THE YEAR 2009 - TEAM AERT ENDURES THE PERFECT STORM

AERT maneuvered through 2009, a year many industry experts have referred to as the perfect storm, in a cautious but consistent manner and regained profitability from operations. This was in spite of the homebuilding depression, credit crisis, class action allegations, and the overall economic mess that most Americans experienced in some fashion. 2009 was also a year that began reflecting the effects of the consolidations, plant closings, and cost cuttings implemented by your company’s management team and AERT associates in prior periods. 2009 brought hurdles of its own; however, these were overcome and new products and positive opportunities were introduced. But before I get into this, I would like to take a moment and reflect on the past. As we look to the future, I feel it is also important to understand the past. Back to Top

AERT’S PAST

AERT was founded in 1988 and received its first outside funding in November, 1989. So 22 years ago this journey began to transform recycled plastics into value added compounds and materials. 1988 was also the year that the Federal Resource Recovery and Conservation Act was enacted which established mandatory recycled content standards for items such as newspapers. The focus was that end markets must be created and sustained to utilize recycled materials in order to maintain recycling collection and markets. Thus, de-inking technologies flourished, technology and standards changed, and today, 20 plus years later, even with the decline in readership due to the internet, newspaper recycling rates are over 70% in the U.S. The true value of Green here is that technology advances in paper recycling allowed recycled paper to be cheaper and more cost effective to use than to pulp virgin wood.

In regard to plastics, AERT started recycling milk jugs and industrial, off spec polyethylene and then moved into films such as grocery bags in 1991 with its original Rogers, Arkansas facility. Over time, items that were easier to recycle, such as clear milk jugs, have increased in value as demand has increased along with recycling rates and prices. In 1991, AERT entered into a joint development agreement with Dow Chemical Company for polyethylene film recycling technology and expanded its Rogers facility. Cleaning systems were developed for post consumer items such as grocery bags and other harder to recycle plastics, and Dow trademarked “Retain” for recycled PE resins. However, resin prices declined significantly in 1993 and 1994 and mandatory recycled content legislation for plastics was not enacted, so the companies went separate ways. Although AERT had some technical success and some initial process patents were attained, plastic film recycling was not sustainable at that time due to economic and waste stream inconsistency issues. AERT moved forward and focused on expanding composite decking sales with Weyerhaeuser, with whom AERT has sold over $750 million dollars to date of wood fiber/plastic composites in the North American marketplace with sales now expanding internationally.

Dow technical personnel were very helpful in sharing and teaching AERT about polyethylene plastic, as there is a whole lot more to polyethylene than just the word plastic. Furthermore, if you wonder why the U.S. national plastic recycling rate is so low, overall 7%, it is because recycling plastic is very complicated. Plastics are designer materials with individual compounds designed for thousands of specific applications. Polyethylene is also not compatible with many other products. Although it is the largest single component of the plastic waste stream, it was originally designed as a disposable material. Thus, several significant questions from the Dow joint development program were still unanswered when we parted ways in regard to consistency, resin identity, and quality from an ongoing mixture of plastic sources in the waste stream. New compounds and types of polyethylene plastics are frequently introduced to the waste stream via new and improved packaging concepts so the waste stream is constantly changing. Although the high amount of wood fiber fillers act as inert monomers in composite production, and allows for some use of wider property materials, wide specification plastic materials are normally very inconsistent and can disrupt the physical properties of finished products such as deck boards. So for AERT to stay in business and maintain a competitive advantage, we had to figure out how to take the inconsistencies and variations out of a constantly changing waste plastic stream or suffer the consequences of ongoing, ever escalating petrochemical markets. Looking back, this was also a big challenge in which very little work had been done due to our society’s “throw it away” and disposable mentality. Each year, AERT recycles 117 million pounds of plastic and wood fiber, creating a reduction in greenhouse gas by 129,274 metric tons of CO2 equivalent, conserves over 3.9 trillion Btu of energy, and creates the equivalent impact of taking over 35,000 passenger vehicles off the road. So when it comes to energy, recycling has a huge and cost effective impact.

In 2005, AERT and Weyerhaeuser were chosen as Lowe’s Vendor of the Year for ChoiceDek. During this time, AERT had to internally reject around $1 million dollars worth of decking due to low physical property values caused by low quality plastics and wider inconsistencies of the recycled plastic waste stream, with end product quality at risk due to ever increasing unknowns of the plastic waste stream. This was also at a time when petrochemical prices started escalating. AERT switched much of its plastic to higher priced, off-spec virgin resin. Thus, raw material prices went up and decking margins deteriorated while the company focused on maintaining quality and maintaining the integrity of its products at a time when many of its competitors faltered. The remaining unanswered questions of the mixed polyethylene plastic stream from the earlier Dow/AERT joint development program re-emerged as major challenges for the company. The Lowell, Arkansas plant was retrofitted with processing and blending capabilities and AERT initiated a significant research and development program aimed at unlocking the mysteries of the mixed polyethylene waste stream as the company’s future was at risk from ever rising polyethylene prices. From that effort, six United States patents were filed in 2007 and are currently pending.

In the last half of 2006, homebuilding began to soften and 2007 continued to deteriorate before 2008 and 2009 fell off the cliff. AERT began closing and consolidating facilities late in 2007, and in 2008 the company exited its window sill business targeted at new home construction. In 2008, the company experienced over $32 million dollars in unusual and infrequent one time write-downs. Most of AERT’s door and window customer base also disintegrated during this time as the company focused on remodeling and renovation markets and fought to build and start up its new Watts, Oklahoma facility.

During 2008, AERT President, Tim Morrison joined the company, followed by CFO, Brian Hanna later that year. Both men brought much industry experience and expertise to the company. In 2009, AERT was able to start reflecting the cost reductions, consolidations, and plant closings previously implemented by the management team. AERT was also able to bring to a close the Class Action suit regarding ChoiceDek cleaning issues. Additional focus and execution also began to take place under Morrison and Hanna’s direction. The company was able to minimize the amount of higher priced third party plastic it purchased due to capitalizing on its recently developed resin identification and reformulation technologies, which are currently pending before the US Patent Office. As the economy deteriorated, AERT sales declined but held up well versus the competition. Back to Top

AERT’S PRESENT

As AERT marches into 2010, we begin with introduction of several new market requested decking products, as well as a test market of a new deck tile product in select Sam’s Club Stores. AERT has partnered with BlueLinx Logistics as a nationwide distributor of ChoiceDek products to Lowe's® Home Improvement Stores.  AERT now has nationwide distribution with its MoistureShield decking line with 32 independent distributor locations throughout North America in addition to 9 international distributors. AERT has also launched a new ChoiceDek handrail program in Lowe’s stores this spring featuring a new 4 sided extruded baluster in addition to embossed, more user friendly 6 foot pre-cut L-Rails. New pictures will be posted soon on the website and an announcement containing additional information will be forthcoming. New post caps and collars are also being introduced. As can be seen, AERT is constantly fighting forward and the company is well positioned for the “Green Age” as the economy crawls back to life and remodeling begins to pick back up later this year. The key to AERT’s composite products continues to be quality Green products at reasonable prices as we realize consumers are very value conscious in this day and age. Back to Top

THE WATTS PLASTIC RECYCLING PROJECT AND THE “GREEN AGE”

AERT announced in March of 2008 our intent to build a plastic recycling washing and reformulation facility near Watts, Oklahoma. In many ways, AERT launched this game changing project in to the eye of the storm that none of us saw coming. However, your AERT associates are dedicated, tough, and refuse to quit, regardless of the odds. As mentioned in the company’s previous annual report, the facility is designed to rein in and reduce petrochemical related raw material costs as well as further diversify the customer base by creating additional sales of recycled plastic resins for other recycled content or Green applications. Our primary funder, Allstate Investments, fully understood and supported this endeavor, put up substantial additional resources, and continues to support AERT even during these tough times. Back to Top

AERT’S GREEN AGE PLASTIC RECYCLING FACILITY

Coming through the storm and bringing on the Watt’s Green Age Recycling Project is a true “game changer” for AERT. AERT’s new facility initiated startup during February, 2010 and is finalizing its operating permits. The vision is now fast becoming reality. We are also pleased that this facility has recently been certified and received a Silver LEED certification. This is a first for Oklahoma and the U.S. and we are proud that this facility is located in Oklahoma. Back to Top

AERT’S FUTURE

With 2010 underway, we expect to see growth in our composite units. New products and innovation will also continue to gain traction. Green is “in” and AERT is well positioned to benefit from any economic improvement. Watts will help AERT control our costs while diversifying our revenue stream in the near future by insulating the company against escalating petrochemical price increases. As we have been quoted saying many times in the past, AERT believes in the future of America and our company is proud that our new “Green Age” plastic recycling facility is now underway. This is also a very timely occurrence as virgin resin polyethylene prices have risen over $.18 cents per pound since the first of the year and one major petrochemical producer recently invoked “force majeure” with HDPE plastic being on allocation. So our AERT challenge now fast becomes demonstrating the commercial quality and consistency of recycled plastics to large volume users. In other words, “showcase the true value of Green” and the energy and cost it saves. For I believe (and we all know) that petrochemical prices are poised to go back up with any improvement in the economy. We are also pleased to announce that our new “Green Age” plastic recycling facility was ranked the number one stimulus project by the Oklahoma Department of Commerce and is now in line for stimulus funding from the U.S. Department of Energy for $3.25 million dollars to further expand the facility for commercial production of recycled content “Green” plastic resins. Additional financial incentives are also now beginning to arise. Therefore, planning is underway to soon commence construction of Phase II, once Phase I is up to speed and funding is complete. This will open the doors for many additional market opportunities for AERT and we expect to dedicate this new “Green Age” recycling facility to the world within the next couple of months. Once this facility demonstrates its commercial viability, we see substantial opportunities for this technology, not only in the U.S., but also around the world. But I again point out, we must show economic and commercial viability and we need our pending patents to issue. But the timing is incredible and the financial world is starting to notice. Back to Top

AERT PARTNERS

AERT would like to recognize and thank our lenders, funders, customers, and vendor partners for working with us through the past year. We would especially like to thank Allstate Investments for working with the Company and restructuring our notes. (See 8-K filed Wednesday, March 31, 2010.) We would also like to thank Liberty Bank of Arkansas and Marjorie Brooks, as well as all AERT shareholders, for their continued support during this difficult period. AERT is working hard to get back on track and AERT associates are committed to ongoing and sustained profitability going forward. Your AERT associates, although a little bruised and battered, have weathered the storm and look forward to building back the value of your company during 2010. Back to Top

DECK CLEANING & MOLD AND MILDEW

There has been much mention on the internet in the past couple of years surrounding mold and mildew and how to clean composite decking.  Those who have been affected by mold and/or mildew are sometimes quite vocal about their experience and unfortunately, their negative comments can create questions and uncertainty in the minds of readers curious about composite decking.  Following is a bit of accurate information about this issue including steps that have been taken to ensure that AERT composite decking continues to be the easiest and most reliable composite decking to own, clean, and maintain.

    *Mold and mildew are naturally occurring in the environment, and can grow on any outdoor surface. Mold and mildew are a form of plant life spread by spores that can settle on to any surface where moisture, pollen, dirt and debris collect. Air currents, insects, animals and water easily transport spores. Due to mold and mildew’s adaptability and the large number of species that exist, they are very hard to control and impossible to totally eliminate. Periodic cleaning of your deck with a mold and mildew cleaner, even if it “appears” clean, is important in order to prevent the build-up of pollen, dirt, and environmental debris. Regular periodic cleaning can also help prevent the reoccurrence of mold and mildew.

    *As with any flooring surface, periodic cleaning is recommended 2-3 times a year, and possibly more if a deck is located under shade trees or where it accumulates dirt and debris.  Cleaning instructions, as well as recommended cleaners, can be found at http://www.choicedek.com/products/deck-care/ or http://www.moistureshield.com/care-cleaning/.  If you do not wish to clean your deck, please be advised that composite decking is not self cleaning, and can accumulate surface dirt, pollen, and debris which supports growth of mold and mildew.

    *AERT's composites are moisture stable and will not shrink like wood.  Gapping of 1/4" between deck planks for proper drainage and air flow is recommended.  Many builders and homeowners install composite decking improperly thinking it will dry out, shrink like wood, and gap itself.  This is incorrect.  In addition, AERT's composites are highly moisture resistant.  When water, dirt, and debris are left standing on the surface, a "flower pot" affect is created whereby mold and mildew can grow out of the debris that has settled in to the embossing pattern.       

    *In October, 2006, AERT began adding zinc borate, a mold inhibitor, in its manufacturing process.  This addition has virtually eliminated mold and mildew concerns in AERT products manufactured after this date where proper cleaning instructions were followed.  Prior to 2006, AERT did not publish detailed cleaning instructions, but has since upgraded them and has made them available in print, online, or on CD.  We sincerely apologize for any inconvenience this has caused our customers.  Proper cleaning and installation education has also contributed to a decrease in mold and mildew problems.   

    *Tips for Preventing Mold Growth:
        • Ensure proper deck gapping is achieved during installation (refer to installation guidelines)
        • Ensure deck plank gapping is clear and free of debris
        • Always wash deck after heavy pollen season
        • Ensure proper ventilation around structure of deck
        • Avoid any direct water discharge from gutters onto deck surface
        • Avoid over spray of fertilizers on and around deck  Back to Top

AERT’S CLASS ACTION SETTLEMENT

AERT decking manufactured between 2003-2006 was included in a class action lawsuit that was settled in September, 2008 and finalized by the court in January, 2009.  In this suit, several customers of AERT's ChoiceDek decking product alleged class action claims in federal court complaining that they were having difficulty keeping their decking free from mold and mildew surface stains and that AERT cleaning instructions were inadequate. These customers bought their ChoiceDek products before AERT began adding zinc borate, a mold inhibitor, in October, 2006. AERT investigated these claims and entered into a settlement agreement in order to resolve the litigation. As part of the settlement, AERT modified and updated ChoiceDek marketing materials to further help customers to understand the need to periodically clean their decking in order to avoid the build up of surface debris which can support mold and mildew. Updated cleaning information and recommended cleaning products were also made available on the ChoiceDek website.  In addition, the settlement offered a formal claim resolution process for those customers who were having difficulty with significant mold or mildew spotting on their decking. The claim resolution process enabled eligible customers to have their decks inspected, cleaned, and treated with a mold inhibitor and provided other additional relief under certain circumstances, such as additional cleanings, refunds, replacement material, coupons for discounted cleanings, and/or credit vouchers for use at Lowe's Home Improvement stores.  In October, 2008 AERT issued a national notice to consumers in USA Today as well as through direct mail to over 387,000 individuals believed to have purchased ChoiceDek from 2004 to 2008.  A special website was also created for this purpose.  The deadline for submitting an official claim form was September 10, 2009.  Approximately 5% of the decks sold during the class time frame, have been submitted for relief as part of the class action settlement.  More information about this settlement can be found at http://www.aert.com/class_action_settlement.asp

    AERT CEO, Joe Brooks, commented on the settlement by stating, "AERT apologizes for any inconvenience this has caused and is committed to customer service and to addressing and positively resolving the issues and concerns of our customers. We at AERT have always prided ourselves in offering first rate customer service.  AERT has a 7 day a week customer service hotline, 800-951-5117, where customers may ask questions or obtain more information.  Our intent is to positively resolve our customers' concerns. This process has enabled AERT to improve and expand its customer support program. In the meantime, AERT continues to improve and develop its existing product line and offer optimal performance on new products."

    Co-lead counsel for the plaintiff and class, Jonathan Selbin of Lieff, Cabraser, Heimann & Bernstein, LLP, stated, "We commend AERT for standing behind its product and taking care of its customers in this way. From the beginning of this process, it was clear to us that customer satisfaction was of utmost importance to AERT, and this settlement evidences that fact. This settlement is an outstanding result for all ChoiceDek owners who bought earlier versions of ChoiceDek and may have experienced mold and mildew problems. They will have those issues addressed by AERT in a timely and fair way."   Back to Top