AERT persists, Still Struggling For Profits

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‘AERT, the composite building material manufacturer, is attempting a recapitalization of the company with a $2.2 million preferred stock offering.

Advanced Environmental Recycling Technologies Inc., as the company is more formally known, has struggled since its founding nearly nine years ago. Although the company’s products have won over such impressive customers as Weyerhauser Inc., General Motors Corp., and Dow Chemical Co., profitability remains elusive. Each time the company has seemed on the verge of turning a profit, misfortune has struck: A string of fires damaged equipment at two plants; the company lost an important and costly lawsuit; and, in early 1996, board chairman Jim Brooks died suddenly.

~ But his son, Joe Brooks, AERT’s president, is predicting, yet again, that profits are just around the corner.

“We don’t have enough production capacity to do all the things we want to do for our customers,” Brooks says. “The demand is there. The customer base is there.”

‘AERT’s plastics reclamation plant in Rogers sits idle, six months after fire heavily damaged the building. The plant had processed plastic, turning it into pellets, the raw material used at the company’s Junction, Texas, manufacturing facility. Since then, AERT has tried, with some success, to secure outside suppliers, but the reclamation plant is desperately needed to help the company fill orders.

The company’s landlord, Lee Harris, plans to rebuild the structure in three phases: 10,840 SF in the first phase, 19,810 SF in the second and 10,953 SF in the third. Although work has begun on the first phase, AERT and city officials are at odds over one requirement: a sprinkler system.

Rick Williams, the city’s inspection officer, says AERT’s past history of fires, both of which remain under investigation, has no bearing on the requirement. It is determined, instead, by the type of operation that will be housed inside the structure, he says.

But Brooks contends a sprinkler could add $250,000 to the building’s cost, and he questions the need for such a system. Company officials had hoped the plant would be back in operation during the second quarter of the year, but that obviously hasn’t happened. Brooks says he’s hoping now for an August restart date and that could mean moving from Rogers.

“We don’t want to” move from the city, he says, but company officials are already scouting other possible locations in Northwest Arkansas.

Stock offering difficult

As for the preferred stock offering, Brooks says the company has a letter of intent now and is in the process of closing the deal. The $2.2 million offering is already oversubscribed despite the difficulties in marketing it, he adds.

“It’s a little difficult in this type of situation. With the arsons, the litigation, the things we’re dealing with, you have to deal with accredited or institutional investors, people that understand risk and do this for a living,” he says. “It’s very difficult to try to take a stock offering under this kind of circumstances. … This is a very high-risk situation. You have to be dealing with people sophisticated and accredited to understand the risk.”

The Brooks family has poured millions of dollars into the company since 1988, when it was founded, and the major shareholder is Marjorie Brooks, with whom AERT has a $2 million line of credit. Her three sons are all involved with the company. Joe is president, Steve is CEO and Doug is executive vice president.

Although the company recently announced it had reached a settlement with its insurance company for the December fire, Joe Brooks says the final payment hasn’t been received.

“We’ve agreed to the terms, but we haven’t received the final payment yet,” he says. “There’s a lot of money at stake here. … Depending on the way it’s rebuilt, [the claim] could go up to $2.2 million.”

The insurance carrier, St. Paul Fire & Marine Insurance Co., canceled the policy, a move Brooks understands.

“We pay a $75,000 premium and they pay out $3.5 million. It’s not a good deal for them. We’re considered too big a risk,” he says.

?The company has obtained insurance coverage from another carrier, although Brooks declines to name the company because of all the past troubles AERT has experienced, resulting in numerous insurance claims.

Legal documents filed with the Securities and Exchange Commission, however, noted that the company’s $25,000 annual premium would probably increase as would its deductible.

Legal action still pending

Also still pending is litigation that began more than three years ago. Mobil Oil Co. filed suit first, asking a Delaware court to invalidate certain patents AERT held. AERT countersued and accused Mobil of infringing on its patents. AERT officials were stunned when a jury decided in favor of Mobil, invalidating four of AERT’s patents.

Subsequently, AERT found evidence, it said, that Mobil falsified documents. Although Mobil has sold off its plastics manufacturing operation, the litigation continues. At this point, the U.S. Court of Appeals has restored two of the four patents to AERT and the company hopes also to recapture the other two.

However, another more important application is pending in the U.S. Patent Office. That application involves AERT’s process.

“We’re cautiously optimistic about a ruling this summer,” Brooks says.

As for the lawsuit, he says, “We were probably a little bit naive in our discovery. … If we’d had all the evidence then we have now, I don’t think it would [have ended] the same way.”

But, he adds, “We’re fortunate we’re still in the ball game. The patent office has all the evidence the court did not see, and we hope to have a ruling some time this summer.”

Currently stayed before the court is a motion by Mobil that asks for $2.7 million in legal fees from AERT.

In a worse-case scenario, according to AERT’s latest 10-K filing, the company “could face an aggressive challenge against it for a significant portion of said $2.7 million attorney’s fees” in an attempt to end the litigation before other motions are heard. Those motions include AERT’s request for a new trial because of Mobil’s alleged misconduct that prejudiced the first trial.

“The company will vigorously defend against Mobil’s claim for attorneys’ fees and costs; however, there can be no assurances as to the outcome of this litigation,” according to the 10-K. The document also indicates AERT expects rulings on both motions – Mobil’s for attorney fees and AERT’s for a new trial – during 1997.

During its history, AERT has been issued 13 patents. The hope is to expand licensing agreements, especially in foreign markets. Brooks says interest from overseas is high because affordable housing is needed in so many countries.

“There’s a tremendous amount of potential for this. Once we get past these initial obstacles, that’s the direction we want to get to on down the road, where not only are you producing and have established your customer base, but where you can take it to the next step to licensing.”

New venture in the wings

AERT also has a willing would-be partner in a new venture planned for Bergman, a small community near Harrison. Bobby Sutton, president of Sutton Products Inc. Sutton Engineered Wood Products Inc., as the new company is called, would manufacture industrial flooring material.

General Motors recently approved a contract with AERT for its industrial flooring.

The contract amounts to a blank approval, authorizing use of the flooring in all GM’s plants worldwide, Brooks says. AERT had already supplied flooring to several of the automaker’s plants, but the latest contract will make it easier for GM operations to purchase the material.

Brooks expects that to just increase his need for expanded manufacturing facilities. In Junction, the company already has added a third extrusion line with plans for a fourth to be added later this year.

Sutton’s project, announced in April 1996, has stalled until he obtains sufficient financing. Already, however, Sutton says, he’s invested a “considerable” sum of money for steel and other work for the new plant. He’s not deterred by the string of misfortunes that have hampered AERT.

“I’ve been visiting in all their plants and know the people personally. Their problems … are not internal problems. They’re external, somebody else. I’ve been around enough to know that the problems are being caused by somebody outside” the company, Sutton says.

Sutton wants the business to bolster his existing company, which makes barstools.

Wanda Norvell, Sutton’s secretary, treasurer and manager, explains that imports from the Pacific Rim have “virtually put us out of business.”

“As bad as this area needs employers and people need jobs … we just need to try to provide jobs for people. This is a wonderful product, and it’s an exciting product,” she continues.

Wood fibers, used in the AERT process, are readily available in the Harrison area, and Sutton believes the location – more central than Texas – would reduce shipping costs to many AERT customers.

Shareholders loyal

Although the Brooks family has invested millions in the company through the years, they feel an obligation to other shareholders, too. The annual report, mailed out last week to investors, contains four-color pictures this year, a first for the company, which holds its annual meeting July 25 at the Holiday Inn in Springdale. AERT’s headquarters remain in Springdale.

“You feel slam-dunked and run through a meat-grinder,” Brooks says about the company’s troubles. “We must have the most loyal shareholders in the world.”

To those shareholders, Brooks says, his family feels “a tremendous responsibility to build their investments into something.” With each misfortune, he adds, “We just back up and regroup.”

Those shareholders sometimes call.

“I had a shareholder call me up here about a month ago,” Brooks says. “He basically said, ‘I just want to know, Are you all ready to quit yet?’

“I said, ‘No, we’re not. We’re pretty persistent,'” Brooks recalls.

That seemed to satisfy the investor.

“He said, ‘That’s all I wanted to hear because I am, too.'”

Backing away from the business would not be in any of those investors’ interests, Brooks says, so the company executives are determined to tough it out.

“The thing that’s driving the company now is the product acceptance and the customer base. We’ve got a customer base most people would give their right arm for,” Brooks says.

He doesn’t foresee bankruptcy in the company’s immediate future either.

“With the financial backing we have with institutional investors and our shareholders and our customers, we’re going to tough this through. I think people are going to be surprised at how fast we come out of this.”