##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 1-10367 Advanced Environmental Recycling Technologies, Inc. Delaware(State or other jurisdiction of incorporation or organization)
    
    71-0675758(I.R.S. Employer Identification No).
 914 N Jefferson Street, Springdale, Arkansas(Address of principal executive offices)
    
    72764(Zip Code)
 Registrants telephone number, including area code:(479) 756-7400 Securities registered pursuant to Section 12(b) of the Act:None Securities registered pursuant to Section 12(g) of the Act:Class A common stock, $.01 par value 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 such 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: [  ] Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
YES: [X] NO: [  ] Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
YES: [  ] NO: [X] On June 30, 2003, the last business day of the registrants
most recently completed second fiscal quarter, the aggregate market
value of the voting and non-voting common equity beneficially held
by non-affiliates of the registrant was $46,821,503 (for the
purposes hereof, directors, executive officers and 10% or greater
shareholders have been deemed affiliates). Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest practicable
date. Number of shares of common stock outstanding at March 23,
2004: Class A  29,500,147
Class B   1,465,530




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition andItem 7A. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESINDEPENDENT AUDITORS REPORTBALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF STOCKHOLDERS EQUITYSTATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSINDEX TO EXHIBITSCertification by the Chairman Co-CEO and PresidentCertification by the Co-Chief Executive OfficerCertification by the Chief Financial OfficerCertification by the Chairman Co-CEO and PresidentCertification by the Co-Chief Executive OfficerCertification by the Chief Financial Officer    Table of Contents  
 PART I 
 Item 1. Business Summary Advanced Environmental Recycling Technologies, Inc. (AERT) develops,
manufactures and markets composite building materials that are used in place of
traditional wood products for exterior applications in building and remodeling
homes. Our products are made from approximately equal amounts of waste wood
fiber and reclaimed polyethylene plastics, have been extensively tested, and
are sold by leading national companies such as the Weyerhaeuser Company
(Weyerhaeuser), Lowes Companies, Inc. (Lowes) and Therma-Tru Corporation.
Our composite building materials are marketed as a substitute for wood and
plastic filler materials for standard door components, windowsills, brick
mould, fascia board, decking and heavy industrial flooring under the trade
names LifeCycle®, MoistureShield®, MoistureShield® CornerLoc, Weyerhaeuser
ChoiceDek® Classic, Weyerhaeuser ChoiceDek® Plus, Weyerhaeuser ChoiceDek®
Premium, ChoiceDek® Classic Colors, and ChoiceDek® Premium Colors. We operate
manufacturing facilities in Junction, Texas, Springdale and Lowell, Arkansas
and Alexandria, Louisiana. Our customers are primarily regional and national
door and window manufacturers, industrial flooring companies and Weyerhaeuser,
our primary decking customer. Products Using the same basic material, we manufacture three product lines:  
    
    Commercial and residential decking planks and accessories
such as balusters and handrails (ChoiceDek),  
    
    Exterior door, window and housing trim components (MoistureShield), and  
    
    Industrial flooring. The wood fiber content of our products gives them many properties similar
to all-wood products, but we believe the plastic content makes our products
superior to either all-wood or all-plastic alternatives because:  
    
    Beginning January 1, 2004, the wood industry no longer
sells chromated copper arsenic (CCA) treated-lumber for
residential and construction applications. The primary
replacement chemical treatment for lumber is alkaline copper quat
(ACQ) and this treated-lumber is approximately 20% higher in price
and will also require additional handling and fastening
techniques.  
    
    They are less subject to thermal contraction or expansion
and have greater dimensional stability than competing all-plastic
products.  
    
    They are engineered for superior moisture-resistance and
will not swell or expand like wood.  
    
    Unlike wood, they do not require preservatives or
treatment with toxic chemicals such as CCA or ACQ, nor do they
require yearly water sealing or staining.  
    
    They can be designed and extruded through dies to a
desired shape in accordance with customer specifications, which
helps the customer to minimize waste.  
    
    They are less subject to rotting, cracking, warping,
splintering, insect infestation and water absorption than
conventional wood materials.  
    
    When combined with our unique tie coat primer, the life
of exterior paint can be greatly enhanced, thus 1




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creating a low-maintenance non-wood trim and fascia system designed
to enhance and complement fiber cement siding. Our composites manufacturing process involves proprietary technologies,
certain of which are patented. We also use manufacturing equipment that has
been custom-built or modified to our specifications. Our composite building
material became a patented product in June 1998 under U.S. Patent No.
5,759,680. Manufacturing We operate the following manufacturing and recycling facilities:  
    
    Our Junction, Texas facility manufactures ChoiceDek
Classic, ChoiceDek Classic Colors, ChoiceDek Premium and ChoiceDek
Premium Colors decking components. There was a fire in March 2003
at the Junction plant which caused substantial damage and
temporarily shut down plant operations. One rebuilt extrusion
line recommenced operations in 2003 and the second line and
material transfer system are scheduled to be operational during
the second quarter of 2004.  
    
    Our door, window and housing trim components
(MoistureShield) are manufactured at our Springdale, Arkansas
facility. The Springdale facility also manufactures the
LifeCycle, ChoiceDek Plus, ChoiceDek Premium and ChoiceDek Premium
Colors lines of decking product, and all of our heavy industrial
flooring. Springdale currently has three extrusion lines with a
fourth line undergoing upgrades and a plastic recycling facility.  
    
    In late 2003, we started-up a second plastics processing
facility in Northwest Arkansas. We have been adding plastic
recycling capacity to that plant and plan to have it fully
built-out by the end of 2004. The finished facility will be used
for plastic recycling and blending, a railroad loading/unloading,
a truck scale and receiving station, and finished goods storage.  
    
    The Company leased plastic recycling equipment and
factory space in Alexandria, Louisiana and commenced operations
there in June 2003. We have made improvements and installed
additional equipment to increase the facilitys throughput. The
upgrades provide flexibility to economically process different
types of scrap plastic and to provide plastic feedstock of a
quality and consistency required in order to more efficiently
operate our extrusion facilities. During the first quarter of 2003, we began road and bridge infrastructure
work on an 18.8-acre tract that adjoins the existing Springdale, Arkansas
facility. In the second quarter of 2004 we plan to complete a portion of the
infrastructure site work and roadwork for a second composite manufacturing
facility in Springdale. The existing site work completed is currently
providing storage space for finished goods and or other inventory. We then
plan to have the manufacturing facility completed and operational in the second
quarter of 2005. Over
the last 24 months, the Company has invested $14.2 million
in plant,
property and equipment. Our expansion plans currently are prioritized around
increasing plastic recycling capacity and lowering raw material costs, in
conjunction with further automation of production processes to improve
efficiencies. These projects will be followed by construction of a second
warehouse and manufacturing facility in Springdale, Arkansas and additional
composite extrusion capacity. New capital projects are currently being paid
for from cash flow and there is no assurance as to the timing of when
additional funds will be available to complete the aforementioned capital
improvement program (see Liquidity and Capital Resources and Note 4: Bonds
Payable). 2




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Operations 2003 Three significant events impacted AERT during 2003: 1. Junction Plant fire: On March 28, 2003, there was an accidental fire at the Junction, Texas
plant. We began demolition and partial rebuilding on April 16, 2003. The
initial restoration project, completed on May 20, 2003, included one extrusion
line that had been partially damaged, electrical system replacement, and roof
replacement. We expect complete restoration, including replacement of the
second extrusion line and the raw material system, to be finished by June 30,
2004. There is no assurance as to the timing of the completion of the second
extrusion line. The Junction plant was, and is, fully insured for fire damage
and business interruption. Through December 31, 2003, we received $5.4 million
in insurance proceeds related to this incident. Damage caused by the fire required us to write down gross assets by
approximately $4.91 million. We simultaneously adjusted accumulated
depreciation on those assets by $3.96 million, resulting in a net book value
decrease in assets of about $950,000. At December 31, 2003, we had invested
approximately $3.9 million in reconstructing the Junction facility. Insurance
proceeds received to reimburse costs incurred to reconstruct the facility
resulted in a gain of $2,962,041 through December 31, 2003. Additionally, we
received $1,366,682 in business interruption insurance during 2003, including
$1,125,372 to replace lost income and $241,310 to cover fixed expenses. At
December 31, 2003, approximately $484,000 was included in accounts receivable
for expected insurance reimbursements. The Junction facility was, and is, fully insured and we believe that our insurance will cover the total
rebuild costs. 2. In October 2003, we completed a $17 million bond refinancing, which
included $14.4 million in tax-free bonds and a $2.6 million note (see
Managements Discussion and Analysis - Liquidity and Capital Resources). 3. During the third quarter of 2003, we began producing a new decking
product line with wood-like aesthetics, including embossed wood grain and five
earth tone colors. This required retooling and re-structuring our
manufacturing process. Marketing and Sales General Market Strategy.Our products are designed for applications where
we can add the greatest value and address market needs, i.e. for external
applications where wood is prone to rot and/or requires substantial yearly
maintenance in the form of staining or water sealing. We have developed an
extensive customer and end-user base in the national door, window, and decking
markets. We are working to constantly develop and improve strong customer
relationships. Outdoor Decking Systems.Weyerhaeuser Building Materials distributes our
decking products through its 71 customer service centers across the U.S. and
Canada. Weyerhaeuser also sells our ChoiceDek Premium decking products to
Lowes Home Improvement Centers. In December 2001, we entered into a contract
with Weyerhaeuser under which they guarantee to purchase a minimum quantity of
decking products each year. The Weyerhaeuser Contract (the Contract)
automatically renews each December for the three subsequent years unless
Weyerhaeuser or we specifically act to cancel it. If the Contract is
cancelled, it will remain in effect for the remaining two years of its term.
The Contract automatically renewed in December 2003 to cover 2004 through 2006.
The Contract requires us to produce, and Weyerhaeuser to purchase, a minimum
number of truckloads of ChoiceDek decking and accessories during 2004.
Weyerhaeuser has traditionally sold ChoiceDek through its retail network of
over 5,000 primarily independent lumberyards. These lumberyards service
contractor and retail accounts as well as large tract homebuilding companies.
AERT, through Weyerhaeuser regional distribution centers, has established a
network of around 750 ChoiceDek stocking dealers. In addition, independent
lumber dealers can special order ChoiceDek from the Weyerhaeuser distribution
network. Additional information is available online at
www.choicedek.com. Weyerhaeuser entered into a rolling 3




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three year agreement with Lowes whereby Lowes has the exclusive right to
carry the ChoiceDek Premium product line. Lowes has agreed to provide
dedicated retail shelf space in all of its over 900 stores and to promote
ChoiceDek Premium through a national print and advertising campaign. We
believe the Weyerhaeuser contract strengthens our competitive position in the
decking marketplace and gives us the opportunity to develop and sell new
products through the same channel. As previously indicated, we recently began producing a new line of colored
decking products that are embossed with a wood-grain look. This required a
research and development (R&D) and factory changeover effort, but we believe
our product offerings are among the best in the marketplace. We promote our decking products through displays and presentations at
regional and local home, lawn and garden shows, and through in-store displays.
We have an on-going print advertising program that targets the residential
decking market. Lowes is also conducting a national print and television
advertising campaign for ChoiceDek Premium. Weyerhaeuser purchases and re-sells substantially all of our decking
products, which represented about 81% of our 2003 revenues. If Weyerhaeuser
were to cancel its contract, we would have to develop an alternative
distribution system for decking products, which could be expensive and time
consuming. Though Weyerhaeuser has purchased substantially all of our decking
production since 1995, there is no assurance that it will continue to do so
past the terms of the contract in 2005 (see Note 2 to the financial statements
regarding concentration of risk). Door and Window Products.We sell our MoistureShield products to door and
window manufacturers for use as component parts of their products. For
example, we manufacture a windowsill that is built into products like Portrait
windows by Stock Building Supply or Vetter windows, among others, and we
manufacture door rails built into doors by Therma-Tru Corporation. In
marketing, we emphasize the value-added potential of the MoistureShield
composite product, which, unlike competing wood products, can be engineered to
incorporate certain desired end-product characteristics, which saves our
customers time and expense. Customers will also avoid the need for chemical
treatments to their final product, which are otherwise often necessary to
prevent rot and sustain durability. The durability of our MoistureShield
composite components allow our customers to extend the lifetime or warranties
of their products while reducing or eliminating warranty claims costs.
Information about MoistureShield products is available on the Internet at
www.moistureshield.com. Therma-Tru and Stock Building Supply each purchase a large portion of our
MoistureShield production. The loss of either customer would negatively impact
sales and earnings. We are unable to predict the future size of the markets
for MoistureShield, however, we believe that the national door and window,
commercial and residential trim and residential decking material markets are
significant and will allow us to diversify our customer base over time. Exterior Trim and Fascia Products.We have been marketing an exterior
trim and fascia system under the trade name MoistureShield CornerLoc. Three
national homebuilders are now using the product. With the fire in Junction,
our production capacity was strained to meet the demand for our decking
systems, so we have been forced to limit CornerLoc production. We also had
some limited sales to various retail distributors in 2003. More information is
available at our website, www.moistureshield.com. We believe this product line
has significant growth potential, and we are striving to increase production
capacity so that we can begin a full production and marketing program, but the
timetable of a full product launch is dependent upon our construction and
financing timetable. Sales and Customer Service.We provide sales support and customer service
through our own marketing department, through Weyerhaeuser, and through
training programs for our customers and their sales associates. Our in-house
sales team is focused on serving commercial decking contractors and supporting
the Weyerhaeuser and Lowes sales professionals. Information and customer
service are provided through the website, www.choicedek.com, and through a
national toll-free telephone number. We also use independent, outside sales
representatives in some markets to promote and serve door, window and decking
customers. 4




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Cyclical Building Products Industry.Our products are used in home
improvement and new home construction. The home improvement and housing
construction industries are subject to significant fluctuations in activity and
periodic downturns caused by general economic conditions. Increased interest
rates and economic uncertainty, in particular, can lead to reduced homebuilding
and/or home improvement activity. Reductions in such activity could have an
adverse effect on the demand for our products. Sources of Raw Materials Wood Fiber.All of our products were originally made with cedar wood
fiber from mills located in or near the Junction, Texas facility. As our
operations have grown and the availability of cedar fiber diminished, we have
switched to using hardwood waste from the numerous mills and manufacturers in
the Ozark mountain region where our Springdale plant is located. We now have
supply contracts for a variety of hardwood fiber. Recycled Plastics.We use the following classes of industrial and
consumer waste polyethylene:  
    
    Low density polyethylene (LDPE) poly coatings or linings
from recycled bleached food-board, which are generated from the
hydro-pulping process;  
    
    High density polyethylene (HDPE) and linear low density
polyethylene (LLDPE) mixed plastic grocery bags from supermarket
and store collection programs;  
    
    HDPE ground container material; and  
    
    LLDPE stretch film from warehouses and packing waste. The materials we use are highly contaminated with paper and other
non-plastic materials, which lessens their value to other plastic recyclers.
Our proprietary recycling process does not require the purity, extensive
cleaning, additional washing and melt filtration required for conventional
plastics manufacturing, and can be conducted faster and more economically. By
using primarily contaminated plastics, we produce a usable, but lower cost,
feedstock for our composite extrusion lines. We also purchase additional
plastic raw materials from outside sources and sometimes virgin resin
producers. These materials are more expensive and more sensitive to swings
related to the petrochemical industry. Competition for Raw Materials.As the wood/plastic composites industry
grows, we sometimes compete for raw materials with other plastic recyclers or
plastic resin producers. We believe, however, that our ability to use highly
contaminated polyethylene limits the number of competitors because most
recycling processes require cleaner waste plastic sources. Nonetheless, we
expect to encounter new entrants into the composites or plastics reclamation
business. These new entrants may have greater financial and other resources
than we do, and may include domestic and foreign beverage bottlers,
manufacturers, distributors and retailers, forestry product producers,
petrochemical and other companies. The requirement to source increased amounts
of plastic raw materials from outside vendors, combined with increases in scrap
waste plastics prices increased our cost of materials and lowered our profit
margins in 2003 and may continue to do so in the future. We are increasing our
capacity for processing waste plastic, which reduces our dependence on outside
suppliers and reduces our overall costs, but there is no assurance that we will
be able to control the effect that increasing waste plastic costs has on our
profitability. Patented and Proprietary Technology Our composite manufacturing process and our development efforts in
connection with waste plastics reclamation technologies involve patents and
many trade secrets that we consider to be proprietary. We have also developed
certain methods, processes and equipment designs for which we have sought
additional patent protection. We have taken measures to safeguard our trade
secrets by, among other things, entering into confidentiality and nondisclosure
agreements, and restricting access to our facilities. We also have installed
advanced security systems, including limited access and cameras, at all
facilities. 5




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We have filed nineteen patent applications and have received issuance from
the United States Patent and Trademark Office for fifteen patents, six of which
relate to our composite materials manufacturing operations and product, and
nine of which relate to waste plastics reclamation technologies. The patents
cover our composite product, extrusion process and apparatus, our continuous
down-stream cooling and forming conveyor system and our plastic reclamation
process and equipment. Should our trade secrets be disclosed notwithstanding
these efforts, our business and prospects could be materially and adversely
affected. The cost of patent protection and, in particular, patent litigation
is extremely high. It can also strain resources and inhibit growth. Industry Standards Local building codes often require that building materials meet strength
and safety standards developed by the American Society for Testing Materials
and that, in order to qualify, the materials be evaluated by an independent
testing organization. Our decking, handrails and stair applications have a
national evaluation report NER code rating under NER-596. The NER rating
provides local building inspectors and code officials with independent testing
and installation information regarding our products. We believe that the NER
listing has helped to increase sales and market acceptance of our decking
products. Competition Competition for Sales.Our products compete with high-grade western pine,
cedar and other premium woods, aluminum, high-performance plastics, and an
increasing number of composites and other construction materials. We believe
that our products have superior physical characteristics, which make them a
better value for the consumer. Manufacturers of some competing products,
however, have long-established ties to the building and construction industry
and have well-accepted products. Many of our competitors are larger and have
research and development budgets, marketing staffs and financial and other
resources which surpass our resources. Sales of non-wood decking products to date represent a small portion of
the decking market. Pressure treated pine, cedar, redwood and other
traditional woods constitute the vast majority of annual decking sales. We
thus view wood decking as our principal competitor. The wood decking industry
is highly segmented with many small to medium sized manufacturers. Wood
decking is principally a commodity that competes as the low-priced product,
whereas the more-expensive non-wood products must compete on features and
performance. Among manufacturers of alternative decking materials, we view Trex
Company, Crane Plastics TimberTech, Louisiana-Pacific Corporations
WeatherBest, CertainTeed Corporations Boardwalk and Fiber Composites, LLCs
Fiberon, as our primary competitors. The market for door, windowsill, and trim products is highly segmented,
with many competitors. We believe that our MoistureShield products have
superior characteristics and are competitively priced. We emphasize
durability, which means that manufacturers and homebuilders using our products
should see reduced warranty callbacks and higher customer satisfaction. Our
product competes on durability and the ability of the customer to order a
product that is custom manufactured to their specifications. Employees On December 31, 2003, we employed 388 people. We had 79 employees at the
Texas facility, of which 3 were executive and/or office personnel and 76 were
full-time factory personnel. The Arkansas facilities employed 290 people, of
which 44 were executives and/or office personnel and 246 were full-time factory
personnel. We had 19 full-time employees at our Louisiana facility. From
time-to-time, we hire part-time employees to supplement our factory workforce.
In 2004, we are focused on streamlining and automating our manufacturing
operations, and we hope to increase output and improve efficiencies without
substantially increasing the number of employees. 6




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Item 2. Properties We conduct our composite products manufacturing operations from two
separate facilities. Our original facility is a 49,000 square foot
manufacturing and storage facility on a seven-acre site in Junction, Texas. On
October 9, 2003, we completed the purchase of the Junction facility with the
acquisition of the buildings for $75,000 from Marjorie S. Brooks, a major
shareholder. We believe that the Junction facility is currently suitable for
composite materials manufacturing requirements on a regional basis. Our Springdale, Arkansas manufacturing facility consists of 103,000 square
feet and is located on 10 acres with a rail siding in the Springdale Industrial
District. We have added 30,440 square feet of shed storage space since 1999
and installed a dual sprinkler system. We purchased this facility for $1.8
million with proceeds from the bond financing (see Liquidity and Capital
Resources and Note 4: Bonds Payable). We lease an office, storage building and parking lot adjacent to the
Springdale facility. The lease is for two years, renewable yearly. We also
lease an adjacent parking area. The office and storage facility is comprised
of 10,000 square feet on 2.36 acres and houses our corporate offices. We have
an option to purchase this property for $360,000, with half of the lease
payments applicable to the purchase price. We own 18.8 acres of land, south of and adjoining the existing
manufacturing facility. This land was acquired for $785,000 and is where a
second Springdale manufacturing facility will be built. We lease a 55,000 square foot second plastic storage warehouse and
laboratory with a lease term of two years expiring on May 1, 2005. There
remain options for two more two-year terms. In the third quarter of 2002 we entered into an agreement to purchase land
and a building in Northwest Arkansas, on approximately 10 acres, for $900,000.
This purchase was completed with funds from the bond financing in October 2003.
We expanded and retrofitted the building to become a plastic regrinding and
blending facility and serve as a reload area for finished products. In
addition, we are adding equipment to provide the capability of processing waste
plastic. We are leasing two warehouses in Northwest Arkansas. One warehouse is
used to store finished goods and store raw materials. The second warehouse is
currently used as a paint facility for our OEM products. We are leasing plastic recycling equipment and factory space
in Alexandria, Louisiana in a 50,000 square foot warehouse. We have made improvements and installed additional equipment to
increase the facilitys throughput. The upgrades provide flexibility to economically process different types of scrap plastic and
to provide plastic feedstock of a quality and consistently required in order to more effectively operate our extrusion facilities. 
 Item 3. Legal Proceedings At this time, we are not a party to any material legal proceedings. 
 Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2003. 7




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PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters AERTs Class A common stock is traded on the NASDAQ in the SmallCap market
and is listed under the symbol AERTA. In order to remain listed on NASDAQ, we
are required to meet certain criteria as maintenance standards established by
NASDAQ. One such standard is a minimum bid price of $1.00 per share. At
December 31, 2003, our closing stock price per share was $1.57 (and $1.22, as
of March 18, 2004). There is no assurance that our stock price will continue
to be greater than the minimum required for NASDAQ listing. The following table sets forth the ranges of high and low quarterly sales
prices (as reported by NASDAQ) of our Class A common stock for the years ended
December 31, 2002 and 2003. The quotations represent prices between dealers,
do not include retail markup, markdown or commission, and do not necessarily
represent actual transactions. Class A Common
StockHigh
    
    LowFiscal 2002First Quarter
    
    
    2.490
    
    
    
    1.100Second Quarter
    
    
    2.740
    
    
    
    1.430Third Quarter
    
    
    1.840
    
    
    
    1.250Fourth Quarter
    
    
    1.500
    
    
    
    1.100Fiscal 2003First Quarter
    
    
    1.400
    
    
    
    1.140Second Quarter
    
    
    1.330
    
    
    
    1.017Third Quarter
    
    
    1.600
    
    
    
    1.303Fourth Quarter
    
    
    1.610
    
    
    
    1.207
 As of December 31, 2003, there were approximately 1,600 record holders of
Class A common stock and 11 record holders of Class B common stock. We have
not previously paid cash dividends on the common stock and there are currently
restrictions under various debt obligations and preferred securities that would
prevent the payment of such dividends for the foreseeable future. 
 Item 6. Selected Financial Data The following tables set forth selected historical data for the years
ended December 31, 1999 through 2003, derived from our audited financial
statements for each such year and should be read in conjunction with such
financial statements and the footnotes attached thereto as well as the
discussion contained herein in Managements Discussion and Analysis of
Financial Condition and Results of Operations. Certain prior period amounts
have been reclassified to conform to the current period presentation. 8




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Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Statements of Operations Data:Net sales
    
    $
    43,520,563
    
    
    $
    41,415,466
    
    
    $
    33,422,959
    
    
    $
    27,707,491
    
    
    $
    20,136,390Income
(loss) before extraordinary gain and accrued premium on preferred
stock
    
    
    (665,921
    )
    
    
    1,193,333
    
    
    
    602,864
    
    
    
    (1,916,521
    )
    
    
    (1,473,736
    )Extraordinary gain
    
    
    2,962,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income
(loss) before accrued premium on preferred stock
    
    
    2,296,120
    
    
    
    1,193,333
    
    
    
    602,864
    
    
    
    (1,916,521
    )
    
    
    (1,473,736
    )Accrued
premium on preferred stock
    
    
    (276,000
    )
    
    
    (278,083
    )
    
    
    (290,000
    )
    
    
    (290,000
    )
    
    
    (290,000
    )Net income
(loss) applicable to common stock
    
    $
    2,020,120
    
    
    $
    915,250
    
    
    $
    312,864
    
    
    $
    (2,206,521)
    
    
    $
    (1,763,736
    )Net income (loss) per common share
before extraordinary gain (1) (Basic)
    
    $
    (.03
    )
    
    $
    .03
    
    
    $
    .01
    
    
    $
    (.08
    )
    
    $
    (.07
    )Net income (loss) per common share
before extraordinary gain (1) (Diluted)
    
    $
    (.03
    )
    
    $
    .02
    
    
    $
    .01
    
    
    $
    (.08
    )
    
    $
    (.07
    )Extraordinary gain per common share
(Basic and Diluted)
    
    $
    .10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per common share
after extraordinary gain (Basic)
    
    $
    .07
    
    
    $
    .03
    
    
    $
    .01
    
    
    $
    (.08
    )
    
    $
    (.07
    )Net income (loss) per common share
after extraordinary gain (Diluted)
    
    $
    .07
    
    
    $
    .02
    
    
    $
    .01
    
    
    $
    (.08
    )
    
    $
    (.07
    )Weighted average number of shares
outstanding (Basic)
    
    
    30,017,661
    
    
    
    29,516,768
    
    
    
    27,565,825
    
    
    
    26,059,013
    
    
    
    24,598,715Weighted average number of shares
outstanding (Diluted)
    
    
    30,017,661
    
    
    
    42,665,451
    
    
    
    37,176,751
    
    
    
    26,059,013
    
    
    
    24,598,715Balance Sheet Data:Working capital deficit
    
    $
    1,915,695
    
    
    $
    6,557,943
    
    
    $
    4,535,600
    
    
    $
    6,804,992
    
    
    $
    7,756,859Total assets
    
    
    36,406,601
    
    
    
    39,335,948
    
    
    
    36,393,071
    
    
    
    35,258,304
    
    
    
    31,455,793Long-term debt less current maturities.
    
    
    16,659,241
    
    
    
    4,068,210
    
    
    
    4,303,202
    
    
    
    4,486,156
    
    
    
    59,656Total liabilities
    
    
    27,458,156
    
    
    
    33,574,481
    
    
    
    32,194,317
    
    
    
    32,548,921
    
    
    
    27,947,095Stockholders equity
    
    
    8,948,445
    
    
    
    5,761,467
    
    
    
    4,198,754
    
    
    
    2,709,383
    
    
    
    3,508,698
  (1)
    
    The net income (loss) per share of common stock is based on the combined
weighted average number of shares of Class A and Class B common stock
outstanding during the period. See Note 2 to the financial statements for
a reconciliation of basic and diluted weighted average number of shares
outstanding. 9




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Three Year Comparison 2003
    
    % Change
    
    2002
    
    % Change
    
    2001Net sales
    
    $
    43,520,563
    
    
    
    5.1
    %
    
    $
    41,415,466
    
    
    
    23.9
    %
    
    $
    33,422,959Cost of goods sold
    
    
    34,361,984
    
    
    
    15.3
    %
    
    
    29,800,939
    
    
    
    23.1
    %
    
    
    24,209,639% of net sales
    
    
    79.0
    %
    
    
    7.0
    %
    
    
    72.0
    %
    
    
    -0.5
    %
    
    
    72.4
    %Gross margin
    
    
    9,158,579
    
    
    
    -21.1
    %
    
    
    11,614,527
    
    
    
    26.1
    %
    
    
    9,213,320% of net sales
    
    
    21.0
    %
    
    
    -7.0
    %
    
    
    28.0
    %
    
    
    0.5
    %
    
    
    27.6
    %Selling and administrative costs
    
    
    9,001,261
    
    
    
    15.0
    %
    
    
    7,823,826
    
    
    
    3.6
    %
    
    
    7,555,253% of net sales
    
    
    20.7
    %
    
    
    1.8
    %
    
    
    18.9
    %
    
    
    -3.7
    %
    
    
    22.6
    %Legal settlement
    
    
    
    
    
    
    -100.0
    %
    
    
    1,100,000
    
    
    
    
    
    
    
    Research and development
    
    
    77,900
    
    
    
    -64.6
    %
    
    
    220,354
    
    
    
    
    
    
    
    Subtotal
    
    
    9,079,161
    
    
    
    -0.7
    %
    
    
    9,144,180
    
    
    
    21.0
    %
    
    
    7,555,253% of net sales
    
    
    20.9
    %
    
    
    -1.2
    %
    
    
    22.1
    %
    
    
    -0.5
    %
    
    
    22.6
    %Operating income
    
    
    79,418
    
    
    
    -96.8
    %
    
    
    2,470,347
    
    
    
    49.0
    %
    
    
    1,658,067% of net sales
    
    
    0.2
    %
    
    
    -5.8
    %
    
    
    6.0
    %
    
    
    1.0
    %
    
    
    5.0
    %Other
income (expense)Insurance proceeds related to lost income
    
    
    1,125,372
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) on disposition of equipment
    
    
    
    
    
    
    -100.0
    %
    
    
    (134,413
    )
    
    
    -859.7
    %
    
    
    17,692Net interest expense
    
    
    (1,870,711
    )
    
    
    63.7
    %
    
    
    (1,142,601
    )
    
    
    6.5
    %
    
    
    (1,072,895
    )Income
(loss) before extraordinary item and accrued premium on
preferred stock
    
    
    (665,921
    )
    
    
    -155.8
    %
    
    
    1,193,333
    
    
    
    97.9
    %
    
    
    602,864% of net sales
    
    
    -1.5
    %
    
    
    -4.4
    %
    
    
    2.9
    %
    
    
    0.9
    %
    
    
    1.8
    %Extraordinary gain on involuntary conversion
of non-monetary assets due to fire
    
    
    2,962,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income
before accrued premium on preferred stock
    
    
    2,296,120
    
    
    
    92.4
    %
    
    
    1,193,333
    
    
    
    97.9
    %
    
    
    602,864% of net sales
    
    
    5.3
    %
    
    
    2.4
    %
    
    
    2.9
    %
    
    
    0.9
    %
    
    
    1.8
    %Accrued premium on preferred stock
    
    
    (276,000
    )
    
    
    -0.7
    %
    
    
    (278,083
    )
    
    
    -4.1
    %
    
    
    (290,000
    )Net income
applicable to common stock
    
    $
    2,020,120
    
    
    
    120.7
    %
    
    $
    915,250
    
    
    
    192.5
    %
    
    $
    312,864% of net sales
    
    
    4.6
    %
    
    
    2.4
    %
    
    
    2.2
    %
    
    
    1.3
    %
    
    
    0.9
    %
 Net Sales
    
    2003
    
    % Change
    
    2002
    
    % Change
    
    2001Springdale facility
    
    $
    34,203,234
    
    
    
    27.1
    %
    
    $
    26,901,808
    
    
    
    38.6
    %
    
    $
    19,410,541Junction facility
    
    $
    9,317,329
    
    
    
    -35.8
    %
    
    $
    14,513,658
    
    
    
    3.6
    %
    
    $
    14,012,418Total Net Sales
    
    $
    43,520,563
    
    
    
    5.1
    %
    
    $
    41,415,466
    
    
    
    23.9
    %
    
    $
    33,422,959
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net sales increased 5.1% in 2003 to $43.5 million from $41.4 million
in 2002. Increased national demand for our ChoiceDek Premium products
and additional production capacity caused net sales at the Springdale
facility to increase 27.1% to $34.2 million from $26.9 million in 2002. Net sales in the Junction facility
decreased 35.8% from $14.5 million in 2002 to $9.3 million
in 2003 due to the major fire in March 2003 that temporarily shut
down plant operations. The facility resumed operations with one
extrusion line in May 2003, and we have been operating at 50%
capacity since then. As previously discussed in Item 1.
Business- Operations 2003, we are now rebuilding the
second line and the material transfer system. We plan to have Junction
fully rebuilt by the end of the second quarter of 2004. 10




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##### Table of Contents



Cost of Goods Sold Our
cost of goods sold, as a percent of sales, increased significantly in
2003 versus 2002 primarily due to the rising cost of acquiring
recyclable plastics. A sharp increase in petroleum prices early in
the year drove up virgin resin prices, which caused industrial
consumers to turn
to recycled plastics, which then forced up the price that we had to
pay for waste plastic. To help offset rising material costs, we are expanding
the plastic recovery process capacity at the second Northwest Arkansas facility
and seeking new sources of waste plastic materials. Selling and Administrative Expenses The
increase in selling and administrative costs as a percentage of sales from
18.9% in 2002 to 20.7% in 2003 is the result of the decrease in revenue at the
Junction facility, the additional sales staff and increased marketing and
brand building expenses related to decking sales. Income Income
before the extraordinary gain decreased from 2002 to 2003 primarily because we had to pay
more for raw materials, Junction sales fell due to the fire, and we
experienced delays in automating portions of our production process. Additionally, net interest
expense increased approximately $728,000 in 2003 over 2002, due
primarily to the completion of the bond financing in the fourth
quarter of 2003, which resulted in higher interest costs and the
write-off of debt issuance costs related to the Arkansas State Bank
loan (see Note 4 to the financial statements). Extraordinary Item There were no extraordinary items in 2002. The extraordinary event in
2003 was the major fire at the Junction facility. The Junction facility was,
and is, fully insured. Damage caused by the fire required us to write down
gross assets by approximately $4.91 million. We simultaneously adjusted
accumulated depreciation on those assets by $3.96 million, resulting in a net
book value decrease in assets of about $950,000. At December 31, 2003, we had
invested approximately $3.9 million in reconstructing the Junction facility.
Insurance proceeds received to reimburse costs incurred to reconstruct the
facility resulted in a gain of $2,962,041 through December 31, 2003.
Additionally, we received $1,366,682 in business interruption insurance during
2003, including $1,125,372 to replace lost income and $241,310 to cover fixed
expenses. At December 31, 2003, approximately $484,000 was included in
accounts receivable for expected insurance reimbursements. Year ended December 31, 2002 compared to year ended December 31, 2001 Net Sales Net
sales increased 23.9% in 2002 versus 2001. The increase in sales were primarily at the Springdale
facility, which produces ChoiceDek premium. Sales were driven by
higher demand for
the ChoiceDek premium decking. Sales at the Junction facility increased
slightly in 2002, up 3.6% over 2001. 11




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##### Table of Contents



Cost of Goods Sold As
a percentage of sales, cost of goods sold decreased 0.5% in 2002
as compared to 2001. In 2002,
the cost of raw material decreased and was the major contributor to the lower
cost. However, in the last quarter of 2002, the cost of acquiring
plastics began to increase. We began to increase our internal
capacity to lessen our dependence on third party processors for our plastic. Selling and Administrative Costs Selling
and administrative costs were approximately $7.8 million
in 2002, an
increase of approximately $269,000 from 2001, which is a 3.7% decrease in
total selling and administrative costs as a percentage of sales. Net Income The
increase in net income, when comparing 2002 to 2001, was due to
higher sales and slower growth in operating costs. We believe increased
production and sales, improved product focus, increased job training, and
increased throughputs have allowed us to attain and increase profitability. Liquidity and Capital Resources At
December 31, 2003, we had a working capital deficit of $1.9
million compared to a working capital deficit of $6.6 million at December 31, 2002.
Excluding the $3.9 million spent to reconstruct the Junction facility,
we spent approximately $8.2 million on capital expansion during
2003. Expenditures were
primarily for improving our equipment at both production facilities in the
areas of extrusion, raw material processing and plastic production. Although
the refinancing decreased the working capital deficit, it was not
eliminated because our gross margin and profitability fell and we
continued to fund capital improvements through cash flow and
short-term loans. As of December 31, 2003, the
working capital deficit involved total current liabilities of approximately
$10.5 million, of which $1.9 million was for miscellaneous
accrued liabilities, $7.1 million was in payables and $1.5 million was a
combination of short-term notes payable and the current portion of long-term
debt. The $1.9 million working capital deficit reflects managements decision
to enter into short-term debt financing to build and improve production and
sales capacities to increase cash flows from operations. Our plan
continues to be using
short-term debt, which can be refinanced in the future, rather than more
expensive and dilutive equity financing. On October 9, 2003, we finalized a long-term financing package with the
City of Springdale, Arkansas and Allstate Insurance Company that resulted in
the release to us of most of the funds previously held in the restricted bond
escrow fund and terminating such escrow agreement. The package consists of
$14.4 million tax-exempt industrial development bonds and a $2.6 million
loan that is subordinated to the bonds. Net proceeds from the financing were used to repay short-term loans, pay
down accounts payable incurred to develop qualified solid waste disposal
facilities, purchase the Springdale, Arkansas extrusion facility, purchase the
Lowell, Arkansas plastic facility, pay issuance fees and provide limited
capital for further expansion. The obligations are secured by substantially
all of our real estate assets and personal property, although provision is made
for us to incur additional working capital lines of credit (subject to
compliance with financial covenants) that would be secured by 12




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##### Table of Contents



accounts receivable and inventory on a basis senior to obligations.
Marjorie S. Brooks, the major shareholder personally guaranteed repayment of up
to $4 million of the tax-exempt bonds. Cash increased $1,004,759 to $1,509,124 in 2003. Significant components
of that increase were: (i) cash provided by operating activities of $2,504,285,
which consisted of the net income for the period of $2,020,120 increased by
depreciation and amortization of $3,671,512 and decreased by other uses of cash
of $3,187,347; (ii) cash used in investing activities of $7,576,063, and (iii)
cash provided by financing activities of $6,076,537. Payments on notes during
the period were $9,112,156, and proceeds from the issuances of notes amounted
to $17,000,000. At December 31, 2003, we had bonds and notes payable in the
amount of $18,167,117, of which $1,507,876 was current notes payable and the
current portion of long-term debt. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
on our financial statements. The estimates made in applying the accounting
policies described below are material to the financial statements and notes
thereto due to the level of judgment involved in arriving at those estimates. Accounts Receivable Trade accounts receivable are stated at the amount management expects to
collect from outstanding balances. Delinquency fees are not assessed.
Payments of accounts receivable are allocated to the specific invoices
identified on the customers remittance advice. Accounts receivable are
carried at the original invoice amount less an estimated reserve made for
returns and discounts based on quarterly review of historical rates of returns
and expected discounts to be taken. The carrying amount of accounts receivable
is reduced, if needed, by a valuation allowance that reflects managements best
estimate of the amounts that will not be collected. Management individually
reviews all accounts receivable balances that exceed sixty days from invoice
date and based on an assessment of current creditworthiness, estimates the
portion, if any, of the balance that will not be collected. Management
provides for probable uncollectible amounts through a charge to earnings and a
credit to a valuation based on its assessment of the current status of the
individual accounts. Balances that remain outstanding after management has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to trade accounts receivable. Changes in the
valuation allowance have not been material to the financial statements.
Recoveries of trade receivables previously written off are recorded when
received. Inventories We state inventories at the lower of cost (first-in, first-out method) or
market. Our inventories are not prone to obsolescence, and therefore
we have not included a reserve for obsolescence in our financial
statements. Buildings and Equipment Property additions and betterments include capitalized interest and
acquisition, construction and administrative costs allocable to construction
projects and property purchases. Provision for depreciation of buildings and
equipment is provided on a straight-line basis over the estimated
useful lives of the assets.
Gains or losses on sales or other dispositions of property are credited or
charged to income in the period incurred. Repairs and maintenance costs are
charged to income in the period incurred, unless it is determined that the
useful life of the respective asset has been extended. We account for the impairment or disposal of long-lived assets in
accordance with the provisions of the Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets(SFAS 144). SFAS 144 requires an assessment of the recoverability of
our investment in long-lived assets to be held and used in 13




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##### Table of Contents



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. Stock-Based Compensation We account for our stock option plans and other stock-based compensation
under Statement of Financial Accounting Standards No. 148,
Accounting for
Stock-Based Compensation  Transition and Disclosure  An Amendment of FASB
Statement No. 123, which allows us to use the intrinsic value method of
accounting set forth in Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (see
Note 2 to the financial statements). Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of our
common stock at the date of the grant over the amount an employee must pay to
acquire the stock. Contractual Obligations The following table represents our contractual obligations outstanding as
of December 31, 2003: Payments Due by PeriodLess than
    
    1 to 3
    
    3 to 5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsLong-term debt
    
    $
    17,801,766
    
    
    $
    1,142,525
    
    
    $
    1,945,067
    
    
    $
    1,814,174
    
    
    $
    12,900,000Operating leases
    
    
    1,064,298
    
    
    
    460,031
    
    
    
    353,525
    
    
    
    250,742
    
    
    
    Total
    
    $
    18,866,064
    
    
    $
    1,602,556
    
    
    $
    2,298,592
    
    
    $
    2,064,916
    
    
    $
    12,900,000
 Uncertainties, Issues and Risks There are many factors that could adversely affect AERTs business and
results of operations. These factors include, but are not limited to, general
economic conditions, decline in demand, business or industry changes, critical
accounting policies, government rules and regulations, environmental concerns,
litigation, new products / product transition, competition, acts of war,
terrorism, public health issues, concentration of customer base, availability
of raw material (plastic) at a reasonable price, managements failure to
execute effectively, inability to obtain adequate financing (i.e. working
capital), equipment breakdowns, low stock price, and fluctuations in quarterly
performance. 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk AERT has no material exposures relating to its long-term debt because all
of the Companys long-term debt bears interest at fixed rates. See Note 4 to
the financial statements for a discussion of outstanding debt. We depend on
the market for favorable long-term mortgage rates to help generate sales of our
product for use in the residential construction
industry. Should mortgage rates increase substantially, our business could be
impacted by a reduction in the residential construction industry. Important
raw materials that we purchase are recycled plastic and wood fiber, which are
subject to price fluctuations. We attempt to limit the impact of price
increases on these materials by negotiating with each supplier on a term basis. 14




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##### Table of Contents



Forward-looking Information An investment in AERTs securities involves a high degree of risk. Prior
to making an investment, prospective investors should carefully consider the
following factors, among others, and seek professional advice. In addition,
this Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements, which are often identified by words such as
believes, anticipates, expects, estimates, should, may, will and
similar expressions, represent AERTs expectations or beliefs concerning future
events. Numerous assumptions, risks and uncertainties could cause actual
results to differ materially from the results discussed in the forward-looking
statements. Prospective purchasers of the Companys securities should
carefully consider the information contained herein or in the documents
incorporated herein by reference. 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 managements current judgment regarding the
direction of the business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, or other future
performance suggested herein. Some important factors (but not necessarily all
factors) that could affect the 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 or
other unscheduled shutdowns affecting AERT, 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 our control; execution of planned
capital projects; weather conditions affecting our operations or the areas in
which AERTs products are marketed; adverse rulings, judgments, or settlements
in litigation or other legal matters. AERT 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 8. Financial Statements and Supplementary Data The response to this item is submitted in a separate section of this
report. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 
 Item 9A. Controls and Procedures Each of our Co-Chief Executive Officers, Joe G. Brooks and Stephen W.
Brooks, and our Chief Financial Officer, Edward J. Lysen, have reviewed and
evaluated the disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) that we have in place
with respect to, among other things, the timely accumulation and communication
of information to management and the recording, processing, summarizing and
reporting thereof for the purpose of preparing and filing this annual report on
Form 10-K. Such review was conducted as of the end of the period covered by
this Form 10-K. Based upon their review, these executive officers have
concluded that we have an effective system of disclosure controls and
procedures and an effective means for timely communication
of information required to be disclosed in this Report. Subsequent to this
evaluation, there have been no significant changes in our internal controls or
in other factors that could significantly affect such controls. 15




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The response to this item is incorporated herein by reference to the
Companys definitive proxy statement for its 2004 annual meeting of
stockholders. 
 Item 11. Executive Compensation The response to this item is incorporated herein by reference to the
Companys definitive proxy statement for its 2004 annual meeting of
stockholders. 
  Item 12.
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The response to this item is incorporated herein by reference to the
Companys definitive proxy statement for its 2004 annual meeting of
stockholders. 
 Item 13. Certain Relationships and Related Transactions The response to this item is incorporated herein by reference to the
Companys definitive proxy statement for its 2004 annual meeting of
stockholders. 
 Item 14. Principal Accounting Fees and Services The response to this item is incorporated herein by reference to the
Companys definitive proxy statement for its 2004 annual meeting of
stockholders. 
 Part IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.  (a1), (a2), and (d).The Financial Statements listed in the accompanying
Index to Financial Statements are filed as part of this report and such
Index is hereby incorporated by reference. All schedules for which
provision is made in the applicable accounting regulation on the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.(a3) and (c).The exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this report and such
Index is hereby incorporated by reference.(b)On October 14, 2003, the Company filed a Current Report on Form 8-K
under Item 7. Financial Statements and Exhibits and Item 12. Results of
Operations and Financial Condition. 16




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. BROOKSJoe G. Brooks,Chairman, Co-Chief Executive Officer and President/s/ EDWARD J. LYSENEdward J. Lysen,Senior Vice President and Chief Financial OfficerDate: March 30, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ JOE G. BROOKS
Joe G. Brooks
    
    Chairman of the board, co-CEO
and president
    
    March 30, 2004/s/ SAL MIWA
Sal Miwa
    
    Vice-chairman of the board
    
    March 30, 2004/s/ STEPHEN W. BROOKS
Stephen W. Brooks
    
    Co-CEO and director
    
    March 30, 2004/s/ MARJORIE S. BROOKS
Marjorie S. Brooks
    
    Secretary, treasurer and director
    
    March 30, 2004/s/ JERRY B. BURKETT
Jerry B. Burkett
    
    Director
    
    March 30, 2004/s/ MICHAEL M. TULL
Michael M. Tull
    
    Director
    
    March 30, 2004/s/ SAMUEL L. TONY MILBANK
Samuel L. Tony Milbank
    
    Director
    
    March 30, 2004/s/ MELINDA DAVIS
Melinda Davis
    
    Director
    
    March 30, 2004/s/ JIM ROBASON
Jim Robason
    
    Director
    
    March 30, 2004
 17




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS PageFinancial Statements:Independent Auditors
Report
    
    
    F-2Balance
Sheets
    
    
    F-3 - F-4Statements of
Operations
    
    
    F-5Statements of Stockholders
Equity
    
    
    F-6Statements of Cash
Flows
    
    
    F-7Notes to Financial
Statements
    
    
    F-8 - F-25
 F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc. We have audited the accompanying balance sheets of Advanced Environmental
Recycling Technologies, Inc. as of December 31, 2003 and 2002, and the related
statements of operations, stockholders equity and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Environmental
Recycling Technologies, Inc. as of December 31, 2003 and 2002, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. /s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLPFayetteville, ArkansasMarch 22, 2004
 F-2




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. 
 BALANCE SHEETS ASSETS December 31,
    
    December 31,2003
    
    2002Current assets:Cash and cash equivalents
    
    $
    1,509,124
    
    
    $
    504,365Restricted bond escrow fund
    
    
    
    
    
    
    16,565,549Accounts receivable, net of allowance of $92,207 at December 31,
2003 and $98,207 at December 31, 2002
    
    
    2,647,665
    
    
    
    2,635,960Inventories
    
    
    3,871,268
    
    
    
    2,684,336Prepaid expenses
    
    
    579,163
    
    
    
    343,409Total current assets
    
    
    8,607,220
    
    
    
    22,733,619Land, buildings and equipment:Land
    
    
    1,612,243
    
    
    
    889,528Buildings and leasehold improvements
    
    
    4,943,462
    
    
    
    1,615,288Machinery and equipment
    
    
    25,753,179
    
    
    
    24,400,913Transportation equipment
    
    
    675,208
    
    
    
    548,959Office equipment
    
    
    698,802
    
    
    
    645,012Construction in progress
    
    
    3,346,298
    
    
    
    1,649,93737,029,192
    
    
    
    29,749,637Less accumulated depreciation
    
    
    14,905,242
    
    
    
    15,223,727Net land, buildings and equipment
    
    
    22,123,950
    
    
    
    14,525,910Other assets:Debt
issuance costs, net of accumulated amortization of $199,067 at
December 31, 2003 and $246,561 at December 31, 2002
    
    
    3,397,134
    
    
    
    1,750,422Debt service reserve fund
    
    
    1,946,643
    
    
    
    Other
assets, net of accumulated amortization of $307,017 at
December 31, 2003 and $278,443 at December 31, 2002
    
    
    331,654
    
    
    
    325,997Total other assets
    
    
    5,675,431
    
    
    
    2,076,419$
    36,406,601
    
    
    $
    39,335,948
 The accompanying notes are an integral part of these financial statements. F-3




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##### Table of Contents



LIABILITIES AND STOCKHOLDERS EQUITY December 31,
    
    December 31,2003
    
    2002Current liabilities:Accounts payable  trade
    
    $
    5,321,317
    
    
    $
    4,663,220Accounts payable  related parties
    
    
    1,799,405
    
    
    
    2,234,699Current maturities of long-term debt
    
    
    1,142,525
    
    
    
    312,050Accrued payroll expense
    
    
    603,134
    
    
    
    493,516Other accrued liabilities
    
    
    1,291,183
    
    
    
    1,184,770Notes
payable - related parties
    
    
    
    
    
    
    1,928,833Notes payable  other
    
    
    365,351
    
    
    
    1,974,474Bonds payable
    
    
    
    
    
    
    16,500,000Total current liabilities
    
    
    10,522,915
    
    
    
    29,291,562Long-term debt, less current maturities
    
    
    16,659,241
    
    
    
    4,068,210Accrued premium on convertible preferred stock
    
    
    276,000
    
    
    
    214,709Commitments and contingenciesStockholders equity:Preferred stock, $1 par value; 5,000,000 shares authorized,
2,900 shares issued and 2,760 shares outstanding at
December 31, 2003 and 2002
    
    
    2,760
    
    
    
    2,760Class A common stock, $.01 par value; 75,000,000 shares
authorized; 29,275,147 and 28,331,312 shares issued and
outstanding at December 31, 2003 and 2002, respectively
    
    
    292,752
    
    
    
    283,313Class B convertible common stock, $.01 par value;
7,500,000 shares authorized; 1,465,530 shares issued and
outstanding at December 31, 2003 and 2002
    
    
    14,655
    
    
    
    14,655Warrants outstanding; 16,580,722 at December 31, 2003 and
16,590,122 at December 31, 2002
    
    
    7,818,834
    
    
    
    7,824,206Additional paid-in capital
    
    
    24,988,295
    
    
    
    23,825,504Accumulated deficit
    
    
    (24,168,851
    )
    
    
    (26,188,971
    )Total stockholders equity
    
    
    8,948,445
    
    
    
    5,761,467Total liabilities and stockholders equity
    
    $
    36,406,601
    
    
    $
    39,335,948
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. 
 STATEMENTS OF OPERATIONS Year Ended December 31,2003
    
    2002
    
    2001Net
sales
    
    $
    43,520,563
    
    
    $
    41,415,466
    
    
    $
    33,422,959Cost of goods
sold
    
    
    34,361,984
    
    
    
    29,800,939
    
    
    
    24,209,639Gross
margin
    
    
    9,158,579
    
    
    
    11,614,527
    
    
    
    9,213,320Selling and administrative
costs
    
    
    9,001,261
    
    
    
    7,823,826
    
    
    
    7,555,253Legal
settlement
    
    
    
    
    
    
    1,100,000
    
    
    
    Research and
development
    
    
    77,900
    
    
    
    220,354
    
    
    
    ,9,079,161
    
    
    
    9,144,180
    
    
    
    7,555,253Operating
income
    
    
    79,418
    
    
    
    2,470,347
    
    
    
    1,658,067Other income (expense)Insurance proceeds related to lost
income
    
    
    1,125,372
    
    
    
    
    
    
    
    Gain (loss) on disposition of
equipment
    
    
    
    
    
    
    (134,413
    )
    
    
    17,692Interest
income
    
    
    160,659
    
    
    
    321,955
    
    
    
    906,736Interest
expense
    
    
    (2,031,370
    )
    
    
    (1,464,556
    )
    
    
    (1,979,631
    )(745,339
    )
    
    
    (1,277,014
    )
    
    
    (1,055,203
    )Income (loss) before extraordinary item and accrued premium on
preferred
stock
    
    
    (665,921
    )
    
    
    1,193,333
    
    
    
    602,864Extraordinary gain on involuntary
conversion of non-monetary assets due
to
fire
    
    
    2,962,041
    
    
    
    
    
    
    
    Income (loss) before accrued premium on preferred stock
    
    
    2,296,120
    
    
    
    1,193,333
    
    
    
    602,864Accrued premium on preferred
stock
    
    
    (276,000
    )
    
    
    (278,083
    )
    
    
    (290,000
    )Net income applicable to common stock
    
    $
    2,020,120
    
    
    $
    915,250
    
    
    $
    312,864Income (loss) per share of common stock
before extraordinary item
(Basic)
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    0.01Income (loss) per share of common stock
before extraordinary item
(Diluted)
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.01Extraordinary gain per share of common
stock (Basic and
Diluted)
    
    $
    0.10
    
    
    
    
    
    
    
    Income per share of common stock after
extraordinary item
(Basic)
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.01Income per share of common stock after
extraordinary item
(Diluted)
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    0.01Weighted average number of common shares
outstanding
(Basic)
    
    
    30,017,661
    
    
    
    29,516,768
    
    
    
    27,565,825Weighted average number of common shares
outstanding
(Diluted)
    
    
    30,017,661
    
    
    
    42,665,451
    
    
    
    37,176,751
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS EQUITY Preferred Stock
    
    Class A Common Stock
    
    Class B Common StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance - December 31, 2000
    
    
    2,900
    
    
    $
    2,900
    
    
    
    25,755,321
    
    
    $
    257,553
    
    
    
    1,465,530
    
    
    $
    14,655Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    358,239
    
    
    
    3,582
    
    
    
    
    
    
    
    Issuance of shares in payment of interest
    
    
    
    
    
    
    
    
    
    
    409,114
    
    
    
    4,092
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    750
    
    
    
    
    
    
    
    Warrants outstanding recorded
due to the adoption of EITF 00-19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Class J Warrants
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,500
    
    
    
    
    
    
    
    Exercise of Class K Warrants
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,500
    
    
    
    
    
    
    
    Exercise of Class I Warrants
    
    
    
    
    
    
    
    
    
    
    45,616
    
    
    
    456
    
    
    
    
    
    
    
    Exercise of Consulting Warrants
    
    
    
    
    
    
    
    
    
    
    199,334
    
    
    
    1,993
    
    
    
    
    
    
    
    Exercise of Placement Warrants
    
    
    
    
    
    
    
    
    
    
    25,150
    
    
    
    252
    
    
    
    
    
    
    
    Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance - December 31, 2001
    
    
    2,900
    
    
    $
    2,900
    
    
    
    27,167,774
    
    
    $
    271,678
    
    
    
    1,465,530
    
    
    $
    14,655Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    338,492
    
    
    
    3,385
    
    
    
    
    
    
    
    Conversion of preferred stock
    
    
    (140
    )
    
    
    (140
    )
    
    
    116,667
    
    
    
    1,166
    
    
    
    
    
    
    
    Exercise of Series X Warrants
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    10
    
    
    
    
    
    
    
    Exercise of Class I Warrants
    
    
    
    
    
    
    
    
    
    
    95,107
    
    
    
    951
    
    
    
    
    
    
    
    Exercise of Consulting Warrants
    
    
    
    
    
    
    
    
    
    
    416,667
    
    
    
    4,167
    
    
    
    
    
    
    
    Exercise of Placement Warrants
    
    
    
    
    
    
    
    
    
    
    195,605
    
    
    
    1,956
    
    
    
    
    
    
    
    Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance - December 31, 2002
    
    
    2,760
    
    
    $
    2,760
    
    
    
    28,331,312
    
    
    $
    283,313
    
    
    
    1,465,530
    
    
    $
    14,655Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    179,586
    
    
    
    1,796
    
    
    
    
    
    
    
    Issuance of shares in payment of interest
    
    
    
    
    
    
    
    
    
    
    309,849
    
    
    
    3,099
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    95,000
    
    
    
    950
    
    
    
    
    
    
    
    Exercise of Placement Warrants
    
    
    
    
    
    
    
    
    
    
    9,400
    
    
    
    94
    
    
    
    
    
    
    
    Issuance of shares in payment of debt
issuance costs
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    
    3,500
    
    
    
    
    
    
    
    Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance - December 31, 2003
    
    
    2,760
    
    
    $
    2,760
    
    
    
    29,275,147
    
    
    $
    292,752
    
    
    
    1,465,530
    
    
    $
    14,655
   [Continued from above table, first column(s) repeated] Warrants Outstanding
    
    AdditionalPaid-in
    
    AccumulatedShares
    
    Value
    
    Capital
    
    Deficit
    
    TotalBalance - December 31, 2000
    
    
    
    
    
    $
    
    
    
    $
    29,851,360
    
    
    $
    (27,417,085
    )
    
    $
    2,709,383Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    286,418
    
    
    
    
    
    
    
    290,000Issuance of shares in payment of interest
    
    
    
    
    
    
    
    
    
    
    515,906
    
    
    
    
    
    
    
    519,998Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    46,531
    
    
    
    
    
    
    
    47,281Warrants outstanding recorded
due to the adoption of EITF 00-19
    
    
    17,818,601
    
    
    
    8,419,345
    
    
    
    (8,419,345
    )
    
    
    
    
    
    
    Exercise of Class J Warrants
    
    
    (100,000
    )
    
    
    (38,241
    )
    
    
    137,241
    
    
    
    
    
    
    
    100,500Exercise of Class K Warrants
    
    
    (150,000
    )
    
    
    (27,663
    )
    
    
    138,663
    
    
    
    
    
    
    
    112,500Exercise of Class I Warrants
    
    
    (45,616
    )
    
    
    (24,040
    )
    
    
    45,632
    
    
    
    
    
    
    
    22,048Exercise of Consulting Warrants
    
    
    (199,334
    )
    
    
    (112,166
    )
    
    
    184,922
    
    
    
    
    
    
    
    74,749Exercise of Placement Warrants
    
    
    (25,150
    )
    
    
    (14,081
    )
    
    
    23,260
    
    
    
    
    
    
    
    9,431Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,864
    
    
    
    312,864Balance - December 31, 2001
    
    
    17,298,501
    
    
    $
    8,203,154
    
    
    $
    22,810,588
    
    
    $
    (27,104,221
    )
    
    $
    4,198,754Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    350,393
    
    
    
    
    
    
    
    353,778Conversion of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,026
    )
    
    
    
    
    
    
    Exercise of Series X Warrants
    
    
    (1,000
    )
    
    
    (531
    )
    
    
    1,721
    
    
    
    
    
    
    
    1,200Exercise of Class I Warrants
    
    
    (95,107
    )
    
    
    (43,328
    )
    
    
    105,258
    
    
    
    
    
    
    
    62,881Exercise of Consulting Warrants
    
    
    (416,667
    )
    
    
    (225,631
    )
    
    
    377,716
    
    
    
    
    
    
    
    156,252Exercise of Placement Warrants
    
    
    (195,605
    )
    
    
    (109,458
    )
    
    
    180,854
    
    
    
    
    
    
    
    73,352Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    915,250
    
    
    
    915,250Balance - December 31, 2002
    
    
    16,590,122
    
    
    $
    7,824,206
    
    
    $
    23,825,504
    
    
    $
    (26,188,971
    )
    
    $
    5,761,467Issuance of shares in payment
of accrued premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    213,722
    
    
    
    
    
    
    
    215,518Issuance of shares in payment of interest
    
    
    
    
    
    
    
    
    
    
    429,296
    
    
    
    
    
    
    
    432,395Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    48,410
    
    
    
    
    
    
    
    49,360Exercise of Placement Warrants
    
    
    (9,400
    )
    
    
    (5,372
    )
    
    
    8,803
    
    
    
    
    
    
    
    3,525Issuance of shares in payment of debt
issuance costs
    
    
    
    
    
    
    
    
    
    
    462,560
    
    
    
    
    
    
    
    466,060Net income applicable to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,020,120
    
    
    
    2,020,120Balance - December 31, 2003
    
    
    16,580,722
    
    
    $
    7,818,834
    
    
    $
    24,988,295
    
    
    $
    (24,168,851
    )
    
    $
    8,948,445
 The accompanying notes are an integral part of these financial statements. F-6




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. 
 STATEMENTS OF CASH FLOWS Year Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income applicable to common stock
    
    $
    2,020,120
    
    
    $
    915,250
    
    
    $
    312,864Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,671,512
    
    
    
    2,985,050
    
    
    
    2,800,055Premium accrued on preferred stock
    
    
    276,000
    
    
    
    278,083
    
    
    
    290,000Interest paid through issuance of common stock
    
    
    432,395
    
    
    
    
    
    
    
    519,997(Gain) loss on disposition of equipment
    
    
    
    
    
    
    134,413
    
    
    
    (17,692
    )Extraordinary gain on involuntary conversion of non-
monetary assets due to fire
    
    
    (2,962,041
    )
    
    
    
    
    
    
    (Increase) decrease in other assets
    
    
    (766,446
    )
    
    
    54,053
    
    
    
    80,068Changes in current assets and current liabilities
    
    
    (167,255
    )
    
    
    505,297
    
    
    
    (3,443,578
    )Net cash provided by operating activities
    
    
    2,504,285
    
    
    
    4,872,146
    
    
    
    541,714Cash flows from investing activities:Purchases of land, buildings and equipment
    
    
    (11,257,967
    )
    
    
    (4,837,311
    )
    
    
    (1,093,087
    )Insurance proceeds from involuntary disposition of
property and equipment
    
    
    3,681,904
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (7,576,063
    )
    
    
    (4,837,311
    )
    
    
    (1,093,087
    )Cash flows from financing activities:Proceeds from issuance of notes
    
    
    17,000,000
    
    
    
    1,415,000
    
    
    
    200,000Payments on notes
    
    
    (9,112,156
    )
    
    
    (769,302
    )
    
    
    (650,267
    )Increase (decrease) in outstanding advances on
factored receivables
    
    
    (187,112
    )
    
    
    (920,143
    )
    
    
    1,263,573Debt acquisition costs
    
    
    (1,677,080
    )
    
    
    (305,309
    )
    
    
    (476,470
    )Proceeds from exercise of stock options
and warrants, net
    
    
    52,885
    
    
    
    293,683
    
    
    
    366,509Net cash provided by (used in) financing activities
    
    
    6,076,537
    
    
    
    (286,071
    )
    
    
    703,345Increase (decrease) in cash
    
    
    1,004,759
    
    
    
    (251,236
    )
    
    
    151,972Cash and cash equivalents, beginning of period
    
    
    504,365
    
    
    
    755,601
    
    
    
    603,629Cash and cash equivalents, end of period
    
    $
    1,509,124
    
    
    $
    504,365
    
    
    $
    755,601
 The accompanying notes are an integral part of these financial statements. F-7




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##### Table of Contents



ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. 
 NOTES TO FINANCIAL STATEMENTS Note 1: Description of the Company Advanced Environmental Recycling Technologies, Inc. develops, manufactures
and markets composite building materials that are used in place of traditional
wood products for exterior applications in building and remodeling homes. The
Companys products are made from approximately equal amounts of waste wood
fiber and reclaimed polyethylene plastics, have been extensively tested, and
are sold by leading national companies such as the Weyerhaeuser Company
(Weyerhaeuser), Lowes Companies, Inc. (Lowes) and Therma-Tru Corporation.
The Companys composite building materials are marketed as a substitute for
wood and plastic filler materials for standard door components, windowsills,
brick mould, fascia board, decking and heavy industrial flooring under the
trade names LifeCycle®, MoistureShield®, MoistureShield® CornerLoc,
Weyerhaeuser ChoiceDek® Classic, Weyerhaeuser ChoiceDek® Plus, Weyerhaeuser
ChoiceDek® Premium, ChoiceDek® Classic Colors, and ChoiceDek® Premium Colors.
The Company is comprised of four manufacturing facilities which are located in
Junction, Texas, Springdale and Lowell, Arkansas and Alexandria, Louisiana.
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 2: Summary of Significant Accounting Policies Revenue Recognition The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements(SAB 101). Under
SAB 101, revenue is recognized when the title and risk of loss have passed to
the customer, there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price is determinable and
collectibility is reasonably assured. The Company typically recognizes revenue
at the time of shipment. Sales are recorded net of discounts, rebates and
returns. Statements of Cash Flows In order to determine net cash provided by operating activities, net
income has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash, 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: Year Ended December 31,2003
    
    2002
    
    2001Receivables
    
    $
    213,444
    
    
    $
    642,513
    
    
    $
    (1,352,504
    )Inventories
    
    
    (1,186,932
    )
    
    
    (451,624
    )
    
    
    (575,046
    )Prepaid expenses and other
    
    
    844,929
    
    
    
    290,012
    
    
    
    231,896Accounts payable -
Trade and related parties
    
    
    (321,085
    )
    
    
    (785,890
    )
    
    
    (1,319,297
    )Accrued liabilities
    
    
    282,389
    
    
    
    810,286
    
    
    
    (428,627
    )$
    (167,255
    )
    
    $
    505,297
    
    
    $
    (3,443,578
    )Cash paid for interest
    
    $
    1,125,238
    
    
    $
    1,126,496
    
    
    $
    2,323,597
 F-8




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##### Table of Contents



Supplemental Disclosures of Non-cash Investing and Financing Activities Year Ended December 31,2003
    
    2002
    
    2001Notes payable for financing of insurance policies
    
    $
    1,080,683
    
    
    $
    400,644
    
    
    $
    250,116Accounts / notes payable for equipment
    
    
    928,023
    
    
    
    1,305,264
    
    
    
    329,899Accrued premium on preferred stock paid with
Class A common
stock
    
    
    215,518
    
    
    
    353,778
    
    
    
    290,000
 Cash Equivalents The Company considers all highly liquid investments, those with a maturity
of three months or less when purchased, to be cash equivalents. At December
31, 2003, cash and cash equivalents includes $145,766 that is restricted by the
bond agreement (see Note 4: Notes Payable and Long-term Debt) for payment of
costs incurred to complete ongoing expansion projects, and $427,155 that is
restricted for payment of the 2004 principal and interest on the bond. The
cash restricted for payment of expansion costs is expected to be paid out prior
to December 31, 2004. Buildings and Equipment Buildings and equipment are stated at cost and depreciated over the
estimated useful life of each asset using the straight-line method.
Estimated useful lives are: buildings  15 to 30 years, leasehold
improvements  2 to 6 years, transportation equipment  3 to 5 years, office
equipment  5 to 6 years and machinery and equipment  3 to 10 years.
Depreciation expense recognized by the Company for the years ended December 31,
2003, 2002 and 2001 was approximately $3.6 million, $3.0 million and $2.8
million, respectively. Gains or losses on sales or other dispositions of property are credited or
charged to income in the period incurred. Repairs and maintenance costs are
charged to income in the period incurred, unless it is determined that the
useful life of the respective asset has been extended. The Company accounts for the impairment or disposal of long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets(SFAS 144). SFAS 144 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.  F-9




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Inventories Inventories are stated at the lower of cost (first-in, first-out method)
or market. Inventories consisted of the following at December 31: 2003
    
    2002Raw materials
    
    $
    2,722,682
    
    
    $
    2,090,807Work in process
    
    
    566,503
    
    
    
    307,775Finished goods
    
    
    582,083
    
    
    
    285,754$
    3,871,268
    
    
    $
    2,684,336
 Other Assets Debt
issuance costs are amortized over the term of the related debt.
The costs for the preparation of patent applications of $178,733 and $207,306,
net, are amortized using the straight-line method over 17 years.
The debt service reserve fund is restricted for the life of the bonds
payable (see Note 4) for payment of principal and interest on
the bonds in the case the Company is unable to make those payments. Accounts Receivable Accounts receivable are uncollateralized customer obligations due under
normal trade terms generally requiring payment within thirty days from the
invoice date. Trade accounts are stated at the amount management expects to
collect from outstanding balances. Delinquency fees are not assessed.
Payments of accounts receivable are allocated to the specific invoices
identified on the customers remittance advice. Accounts receivable are carried at original invoice amount less an
estimated reserve made for returns and discounts based on quarterly review of
historical rates of returns and expected discounts to be taken. The carrying
amount of accounts receivable is reduced, if needed, by a valuation allowance
that reflects managements best estimate of the amounts that will not be
collected. Management individually reviews all accounts receivable balances
that exceed sixty days from invoice date and based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that will not
be collected. Management provides for probable uncollectible amounts through a
charge to earnings F-10




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##### Table of Contents



and a credit to a valuation based on its assessment of the current status of
the individual accounts. Balances that remain outstanding after management has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to trade accounts receivable. Changes in the
valuation allowance have not been material to the financial statements.
Recoveries of trade receivables previously written off are recorded when
received. Earnings Per Share The Company calculates and discloses earnings per share (EPS) in
accordance with SFAS No. 128, Earnings Per Share(SFAS 128). SFAS 128 replaces
the presentation of Primary EPS with Basic EPS and requires dual presentation
of Basic and Diluted EPS on the face of the statements of operations and
requires a reconciliation of the numerator and denominator of the Basic EPS
computation to the numerator and denominator of the Diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted EPS is computed similarly
to Fully Diluted EPS pursuant to Accounting Principles Board Opinion No. 15,
Earnings Per Share. In computing Diluted EPS, only potential common shares that are
dilutivethose that reduce earnings per share or increase loss per share 
are included. Exercise of options and warrants or conversion of convertible
securities is not assumed if the result would be antidilutive, such as when a
loss from continuing operations is reported. The control number for
determining whether including potential common shares in the Diluted EPS
computation would be antidilutive is income from continuing operations. As a
result, if there is a loss from continuing operations, Diluted EPS would be
computed in the same manner as Basic EPS is computed, even if an entity has net
income after adjusting for discontinued operations, an extraordinary item or
the cumulative effect of an accounting change. The Company incurred a loss
from continuing operations for the year ended December 31, 2003. Therefore,
Basic EPS and Diluted EPS are computed in the same manner for that year. Year Ended December 31,2003
    
    2002
    
    2001Before Extra-
    
    After Extra-ordinary Item
    
    ordinary ItemNet income (loss) applicable to common stock (A)
    
    $
    (941,921
    )
    
    $
    2,020,120
    
    
    $
    915,250
    
    
    $
    312,864Assumed exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    20,821,319
    
    
    
    19,026,734Application of assumed proceeds toward
repurchase of stock at average market price
    
    
    
    
    
    
    
    
    
    
    (7,672,636
    )
    
    
    (9,415,808
    )Net additional shares issuable
    
    
    
    
    
    
    
    
    
    
    13,148,683
    
    
    
    9,610,926Adjustment of shares outstanding:Weighted average common shares
outstanding
    
    
    30,017,661
    
    
    
    30,017,661
    
    
    
    29,516,768
    
    
    
    27,565,825Net additional shares
issuable
    
    
    
    
    
    
    
    
    
    
    13,148,683
    
    
    
    9,610,926Adjusted shares outstanding (B)
    
    
    30,017,661
    
    
    
    30,017,661
    
    
    
    42,665,451
    
    
    
    37,176,751Net income (loss) per common share  Diluted (A)
divided by (B)
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    0.01
 F-11




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Concentration Risk Credit Risk The Companys revenues are derived principally from a number of regional
and national door and window manufacturers, industrial-flooring companies and
Weyerhaeuser, the Companys primary decking customer. The Company extends
unsecured credit to its customers. This industry concentration has the
potential to impact the Companys exposure to credit risk because changes in
economic or other conditions in the construction industry may similarly affect
the customers. The Company derived more than 10% of its revenue from the
following customer: 2003
    
    2002
    
    2001Weyerhaeuser
    
    
    81
    %
    
    
    81
    %
    
    
    82
    %
 Cash The Company maintains bank accounts which are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000. At times, cash balances
may be in excess of the FDIC insurance limit. The Company believes no
significant concentrations of risk exist with respect to its cash. Disclosure about Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company: Current assets and current liabilities The carrying value approximates fair
value due to the short maturity of these items. Long-term debt The fair value of the Companys long-term debt has been
estimated by the Company based upon each obligations characteristics,
including remaining maturities, interest rate, credit rating, collateral and
amortization schedule. The carrying amount approximates fair value. Stock-Based Compensation The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). The following table illustrates the effect on net income
(loss) and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock- F-12




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##### Table of Contents



based employee compensation for the years ended December 31, 2003, 2002, and
2001. 2003
    
    2002
    
    2001Before Extra-
    
    After Extra-ordinary
    
    ordinaryItem
    
    ItemNet income (loss) applicable to common stock, as
reported
    
    $
    (941,921
    )
    
    $
    2,020,120
    
    
    $
    915,250
    
    
    $
    312,864Deduct: Total stock-based compensation expense determined under fair
value based method for all
awards
    
    
    396,958
    
    
    
    396,958
    
    
    
    628,795
    
    
    
    497,683Net income (loss) applicable to common stock, pro
forma
    
    $
    (1,338,879
    )
    
    $
    1,623,162
    
    
    $
    286,455
    
    
    $
    (184,819
    )Net income (loss) per share of common stock:Basic  as reported
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.01Basic  pro forma
    
    $
    (0.04
    )
    
    $
    0.05
    
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    0.01Diluted  pro forma
    
    $
    (0.04
    )
    
    $
    0.05
    
    
    $
    0.01
    
    
    $
    (0.01
    )
 The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2003, 2002 and 2001,
respectively: risk-free interest rates of 4.0, 4.3 and 4.9 percent; expected
lives of 10, 8 and 7 years; and expected volatilities of 91, 74 and 103
percent. Since no dividends are expected to be paid by the Company during the
expected lives of the options, a dividend yield of zero was used for purposes
of computing the fair value of the options. The weighted-average fair value of
options granted during 2003, 2002 and 2001 was $0.98, $1.19 and $0.87,
respectively. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Advertising Costs Advertising costs are charged to expense in the period incurred.
Advertising expense was approximately $1,277,000, $1,129,000 and $1,074,000 in
2003, 2002 and 2001, respectively. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities(SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and did not have an impact on the Companys
financial statements and related disclosures. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity(SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Adoption of this statement did not have an impact on the
Companys financial statements and related disclosures. In December 2003, the Financial Accounting Standards Board issued
Interpretation 46R Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(FIN 46R), which replaces
FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, and
clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the F-13




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##### Table of Contents



characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The Company is required to adopt the
provisions of this Interpretation no later than the end of the first reporting
period that ends after March 15, 2004. The Company does not have an interest
in an entity that is subject to the Interpretation, therefore, the adoption of
FIN 46R is not expected to have any effect on the Companys financial
statements and related disclosures. Reclassifications Certain reclassifications have been made to prior years financial
statements to conform to the current year presentation. These
reclassifications had no effect on the Companys net income. Note 3: Related Party Transactions The Company accounts for transfers of receivables, with recourse, to a
related party under the guidelines of SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities(SFAS
125). This statement provides accounting and reporting standards for, among
other things, the transfer and servicing of financial assets, such as transfers
of receivables with recourse, and provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. Based on the requirements of SFAS 125, the receivables transferred
to the related party with recourse are accounted for as a secured borrowing
because the Company is not considered to have surrendered control over the
transferred assets. Accounts receivable and accounts payable-related parties
at December 31, 2003 and 2002, include $1,795,670, and $1,982,782,
respectively, to reflect these requirements. During 2003, the Company had an agreement with an affiliate, Brooks
Investment Co., controlled by Marjorie S. Brooks, whereby the Company agreed to
transfer certain of its trade receivables as collateral, which Brooks
Investment Co. deemed acceptable, up to $2.5 million at any one time. Upon
acceptance of a transfer of a receivable, Brooks Investment Co. remitted to the
Company 85% of the receivable, as defined in the agreement. Upon collection of
the receivable, Brooks Investment Co. withheld 1.25% of the
receivable as a factoring charge and the additional 13.75% of the receivable
was remitted to the Company, less interest costs, which were based on the time
period over which the receivable was outstanding. The Company indemnified
Brooks Investment Co. for any loss arising out of rejections or returns of any
merchandise, or any claims asserted by the Companys customers. During 2003,
the Company transferred an aggregate of approximately $45 million in
receivables under this agreement, of which $2.1 million remained to be
collected as of December 31, 2003. During 2002 and 2001, the Company
transferred an aggregate of approximately $42.8 and $34 million, respectively,
in receivables under this agreement, none of which remains to be collected.
Costs of $512,233, $343,752 and $517,349 associated with the factoring
agreement were included in selling and administrative costs at December 31,
2003, 2002 and 2001, respectively. At December 31, 2003, accounts payable-related parties included advances
on factored receivables of approximately $1.8 million and $3,736 relating to
other items owed to related parties. Note 4: Notes Payable and Long-Term Debt Notes Payable - Other Notes payable  other, consisted of the following at December 31:
    
    2003
    
    200212% notes payable, paid in full in 2003
    
    $
    
    
    
    $
    1,893,630Various notes with rates ranging from 4% to 11.5%
    
    
    365,351
    
    
    
    80,844Total
    
    $
    365,351
    
    
    $
    1,974,474
 F-14




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##### Table of Contents



The Company has had five bridge financing agreements. The first was
completed on October 30, 1997, and was paid off in 2001. The remaining four
financings were completed in 1998, and paid off in 2003 with proceeds from the
$17 million financing discussed in the long-term debt section of this note. Notes Payable  Related Parties Notes payable to related parties consisted of the following at December 31:
    
    2003
    
    2002Various notes payable to related parties, with stated interest rates
ranging from 6.5% to 12%, paid in full in 2003
    
    $
    
    
    
    $
    1,928,833$
    
    
    
    $
    1,928,833
 Long-term Debt Long-term debt, less current maturities consisted of the following at December 31:
    
    2003
    
    20027% bonds payable to Regions Bank; principal payable annually; interest payable
semi-annually; subject to mandatory sinking fund redemption; secured by real estate and
improvements, fixed assets, patents and trademarks, inventory, pledged revenues, and a
personal guarantee by Marjorie S. Brooks, the major shareholder;
maturing on October 1, 2017 (a)
    
    $
    14,400,000
    
    
    $
    19.75% note payable to Allstate Insurance Company, secured by subordinated interest in
the collateral securing the bonds payable; interest payable semiannually; principal due
on October 1, 2017
    
    
    2,600,000
    
    
    
    5% note
payable with weekly principal payments of $6,540 plus interest;
unsecured; maturing October 14, 2005
    
    
    614,600
    
    
    
    9.75% note
payable to Arkansas State Bank; due in monthly installments of
$49,156;
secured by real estate and improvements, fixed assets, assignment of life insurance
policy, personal guarantee of certain stockholders and an 80% USDA Department of Rural
Development guarantee; original maturity February 23, 2015; paid
in full in 2003
    
    
    
    
    
    
    4,176,015Other
    
    
    187,166
    
    
    
    204,245Total
    
    
    17,801,766
    
    
    
    4,380,260Less current
maturities
    
    
    (1,142,525
    )
    
    
    (312,050
    )Long-term debt, less current maturities
    
    $
    16,659,241
    
    
    $
    4,068,210
  (a)
    
    The bond agreement contains financial covenants, which include a current
ratio of not less than 1.00 to 1.00 and a requirement that not more than
10% of accounts payable be in excess of 75 days past the invoice date.
The Company was not in compliance with these two covenants at December 31,
2003. The accounts payable covenant was waived, and the current ratio
covenant was modified to include the debt service reserve fund of
$1,946,643 in current assets for purposes of the current ratio
calculation, resulting in the Companys compliance with this covenant at
December 31, 2003. F-15




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##### Table of Contents



The aggregate maturities of long-term debt, net of debt discount, as of
December 31, 2003, are as follows: Year
    
    Amount2004
    
    $
    1,142,5252005
    
    
    1,121,8232006
    
    
    823,2442007
    
    
    912,6052008
    
    
    901,569Thereafter
    
    
    12,900,000$
    17,801,766
 Notes and Bonds Payable On October 9, 2003, the Company finalized a long-term financing package
with the City of Springdale, Arkansas and Allstate Insurance Company that
resulted in the Company borrowing the funds previously in the restricted bond
escrow fund on a long-term basis and terminating such escrow agreement. The
package consists of $14.4 million tax-exempt industrial development bonds and
$2.6 million subordinated debt. Net proceeds from the financing were used to repay short-term loans, pay
down accounts payable incurred to develop qualified solid waste disposal
facilities, purchase the Springdale, Arkansas extrusion facility, purchase the
Lowell, Arkansas plastic facility, pay issuance fees and provide limited
capital for further expansion. The obligations are secured by substantially
all of the Companys real estate assets and personal property, although
provision is made for the Company to incur additional working capital lines of
credit (subject to compliance with financial covenants) that would be secured
by accounts receivable and inventory on a basis senior to the existing obligations. In
addition, there is a $4 million personal guarantee from Marjorie S. Brooks, the
major shareholder. Note 5: Stockholders Equity Preferred Stock The Company issued 1,500 Series A preferred shares, 900 Series B preferred
shares and 500 Series C preferred shares at a price of $1,000 per share in
1998. Such stock was purchased by the major stockholder, a 5% holder and
accredited institutional investors. The preferred stock bears an interest
premium of 10% per year and is payable in cash or common stock. The Company
has reserved 6,079,989 shares of Class A common stock for conversion under the
preferred stock agreement. During 2002, 140 shares of the Series A preferred
stock was converted into 116,667 shares of Class A common stock. The Company
converted $215,518 and $353,778 of accrued premiums to common stock in 2003 and
2002, respectively. These transactions are considered non-cash financing
activities for statement of cash flow purposes. On the 7th anniversary date of the issuance of 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. If the preferred stock is converted prior to the
7th anniversary of its date of issuance, the conversion price is the lower of
$1.20 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. The Company, at its option and two years from the
issuance date, can redeem the stock prior to conversion at a premium of 150
percent. The stock was issued with series of X and Y warrants, which can be
exercised at $1.20 and $2.50 per share, respectively, as described in the
warrants section below. The preferred stock agreements contain potential redemption events which
would cause the Company to have to redeem the preferred stock, all of which are
within the control of the Company. The agreements state that if a redemption F-16




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##### Table of Contents



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. Common Stock The Class A common stock and the Class B common stock are substantially
similar in all respects except that the Class B common stock has five votes per
share while the Class A common stock has one vote per share. Each share of
Class B common stock is convertible at any time at the holders option to one
share of Class A common stock and, except in certain instances, is
automatically converted into one share of Class A common stock upon any sale or
transfer. Warrants The Company has reserved 16,580,722 shares of the Companys Class A common
stock for issuance under the following warrant agreements. Class C Warrants Each Class C Warrant is exercisable into one share of Class A common stock
at an exercise price of $1.075 per share. During 1998, the Company received
net proceeds of $330,000 from the exercise of 275,000 Class C Warrants. One
Bonus Warrant (described below) was granted to the holder for each warrant
exercised. On February 12, 1999, 50,000 Class C Warrants expired. The
remaining 325,000 Class C Warrants were set to expire in June 2003, but the
expiration date was extended to June 2005. Class F Warrants In 1999, 350,864 Class F Warrants were exercised at a price of $0.61 per
share, resulting in proceeds of $214,027. The remaining 987,040 Class F
Warrants were set to expire in June 2004, but the expiration date was extended
to June 2006. The Warrants are exercisable at a price of $0.61 per share of
Class A common stock for each Class F Warrant exercised. Class G Warrants In 1999, 481,810 Class G Warrants were exercised at prices ranging from
$0.91 to $0.92 per share, resulting in proceeds of $441,956. The remaining
2,987,040 Class G Warrants were set to expire in June 2004, but the expiration
date was extended to June 2006. The Warrants are exercisable at a price of
$0.92 per share of Class A common stock for each Class G Warrant exercised. Class H Warrants In 1995, in connection with a note payable to Marjorie S. Brooks and
accounts payable to a company controlled by her (see Note 3), the Companys
Board of Directors authorized the issuance of up to 2,000,000 Class H Warrants
on a one-for-one basis for each dollar advanced under the agreement and having
an exercise price equal to the per share market value of the Companys Class A
common stock on the date of such advances. The warrants were exercisable at
prices from $0.39 to $0.49 per share of Class A common stock for each Class H
Warrant exercised. In 2000, 228,208 shares of Class H Warrants were exercised
at prices ranging from $0.39 to $0.49 per share, resulting in proceeds of
$100,000. The remaining 1,771,792 Class H Warrants were set to expire in
February 2005, but the expiration date was extended to February 2007. The
Warrants are exercisable at prices from $0.46 to $0.48 per share of Class A
common stock for each Class H Warrant exercised. F-17




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##### Table of Contents



Class I Warrants In June 1996, the Company completed an offering to qualified foreign
investors under Regulation S of the Securities Act of 1933 with the issuance of
1,666,893 shares of Class A common stock. Net offering proceeds consisted of
$1,146,000 in cash. As part of the offering, the Company issued 242,878 Class
I Warrants to the Stock Placement Distributor. The Class I Warrants were to
expire three years from the date of issue and were exercisable at prices
ranging from $0.9375 to $1.125 per share of Class A common stock for each Class
I Warrant exercised. In May 1997, an additional 150,466 Class I warrants were
issued in connection with the December 1996 Regulation S Offering, as described
below, at exercise prices ranging from $0.31 to $0.56 per share of Class A
common stock for each Class I Warrant exercised. In December 1996, the Company received $185,000 in cash relating to an
offering to qualified foreign investors under Regulation S of the Securities
Act of 1933 with the issuance of 228,571 and 134,454 shares of Class A common
stock in 1996 and 1997, respectively. Also, in 1997, $228,999 was received and
977,367 shares of Class A common stock were issued. In 1999, 29,367 Class I Warrants were exercised at a price of $0.9375 per
share, resulting in proceeds of $27,532, and 42,866 Class I Warrants expired.
Also in 1999, 321,111 Class I Warrants were extended to June 22, 2003, and have
since been extended to June 22, 2005. In 2001, 45,616 Class I Warrants were
exercised at prices ranging from $0.31 to $0.9375 per share, resulting in
proceeds of $22,048. In 2002, 95,107 Class I Warrants were exercised at prices
ranging from $0.31 to $1.125 per share, resulting in proceeds of $62,881. Class J and K Warrants In December 1996, in connection with a note payable of $100,000, the
Company authorized and issued two sets of Warrants, Class J for 200,000 and
Class K for 150,000. Each Class J and Class K Warrant is exercisable on a
one-for-one basis into common stock. Each Class J Warrant is exercisable at
$0.50 per share and each Class K Warrant is exercisable at $0.75 per share. In
2000, 100,000 shares of Class J Warrants were exercised at a price of $0.50 per
share, through the conversion of a note payable to the warrant holder of
$50,000. The remaining 100,000 Class J Warrants and
150,000 Class K Warrants were exercised in 2001. X and Y Warrants Issued in Connection with Preferred Stock The preferred stock carries a series of X and Y Warrants, which will
convert at $1.20 and $2.50 per share. In connection with the 2,900 preferred
shares, the Company issued 2,900 X Warrants and 2,900 Y Warrants. Each of the
Series X Warrants entitles the holder to the right to acquire 555 shares (for X
Warrants issued with Series A shares) and 833.33 shares (for X Warrants issued
with Series B and C shares) of the Companys common stock (1,999,162 shares).
Each of the Series Y Warrants entitles the holder to the right to acquire 205
shares (for Y Warrants issued with Series A shares) and 400 shares (for Y
Warrants issued with Series B and C shares) of the Companys common stock
(867,500 shares). Each of the warrants has cashless exercise features that are
based on various conversion amounts and terms. The expiration date of the
warrants was extended from November 2005 to November 2007. In 2002, 1,000
Series X Warrants were exercised at $1.20, resulting in proceeds of $1,200. X and Y Warrants to Placement Agent The Series A preferred stock shares were placed through a placement agent.
The placement agent and certain officers of the placement agent were given
Series X Warrants to purchase, in the aggregate, 278.33 shares of the Companys
common stock for each $1,000 of purchase price (417,495 shares) and Series Y
Warrants to purchase, in the F-18




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##### Table of Contents



aggregate, 102.7 shares of the Companys common stock for each $1,000 of
Purchase Price (154,050 shares). The Series X Warrants were originally
exercisable for a period of six years from the first anniversary of the date of
issuance at a price per share equal to $1.20 and the Series Y Warrants were
originally exercisable for a period of five years from the second anniversary
of the date of issuance at a price per share equal to $2.50. The exercise
period for both the Series X and Series Y Warrants was extended by two years.
No placement agent was used for the Series B and C shares. Bonus Warrants In connection with the exercise of the Class B and C Warrants during 1998
and 1999, the Company granted a new warrant on a one-for-one basis for each
Class B and C Warrant exercised. The Bonus Warrants, 1,054,670 and 257,994
issued in 1998 and 1999, respectively, were originally to expire February 12,
2001, but were extended to June 22, 2003, and later extended to June 22, 2005,
and are exercisable at a price of $3.00 per share of Class A common stock for
each Bonus Warrant exercised. Consulting and Placement Warrants In 1997 and 1998, the Company obtained bridge financing of $3.2 million
(see Note 4). In connection with the financing, 6,314,926 Consulting warrants
and 378,895 Placement warrants were issued at an exercise price of $0.375. The
expiration dates for all warrants were extended by two years in 2002. Since
the issuance of the warrants, 1,345,335 Consulting warrants and 378,622
Placement warrants have been exercised, as shown in the table below, leaving
4,969,591 Consulting warrants and 273 Placement warrants outstanding at
December 31, 2003. Year
    
    Consulting
    
    PlacementExercised
    
    Warrants
    
    Warrants2003
    
    
    
    
    
    
    9,4002002
    
    
    416,667
    
    
    
    195,6052001
    
    
    199,334
    
    
    
    25,150Prior to 2001
    
    
    729,334
    
    
    
    148,4671,345,335
    
    
    
    378,622
 The number of Consulting and Placement warrants outstanding and their
current expiration dates are shown in the following table. Consulting
    
    Placement
    
    ExpirationWarrants
    
    Warrants
    
    Date1,493,999
    
    
    
    
    
    
    10/30/041,520,666
    
    
    273
    
    
    
    12/05/05760,000
    
    
    
    
    
    
    04/06/05619,926
    
    
    
    
    
    
    06/03/05575,000
    
    
    
    
    
    
    08/21/054,969,591
    
    
    273
 Extension Warrants In connection with the extension of the October 30, 1997 bridge financing,
310,000 extension warrants were F-19




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##### Table of Contents



issued. The stock warrants were originally to expire on November 5, 2003, but
the expiration date was extended to November 5, 2005, and are exercisable at a
price of $0.375 per share of Class A common stock for each warrant exercised. Series Z Placement Warrants In 1998, the Company issued 300,000 Placement Warrants in connection with
the issuance of the Series C Preferred Stock. These warrants are exercisable
at a price of $1.00 per share of Class A common stock for each warrant
exercised, and were originally to expire on November 12, 2003, but the
expiration date was extended to November 12, 2005. At December 31, 2003, the Company had outstanding warrants as follows: Warrants forClass A
    
    Weighted AverageCommon Stock
    
    Exercise PriceClass C Warrants
    
    
    325,000
    
    
    $
    1.075Class F Warrants
    
    
    987,040
    
    
    
    0.61Class G Warrants
    
    
    2,987,040
    
    
    
    0.92Class H Warrants
    
    
    1,771,792
    
    
    
    0.47Class I Warrants
    
    
    180,388
    
    
    
    0.77Series X Warrants
    
    
    1,998,162
    
    
    
    1.20Series Y Warrants
    
    
    867,500
    
    
    
    2.50Series X Warrants - Placement Agent
    
    
    417,503
    
    
    
    1.20Series Y Warrants - Placement Agent
    
    
    153,769
    
    
    
    2.50Bonus Warrants
    
    
    1,312,664
    
    
    
    3.00Consulting Warrants
    
    
    4,969,591
    
    
    
    0.375Placement Warrants
    
    
    273
    
    
    
    0.375Extension Warrants
    
    
    310,000
    
    
    
    0.375Series Z Placement Warrants
    
    
    300,000
    
    
    
    1.0016,580,722
    
    
    $
    0.99
 Effective June 30, 2001, the Company adopted Financial Accounting
Standards Board SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities(SFAS 133), with no effects on its financial
statements except for warrants that are
indexed to and potentially settled in the Companys common stock. These
warrants have been accounted for under the provisions of Emerging Issues Task
Force abstract 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock(EITF 00-19). The
Company modified certain of its warrant related registration rights agreements
as of June 30, 2001, so that those warrants would be classified as equity
rather than debt in its balance sheet under the provisions of EITF 00-19. As a
result of these modifications, there was no impact on earnings. In accounting for its derivative contracts at June 30, 2001, the Company
recorded $8,419,345 in warrants outstanding in the equity section of its
balance sheet and decreased its additional paid-in capital by the same amount,
leaving its total stockholders equity amount unaffected. The warrant
valuation was determined as of June 30, 2001 using the Black-Scholes
option-pricing model, with the following details and assumptions. The
underlying stock price was
$0.87. Exercise prices of the warrants ranged from $0.31 to $3.00. The
volatility of the stock underlying the warrants ranged from 46.42% to 87.27%,
and the risk-free rates of return ranged from 3.63% to 4.82%. F-20




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##### Table of Contents



Note 6: Stock Option Plans The Companys Stock Option Plans (the 1997 Plan, 1994 Plan, Director Plan,
Chairman Plan and the 1989 Plan, collectively the Plans) authorize the
issuance of 7,600,000 shares of the Companys Class A common stock to its
directors, employees and outside consultants. The option price of the stock
options awarded must be at least equal to the market value of the Class A
common stock on the date of grant. Stock options may not be granted to an
individual to the extent that in any calendar year in which options first
become exercisable, the shares subject to options first exercisable in such
year have a fair market value on the date of grant in excess of $100,000. No
option may be outstanding for more than ten years after its grant. The purpose
of the Plans is to enable the Company to encourage key employees, directors and
outside consultants to contribute to the success of the Company by granting
such persons incentive stock options (ISOs) and/or non-incentive stock options
(nonqualified stock options). The ISOs are available for employees only. In
order to provide for disinterested administration of the Plans for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934, the Director Plan also
provides that outside directors will automatically receive annual awards of
nonqualified stock options. The Companys stockholders approved the Non-Employee Director Stock Option
Plan (the Director Plan), in June 1994. The Director Plan provides for the
issuance of options to purchase up to an aggregate of 500,000 shares of the
Companys Class A common stock to eligible outside directors of the Company.
Each eligible outside director will be granted options to purchase 25,000
shares of common stock annually commencing in 1995 and each year thereafter. In June 1994, stockholders of the Company approved the adoption of the
Amended and Restated Stock Option Plan (the 1994 Plan), which superseded and
replaced the Companys 1990 Stock Option Plan. The new Plan provides for the
granting of options to purchase up to 1,000,000 shares of the Companys Class A
common stock by recipients of incentive stock options or nonqualified stock
options as granted by the Companys Board of Directors. Also, in June 1994, stockholders of the Company approved the Chairman
Stock Option Plan. The Plan provided for a grant of options to purchase up to
500,000 shares of the Companys Class A common stock. In July 1997, stockholders of the Company approved the adoption of the
Advanced Environmental Recycling Technologies, Inc. 1997 Securities Plan (the
1997 Plan). The 1997 Plan provides for certain awards to be given to senior
and executive management of the Company to encourage and reward superior
performance. The awards can be in the form of stock options, restricted stock
and other performance awards to be given. The aggregate number of shares which
may be offered pursuant to incentive stock options under the 1997 Plan
originally was not to exceed 3,000,000, but this amount was increased by
approval of the stockholders to 5,000,000 in July 1999. The aggregate number
of shares which may be offered for purchase pursuant to non-qualified stock
options shall not exceed 500,000 shares. The stock options may not be granted
with an exercise price less than the fair market value of a share on the date
the option is granted, unless granted to a 10% shareholder, then the exercise
price must be at least 110% of the fair market value per share on the date such
option is granted. The Incentive Stock Options may not be exercised after ten
years from the date the option is granted unless the option is given to a 10%
shareholder, and then the expiration date is five years from the date the
option is granted. The options must be exercised within three months after
termination of employment. During June 1989, stockholders of the Company approved the adoption of the
Advanced Environmental Recycling Technologies, Inc. 1989 Stock Option Plan (the
1989 Plan). The 1989 Plan was designed to increase the interest of the
directors and executives and other employees of the Company. The total number
of shares of the Companys Class A common stock which could have been issued
under options granted pursuant to the Plan was not to exceed 600,000. The
option price had to be the fair market value of the shares on the date on which
the respective shares were granted unless granted to a 10% stockholder, then
the exercise price had to be at least 110% of the fair market value per share
on the date such option was granted. Each options expiration date could not
exceed ten years from the date such option was granted, unless the option was
granted to a 10% shareholder, and then the expiration date was five years from
the date the option was granted. The 1989 Plan terminated on June 4, 1999, and
no additional options can be granted after such date. F-21




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##### Table of Contents



A summary of the activity in the Companys stock option plans during the
years ended December 31, 2003, 2002 and 2001, follows: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding, beginning of year
    
    
    5,667,630
    
    
    $
    1.00
    
    
    
    5,190,130
    
    
    $
    0.93
    
    
    
    4,690,130
    
    
    $
    0.84Granted
    
    
    215,000
    
    
    
    1.13
    
    
    
    530,000
    
    
    
    1.72
    
    
    
    575,000
    
    
    
    1.13Exercised
    
    
    (95,000
    )
    
    
    0.52
    
    
    
    
    
    
    
    
    
    
    
    (75,000
    )
    
    
    0.66Forfeited
    
    
    (45,000
    )
    
    
    1.03
    
    
    
    (52,500
    )
    
    
    1.00
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    5,742,630
    
    
    $
    1.01
    
    
    
    5,667,630
    
    
    $
    1.00
    
    
    
    5,190,130
    
    
    $
    0.93Exercisable, end of year
    
    
    5,215,130
    
    
    $
    0.92
    
    
    
    4,840,130
    
    
    $
    0.87
    
    
    
    4,340,130
    
    
    $
    0.74
 The following table summarizes information about stock options outstanding
under the Companys stock option plans as of December 31, 2003: Options Outstanding
    
    Options ExercisableNumber
    
    Wtd. Avg.
    
    Wtd. Avg.
    
    Number
    
    Wtd. Avg.Outstanding
    
    Remaining
    
    Exercise
    
    Exercisable
    
    ExerciseRange of Exercise Prices
    
    at 12/31/03
    
    Contract Life
    
    Price
    
    at 12/31/03
    
    Price$0.38 - $ 0.48
    
    
    1,107,667
    
    
    2.32 years
    
    $
    0.44
    
    
    
    1,107,667
    
    
    $
    0.44$0.56 - $ 1.00
    
    
    2,848,963
    
    
    2.65 years
    
    $
    0.75
    
    
    
    2,848,963
    
    
    $
    0.75$1.02 - $ 1.41
    
    
    653,500
    
    
    5.47 years
    
    $
    1.17
    
    
    
    483,500
    
    
    $
    1.18$1.75 - $ 2.75
    
    
    1,132,500
    
    
    3.73 years
    
    $
    2.11
    
    
    
    775,000
    
    
    $
    2.085,742,630
    
    
    3.12 years
    
    $
    1.01
    
    
    
    5,215,130
    
    
    $
    0.92
 The weighted-average fair value of options granted during 2003, 2002 and
2001 was $0.98, $1.19 and $0.87, respectively. Note 7: Leases At December 31, 2003, the Company was obligated under various operating
leases covering certain buildings and equipment. Rent expense under operating
leases for the years ended December 31, 2003, 2002 and 2001 was $1,602,788,
$958,883 and $671,762, respectively. Future minimum lease payments required
under operating leases as of December 31, 2003, are as follows: Year
    
    Amount2004
    
    $
    460,0312005
    
    
    189,1542006
    
    
    164,3712007
    
    
    164,3712008
    
    
    86,371Total minimum payments required
    
    $
    1,064,298
 F-22




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##### Table of Contents



Note 8: Income Taxes The Company records income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. As of December 31, 2003, the Company had net operating loss carryforwards
of approximately $22 million for federal income tax purposes, which are
available to reduce future taxable income and will expire in 2004 through 2019,
if not utilized. The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows: Year Ended December 31,2003
    
    2002
    
    2001Deferred tax assetsNet operating loss carryforwards
    
    $
    7,637,000
    
    
    $
    8,464,000
    
    
    $
    8,125,000Valuation allowance
    
    
    (7,567,000
    )
    
    
    (7,551,000
    )
    
    
    (7,301,000
    )Total deferred tax assets
    
    
    70,000
    
    
    
    913,000
    
    
    
    824,000Deferred tax liabilityDepreciation
    
    
    70,000
    
    
    
    913,000
    
    
    
    824,000Net deferred tax
    
    $
    
    
    
    $
    
    
    
    $
    
 As the Company generated net operating losses from its inception through
2000 and there is no assurance of the Companys ability to generate adequate
future taxable income to enable the Company to realize these carryforwards
prior to expiration, a valuation allowance of approximately $7.6 million has
been established at December 31, 2003, to recognize its deferred tax assets
only to the extent of its deferred tax liabilities. The Company will continue
to evaluate the need for such valuation allowance in the future. Note 9: Extraordinary Item On March 28, 2003, the Company had an accidental fire at the Junction,
Texas plant. The Company was given permission to begin demolition and the
rebuilding of a portion of the production facility on April 16, 2003. The
initial restoration project, completed on May 20, 2003, included the rebuild of
one extrusion line that had been partially damaged, electrical system
replacement, and roof replacement. Concurrently, the Company installed another
extrusion line in the Springdale, Arkansas plant, which became operational on
June 9, 2003. With the completion of these lines, the production capacity was
the same as before the fire. At this time, there has been minimal disruption
in meeting the customers needs, although several new product introductions
were delayed. The rebuild of the second extrusion line and the raw material system at
the Junction, Texas facility is expected to be finished during the second
quarter of 2004, completing the rebuild of the Junction Plant. There is no
assurance as to the timing of the completion of the remaining extrusion line
and raw material system. The Junction plant was, and is, fully insured for
fire damage and business interruption. Through December 31, 2003, the Company
had received $5.4 million in insurance proceeds related to this incident. Due to the Junction facility fire, gross assets were written down by
approximately $4.91 million, along with the associated accumulated depreciation
on those assets in the amount of $3.96 million, resulting in a net book value
decrease in assets of about $950,000. At December 31, 2003, approximately $3.9
million had been invested in reconstructing the Junction facility. Insurance
proceeds received to reimburse costs incurred to reconstruct the facility have
resulted in a gain of $2,962,041 through December 31, 2003. Additionally, the
Company recorded $1,366,682 in business interruption insurance during 2003,
including $1,125,372 to replace lost income and $241,310 to cover fixed
expenses. At December F-23




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##### Table of Contents



31, 2003, approximately $484,000 was included in accounts receivable for
expected insurance reimbursements. Note 10: Commitments and Contingencies The Company was sued in May 2000, in a federal action in the Western
District of Texas, for breach of contract seeking royalties allegedly owed but
unpaid from a 1987 settlement of prior litigation against a predecessor entity
and two of our founders in the United States District Court for the Western
District. The plaintiffs were seeking approximately $1.2 million in past
royalties, plus attorneys fees, any applicable pre-judgment and post-judgment
interest, and a declaration that the Company pay an ongoing royalty in the
amount of $10 per ton on future sales from the Companys Junction, Texas
facility on production utilizing cedar fiber and recycled plastic. In
2001, the plaintiffs amended the complaint to include two of our
founders as co-defendants. At trial, the plaintiffs obtained a
judgment for past royalties in the amount of approximately $821,000,
plus prejudgment and post-judgment interest and attorneys
fees. The Company
settled the lawsuit in December 2002 for $1,100,000. The court,
in May 2002, declined to enter a declaratory judgment requested by
the plaintiff requiring the Company to pay a royalty on a monthly
basis in the future on the Companys products, and the release
executed in connection with the December 2002 settlement does not
release any potential claims for royalties after January 1,
2002. As to the requested declaratory judgment, the court noted that
the plaintiffs had not properly sought a declaratory judgment from a
procedural standpoint and also took note that the changes to the
initial process developed over the years by the Company have brought
the Companys manufacturing operations farther away from the
plaintiffs technology. Note 11: 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:  
    
    That engages in business activities from which it may earn revenues and expenses,
    
    Whose operating results are regularly reviewed by the enterprises chief operating decision maker,
    
    For which discrete financial information is available. As of December 31, 2003, 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 sales segregated
by product line and gross margin by plant location are as follows: Year Ended December 31,2003
    
    2002
    
    2001Net Sales Commercial and residential decking surface components
    
    $
    35,646,315
    
    
    $
    33,996,864
    
    
    $
    26,743,874Exterior door, window and housing trim components
    
    
    7,418,157
    
    
    
    7,058,653
    
    
    
    6,099,479Industrial
flooring
    
    
    456,091
    
    
    
    359,949
    
    
    
    579,606$
    43,520,563
    
    
    $
    41,415,466
    
    
    $
    33,422,959
 Year Ended December 31,2003
    
    2002
    
    2001Springdale
    
    Junction
    
    Springdale
    
    Junction
    
    Springdale
    
    JunctionGross Margin Net revenues
    
    $
    34,203,234
    
    
    $
    9,317,329
    
    
    $
    26,901,808
    
    
    $
    14,513,658
    
    
    $
    19,410,541
    
    
    $
    14,012,418Cost of goods sold
    
    
    26,779,482
    
    
    
    7,582,502
    
    
    
    18,851,046
    
    
    
    10,949,893
    
    
    
    13,372,102
    
    
    
    10,837,537Gross margin
    
    $
    7,423,752
    
    
    $
    1,734,827
    
    
    $
    8,050,762
    
    
    $
    3,563,765
    
    
    $
    6,038,439
    
    
    $
    3,174,881
 F-24




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##### Table of Contents



Note 12: 401(k) Plan During December 2000, the Company initiated the A.E.R.T. 401(k) Plan (the
Plan) for the benefit of all eligible employees. The Plan qualifies under
Section 401(k) of the Internal Revenue Code thereby allowing eligible employees
to make tax-deferred contributions to the Plan. The Plan provides that the
Company may elect to make employer-matching contributions equal to a percentage
of each participants voluntary contribution. The Company may also elect to
make a profit sharing contribution to the Plan. Profit sharing contributions
to the Plan can range from 0% to 15% of participants annual compensation. The
Company has never made any matching or profit sharing contributions to the
Plan. F-25




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##### Table of Contents



INDEX TO EXHIBITS Exhibit No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation, including Certificate ofAmendment filed on June 12, 1989 (a), and Certificate ofAmendment filed on August 22, 1989. (b)3.2
    
    Certificate of Designation of Class B common stock. (a)3.3
    
    Bylaws of Registrant. (a)3.4
    
    Form of Class A common stock Certificate. (c)4.2
    
    Form of Class B common stock Certificate. (a)4.3
    
    Form of Warrant Agreement with American Stock Transfer & Trust Company,
including Class A and Class B common stock Purchase Warrants. (a)4.7
    
    Form of Redeemable Class B Warrant Certificate. (c)4.8
    
    Form of Class C Warrant Certificate. (h)4.9
    
    Form of Class D Warrant Certificate. (h)4.10
    
    Form of Class E Warrant Certificate. (h)4.11
    
    Form of Class F Warrant Certificate. (i)4.12
    
    Form of Class G Warrant Certificate. (i)4.13
    
    Form of Class H Warrant Certificate. (j)4.14
    
    Form of Class I Warrant Certificate. (k)4.15
    
    Form of Class J Warrant Certificate. (l)4.16
    
    Form of Class K Warrant Certificate. (m)10.1.1
    
    Private Placement Agreement. (o)10.1.2
    
    Consulting Agreement. (o)10.1.3
    
    Note Purchase Agreement. (o)10.1.4
    
    Form of Note. (o)10.1.5
    
    Form of Private Placement Warrants. (o)10.1.6
    
    Form of Consulting Warrants. (o)10.9
    
    Form of Right of Refusal Agreement among Class B common stockholders. (a)10.10
    
    1989 Stock Option plan. (a)10.11
    
    Form of Escrow Agreement with American Stock Transfer & Trust Company. (c)10.15
    
    Lease Agreement dated June 1, 1990 between the Registrant and Js Feed, Inc. for
the Registrants plastics reclamation facility. (e)10.16
    
    Loan Agreement dated June 13, 1991 with Dow Credit
Corporation. (f)10.17
    
    Loan Agreement dated October 22, 1991 with Dow Credit
Corporation. (f)10.18
    
    Loan Agreement with City of Rogers, arranged through
Arkansas Industrial
Development Commission. (f)10.19
    
    Lease Agreement dated June 15, 1992 between the Registrant
and Georges, Inc. for the
Registrants corporate office facility. (g)10.20
    
    Factoring Agreement dated April 30, 1993 between the Registrant and
Brooks Investment Company. (h)10.21
    
    Private Placement Distribution Agreement dated September 23, 1993 between the Registrant and
Berkshire International Finance, Inc. (h)10.22
    
    Lease Agreement dated June 16, 1994 between Registrant and Marjorie S. Brooks. (i)10.27
    
    Line of Credit Promissory Note payable to Jim G. Brooks and Marjorie S. Brooks. (i)10.28
    
    Amended and Restated Stock Option Plan. (i)10.29
    
    Non-Employee Director Stock Option Plan. (i)10.30
    
    Chairman Stock Option Plan. (i)10.31
    
    Factoring Agreement dated April 30, 1994 between the Registrant and Brooks Investment
Company. (i)




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.32
    
    Lease agreement dated July 29, 1997 between Registrant and Dwain A.
Newman, et ux., and National
Home Center, Inc. (n)10.33
    
    Securities Purchase Agreement. (p)10.34
    
    Certificate of Designation of Series A Preferred Convertible Stock. (p)10.35
    
    Certificate of Designation of Series B Preferred Convertible Stock. (p)10.36
    
    Certificate of Designation of Series C Preferred Convertible Stock. (p)10.37
    
    Form of Series X Warrants. (p)10.38
    
    Form of Series Y Warrants. (p)10.39
    
    Registration Rights Agreement. (p)10.40
    
    Placement Agency Agreement. (p)10.41
    
    Indenture of Trust between City of
Springdale and Regions Bank, Trustee, as of October 1, 2003. (r)10.42
    
    Mortgage and Loan Agreement between
City of Springdale and Company, as of October 1, 2003. (r)10.43
    
    Assignment of Mortgage and Loan
Agreement between City of Springdale and Regions Bank. (r)10.44
    
    Note Purchase Agreement between
Company and Allstate Insurance Company dated October 9, 2003. (r)10.45
    
    Promissory Note made by Company
dated October 9, 2003. (r)31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys chairman, co-chief executive
officer and president.**31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys co-chief executive officer.**31.3
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys chief financial officer.**32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys chairman, co-chief executive
officer and president.**32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys co-chief executive officer.**32.3
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, by the Companys chief financial officer.**
   *
    
    The Registrant has no exhibits corresponding to Exhibits 1, 2, 5, 6, 7, 8,
9, 11, through 23, or 26 through 29.**
    
    Filed herewith.  (a)
    
    Contained in Exhibits to Registration Statement on Form S-1, No.
33-29595, filed June 28, 1989.(b)
    
    Contained in Exhibits to Amendment No. 1 to Registration Statement on
Form S-1, No. 33-29595, filed August
24, 1989.(c)
    
    Contained in Exhibits to Amendment No. 2 to Registration Statement on
Form S-1, No. 33-29595, filed
November 8, 1989.(d)
    
    Filed with Form 10-K for December 31, 1989.(e)
    
    Filed with Form 10-K for December 31, 1990.(f)
    
    Contained in Exhibits to Post Effective Amendment No. 1 to
Registration Statement on Form S-1, No. 33-29593,
filed December 24, 1991.(g)
    
    Filed with Form 10-K for December 31, 1992.(h)
    
    Filed with Form 10-K for December 31, 1992.(i)
    
    Filed with Form 10-K for December 31, 1994.(j)
    
    Filed with Form 10-K for December 31, 1996.(k)
    
    Filed with Form 10-K for December 31, 1996.(l)
    
    Filed with Form 10-K for December 31, 1996.(m)
    
    Filed with Form 10-K for December 31, 1996.(n)
    
    Filed with Form 10-K for December 31, 1997.(o)
    
    Contained in Exhibits to Registration Statement on Form S-3, No.
333-42555 filed December 18, 1997.(p)
    
    Filed with Form 10-K for December 31, 1998.(q)
    
    Filed with Form 10-K for December 31, 2002.(r)
    
    Filed with Form 10-Q for September 30, 2003.(s)
    
    Filed with Form 10-K for December 31, 2003.