required to receive the bond financing
proceeds. In addition, the bonds are subject to mandatory tender for purchase by
the Company in whole on October 13, 2000 (the Reset Date), at which time the
Company will attempt to re-market the bonds. There are no assurances that the
Company will be successful in re-marketing the
15
<PAGE> 18
bonds, at which time the Company will be required to buy back the bonds. Should
the Company be successful in its efforts to break escrow the Company believes it
will have more than adequate debt service coverage for its pending long-term
bond debt.
On February 29, 2000, the Company closed a bank financing with an Arkansas based
bank totaling $4.5 million. This loan has a 15-year amortization, is 80%
guaranteed by the U.S. Government and carries a 9.75% interest rate.
Approximately $800,000 of the loan proceeds were used to acquire the 18.6 acres
of land that adjoins the plant in Springdale, Arkansas. This land will be the
site of the third manufacturing facility and an additional plastic plant, as
previously mentioned. Also, the loan proceeds were used to pay debt acquisition
costs of approximately $346,000, reduced the Company's accounts payable by
approximately $2,000,000 and provided working capital of approximately
$1,350,000. Said financing also required personal guarantees by the major
shareholder and two family members. The Company has initiated an outside third
party fairness opinion regarding this transaction, and may, but is not required
to, compensate these individuals in the future for use of their guarantees. The
Company believes that with the successful completion of its pending escrowed
bond financing it will reduce and later eliminate its working capital deficit by
paying off the remaining bridge note balance of $1.8 million during the
remainder of 2000. In addition, the Company will be reimbursed for approximately
$4.7 million of working capital used to pay vendors for costs eligible to be
paid from bond proceeds. The Company will also receive approximately $800,000
for unpaid costs eligible for reimbursement, which are reflected in the
Company's accounts payable total. The bond funds will greatly improve the
working capital position, and will restructure a significant portion of the
Company's short-term indebtedness into long-term debt with more favorable
interest rates if the Company is able to meet the requirements of the bond
indenture previously described and break escrow. Purchasing the existing
manufacturing site over a longer term should also help improve operating costs
by reducing the monthly lease payment cash requirement. By having substantial
dollars allocated and available for capital expansion, the Company believes that
increasing cash flows generated from operations can be used for working capital
and to further reduce the deficit.
In 1998, 2,900 shares of preferred stock were issued to the major shareholder
and several close accredited investors for $1,000 per share. Classes were issued
in Series A, B and C with Series B having voting rights for the underlying
shares and warrants. On the 7th anniversary date of the issuance of the
preferred stock, the preferred stock will automatically be converted into shares
of common stock with the conversion price equal to the lower of the average of
the closing bid prices for the common stock for the 5 trading days immediately
preceding the 7th anniversary of the issuance or the fixed conversion price. The
fixed conversion price is $1.20. Under the terms of the preferred stock
agreements, certain continuing performance criteria are required of the Company,
including: (1) minimum sales of $6 million per quarter and (2) positive
quarterly cash flow from operations each quarter. If a milestone failure occurs,
the conversion price is the lower of the fixed conversion price or the variable
conversion price. The variable conversion price is the average of the closing
bid prices for the common stock during the 10 consecutive trading days ending on
the trading date immediately preceding the date of determination. A 10% premium
is payable per year. Series X and Y warrants were issued in connection with the
preferred stock and are exercisable at $1.20 and $2.50 per share, respectively.
Each of the warrants has cashless exercise features that are based on various
conversion amounts and terms. Series X warrants cannot be exercised for one year
from date of issuance. The preferred stock agreements require that the Company
register with the SEC the common stock underlying the convertible preferred
stock and warrants with an effective registration statement by October 1, 2000.
The Company may be required to pay certain penalties to the holders
16
<PAGE> 19
of the preferred stock and warrants if the registration statement is not
declared effective by the SEC by October 1, 2000. The penalties increase over
time until the registration statement is effective. The preferred stock
agreements contain potential redemption events, which would cause the Company to
have to redeem the preferred stock. The agreements state that if a redemption
event occurs, the Company must pay each holder of preferred stock an amount
equal to ten percent of the aggregate stated value of the shares of preferred
stock then outstanding. As a condition of this financing, the Company filed an
initial registration statement for the preferred stock in December 1999 and
expects to have it declared effective by the SEC prior to October 1, 2000.
Cash and cash equivalents increased $607,413 in the first half of 2000.
Significant components of that increase were: (i) cash used in operating
activities of $2,064,290, which consisted of the net loss for the period of
$480,904 reduced by depreciation and amortization of $1,021,973 and increased by
other uses of cash of $2,605,359; (ii) cash used in investing activities of
$1,769,240, and (iii) cash provided by financing activities of $4,440,943.
Payments on notes during the period were $385,030, and proceeds from the
issuances of notes amounted to $4,500,000. At June 30, 2000, the Company had
bonds and notes payable in the amount of $24,066,926, of which $19,616,318 were
current bonds and notes payable or current portion of long-term debt. Of the
current bonds and notes payable, $3,037,663 or 15% was to the major shareholder
and other investors closely associated with the Company. During the fourth
quarter of 1998, the Company reduced the indebtedness of its $3.16 million
bridge loan by $1 million through the issuance of preferred stock. During the
first quarter of 1999, the loan was further reduced by $200,000 to $1.9 million.
The Company paid $100,000 in the second quarter of 2000 and intends to pay down
the remaining $1.8 million from cash flow and/or refinancing during 2000 and the
final balance upon successful completion of the bond financing.
FUTURE PLANS
With the startup and commercial implementation of the third Springdale extrusion
line, management believes the Arkansas facility will have sufficient production
capacity to support its customer base and maintain positive cash flows and
respectable profitability. With initial phases primarily complete, the Company's
objectives are to now restructure and solidify its balance sheet, eliminate its
"going concern" issue and attain a clean audit opinion. These objectives are to
be attained in four ways.
o Debt restructuring
o Cash flow
o Profitability
o Potential voluntary warrant exercise
Debt restructuring: Once both plants are in a sustainable profit mode, the
Company intends to break escrow on a portion of the bonds, with which AERT can
purchase the Springdale plant, refinance a significant portion of the bridge
loans, pay open account balances on remaining construction payables and increase
working capital by reimbursing AERT for bills eligible for bond reimbursement
that have been paid by AERT out of working capital. In addition, the Company
will be reimbursed for approximately $4.7 million of working capital used to pay
vendors for costs eligible to be paid from bond proceeds. The Company will also
receive approximately $800,000 for unpaid costs eligible for reimbursement,
which are reflected in the Company's accounts payable total. This debt
restructuring is estimated to reduce short-term payables and debt by
approximately $5 million, and will
17
<PAGE> 20
greatly improve the Company's short-term debt position. The purchase of the
existing Springdale plant will eliminate $228,000 in annual lease payments.
Cash flow: With the third Springdale extrusion line now up and running, both of
the plants should be producing a consolidated minimum amount of $900,000 of
gross sales weekly when efficiencies of scale are attained. That amount of gross
sales annualizes to $46,800,000, which management believes will generate enough
cash to pay operating expenses on a current basis. When the bond funds break
from escrow, designated bond funds will be dedicated for construction and
expansion, and cash flows generated will then begin to increase our working
capital balances.
Profitability: At the aforementioned sales level, we believe we will be
generating profits on a consistent basis. The Company is currently holding
bi-weekly meetings at both plants to increase communications between the plant
associates and management and to identify specific areas for improving the
efficiency of the operations and reducing costs.
We are implementing a new accounting and reporting system in order to monitor
operating performance in a more timely manner. The company is now in a position
under normal working conditions to make profits each month. This of course does
not anticipate major breakdowns or consistent underutilization of the equipment
due to poor operating procedures. The Company has the infrastructure to move to
consistent profitability.
Raw materials: The Company intends to immediately build a second plastic
recycling facility, and improve and increase its internal raw material
processing capacity once the bond financing breaks escrow. Management believes
and has demonstrated that substantial cost savings can be realized by
processing waste plastic internally rather than relying on outside brokers or
processors. With substantial extrusion capacity now in place, management
believes lowering raw material feedstock cost can shortly result in improved
financial performance and profitability.
Potential voluntary warrant exercises: The Company has a series of warrants
outstanding, including those covered by a recent S-3 registration statement
filing, which was filed by the Company as a condition of the preferred stock
offering. This offering of $2.9 million helped the Company complete the
Springdale plant. Although outstanding warrants are of a voluntary conversion
nature by the warrant holders, other than time of expiration, management
believes that when the Company demonstrates that the Springdale plant can make
money and that the Company can sustain profitability, shareholders may decide to
exercise warrants, which could bring additional equity into the Company. There
can be no assurance that shareholders may decide to voluntarily convert their
warrants. The recent S-3 registration statement will expire 2-years from its
effective date.
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.
18
<PAGE> 21
ITEM 4. INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000
Through the date of this report, the Company completed the transition from
calendar year 1999 to calendar year 2000 without any major problems or
disruptions because of year 2000 issues. Additionally, no problems are expected
to arise as a result of any year 2000 related failure in the future.
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 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 its 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, 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
the Company's motion for new trial based upon discovery misconduct and the
Company's motion to supplement record.
19
<PAGE> 22
Mobil recently filed an appeal brief regarding denial and dismissal of the
attorneys' fees motion by the Delaware Court. The Company recently answered
Mobil's appeal and cross-appealed the dismissal of its prejudicial misconduct
motion by the Delaware Court in March of 2000. The Company retained new legal
counsel for said appeal, which has extensive experience and specializes in
appellate actions. The Company's cross-appeal involves allegations of tampering
with, altering and withholding critical evidence by Mobil prior to trial. It
seeks a final denial of Mobil's request for attorneys' fees and a new trial for
prejudicial discovery misconduct. The Company's counterclaims are still pending,
although Mobil is no longer in the composite products business.
There can be no assurance that the Company can prevail on these issues or that
if it prevails, Mobil will not further appeal to a higher court. Furthermore,
there can be no assurance that the Company will be awarded a new trial upon
appeal. The Company has $40,000 accrued for any legal fees that could arise as a
result of this litigation.
The Company is a counterclaim defendant in a federal action in Texas, involving
allegations from a former employee and officer of the Company that the Company
breached an employment agreement by terminating employment. The Company believes
this action is without merit.
We were also sued in May 2000 in federal court in Texas for back royalty
payments allegedly due to a successor to a licensor of firelog extrusion
technology. That licensor licensed technology to a firelog manufacturing company
operated by our founders in 1986-1987. A dispute and lawsuit arose at that time
between our founders and that licensor that was settled by an agreement that our
founders and their affiliates would pay the licensor a royalty of $10.00 per ton
of material, if any produced using the licensor's technology. As described in
our December 1989 IPO prospectus and for many years thereafter, we have always
contended that we did not use such technology and no royalty was paid nor, prior
to this year, did that licensor ever pursue any claim for such royalties. We
believe numerous defenses are available and intend to vigorously defend
ourselves against what we consider a matter related to the current suit in
Delaware. Mobil was also a successor and licensee from affiliates of that
firelog technology licensor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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: July 27, 2000 Date: July 27, 2000
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
