FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission file number 333-9583
AMERICAN INTERNATIONAL CONSOLIDATED INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0145668
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14603 Chrisman, Houston, Texas 77039
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(281) 449-9000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 No X (Although the registrant has filed all
required reports, it has been subject to the
filing requirements only since March 13,
1997.)
As of April 30, 1997, the Registrant had outstanding 2,900,100 shares of its
common stock, par value $.001.
<PAGE>
AMERICAN INTERNATIONAL CONSOLIDATED INC.
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1997
INDEX
-----
Page No.
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 1996 and January 31, 1997 (unaudited)...............3
Condensed Consolidated Statements of Operations
for each of the three months and nine months
ended January 31, 1996 and 1997 (unaudited)...................4
Condensed Consolidated Statements of Cash Flows
for each of the nine months ended
January 31, 1996 and 1997 (unaudited).........................5
Notes to Condensed Consolidated Financial Statements............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
Part II -- OTHER INFORMATION
Item 5. Other Information..............................................14
Item 6. Exhibits and Reports on Form 8-K...............................14
2
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
---------------------
AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 30, January 31,
1996 1997
----------- -----------
(unaudited)
ASSETS
------
Current assets:
<S> <C> <C>
Cash $ 265,949 $ 168,880
Accounts receivable:
Contracts, less allowance for
doubtful accounts 4,874,421 4,087,725
Employee 26,543 13,323
Costs and estimated earnings in excess of
billings on uncompleted contracts 645,420 973,523
Other current assets 131,725 335,231
----------- -----------
Total current assets 5,944,058 5,578,682
----------- -----------
Property and equipment, net 1,185,841 1,190,147
Other assets 216,184 431,419
----------- -----------
Total assets $ 7,346,083 $ 7,200,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Note payable to financial institutions $ -- $ --
Notes payable to stockholders, net of discount -- 199,998
Current portion of long-term debt and capital
lease obligation 552,264 2,240,546
Accounts payable 3,826,207 5,401,016
Accrued payroll and related expenses 108,970 72,703
Billings in excess of costs and estimated
earnings on uncompleted contracts 261,319 257,167
Other current liabilities 358,524 256,648
----------- -----------
Total current liabilities 5,107,284 8,428,078
----------- -----------
Long-term debt, net of current portion 2,400,005 319,483
Capital lease obligation, net of current portion 22,287 38,732
Other liabilities 37,000 37,000
----------- -----------
Total liabilities 7,566,576 8,823,293
Contingencies (Note 5)
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 2,400,000 shares issued and outstanding 2,400 2,900
at April 30, 1995 and 1996; and 2,900,100 issued
and outstanding at January 31, 1997
Additional paid-in capital 145,755 1,395,505
Accumulated deficit (368,648) (3,021,450)
----------- -----------
Total stockholders' equity (deficit) (220,493) (1,623,045)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 7,346,083 $ 7,200,248
=========== ===========
See accompanying Notes to these Condensed Consolidated Financial Statements
</TABLE>
3
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<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended January 31 Nine Months Ended January 31
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Contract revenue $ 7,685,720 $ 7,507,469 $ 23,266,620 $ 25,595,976
Contract cost 6,057,381 7,414,187 20,016,257 23,657,827
------------ ------------ ------------ ------------
Gross profit 1,628,339 93,282 3,250,363 1,938,149
Selling, general and
administrative 779,673 980,680 2,617,681 3,040,784
Provision for doubtful
accounts 17,520 18,608 52,547 272,400
Other income (expense):
Interest and other
financing costs (64,934) (66,523) (158,179) (225,999)
Private placement
financing costs -- (99,999) -- (1,205,248)
Interest income and
other, net (66,880) 85,055 (54,642) 153,480
------------ ------------ ------------ ------------
Income (loss) before federal
income taxes 699,332 (987,473) 367,314 (2,652,802)
Federal income tax (expense)
benefit -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 699,332 $ (987,473) $ 367,314 $ (2,652,802)
============ ============ ============ ============
Net income (loss) per share $ .24 $ (.34) $ .13 $ (.91)
============ ============ ============ ============
Weighted average common
shares outstanding 2,900,100 2,900,100 2,900,100 2,900,100
============ ============ ============ ============
See accompanying Notes to these Condensed Consolidated Financial Statements
</TABLE>
4
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<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31
-----------------------------------
1996 1997
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 367,314 $(2,652,802)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Fair value of common stock
issued in connection with
private placement financing -- 1,050,249
Depreciation and amortization 128,440 122,035
(Increase) decrease in:
Receivables, net (1,909,806) 799,916
Costs and estimated earnings
in excess of billings on
uncompleted contracts (302,043) (328,103)
Other current assets (50,937) (203,506)
Increase (decrease) in
Accounts payable 2,052,933 1,574,809
Billings in excess of costs and
estimated earnings 163,832 (4,152)
Other current liabilities (98,435) (138,143)
Other, net (39,606) (105,173)
----------- -----------
Net cash provided by (used
in) operating activities 311,692 115,130
Cash flows from investing activities:
Capital expenditures (134,418) (4,306)
Proceeds from sale of investments (5,000) --
----------- -----------
Net cash used in investing
activities (139,418) (4,306)
Cash flows from financing activities:
Net borrowings (payments) under
receivables factoring agreements (407,678) --
Proceeds from notes payable to
stockholders -- 300,000
Issuance of long-term debt -- --
Principal payments on long-term
debt, capital leases and other
notes payable (309,996) (375,795)
Other -- (132,098)
Distributions to stockholders -- --
----------- -----------
Net cash used in
financing activities (717,674) (207,893)
----------- -----------
Net increase (decrease) in cash (545,500) (97,069)
Cash, beginning of period 628,979 265,949
----------- -----------
Cash, end of period $ 83,579 $ 168,880
=========== ===========
See accompanying Notes to these Condensed Consolidated Financial Statements
</TABLE>
5
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<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
Nine Months Ended January 31,
------------------------- ---
1996 1997
------------ -----------
(unaudited) (unaudited)
Supplemental disclosures:
<S> <C> <C>
Interest paid $ 158,179 $155,760
Equipment and vehicles acquired
in exchange for long-term debt $ -- $ --
Advances to stockholders
converted to compensation $ -- $ --
Land acquired in exchange for long-
term debt $ -- $ --
Trade payable converted to
long-term debt $ -- $ --
Equipment acquired under
capital leases $ $ 56,320
============== ========
See accompanying Notes to these Condensed Consolidated Financial Statements
</TABLE>
6
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AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Organization: The accompanying consolidated financial statements include the
accounts of American International Consolidated, Inc. (AIC), a Delaware
corporation, and its wholly-owned subsidiaries: C.H.O.A. Construction Company
and L. Campbell Construction, Inc., which is currently inactive. Effective July
26, 1996, the Company changed its name from American International Construction
Inc. to American International Consolidated, Inc. Effective April 30, 1994, the
Company acquired all of the outstanding shares of AIC Management, Inc., a
corporation wholly owned by the stockholders of the Company, for $1,015,000,
consisting of 75,000 shares of the Company's common stock, with an assigned
value of $44,000, and liabilities assumed totalling $971,000. This acquisition,
which was accounted for under the purchase method of accounting, gave rise to no
goodwill. The results of operations of AIC Management, Inc., are included with
those of the Company, beginning on May 1, 1994. In June 1994, American
International Construction , Inc., a Texas corporation, formed AIC, a Delaware
corporation, as a wholly-owned subsidiary. Subsequent to this, the Texas
corporation was merged into the Delaware corporation in a reverse tax-free
exchange. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company is primarily engaged in the design and erection of metal buildings
for use as self-storage, commercial and cold storage facilities and fabrication
of metal building components. The Company also participates in major
construction projects as a general contractor.
The condensed consolidated balance sheet as of January 31, 1997 and the
consolidated statements of operations and cash flows for the nine month periods
ended January 31, 1996 and 1997 were taken from the Company's books and records
without audit. However, in the opinion of management, such information includes
all adjustments (consisting only of normal recurring accruals), which are
necessary to properly reflect the financial position of the American
International Consolidated, Inc. and Subsidiaries as of January 31, 1997 and the
results of their operations for the three and nine months ended January 31, 1996
and 1997 and their cash flows for the nine months ended January 31, 1996 and
1997. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the year.
NOTE 2 - HISTORICAL OPERATIONS
---------------------
The Company experienced substantial losses prior to fiscal 1995 and during the
nine months ended January 31, 1997 which has resulted in an accumulated deficit
of $3,021,450 at January 31, 1997. The Company's ability to continue to fund its
future operating and capital needs is dependent upon its ability to continue
profitable operations and to generate adequate cash flows from operations. For
the year ended April 30, 1996, the Company reported net income of $351,570, cash
flow from operations of $644,898 and an increase in its working capital to
$836,774 as a result of converting $2,400,000 of trade accounts payable to
long-term debt. For the nine-month period ended January 31, 1997, the Company
incurred a net loss of $2,652,802, of which $1,205,248 represented non-cash
costs associated with the Company's bridge financing, positive cash flow from
operations of $115,130, and a negative working capital of $2,849,396, primarily
as a result of the classification of the entire balance of the note payable to
supplier in current liabilities.
7
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AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
NOTE 3 - CONSTRUCTION ACCOUNTS
Costs and billings on uncompleted contracts consists of the following:
<TABLE>
<CAPTION>
January 31,
---------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 13,310,848 $ 16,840,982
Estimated earnings on uncompleted contracts 2,229,518 1,568,147
------------ ------------
15,540,366 18,409,129
Less: Billings to date (15,180,334) (17,692,773)
------------ ------------
$ 360,032 $ 716,356
============ ============
Included in the Company's consolidated
balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,011,678 $ 973,523
Billings in excess of costs and estimated
earnings on uncompleted contracts (651,646) (257,167)
------------ ------------
$ 360,032 $ 716,356
============ ============
NOTE 4 - CONTRACTS RECEIVABLE
Contracts receivable consisted of the following:
April 30, January 31,
1996 1997
------------ ------------
Completed contracts $ 1,458,204 $ 485,390
Uncompleted contracts 3,158,551 2,661,189
Retainage 337,523 1,023,234
------------ ------------
4,954,278 4,169,813
Less allowance for doubtful accounts (79,857) (82,088)
------------ ------------
$ 4,874,421 $ 4,087,725
============ ============
</TABLE>
8
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AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
NOTE 5 - CONTINGENCIES
-------------
The owner of one of the Company's construction projects has disputed some of the
costs charged to a job which was completed in the fourth quarter of fiscal 1996.
The Company settled this dispute during November 1996 for $125,000, resulting in
a reduction in amounts due from this owner by $200,000 during the second quarter
of fiscal 1997.
Additionally, the Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial condition, liquidity or results of
operations.
NOTE 6 - INCENTIVE STOCK OPTION PLAN
---------------------------
The Company has a Stock Option Plan (the Option Plan) pursuant to which options
to purchase 200,000 shares of the Company's common stock may be granted to
officers and employees of the Company or its subsidiaries and to other persons.
As of January 31, 1997, no stock options had been granted pursuant to the Option
Plan.
NOTE 7 - INITIAL PUBLIC OFFERING
-----------------------
The Company has registered for the sale of a minimum of 700,000 shares and a
maximum of 800,000 shares of common stock, and a minimum of 700,000 and a
maximum of 800,000 common stock purchase warrants with the Securities and
Exchange Commission as part of an initial public offering. Each warrant is
exercisable to purchase one share of common stock at an exercise price of $5.00
per share. The Company intends to offer these securities through an underwriter
on a "best efforts basis". If the offering is consummated, the underwriter will
receive underwriters' warrants to purchase one share of common stock for each
ten shares sold in the offering and one warrant for each ten warrants sold in
the offering, with each warrant exercisable at 165% of the initial offering
price for a period of four years beginning twelve months after the effective
date of the registration statement concerning the offering. The Company has
granted registration rights with respect to the common stock and warrants
underlying the underwriters' warrants.
NOTE 8 - GOING CONCERN
-------------
The Company's year to date loss, which includes a non-cash charge of $1,205,000
related to the Company's private placement of securities in July 1996, increased
from approximately $1,665,000 for the six months ended October 31, 1996 to
$2,653,000 for the nine months ended January 31, 1997. This increase of $988,000
included a non-cash charge of $100,000 related to the Company's private
placement of securities in July 1996 and the remainder resulted primarily from
the erosion of gross margins on contracts which were in progress at January 31,
1997. As a result of these additional losses, the Company's working capital
position and ability to generate sufficient cash flows from operations to meet
its operating and capital requirements has further deteriorated. These matters
raise substantial doubt about the Company's ability to continue as a going
concern without a substantial infusion of equity capital. The Company believes
9
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AMERICAN INTERNATIONAL CONSOLIDATED INC.
AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
NOTE 8 - GOING CONCERN (continued)
-------------
that it will be successful in removing the threat concerning its ability to
continue as a going concern by adhering to closer and stricter scrutiny of its
contract bids and utilizing the estimated minimum net proceeds of approximately
$2.9 million from the proposed best efforts public offering to achieve
profitability through lower interest and bonding costs and expanded volume.
There is no assurance these results will occur even if the proposed best efforts
public offering is consummated. If this does not occur, the Company will pursue
other sources of financing, but there is no assurance any other source of
financing will be available.
10
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Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
------------------------------------------------------------------------
Results Of Operations
Nine Months Ended January 31, 1997 Compared With Nine Months
Ended January 31, 1996
- ------------------------------------------------------------
For the nine months ended January 31, 1997, the Company reported a net loss
of $2,653,000, or $.91 per share, on revenues of $25,596,000, as compared with
net income of $367,000, or $.13 per share, on revenues of $23,267,000 for the
nine months ended January 31, 1996. The increase in net loss is primarily
attributable to the following: (a) the Company recorded a one-time non-cash
charge of $1,205,000 for private placement costs; (b) the Company's gross
margins decreased approximately $1,312,000 for the period ended January 31, 1997
as compared with the same period of the prior year; and (c) the Company incurred
an expense of $200,000 as a provision for doubtful accounts resulting from its
agreement to settle a disputed account receivable by accepting $200,000 less
than the full value of the account.
The total margins decreased from 14.0% to 7.6% when comparing the nine
months ended January 31, 1996 with the nine months ended January 31, 1997. This
decreased margin is attributable primarily to the metal building division which
earned revenues of $12.3 million with a margin of 2.0% for the nine months ended
January 31, 1997 as compared with earned revenues of $6.3 million with a margin
of 12.4% for the nine months ended January 31, 1996.
The mini-warehouse division margins decreased to 12.4% on revenues of $12.5
million for the nine months ended January 31, 1997 as compared with margins of
14.5% on revenues of $16.1 million for the nine months ended January 31, 1996.
The Thermal Systems division earned revenues of $.7 million with margins of
18.7% for the nine months ended January 31, 1997 as compared with revenues of
$.8 million with margins of 14.8% for the comparable period in 1996.
Selling, general and administrative expenses as a percentage of revenues
increased to 11.9% for the nine months ended January 31, 1997 as compared with
11.3% for the nine months ended January 31, 1996. This increase in percentage is
primarily a result of increasing insurance expenses. The Company anticipates
that, to the extent that revenues continue to increase in the future, of which
there is no assurance, selling, general and administrative expenses will
increase at a lower rate.
Interest expense increased $68,000 from $158,000 for the nine months ended
January 31, 1996 to $226,000 for the nine months ended January 31, 1997. This
increase is the result of the conversion of non-interest-bearing accounts
payable to interest-bearing Notes Payable to Supplier effective in April 1996.
The Company's contract backlog as of January 31, 1997 was $18.7 million as
compared with $11.1 million as of January 31, 1996, an increase of $7.6 million,
which is attributable to a $3.6 million increase in the backlog for the
mini-warehouse construction division, a $2.8 million increase in the backlog for
the metal building manufacturing division, and a $1.2 million increase for the
thermal systems division.
The Company currently estimates that its operations for the three-month
period from February 1997 through April 1997 resulted in a loss of approximately
$130,000. Although the Company had anticipated profitable operations for the
11
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February-April 1997 period, it experienced unusual and unseasonable heavy rain
and other inclement weather which hampered a number of its projects for more
than 20 days. Without the work stoppages caused by these unusual weather
conditions, the Company believes it would have been profitable for the February
through April 1997 period.
As of April 30, 1997, the Company's backlog was approximately $18.0
million. The Company believes that, barring unforeseen occurrences, it will be
profitable during the three-month period from May through July 1997 as it
proceeds to work on its backlog.
Quarter Ended January 31, 1997 Compared With Quarter Ended January 31, 1996
- ---------------------------------------------------------------------------
For the quarter ended January 31, 1997, the Company reported a net loss of
$987,000, or $.34 per share, on revenues of $7,507,000 as compared with net
income of $699,000, or $.24 per share, on revenues of $7,686,000 for the quarter
ended January 31, 1996. These losses result primarily from recognition that the
currently estimated gross margin on a number of contracts is substantially less
than had been estimated at the time of the bid and is substantially less than is
necessary to maintain profitable operations. These contracts were erroneously
estimated by a salesperson, and erroneously approved by the general manager of
the Company's metal building manufacturing division; and errors in
underestimating costs were not discovered until after the Company had entered
into the contracts and had commenced the respective projects. The Company has
terminated the employment of the salesperson that prepared and submitted the
bids for, and the general manager overseeing, a majority of the projects
representing the negative and below average gross margins incurred during the
November 1996-January 1997 period.
The total margins decreased significantly to margins of 1.2% on revenues of
$7,507,000 for the quarter ended January 31, 1997 as compared with margins of
21.1% on revenues of $7,686,000 for the quarter ended January 31, 1996. These
decreased margins are attributable primarily to the metal building manufacturing
division which recognized negative gross margins of (5.9%) on revenues of
$3,497,000 for the 1997 quarter as compared with margins of 20.1% on revenues of
$2,069,000 for the 1996 quarter. The mini-warehouse division's total margins
decreased 15.1% to margins of 6.7% on revenues of $3,792,000 for the quarter
ended January 31, 1997 as compared with gross margins of 21.8% on revenues of
$5,113,000 for the quarter ended January 31, 1996. The thermal systems division
increased its gross margins 2.7% to 20.5% on revenues of $218,000 for the
quarter ended January 31, 1997 as compared with gross margins of 17.8% on
revenues of $503,000 for the quarter ended January 31, 1996.
Selling, general and administrative expenses as a percentage of revenues
increased to 13.1% for the quarter ended January 31, 1997 as compared with 10.1%
for the quarter ended January 31, 1996. This increase is primarily attributed to
an increase in insurance expense for the quarter ended January 31, 1997 as
compared with the quarter ended January 31, 1996.
Interest expenses increased $2,000 to $67,000 for the quarter ended January
31, 1997 as compared with $65,000 for the quarter ended January 31, 1996.
Other Income for the quarter ended January 31, 1997 was $85,000 as a result
of earning additional income from previously completed contracts. This compares
to other Expenses being incurred of $66,000 for the quarter ended January 31,
1996.
12
<PAGE>
The Company's contract backlog at January 31, 1997 was $18.7 million as
compared to $11.1 million as of January 31, 1996, an increase of $7.6 million,
which is attributable to a $3.6 million increase in the backlog for the
mini-warehouse construction division, a $2.8 million increase in the backlog for
the metal building manufacturing division, and a $1.2 million increase for the
thermal systems division.
Liquidity And Capital Resources
As of January 31, 1997, the Company had current assets of $5,579,000 and
current liabilities of $8,428,000 which represents negative working capital of
$2,849,000. Working capital decreased $3,686,000 as compared with April 30,
1996. As of April 30, 1996 the Company had current assets of $5,944,000 and
current liabilities of $5,107,000, which represents a positive working capital
of $837,000. The $3,686,000 decrease in working capital is primarily the result
of including the entire balance of the Note Payable to Supplier amounting to
$2,201,000, as a current liability. The balance of the decrease in working
capital is attributed to the loss incurred from operations for the nine months
ended January 31, 1997 of $1,448,000.
As of January 31, 1997, the Company's cash balance decreased $97,000 as
compared with the balance at April 30, 1996. This decrease is primarily
attributable to the Company's utilizing available cash to reduce notes payable
and capital lease obligations by $376,000 and costs associated with the
Company's initial public offering.
The Company's net cash flow is materially affected by the timing of
payments of accounts payable, other amounts owed, and collection of accounts
receivable. The Company's cash flow from operations for the nine months ended
January 31, 1997 decreased $197,000 as a result of the Company's loss from
operations, which was partially offset by an increase in accounts payable of
$1,575,000.
As a result of its operating losses, the Company's working capital position
and ability to generate sufficient cash flows from operations to meet its
operating and capital requirements has further deteriorated. These matters raise
substantial doubt about the Company's ability to continue as a going concern
without a substantial infusion of equity capital. The Company believes that it
will be successful in removing the threat concerning its ability to continue as
a going concern by adhering to closer and stricter scrutiny of its contract bids
and utilizing the estimated minimum net proceeds of approximately $2.9 million
from its proposed best efforts public offering to achieve profitability through
lower interest and bonding costs and expanded volume. There is no assurance
these results will occur even if the proposed best efforts public offering is
consummated. If this does not occur, the Company will pursue other sources of
financing, but there is no assurance any other source of financing will be
available.
13
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PART II -- OTHER INFORMATION
Item 5. Other Information: Disclosure Regarding Forward Looking Statements
Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act Of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act Of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Form 10-Q, including without limitation the statements under
"ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the notes to the Financial Statements located elsewhere
herein regarding the Company's financial position and liquidity, the amount of
and its ability to make debt service payments, its strategies, financial
instruments, and other matters, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Form 10-Q including without limitation in conjunction with the
forward-looking statements included in this Form 10-Q and in Exhibit 99 to this
Form 10-Q. All written and oral forward-looking statements attributable to the
Company or persons acting on its behalf subsequent to the date of this Quarterly
Report are expressly qualified in their entirety by the Cautionary Statements.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule.
Exhibit 99. Disclosure Regarding Forward Looking Statements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the
quarter ended January 31, 1997.
14
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SIGNATURES
Pursuant to the requirements 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.
AMERICAN INTERNATIONAL CONSOLIDATED INC.
Date: May 1, 1997 By: /s/ Jim W. Williams
----------------------------------------
Jim W. Williams, Principal Financial
Officer, Vice President/Finance
15
Disclosure Regarding Forward-Looking Statements And Cautionary Statements
- -------------------------------------------------------------------------
Cautionary Statements. In addition to the other information contained in
this Quarterly Report on Form 10-Q, the following Cautionary Statements should
be considered when evaluating the forward- looking statements contained in this
Quarterly Report:
1. Substantial Doubt About The Company's Ability To Continue As A Going
Concern Without Completion Of Public Offering. The Company's operating results
for each of the fiscal years ended April 30, 1996 and 1995 resulted in a profit;
however, the Company has incurred operating losses for the nine months ended
January 31, 1997, and for each of the fiscal years ended April 30, 1994, 1993
and 1992, and there is no assurance that the operations of the Company will be
profitable in the future. As a result of the Company's current fiscal year
losses from May 1, 1996 through January 31, 1997 (approximately $2.5 million,
including a non-recurring charge of $1.1 million), the Company's working capital
position and ability to generate sufficient cash flows from operations to meet
its operating and capital requirements has further deteriorated and these
matters raise substantial doubt about the Company's ability to continue as a
going concern without completion of the Company's pending best-efforts initial
public offering of common stock and common stock purchase warrants (the
"Offering") or a substantial infusion of equity capital. The Company believes
that it will be successful in removing the threat
<PAGE>
concerning its ability to continue as a going concern by adhering to closer and
stricter scrutiny of its contract bids and utilizing the estimated minimum net
proceeds of approximately $2.9 million from the Offering to achieve
profitability through lower interest and bonding costs and expanded volume.
Management believes that approximately $1.0 to $1.2 million of the proceeds from
the Offering are necessary to remove the threat concerning the Company's ability
to continue as a going concern and that if this Offering is completed, the
minimum proceeds from the Offering will enable the Company to continue operating
for the foreseeable future at its current level of operations. The length of the
period that the minimum proceeds would enable the Company to continue operating
at its current level of operations is dependent upon a number of factors,
including primarily the Company's profitability. Assuming the Company incurs,
during fiscal 1998 and 1999, additional net losses (excluding non-cash,
non-recurring charges) at the same rate as estimated for fiscal 1997 ($1.4
million), the minimum net proceeds would allow the Company to operate at its
current level of operations for approximately 1.2 years. However, management of
the Company does not believe that the Company will incur cumulative net losses
for fiscal 1998 and 1999. There is no assurance that management's belief is
accurate and that the Company will not incur future cumulative net losses. To
the extent that management's belief is accurate, then the minimum net proceeds
from the Offering would allow the Company to continue operations as long as the
Company had not sustained future cumulative net losses of approximately $1.7
million. There is no assurance these results will occur even if this Offering is
consummated. If this does not occur, the Company will pursue other sources of
financing, but there is no assurance any other source of financing will be
available.
The Company is current in its obligations to all lenders and major
suppliers except the Supplier described in paragraph No. 3 below. That Supplier
has indicated that it has no intent of accelerating payment on any obligations
as long as the Offering is completed. The Supplier has not indicated what it
will do if the Offering is abandoned or otherwise terminated unsuccessfully.
As a result of the losses incurred in November and December 1996, the audit
report of the Company's independent auditors for the year ended April 30, 1996
indicates that there is substantial doubt concerning the Company's ability to
continue as a going concern without a substantial infusion of equity capital,
such as that contemplated from the Offering. The implication of this to
investors in the Company is that successful completion of the Offering (or an
equity infusion from another source) is necessary for the Company to continue
operations. See Note 19 to the Company's Financial Statements for the year ended
April 30, 1996 included in the Company's Registration Statement on Form S-1
concerning the Offering.
2. Limited Financial Resources, Negative Net Worth, And Outstanding
Obligations. The Company has limited financial resources available, which has
had an adverse impact on the Company's liquidity. Its activities and operations
to date have resulted in a negative net worth. There is no assurance that the
proceeds of the Offering will be sufficient to successfully develop, produce,
and market the Company's services. The Company may be forced to limit its
activities because of the lack of availability of adequate financing. In the
past, the Company's limited liquidity has limited the amount of credit available
from the Company's suppliers. If the Company were not to have adequate financing
available in the future, it is likely that this credit limitation would continue
and that the Company's domestic and international marketing would be directly
affected, which would impair the Company's ability to increase its business
volume.
<PAGE>
The Company's negative net worth and financial condition in general have
prevented the Company from being able to obtain performance and payment bonds,
which has limited the Company's ability to obtain certain projects. If this
Offering is successfully completed, the Company believes that it will be able to
increase its bonding line and thereby increase the jobs available to it.
3. Outstanding Indebtedness. As of December 31, 1996, the Company owed
its major supplier of raw materials (the "Supplier") $1,800,000 for accounts
payable and an additional $2,133,000 that is evidenced by a note (the "Note")
and other related loan documents. The Company is required to make weekly
payments of $11,537 for outstanding principal and accrued interest on the Note
until April 30, 2001. If the Offering is successfully completed, of which there
is no assurance, the Company intends to use $1.2 million of the proceeds to
reduce the balance of the Note to approximately $935,000, which will reduce the
weekly payments to approximately $5,100 per week. Pursuant to the terms of the
Note, it is an event of default if the Company's net income before interest
expense is less than 1.5 percent of the Company's total sales for any fiscal
year beginning with the fiscal year ending April 30, 1997. The Supplier has
agreed to waive this requirement for the first eight months (through December
31, 1996) of the fiscal year ending April 30, 1997, but the Company will be
required to satisfy it for the last four months of the fiscal year ending April
30, 1997 and subsequent fiscal years. Although the Company would not have
satisfied this requirement for any of its previous fiscal years or for the first
eight months of its current fiscal year, management believes that if this
Offering is completed, it will be able to satisfy the requirement for the last
four months of the fiscal year ending April 30, 1997 and for fiscal 1998 and
thereafter while the Note is outstanding, or that it will be close enough to
satisfying it that the Supplier will waive it. Nevertheless, there is no
assurance that the Company will satisfy this requirement. As of December 31,
1996, the Company also was in violation of certain other covenants for which it
has received a waiver from the Supplier and for which there is no assurance that
the Company will be able to satisfy in the future. If all these requirements are
not satisfied as required in the future, the Company will be required to obtain
alternate financing, receive a waiver from the Supplier, or default on the Note.
As of October 31, 1996, the Company also owed an aggregate of approximately
$349,000 to FCLT, L.P., a Texas limited partnership ("FCLT"), pursuant to two
loans that are payable in June 1998, are collateralized by the Company's land
and buildings, and are guaranteed by the three principal stockholders of the
Company. Aggregate monthly payments on these two loans are $6,082.
The Company had other obligations of an aggregate of approximately $173,000
at December 31, 1996 that require aggregate monthly payments of approximately
$13,100. The Company also is the obligor on an aggregate of $300,000 principal
amount of unsecured notes that will be repaid from the proceeds of the Offering.
4. Fluctuations In Industry Construction Activity. Although most recently,
new construction projects for storage facilities, warehouses and pre-engineered
metal buildings and freezer/refrigerated facilities, as well as renovations and
<PAGE>
remodeling projects, have occurred at a historically active rate, new projects
were not as numerous in prior years. These fluctuations in industry activity
result from numerous factors, including general economic conditions, interest
rates and the general real estate market. There can be no assurance that future
demand for the Company's services will be adequate for the Company to operate
profitably.
5. Uncertain Markets And Market Acceptance. No assurance can be given of
market acceptance or profitability from sales of the Company's current services
or that sales of future services will be profitable. The Company's industry is
extremely competitive and subject to numerous changes.
6. Competition. The Company competes, in a highly competitive environment,
with many companies in the manufacture, construction and erection of storage
facilities, warehouses, pre-engineered metal buildings, freezer/refrigerated
facilities, and other construction services. Many of the Company's primary
competitors not only have greater resources than the Company, they also have
larger administrative staffs and more available service personnel. The larger
competitors also may use their greater financial resources to develop and market
their services. The presence of these competitors may be a significant
impediment to any attempts by the Company to develop its business. Major
competitive factors include product knowledge, experience, past relationships,
quality of performance, financial condition, reputation, timeliness, and
pricing. The Company believes that it ranks highly and therefore will have
certain competitive advantages in attempting to develop and market its services,
including the Company's excellent relationships with its past and current
customers, which has led to "repeat" business, the Company's product knowledge,
experience, past relationships, quality of performance, reputation and pricing,
and the Company's ability to respond to customer requests more quickly than some
larger competitors. For the year ended April 30, 1996, approximately 45 percent,
and for the six months ended October 31, 1996, approximately 28 percent, of the
Company's business was derived from repeat customers; however there is no
assurance that this will occur in the future. None of the Company's repeat
business is derived from long-term contracts, and all repeat business results
from separately negotiated contracts. With respect to lower rankings for
competitive factors, the Company's capitalization prior to this Offering has
placed it at a competitive disadvantage in the past but the Company believes
that as a result of this Offering it will increase its ability to compete on the
basis of financial condition. However, there is no assurance that this will
prove correct.
7. Exposure To Construction Related Litigation. The construction industry
has a high incidence of litigation, and as a participant in this industry, the
Company is constantly exposed to the risk of litigation. Even though the Company
maintains insurance for these matters in amounts customary in the industry, and
even if the Company prevails in any such litigation, of which there is no
assurance, the management time and out-of-pocket expense expended in commercial
litigation could have an adverse impact on the Company.
8. Past Dependence On Major Customers. During the six months ended October
31, 1996 and the fiscal year ended April 30, 1996, U-Haul, Inc. accounted for
approximately $3.2 million and $8.1 million, respectively, or 18 percent and 26
percent, respectively, of the Company's total revenues. During the fiscal years
ended April 30, 1995 and 1994, U-Haul, Inc.
<PAGE>
accounted for approximately $4.9 and $4.9 million, respectively, or
approximately 20 percent and 19 percent, respectively, of the Company's total
revenues. The Company negotiates each project with U-Haul separately as there is
no contract with U-Haul covering the construction of future projects. The loss
of U-Haul, Inc.'s business could have a materially adverse effect on the
Company. Also during the fiscal year ended April 30, 1994, another customer,
with a contract for cold storage construction, accounted for approximately 22
percent of the Company's total revenues. This contract was entered into as a
one-time project, and the Company does not anticipate any future business from
this customer.
9. Previous Unprofitable International Operations. The Company plans to
expand its business in international markets but a significant portion of its
past experiences in international markets has been unprofitable. The past losses
from international business occurred in situations in which the Company had set
up satellite offices in other countries, such as Guam and Puerto Rico, and the
cost of operating and maintaining these offices was too great to operate
profitably. The Company has closed its offices in Puerto Rico and in Guam, and
believes that it will be able to conduct business internationally without
opening satellite offices. The Company currently is doing a small amount of
business internationally through an international sales force located in its
Houston, Texas headquarters.
10. Availability Of Labor. In order to minimize overhead, the Company often
contracts with independent third parties to provide a substantial portion of the
labor for its construction projects. Therefore, the Company's ability to provide
these services is dependent upon outside sources of workers and this may result
in delays in the completion of contracts due to the unavailability of such
labor. The Company is not currently experiencing, and has not in the past
experienced, a shortage of labor.
11. Possible Effect Of Subcontractors' Use Of Unionized Labor. At the
current time, the use of unionized labor by subcontractors engaged by the
Company does not have a significant effect on the Company because subcontractors
tend to use unionized labor only in areas where there is a heavy concentration
of unionized labor, and because in those areas other contractors in competition
with the Company most often utilize unionized labor so that there would be no
competitive advantages or disadvantages to the Company. There is no assurance
that this situation will remain constant in the future.
12. Dependence On Key Personnel. The success of the Company is largely
dependent upon the efforts of John Wilson, Chief Executive Officer and a
director of the Company, Danny Clemons, President and a director of the Company,
R. L. Farrar, Vice President of Operations, Treasurer, Secretary and a director
of the Company, and Jim Williams, Vice President of Finance, Assistant Secretary
and a director of the Company. The loss of the services of any of these persons
or the loss of the services of Jimmy M. Rogers, head of the Company's Thermal
System Division, could be detrimental to the Company as there is no assurance
that the Company could replace any of them adequately at an affordable
compensation level. The Company has entered into employment agreements with each
of the above officers. The Company is the beneficiary for $500,000 of key-man
term life insurance coverage on each of Messrs. Wilson, Clemons, Farrar, Rogers
and Williams. There is no assurance that these insurance policies will provide
the Company with adequate compensation in the event of the death of any of the
insured.
<PAGE>
13. Government Regulation And Workers Compensation Insurance. The Company
is subject to government regulation of its business operations. In addition, the
Company's construction activities must meet with the requirements of local
building codes, and the Company is required to provide workers compensation or
alternate insurance coverage for the Company's employees. Because of the nature
of the Company's business in construction services, the cost of this insurance
for the Company's on-site employees is higher relative to the cost of insurance
coverage for the Company's office personnel. When construction work is performed
on behalf of the Company by subcontractors, the subcontractors, and not the
Company, pay the direct costs of insurance for the construction workers. There
is no assurance that subsequent changes in laws or regulations will not affect
the Company's operations adversely.
14. Possible Need For Future Financing. The Company believes that the
proceeds of the Offering will enable it to accomplish the purposes set forth
under "BUSINESS", although there can be no assurance that this will be the case.
If those proceeds are not sufficient, the Company would be required to seek
additional financing to enable it to conduct its business operations. There can
be no assurance that the Company will be able to obtain such financing on
acceptable terms. Any such additional financing may entail substantial dilution
of the equity of the then-existing stockholders of the Company. The availability
of additional financing may be restricted by provisions in the underwriting
agreement with the the underwriters of the Offering that require, for a period
of 24 months after this Offering, that the Company obtain the underwriters'
permission in order to issue securities for financing purposes.
15. Potential Conflicts Of Interest. Potential conflicts of interest may
arise between the Company and its officers and directors. Although each of the
Company's officers and directors is committed to devote full working time to the
business of the Company, they also may be engaged in other business activities.
If these business activities are of the same type as those engaged in or
contemplated by the Company, conflicts of interest will arise in the area of
corporate opportunities or in the area of conflicting time commitments with
respect to the officers and directors of the Company. Conflicts of interest also
will develop with respect to any contractual relationships that may be entered
into between the Company and any of its officers and directors.
At the present time, there are not any material conflicts of interest
between the Company and any of its officers or directors, except to the extent
that their respective positions as large stockholders might present conflicts of
interest and except to the extent that a consulting arrangement with one
director might present conflicts of interest. A previously existing conflict of
interest was resolved in May 1994 when AIC Management, Inc. merged with and into
the Company. At the time of the merger, AIC Management, Inc. owned the land and
buildings that are utilized for the Company's administrative offices as well as
its metal buildings manufacturing facility. The shareholders and directors of
AIC Management, Inc. at the time of the merger were Messrs. Clemons, Farrar and
Wilson, who are the three largest stockholders and three of the four directors
of the Company.
<PAGE>
The Company has established a policy pursuant to which the Board Of
Directors will consider transactions with officers, directors, and shareholders
of the Company and their respective affiliates. Pursuant to this policy, the
Board Of Directors will not approve any transaction unless it determines that
the terms of the transaction are no less favorable to the Company than those
available from unaffiliated parties. Because this policy is not contained in the
Company's Certificate Of Incorporation or Bylaws, the policy is subject to
change by the Board Of Directors, although it currently is not contemplated that
the policy will be changed. In addition, in the event any conflicts of interest
arise with respect to any officer or director of the Company, the Company
anticipates that its officers and directors will exercise their judgment
consistent with their fiduciary duties arising under the applicable state laws.
There can be no assurance that all conflicts of interest will be resolved in
favor of the Company.
16. Lack Of Outside Directors. At the present time, only one of the
Company's directors is not also an officer and employee of the Company. However,
this director also serves as a paid consultant to the Company, which may present
conflicts of interest. See above, paragraph No. 15, "Potential Conflicts Of
Interest".
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from American
International Consolidated Inc., and Subsidiaries - Condensed Consolidated
Financial Statements at January 31, 1997.
</LEGEND>
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<PERIOD-END> JAN-31-1997
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</TABLE>
