Better Times Ahead for AERT

With its stock recently reaching a four-year high and $16.5 million from a new bond offering expected within days, Advanced Environmental Recycling Technologies Inc. may finally be on the verge of financial success.

The company recorded its first-ever profitable quarter – $195,000 profit for the quarter ended March 31 versus a loss of $360,000 for the same quarter a year earlier. “Big Bertha,” the company’s newest and biggest extrusion line, finally came on-line in February, months later than originally anticipated but finally up to expectations.

“We’re not going to be a little microcap company much longer,” chairman and co-CEO Joe G. Brooks told shareholders attending the annual meeting in Springdale recently. “Our goal is to make you a lot of money.”

Certainly, it seems that AERT has its best chance ever to do that in 1999. In mid-July, the stock price closed above $2 a share for the first time since mid-1995, and many shareholders seemed to want to discuss that subject with Brooks.

He’s pragmatic about the stock price, however. “The stock’s gonna do what the stock’s gonna do,” he told investors and then cheerfully referred all discussions on that matter to Robert A. Thayer, the analyst now covering the company.

Still, Brooks never forgets those long-suffering shareholders who have stuck with the company through the last decade. Instead of being a money-maker, the company has been more like a black hole for investors’ money, especially for the Brooks family, who have poured in millions of dollars in recent years.

Management has always contended there’s a huge market for AERT’s products – door and window components, industrial flooring and decking material, all made from recycled plastics and sawdust.

But the company’s ability to produce those products has been severely limited by an almost unbelievable string of catastrophes. A series of fires, some of suspicious origin, disrupted and shut down operations, and a devastating legal battle with corporate giant Mobil Oil Co. threatened tiny AERT’s survival when a jury returned a verdict against it.

Company Persevered

Still, the company has persevered, thanks largely to the persistence of – and additional investments by – the Brooks family, especially Joe Brooks’ mother, Marjorie, and his father, Jim Brooks, who died two years ago while leading the company.

Two years ago, the company leased in Springdale the former Cabinet Craft building that seemed custom-made for its extrusion and painting operations. Bringing that plant on-line has taken longer than expected, at least in part because a computerized transfer system failed to work properly. That situation was remedied only after AERT threatened the vendor with legal action. So far, the company has poured nearly $4 million worth of improvements into the plant.

Brooks says the Springdale plant now has about 120 employees and he expects to add about 50 more by year’s end. Operations are approaching the break-even point, he says. Money from the bond issue will help pay for the addition of 18.6 more acres, bringing the Springdale operation up to 30 acres.

He believes the $16.5 million from the industrial revenue bond issue is just the beginning. Changes in federal laws in recent years restricted the use of tax-exempt financing by most industries to $10 million over a 10-year period.

“The state of Arkansas was gracious enough to grant us $16 million [in tax-exempt bonds],” Brooks says. “Other states [also] have the ability to do that. [We expect to] execute this business plan, put this expansion in, start generating profits and the cash flows we feel are right around the corner, and we’ve got another $84 million of subsidized financing” possible.

He adds, “It’s tremendous leverage, and it’s non-dilutive,” meaning AERT won’t have to issue additional shares to take advantage of this additional financing.

The bond underwriter is Hutchinson, Shockey Erley & Co. of Denver. Although it was expected to close earlier, the issue was delayed 45 days on a technicality. A ruling released in April by the Internal Revenue Service had muddied the definition of a recycling business and the issue couldn’t close until it was determined that AERT fit the definition.

Now, Brooks expects the issue to close by Aug. 20. It’s already sold out through private placement, he says.

“The neat thing about the bond issue is we’ve got cash flow in place now,” Brooks says. “Even if none of the other equipment came on-line, we’d be able to make debt service [payments].”

“This is designed to really leap-frog us,” he says enthusiastically.

The money’s being used for various capital improvements, including expanding the Springdale plant and installing new equipment at the company’s facility in Junction, Texas.

Planned Improvements

AERT’s latest quarterly report, filed May 5 with the Securities and Exchange Commission, lays out the planned expenditures with the bond money. They include $1.75 million to buy the existing Springdale factory building (103,000 SF of building space) and 10 acres of property; $1.3 million for buying another 18.6 acres adjacent to the plant; $2.8 million for additional plastic recycling equipment and capacity; and $7.9 million for additional extrusion and manufacturing capacity.

Improvements are also under way at the company’s Texas plant, which has another 110 employees. The factory was shut down over the Independence Day holiday weekend so construction crews could rip off the roof and, using a crane, set in place new equipment.

Sales have climbed to about $500,000 a week, a level Brooks hopes to maintain and then grow. On Aug. 4, the company announced another record in gross sales – $551,000 for the week ended July 24. The company reported sales of $4.5 million for the first quarter of 1999 and Brooks says the next goal is $6 million in quarterly sales.

Thayer, the analyst now following AERT for Westergaard Broadcasting Network Professionals, believes the company’s on the right track.

“The bond issue is coming at a great time,” Thayer says. “I think the bond issue will turbo-charge their growth.”

Thayer notes the persistence of the company founders.

“A lot of entrepreneurs would have given up a few years back.”

One concern some shareholders have raised repeatedly concerns dilution of their holdings. At the recent meeting, shareholders nonetheless gave management the authority to issue another 25,000 shares.

Brooks said previously that was preparation for the future and that there are no plans to issue more stock in the near future.

That’s what Thayer believes, too.

“The way he described it is as a long-term planning item,” he says. “They don’t intend to issue a lot of new shares right now, so I don’t think it hurts to have the authority to issue the shares. I see that as a legal thing.”

He adds, “There are a lot of options and warrants out there, and that’s something that was probably necessary to get the funding to get [AERT] as far as they’ve come. That’s not at all unusual for a small company to have to extend those kinds of warrants and options.”

Brooks says he expects the number of shares to eventually settle out at about 40 million.

“Is that good or bad?” Thayer asks rhetorically. “It depends on how profitable they are.”

AERT hopes to take advantage of the boom in decking materials, and it’s even landed a celebrity spokeswoman, Irlene Mandrell, the musician and singer.

But at least one person at the shareholders’ meeting wondered whether AERT’s new name for its decking material, DreamWorks, might face a legal challenge from the movie production company of the same name.

“You’re worried about Steven Spielberg,” Brooks replied. He shrugged off the concern, saying Spielberg hadn’t copyrighted the name on nonmetal building material.

AERT still faces other possible legal problems, stemming from the lawsuit that originated with Mobil Oil. Motions have been pending for months concerning attorney fees – an award against AERT could be devastating – as well as AERT’s request for a new trial.