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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB/A-1
General Form For Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Act of 1934
AMERICAN ENERGY SERVICES, INC.
(Name of small business issuer in its charter)
TEXAS 76-0279288
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7224 Lawndale 77012
Houston, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (713) 928-5311
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Securities to be registered under Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
- NONE -
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS
PART I
Item 1 Description of Business..........................................
Item 2. Management's Discussion and Analysis or Plan of Operation........
Item 3. Description of Property..........................................
Item 4. Security Ownership of Certain Beneficial Owners and Management...
Item 5. Directors, Executive Officers, Promoters and Control Persons.....
Item 6. Executive Compensation...........................................
Item 7 Certain Relationships and Related Transactions...................
Item 8. Description of Securities........................................
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and other Shareholder Matters....................................
Item 2. Legal Proceedings.................................................
Item 3. Changes and Disagreements with Accountants........................
Item 4. Recent Sales of Unregistered Securities...........................
Item 5. Indemnification of Officers and Directors.........................
PART F/S
Financial Statements..............................................
PART III
Item 1. Index to Exhibits.................................................
Item 2. Description of Exhibits...........................................
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SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS
Certain statements in this Registration Statement constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and
variations of which words and similar expressions are intended to identify such
forward looking statements. These statements are based on current expectations
and projections about the Company's business and industry and assumptions made
by management and are not guarantees of future performance. Therefore, actual
events and results may differ materially from those expressed or forecasted in
the forward looking statements due to factors such as the economic conditions of
the industries served by the Company (including the energy, chemical and
petrochemical industries), the availability to the Company of sufficient working
capital to bid for and perform contracts, the ability of the subvendors used by
the Company to meet many of its manufacturing requirements, demand for
custom-engineered flow control valves in general and specifically for the
Company's services, and other factors identified in this Registration Statement.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company undertakes no
obligation to update any forward looking statements in this Registration
Statement.
EXPLANATORY NOTE:
All share and per share information contained herein has been adjusted to
reflect a ten-for-one reverse split of the common stock of the Company, as
hereinafter defined, effected on August 28, 1997.
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
American Energy Services, Inc., a Texas corporation ("Old AES"), was
founded and incorporated in 1987. AES specialized in designing, manufacturing,
marketing and servicing high quality, custom-engineered flow control valves,
including gate, globe, check and ball valves for use by a broad range of
industrial, commercial and utility entities. Old AES began operations in 1989
after acquiring certain operating assets previously owned by two other valve
manufacturing and remanufacturing businesses, CGM Valve, Inc. ("CGM") and
American Energy Valves, Inc. ("AEV"). The Company's current directors, Larry
Elliott, Patrick Elliott, Sidney McCarra, Mark Elliott, and Cary McCarra, were
previously associated with CGM and AEV.
In January 1996, Old AES was merged with and into Seahawk Overseas
Exploration Company, a California corporation ("Seahawk"), pursuant to that
certain Agreement and Plan of Merger by and between AES and Seahawk (the
"Merger"). At the time of the Merger, Seahawk was a "shell" corporation with
substantially no assets, business or operations. Old AES's previous stockholders
received approximately 95% of the issued and outstanding stock of Seahawk in
connection with the Merger. As a result of the Merger, Seahawk became the
surviving entity but its name was changed to American Energy Services, Inc., a
California corporation. In February 1996, the directors and officers of Seahawk
formed a new corporation under the name American Energy Services, Inc., a Texas
corporation ("New AES"). Subsequent to the formation of New AES, Seahawk was
merged with and into the New AES in order to maintain the historic domicile of
Old AES in Texas and to retain the historic business name. In addition, the
merger was intended to provide the Company with a legal entity which could enter
the public company domain and ultimately, provide potential capital through the
sale of registered securities. The effect of this merger has been that the
Company was able to acquire approximately 1,500 shareholders formerly owning
shares of Seahawk stock. As used herein, references to the "Company" or to "AES"
refer to New AES, and its predecessors.
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The Company's products include both standard and specialty valves of
varying sizes and pressures used to regulate the movement of liquids, gases and
solid materials. The Company markets and sells its products worldwide to
processing manufacturers, energy companies and engineering/construction
contractors. Principal end-user markets served by the Company include domestic
and international oil and gas production, transmission and refining segments of
the energy industry, and the petrochemical, processing and power generation
industries.
The Company utilizes both Company owned and operated manufacturing
facilities and AES quality audited, contractually licensed manufacturing
subcontractors to produce the full line of AES standard and engineered valves.
For much of its standard product manufacturing requirements, AES relies on
a network of AES selected subcontractors, all of which are audited and licensed
under internationally recognized quality programs, including ISO 9000 and API
Q1. This arrangement has allowed the Company to reduce fixed costs by minimizing
its investments in plant and equipment. Moreover, by maintaining manufacturing
relations all over the world, the Company has been able to attract additional
customers worldwide.
The Company does, however, design, engineer, and manufacture certain
products at one of its Houston facilities. It has full scale manufacturing
capabilities, including large turning and machine centers, heavy duty cranes,
and full welding facilities in its manufacturing facility located in Houston,
Texas. The Company also houses a fully equipped engineering department with a
computer aided design (CAD) system and metallurgical equipment to determine ASTM
specified requirements.
VALVE DESIGN AND MANUFACTURE
The Company manufactures valves to the following qualifications: API 6D,
API 6A, API 600, API 599, and API 602. The Company is a licensed API monogram
holder under specifications 6D and Q1 and its Quality Assurance Manual is ISO
9000 approved. Steps involved with the design and manufacture of the Company's
valves include (i) consultation with the customer's project coordinators, (ii)
general design work and detailed engineering, (iii) fabrication and assembly and
(iv) final installation.
The Company's sales personnel and independent marketing representatives,
or agents, initiate sales calls and coordinate bid proposals with the Company's
quotation specialists. The quotation specialists produce proposals that identify
preliminary design and cost estimators for a type of valve to be utilized for a
specific application. AES marketing management must also determine whether there
is a sufficient amount of working capital available to generate revenue. Under
normal operating conditions, forty percent (40%) to sixty-five percent (65%) of
a contract amount must be available to fund the Company's working capital
requirements. As a result of limited working capital, of more than $700,000,000
contract quotations given by the Company during the fiscal year ending February
28, 1998, the Company was only able to accept contract amounts totaling
approximately $13,000,000, a 2% success ratio.
The initial design efforts involve significant communication and
coordination with the customer so that valve specifications are identified and
agreed upon. For custom-engineered valve projects, design concepts are tested
against established empirical data and previously manufactured valve designs.
The Company maintains a
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source library of designs from which to choose and the Company's computer aided
design capabilities provide readily available and accessible valve design
parameters. When orders require standard valve designs, the Company's engineers
and quality assurance personnel verify that the Company's "off the shelf"
designs comply with required specifications. Once the valve application has been
clearly defined, the Company's engineers formulate a design for the manufactured
valve. Project engineers perform complete engineering services, including
mechanical schematics, layouts and drawings. Process and electrical control
systems can also be integrated into the design.
The manufacturing step of the process involves fabrication and assembly of
component parts to meet specific valve designs and specifications. The Company
produces machined assemblies from raw castings and forgings or sourced machined
assemblies, which are fully inspected for material and tolerance compliance,
from subcontractors. The assembly groups are then put together as a complete
valve, and function and operation tests are performed. Testing involves
configuring testing procedures and changing the equipment before each test in
order to ensure that the valves meet the particular project's needs and
requirements. The Company believes that its testing of valve integrity is the
basis for the Company's ability to provide performance and quality guarantees
and total concept capability. After testing is completed, the valves are
prepared for shipment.
Because the manufacturing phase can last several weeks to several months,
customers frequently request partial shipment of finished products and
components. The Company generally invoices the customer as deliveries are made.
However, on certain highly specialized products or large projects, the Company
invoices under a milestone payment basis. Receivables represent billings for
delivered products or milestone achievements. Revenue is recognized using the
percentage-of-completion method.
NEW PRODUCTS AND SERVICES
Starting in 1993, the Company has developed (i) a full line of refinery
and process gate, globe, swing check, and ball valves of varying sizes, (ii) a
line of specialty valve products, designed and manufactured to meet a client's
particular valve application requirements, and (iii) other products, including
lubricated plug valves, rotary control valves, linear control valves, geothermal
through conduit gate valves and pressure seal valves. The Company offers
trunnion mounted ball valves, floating ball valves, reduced and full bore type,
in virtually any metallurgy required.
SPECIAL PRODUCTS. The Company designs and manufactures high pressure
three-way ball valves for high temperature switching service, metal seated ball
valves for various services including abrasives, three-way piggable "Y" pattern
ball valves for dock loading applications, rapid shutoff high pressure flood
valves for NASA launch pad facilities, rotary control valves for quiet
operations for the US Navy Submarine Division, and cryogenic valves (gate, globe
and ball valves) for service to - 150 degrees Celsius.
QUALITY COMMITMENT AND CONTROL
The Company's comprehensive quality control program is designed to ensure
that valves manufactured by the Company, as well as components purchased from
outside manufacturers, meet the Company's quality standards. The Company's
quality control program includes inspections at all stages of the design and
manufacturing process at the Company's manufacturing facility. All purchased
components and products
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assembled by subcontractors are also inspected to ensure that they perform
properly. Thus far, the Company management has been satisfied with the quality
and reliability of products assembled by subcontractors. However, there can be
no assurance that such products will always perform properly. The failure of a
product to perform properly could have a material adverse effect upon the
Company's business, operating results, and financial condition.
Since 1989, the Company has manufactured over 60,000 valve units. Due to
the Company's strict adherence to quality standards, less than one-fifth of one
percent of these 60,000 valve units produced have required any type of field
service or plant refitting. The Company is licensed under internationally
recognized quality programs, including API Specifications 6D, Q1 and its Quality
Assurance Manual is IS09000 approved. In addition, the Company has been a member
of several standardization societies including the American Petroleum Institute
and the American Society for Testing Materials (ASTM), among others.
SUPPLIERS AND SUBCONTRACTORS
The Company purchases nearly all castings, forgings, and certain finished
or semi-finished components used in its products from domestic and international
suppliers including foundries and forging companies, bolt distributors and soft
goods distributors. The Company performs most of the finished machining for the
Company's engineered products. The Company also assembles valve components, and
performs pressure testing and final preparation of the finished product. The
Company maintains an approved vendor list of sub-suppliers who have been quality
audited and found acceptable for providing various parts, supplies and
sub-assemblies for the final manufacture of equipment by AES for its clients.
Over the past eight years AES has developed a working relationship with a
substantial number of suppliers and sub-vendors. Management believes that these
approved vendors provide adequate availability of alternative sources of quality
supplies for use by the Company. During the fiscal year ended February 28, 1998,
the Company purchased from its leading sub-vendors, CMEC and DHV, 18% and 11%,
respectively, of all components purchased by the Company for its fiscal 1998
sales. However, the Company has not entered into any agreements or contracts
with either of these leading sub-vendors except for the placement of specific
purchase orders related to the Company's normal course of business. AES sources
its sub-vendors on a continuing, as needed basis. Terms of sale between the
Company and the sub-vendors are generally either C.O.D. or under an Irrevocable
Letter of Credit payment.
CUSTOMERS
The Company's customers include manufacturers, energy companies, domestic
and international oil and gas producers, transmission and refining segments of
the energy industry, and the petrochemical processing and power generation
industries. End-users of the Company's products consist of a broad range of
industrial, commercial and utility companies. The Company's customer base is
comprised of 300 accounts with over 125 considered active. The Company markets
and sells a vast majority of its products internationally while marketing
domestically through distribution. Over the last nine years, the Company has
placed in service approximately $64 million dollars worth of valve products.
The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Some of the Company's
principal customers include Kuwait Oil Corporation, Petroleos Mexicanos, Bechtel
Corporation, EcoPetrol, British Petroleum, and Parsons Engineering. During the
Company's fiscal year ended February 28, 1997, sales to the Company's four
largest customers, Parsons Engineering, EPX Trading Co., Inc., Lancaster Steel
and Eastern Bechtel Ltd. accounted for 17%, 15%, 15% and 12%, respectively, of
the Company's net sales. For year ended February 28, 1998, sales to the
Company's largest customer, Techint Cotecol S.A., accounted for 31% of the
Company's net sales. Due to the nature of the Company's operations, it is
anticipated that significant portions of future revenues may continue to be
attributable to a few customers, although it is likely that the identity of such
customers will change from period to period. Techint Cotecol SA down-sized it's
Columbia operations after completion of Phase II of the Cuciana Field
development, in which AES strongly participated. For this reason, management
believes Techint Cotecol will provide less than 10% of the gross sales for AES
during 1999. Because of the Company's range of gate, globe, check and ball
valves and the variety of applications available to the valves sold by the
Company, the Company maintains a broad customer base within the various
industries it serves.
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The Company's products are used by a variety of segments of the general
industries indicated below:
ENERGY INDUSTRY POWER GENERATION
Refiners and Processors Cogenerators
Oil and Gas Producers Utility
Transmission Companies
PLASTIC AND PETROCHEMICAL MINING AND MINERAL PROCESSING
Petrochemical Complexes Water and Waste Treatment
Base Resin Manufacturers Catalysts
Base Chemicals Steel Mills
Pulp and Paper
MARKETING AND DISTRIBUTION
DOMESTIC. The Company's domestic (United States and Canada) marketing
network consists of a primary distribution relationship with multifaceted
production, general supply companies and specialty valve distributors.
Presently, the Company's distribution activities are in the initial stages of
growth. Since January 1995, the Company has established distribution agreements
with four (4) separate supply companies in North America. Distributed product
provided by AES from January 1995 through January 31, 1998 exceeds $4,000,000
with a distribution backlog as of July 1, 1998 in excess of approximately
$1,500,000.
INTERNATIONAL. The Company markets its valve products internationally
through a network of independent manufacturer's representative firms or agents
located in every major oil and gas producing and/or consuming country in the
world. The Company maintains relationships with international customers by
regularly sending the Company's international marketing personnel to foreign
countries to discuss local market conditions, to conduct technical presentations
to potential buyers and to participate in point of sale commercial negotiations
during major bid activities. Both domestic and international engineered product
sales involve the Company's technical sales personnel and valve engineering
consultants. The Company's quotation specialists act as liaisons between
customers and the Company's design and engineering group by responding to
customer requests for proposals regarding the cost of a certain quantity of
valves that meet specific design and capability criteria.
The Company's international markets are divided among the following areas:
1. Western Hemisphere: Mexico, Venezuela, Argentina, Colombia, Peru,
Ecuador, Brazil
2. Europe: North Sea, Continental Europe, United Kingdom,
Russia
3. Africa: Nigeria, Algeria, Offshore West Africa, South
Africa
4. Middle East: Turkey, Syria, Saudi Arabia, Kuwait, U.A.E., Egypt
5. Sub-Continent: India, Pakistan, Bangladesh
6. Pacific Rim: Singapore, Malaysia, Indonesia, Japan, Korea,
Thailand
7. China: Mainland China, Hong Kong, Taiwan
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The market and demand for the Company's valves have grown rapidly
recently, primarily as a result of the resurgence of the industries to which the
Company markets. The international energy, chemical, and petrochemical
industries, as well as domestic refining and pipeline markets have experienced
rapid growth. In response to such growth, the Company has opened regional or
country offices staffed by marketing personnel indigenous to the local market
and technically well versed in valve product applications. The Company employs
support personnel in Beijing, China, Seoul Korea, and Calgary, Canada.
The prospects for the Company depend to a large extent upon the economic
condition of the industries to which the Company markets. Should these
industries experience an economic downturn, there may be a significant reduction
in the demand for the Company's products. Many of the Company's competitors are
significantly larger than the Company and have substantially greater financial
and other resources at their disposal. No assurance, therefore, can be given as
to the Company's ability to compete effectively in the event the industries it
serves experience an economic downturn.
In addition to direct marketing by independent and Company marketing
representatives, the Company markets its products and services through
catalogues and brochures. The Company also advertises and attends major trade
shows and conventions worldwide.
COMPETITION AND INDUSTRY
The valve manufacturing industry is highly competitive. Although reliable
comparative figures are not available, the Company believes that its principal
competitors have more extensive and diversified operations and also have
financial, operating and other resources substantially in excess of those
available to the Company. However, personal relationships and interaction with
clients worldwide at their places of business has proven to be a very effective
way of combating competition, developing business and cutting costs. Many years
of experience with international manufacturers and suppliers have allowed the
Company to purchase valve castings and semi-finished components used in its
products at cost competitive prices.
The Company has also been able to successfully compete because minimal
overhead and fixed manufacturing costs have allowed it to bid and complete
projects at lower prices than its competitors. Many other large traditionally
structured valve manufacturers have a substantial capital investment in domestic
plant and equipment along with continuing monthly maintenance and production
expenses. In contrast, the Company has structured a flexible custom
manufacturing, assembly, testing, and quality verification plant in Houston,
Texas that is staffed by a core group of experienced, quality-oriented valve
experts. The Company's specialized facility is supported and complemented by
both domestic and international quality conscious valve manufacturing
subcontractors that are selectively utilized on a when needed basis - only as
project quality and budget requirements dictate. By outsourcing its
manufacturing requirements, not only has the Company been able to minimize fixed
costs, but it has also established a large network of subcontractors
strategically located throughout the world that can provide annual valve
manufacturing capacity exceeding $100 million.
The Company competes against numerous valve manufacturers. Several of the
Company's competitors are more established in the industry and have
substantially greater manufacturing, marketing and financial resources than the
Company. However, the Company plans to remain competitive by continuing to
maintain strict quality standards, respond flexibly and responsibly to
customers' needs, and deliver high quality products on a reliable basis and at
competitive prices.
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Some of the Company's competitors include large, well-established US-based
valve manufacturers with revenues in excess of $200 million, including Cooper
Industries, Crane Valve Company and Zidell Corporation, among others. These
large domestic-based producers, which are established domestically and
internationally, are able to protect their market territories by target pricing,
approval protection, and local relations. Further, their large amount of capital
and reserves allow them to survive difficult economic downturns. Another group
of competitors includes divisional or stand-alone US valve manufacturers with
revenues between $20 million and $100 million, including TK Valve and Tom
Wheatley Valve Corporation, both of which are divisions of Dresser Industries,
Inc.
The Company also competes with several international competitors located
in various parts of Europe, North and South America and Asia. One group of
international valve manufacturers with which the Company competes, including
Kitz, Grove-Italia and PBV, are recognized, well established, international
valve manufacturers with revenues between $10 million and $1 billion. The
Company also competes with various low cost producers located in Eastern Europe,
India and China.
BACKLOG
The Company's total backlog of valve manufacturing contracts as of July 1,
1998 was approximately $12,800,000. Approximately 90% of the Company's present
backlog of contracts is at least partially secured for payment by irrevocable
letters of credit, milestones, progress payments, or wire transfer of funds at
time of shipment; however, the majority of the Company's contracts are
terminable by the customer without penalty. Certain of the Company's contracts
include a "cancellation for convenience" section, which provides for AES'
recovery of costs incurred to date and related profits. However, there can be no
assurance that the total amount of backlog will be ultimately realized.
INDUSTRY OUTLOOK
OIL AND GAS PRODUCTION, TRANSMISSION AND REFINING. Both domestic and
international production, transmission and refining markets demand high quality,
reliable and long-lasting products for their facilities. The domestic valve
market has historically been dominated by brand name products; however, given
the economics of domestic deregulation coupled with international end-user
acceptance of low-bid, technically capable valve products, the international
marketplace is expected to provide quality conscious, low-priced valve
manufacturers like the Company with many opportunities.
PETROCHEMICAL, CHEMICAL AND PROCESSING. Over the last few years, the
Company has experienced an increasing demand from the international
petrochemical and refinery industries for the Company's products. The Company's
current positive outlook is directly impacted by the new construction projects
regularly announced by the worldwide chemical and petrochemical industries.
POWER GENERATION AND OTHER. The power generation, textile, pulp and paper,
food, and mineral processing industries have historically comprised a modest
amount of the Company's revenues and business development efforts. However,
because the future of these industries is believed by management to offer the
Company opportunities for growth, the Company intends to devote a greater amount
of its marketing and business development efforts to these industries.
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TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns 100% of the Full Port Cartridge Loaded Forged Check Valve
design which has been patented with the United States Patent and Trademark
Office (US Patent No. 5,522,423). The Company is also in the process of
developing several other patents, including a Prescription Compact Thru-Conduit
Terminal Gate Valve and a Three-Port Terminal Switch Valve. The Company has also
registered the names AEV, AES, and AES Accuseal 500 with the United States
Patent and Trademark Office.
RESEARCH AND DEVELOPMENT
The Company currently conducts regular research and development activities
involving the engineering and design of valve products. During the fiscal years
ended February 28, 1996, February 28, 1997, and February 28, 1998, approximately
$165,000, $400,500, and $226,000, respectively, was expended in connection with
such activities. Management anticipates that research and development costs as a
percentage of sales will not increase materially from current levels.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to a variety of federal, state and
local laws and regulations, including laws and regulations relating to the
protection of the environment. The Company is required to expend financial and
managerial resources to comply with such laws and related permit requirements in
its operations and anticipates that it will continue to do so in the future.
Although such expenditures historically have not been material to the Company,
the fact that such laws or regulations are changed frequently makes it
impossible for the Company to predict the cost or impact of such laws and
regulations on its future operations. Modification of existing laws or
regulations or the adoption of new laws or regulations affecting the Company's
operations could adversely affect the Company. The Company believes that it
currently is in material compliance with all such applicable laws and
regulations.
EMPLOYEES
At July 1, 1998, the Company employed 60 persons. None of the Company's
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
AES was founded and incorporated in 1987. The Company began active
operations in 1989 as a result of its acquisition of certain operating assets
previously owned by two other valve manufacturing & remanufacturing businesses,
CGM Valve and American Energy Valve, Inc. ("AEV"). In 1992, AES acquired all
remaining assets of AEV.
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Since 1989 AES has specialized in designing, manufacturing & providing
high quality standard & custom engineered flow control valves including gate,
globe, check, ball & plug valves for use by a broad range of industrial,
commercial and utility clients.
In January, 1996 AES was merged with & into a California shell
corporation, Seahawk. In February, 1996, Seahawk was merged into a new Texas
corporation under the name American Energy Services, Inc. primarily to maintain
the historical domicile business name of AES in Texas.
RESULTS OF OPERATIONS
Fiscal year ending February 28, 1998 compared with Fiscal year ending
February 28, 1997.
Net sales for the Company's fiscal year ended February 28, 1998 ("fiscal
1998") increased $1,271,000, or 12%, over the Company's fiscal year ended
February 28, 1997 ("fiscal 1997"), to $11,989,000 in fiscal 1998 from
$10,718,000 in fiscal 1997. The majority of the increase was the result of
aggressive sales efforts initiated during mid 1996 to regain market presence in
AES project business.
Cost of sales for fiscal 1998 increased $1,262,000, or 15%, over fiscal
1997 from $8,340,000 in fiscal 1997 to $9,601,000 in fiscal 1998.
Gross profit for fiscal 1998 was $2,387,000 and was essentially the same
for fiscal 1997 at $2,378,000. Gross profit as a percentage of sales decreased
to 19.9% in fiscal 1998 from 22.2% in fiscal 1997. This can be attributed to the
different, lower margin product mix sold in fiscal 1998 compared to fiscal 1997.
The lower margins on products sold in fiscal 1998 were less than the previous
year primarily due to higher material costs on those products versus material
costs of the product sales mix in fiscal 1997.
Operating expenses decreased approximately $1,959,000 or 53%, to
$1,727,000 for fiscal 1998 from $3,686,000 for 1997. This significant decrease
in operating expenses was primarily attributable to the following factors: (i)
fiscal 1997's operating expenses included $900,000 worth of bad debt while
fiscal 1998 had only $20,000 and (ii) AES management engaged in certain cost
control measures which further reduced 1998 operating expenses. With regard to
the bad debt write-offs in fiscal year 1997 mentioned above, no provision for
bad debts was accrued, as is indicated on the "Statement of Cash Flows" on page
F-6. However, based on recommendations of AES' independent auditors, in their
annual audit of the Company's financial statements, a write-off of $900,000 was
charged to bad debt expense. "Certain cost control measures" in fiscal 1998
resulted in a significant (38%) reduction in operating expenses when compared to
the previous fiscal year. The measures implemented by management that generated
a significant portion of the operating expense savings included a reduction in
redundant positions within the Company, coupled with the utilization of
project-specific personnel on a "job only" basis.
Operating expenses as a percentage of sales decreased from 34% in fiscal
1997 to 14% in fiscal 1998.
Under other expenses, the cost of financing was almost unchanged as AES
continued to utilize its project specific financing and operating credit lines
to support daily operation and organization of AES project business. Interest
charges for 1998 were $500,000 down $5,000 from fiscal 1997 at $505,000. Total
other expenses of $483,000 for fiscal 1998 were lower, than total other expenses
of $512,000 for fiscal 1997.
On August 28, 1997 the Company effected a 1-for-10 reverse stock split and
outstanding shares decreased to 6,199,000.
Net income before taxes improved $1,998,000 from a fiscal 1997 pretax loss
of $1,820,000 to fiscal 1998 pretax profit of $178,000. The Company received a
future income tax benefit of approximately $596,000 as a result of losses from
operations during fiscal 1997.
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Net income after income tax benefits or expense improved from a fiscal
1997 loss of $1,225,000 to fiscal 1998 profit of $109,000. As a result, the
Company showed basic and diluted income per share of $.02 for fiscal 1998.
Three months ended May 31, 1998 compared with the three months ended May
31, 1997.
Net sales for the three months ended May 31, 1998 decreased $632,000, or
21% from the three months ended May 31, 1997 to $2,405,000 in 1998 from
$3,037,000 in 1997. This decrease was primarily due to working capital
constraints. Reduced working capital hampered the Company's ability to procure
parts for manufacturing or sub-assemblies for testing/shipment, thus reducing
revenues both as a percentage-of-completion or booked sale.
Cost of sales for the three months ended May 31, 1998 decreased $716,000,
or 29%, from the three months ended May 31, 1997 to $1,760,000 in 1998 from
$2,476,000 in 1997. This decrease was primarily caused by improved manufacturing
efficiency and lower purchase price for raw materials.
Gross profit for the three months ended May 31, 1998 increased $84,000, or
2%, from the three months ended May 31, 1997 to $645,000 in 1998 from $561,000
in 1997. Gross profit as a percent of sales improved from 18% in 1997 to 27% in
1998.
Operating expenses for the three months ended May 31, 1998 decreased
$49,000, or 11%, from the three months ended May 31, 1997 to $407,000 in 1998
from $456,000 in 1997. This decrease was the result of improved operating
efficiency.
Under other expenses, the cost of financing decreased by $36,000 to
$100,000 in 1998 from $136,000 in 1997. This was from reduced debt and
restructuring of loans for lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at February 28, 1998 was a deficit of $1,149,000, compared
to a deficit of $1,898,000 at February 28, 1997. Cash provided by operating
activities was $548,000 for fiscal 1998, compared to $1,541,000 used by
operations for fiscal 1997. The improvement in cash from operations resulted
primarily from the improvement of operating results from a net loss of
$1,225,000 in fiscal 1997 to a net income of $109,000 for fiscal 1998. Working
capital at May 31, 1998 was a deficit of $982,000, as compared to a deficit of
$1,966,000 at May 31, 1997. Cash provided by operating activities was $209,000
for the three months ended May 31, 1998, and $108,000 for the three months ended
May 31, 1997. Capital expenditures totaled $391,000 for fiscal 1998. In the
fiscal 1997, capital expenditures were $460,000.
Although Company sales generally include a high percentage of export
sales, the exposure to currency rate fluctuations is considered minimal. The
U.S. dollar is the functional currency of the Company and all AES purchase
orders are placed with and paid to the Company in that same currency. Thus, all
sales and receivables are denominated in U.S. dollars.
The economic downturn in the Pacific Rim has had a minimal impact, if any
at all, on the Company's reported results of operations. Management believes,
however, that the cumulative effect of the region's economic downturn as it
influences the size and timing of expenditures on industrial construction
projects could have an adverse effect on future AES revenues.
The Company anticipates that cash flows will not be adequate to overcome
the deficit in working capital and provide for the growth anticipated from the
current economic conditions and the aggressive marketing plan management would
like to pursue. The shortage of working capital over the past year has caused
inefficiencies and lost opportunities. The Company has been successful in
negotiating for advance payments from many customers to satisfy some working
capital needs. Additional working capital has been provided by pledging or
borrowing against letters of credit established by customers. The working
capital deficit will continue to hinder operations and profitability during at
least the next nine to twelve months. The Company currently has orders in
backlog that it anticipates will be shipped during the next six months and the
12
<PAGE> 13
Company believes that revenues from these orders will ease working capital
needs. However, there can be no assurance that these orders will ultimately be
completed or that the profit margins earned by the Company with respect to these
orders will be sufficient to adequately address working capital needs. The
Company intends to seek additional capital as necessary for these purposes
through one or more funding sources that may include borrowings guaranteed by
the EXIM Bank for export sales, private trade finance companies, or offerings of
debt and/or securities of the Company. There can be no assurance that such
capital will be available to the Company at the time it is required or on terms
acceptable to the Company.
The Company estimates its capital expenditure needs for the fiscal year
ending February 28, 1999 will be approximately $600,000 for new production
equipment, computers and software. In the three months ended May 31, 1998,
capital expenditures were $12,000.
At February 28, 1998, the Company had two notes from its principal bank
used to finance export sales, which are guaranteed by EXIM Bank: one for
$2,000,000 and one for $644,000. The $2,000,000 loan is a revolving loan, due on
demand, with interest at prime, plus 0.5%. The $644,000 loan has been reduced by
a $252,000 payment made in May 1998. The balance is to be paid out over two
years, in monthly installments of $18,658, with interest at 8.5%; provided
however, the bank can demand payment at any time on this loan. The Company also
has a loan guaranteed by the Small Business Administration for $1,200,000,
payable over ten years of installments of $16,192, including interest at prime
plus 2%. Another loan, collateralized by the Company's main manufacturing
facility, is payable in monthly payments of $3,410, with interest at 10.5%.
Other loans are for short term transactional financing and equipment purchases,
with varying maturities and interest rates. For more information on loans, see
Notes 3 and 4 in the February 28, 1998 financial statements.
ITEM 3. DESCRIPTION OF PROPERTY
PRINCIPAL PLANTS AND OTHER PROPERTY
The Company maintains two operating locations in Houston, Texas. The
Company's main warehouse and Directors Meeting Room are located at 7311 Old
Galveston Road, Suite 130, Houston, Texas 77034. ("Old Galveston Road") is also
the site of certain quality assurance and distribution activities. Old Galveston
Road is leased from an unaffiliated third party and is approximately 25,000
square feet. Monthly rent is $2,500.00. The facility is leased through February
28, 1999. The other operating location ("Lawndale") has approximately 40,000
square feet of space and functions as the Company's main manufacturing plant.
The Company believes that its property and equipment are adequate for its
present activities.
REAL ESTATE AND OPERATING DATA
The book value, of the Lawndale facility, amounts to less than ten percent
(10%) of the total assets of the Company.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
13
<PAGE> 14
The following table sets forth certain information concerning the number
of shares of Common Stock owned beneficially as of July 1, 1998 by : (i) each
person known to the Company to own more than five percent (5%) of any class of
the Company's voting securities; (ii) each director of the Company; and (iii)
all directors and officers as a group.
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
---------- -------------------- ------------------- -------------
Common Stock Larry S. Elliott 1 1,708,679.2 27.56%
5319 Mandell
Houston, TX 77005
Common Stock Pat S. Elliott 2 1,767,457.8 28.51%
2608 Green Tee
Pearland, TX 77581
Common Stock Mark P. Elliott 883,728.9 14.26%
3504 E. Circle Drive
Pearland, TX 77581
Common Stock Sidney J. McCarra 1,237,425.5 19.96%
1903 Orchard Country
Houston, TX 77062
Common Stock Cary P. McCarra 294,576.3 4.75%
3663 Nasa Road 1, #301
Seabrook, TX 77586
Common Stock All directors and 5,891,867.7 95.05%
officers as a group
- ------------------------------------------------------------------------------
Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers.
1. Includes 1,708,679.2 shares owned by the Larry S. Elliott Trust for the
benefit of Ross S. Elliott and Laura Elise Elliott, the children of Larry S.
Elliott. Larry S. Elliott, as trustee of this trust, has sole voting and
dispositive power over the trust assets.
2. Includes 1,767,457.8 shares owned by the Pat S. Elliott Trust for the
benefit of Mark P. Elliott, Shannon Elliott and Michelle Elliott, the children
of Pat S. Elliott. Pat S. Elliott, as trustee of this trust, has sole voting and
dispositive power over the trust assets.
The Company is not aware of any arrangement which might result in a change
of control in the future.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
14
<PAGE> 15
The following table sets forth certain information about the directors and
executive officers of the Company:
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
--------- ----- ------------
Patrick S. Elliott 54 Director/President
Chairman of the Board /Vice
Larry S. Elliott 51 President
Mark P. Elliott 34 Director/Vice President
Cary P. McCarra 36 Director/Vice President
Sidney J. McCarra 47 Director/Vice President
PATRICK S. ELLIOTT Patrick Elliott has served as Vice President of the
Company since March 1989 and as Chairman of the Board and a director since
October 1992. In October 1997, Mr. Elliott was appointed President of AES. For
the past five years, he has devoted his time to the management and operation of
the Company. He has assisted in manufacturing and design oversight and sales.
Recently, with the addition of new key manufacturing personnel, he moved to the
accounting/purchasing department to oversee financial management as it applies
to budgeting, purchasing, and all aspects of cash management.
LARRY S. ELLIOTT Larry Elliott has served as President of the Company
since March 1989 and as a director since October 1992. In October 1997, Mr.
Elliott was appointed Chairman of the Board of Directors of AES. He is mainly
responsible for directing and managing the growth and profitability of the
Company. He has over 27 years experience in the valve industry, including
extensive business travel and relationships in 45 countries. He is familiar with
every major area of the Company, including sales, engineering, manufacturing,
accounting, and legal.
MARK P. ELLIOTT Mark Elliott has served as a director of the Company since
October 1992 and as Vice President since March 1989. During that time, he has
been responsible for marketing and selling the Company's valves and services to
the oil and petrochemical industry. He is currently Vice President of Sales and
leads the efforts of the Company's Sales Department.
CARY P. MCCARRA Cary McCarra has served as a director of the Company since
October 1992 and as Vice President since March 1989. He has nearly 20 years
experience in the valve industry, including welding, machining, assembly and
testing. He is currently responsible for on-site inspection tours of all current
and potential Company vendors, including auditing Quality Assurance programs and
witnessing procedure implementation.
SIDNEY J. MCCARRA Sidney McCarra has served as a director of the Company
since October 1992 and as Vice President since March 1989. He has been active in
the valve manufacturing and remanufacturing industry since 1974. He has served
as Vice President of Procurement and Vice President of Operations. He has been
15
<PAGE> 16
responsible for purchasing valve products and equipment, including parts,
machinery and valves, and for managing day to day operations, including
accounting, collections, shipping, receiving, and sales. He is currently
responsible for locating and approving new quality vendors, negotiating vendor
contracts, and performing management duties for all foreign operations as it
relates to product distribution and project business.
FAMILY RELATIONSHIPS. Patrick and Larry Elliott are brothers. Mark P.
Elliott is Patrick Elliott's son and Larry Elliott's nephew. Cary and Sidney
McCarra are brothers.
ITEM 6. EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
regarding compensation paid during the fiscal year ending February 28, 1998,
1997 and 1996 to the executives of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------------- All
Name Other Annual Other
Principal Position Year Salary ($) Bonus ($) Compensation Compensation
- ----------------------- ----- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry S. Elliott 1998 143,000 - - -
Vice President 1997 126,000 - - -
1996 110,000 - - -
Patrick S. Elliott 1998 107,000 - - -
President 1997 100,000 - - -
1996 110,000 - - -
Mark P. Elliott 1998 100,500 - - -
Vice President 1997 100,000 - - -
1996 90,000 - - -
Cary P. McCarra 1998 98,500 - - -
Vice President 1997 100,000 - - -
1996 90,000 - - -
Sidney J. McCarra 1998 98,500 - - -
Vice President 1997 100,000 - - -
1996 110,000 - - -
</TABLE>
Presently there are no options, benefit plans nor employment agreements
between the Company and the officers.
COMPENSATION OF DIRECTORS. No director of the Company received any form of
compensation from the Company for any services provided as a director, for
committee participation, or for special assignments.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
16
<PAGE> 17
The Company intends that any transactions between the Company and its officers,
directors, principal stockholders, affiliates or advisors will be on terms no
less favorable to the Company than those reasonably obtainable from third
parties.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorize the Company to issue
100,000,000 shares of Common Stock, par value $.001 per share ("Common Stock").
As of July 1, 1998, there are 6,198,966 issued and outstanding shares of Common
Stock held of record by approximately 1,500 shareholders.
Holders of Common Stock are entitled to one vote per share on each matter
submitted to vote at any meeting of shareholders. Common Stock does not carry
cumulative voting rights and, therefore, holders of a majority of the
outstanding shares of Common Stock will be able to elect the entire Board of
Directors, if they choose to do so, in which event the holders of the remaining
shares will be unable to elect directors. There are currently five (5) members
on the Board of Directors. The By-Laws of the Company provide that the number of
directors shall be five. The Common Stock has no preemptive or other
subscription rights, has no conversion rights and is not subject to redemption.
WARRANTS
In December 1995, the Company granted the William H. Murphy & Co.,
investment bankers for the Company, a five (5) year option to purchase up to
310,098 shares of the Company's Common Stock. The options have an aggregate
exercise price of $51,000.00, or approximately $.17 per share, based on the
total shares as related to the net book value of AES at the time of grant and
the merger agreement dated December 20, 1995. No expense relating to the grant
of these warrants has been recorded.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for shares of the Company's
Common Stock. As of July 1, 1998, there were approximately 1,500 holders of the
Company's Common Stock.
The Company has not distributed any dividends during fiscal years 1997 and
1998.
17
<PAGE> 18
Under conditions of the Loan Agreements between AES and its Bank, the
Company is prohibited from paying dividends on its common stock, other than
dividends payable in shares of the Company stock.
ITEM 2. LEGAL PROCEEDINGS
The Company is the plaintiff or has been named as a defendant in various
lawsuits arising in the ordinary course of business. Management believes that
the ultimate resolution of such litigation will not have a material adverse
impact on the Company's results of operations or financial position.
In December 1996, the Company filed suit against Union Pacific Resources
Company ("UPRC") and DTI DiversTech, Inc. in the 190th Judicial District Court
of Harris County, Texas. The lawsuit seeks actual damages for injuries to AES
for certain breach of contract claims against UPRC and willful slander claims
against UPRC and its agents arising from events related to a multi-million
dollar valve contract entered into by and between the Company and UPRC. A
dispute arose between the parties regarding certain commercial and quality
issues in connection with valves delivered by the Company to UPRC pursuant to
the valve contract. The parties resolved this dispute pursuant to an agreement
executed in August 1994, pursuant to which UPRC acknowledged the Company's
ability to manufacture valves for sour gas and cryogenic service. The lawsuit
alleges that UPRC and its agents subsequently defamed the Company. In addition
to actual damages, the Company is seeking special damages, exemplary damages and
attorneys fees and other costs of suit. No counterclaims have been filed in this
action.
In January 1998 K&M International Corporation ("K&M") filed suit against
the Company in the 55th Judicial District Court of Harris County, Texas, in
connection with the Company's termination of K&M as the Company's representative
for Kuwait and outstanding orders related thereto. In connection with this
matter, K&M is claiming actual damages totaling $395,000 for reimbursement of
certain payments made to the Company, lost business revenues and other damages,
plus attorney's fees and court costs. In June 1998, the Company initiated a
counterclaim against K&M asserting claims of breach of contract and fraud in
excess of $460,000, plus all costs and court fees.
AES intends to vigorously pursue both of UPRC claims and the counter-claims in
the K&M dispute and defend against the claims in the K & M suit. However, the
ultimate outcome of these lawsuits cannot be predicted with certainty.
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
None.
18
<PAGE> 19
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth certain information for all
securities the Company has sold during the past 3 years without registration
under the Securities Act of 1933 (the "Securities Act"):
In connection with a migratory merger effective August 22, 1996, pursuant
to which Seahawk was merged with and into the Company, 6,198,966 shares of the
Company's stock were issued to the Seahawk stockholders. Utilizing Rule 145,
promulgated pursuant to the Securities Act, the Company's claim for exemption
from registration with respect to the AES/Seahawk merger relied on the
following:
a) The merger was a reverse acquisition where AES was first merged into
Seahawk and then Seahawk was merged into NEW AES.
b) NEW AES became the sole surviving corporation and the separate
existence of Seahawk ceased.
c) The purpose of this merger was to change the domicile of Seahawk from
California to Texas, and to maintain the name and operating address of
AES.
d) Each share of Seahawk common stock, $0 par value, was cancelled and
converted by the merger into one share of AES common stock at $0 par
value. After the merger, each share of Seahawk stock issued and
outstanding immediately prior to the merger was automatically
cancelled.
There has been no other issuance of stock by AES during the last three
years.
There were no underwriters participating in this transaction.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company provide that the Company
shall indemnify its directors, officers, employees and agents, to the fullest
extent permitted by law. The laws of the State of Texas permit, and in some
cases require, corporations to indemnify officers, directors, agents and
employees who are or have been a party to or are threatened to be made a party
to litigation against judgments, fines, settlements and reasonable expenses
under certain circumstances.
The Company has also adopted provisions in its Articles of Incorporation
that limit the liability of its directors to the fullest extent permitted by the
laws of the State of Texas. Under the Company's Articles of Incorporation, and
as permitted by the laws of the State of Texas, a director is not liable to the
Company or its shareholders for damages for breach of fiduciary duty. Such
limitation of liability does not affect liability for (i) breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any transaction from which the director derived an
improper personal benefit, or (iv) the payment of any unlawful dividend.
19
<PAGE> 20
PART F/S
Please refer to the Consolidated Financial Statements and the index
thereto which appear on pages F-1 to F- 10 hereof.
PART III
ITEM 1. INDEX OF EXHIBITS
See the "Index to Exhibits" which appears after page F-22.
ITEM 2. DESCRIPTION OF EXHIBITS
2.1 Articles of Incorporation of the Company
2.2 Articles of Merger of Seahawk Overseas Exploration Corporation
with and into the Company
2.3 Bylaws of the Company
2.4 Form of Common Stock Certificate
2.5 Common Stock Purchase Warrant of Murphy & Co.
6.1 Promissory Note dated November 17, 1997 executed by the
Company in favor of Metrobank, N.A., in the original principal
amount of $1,200,000.00.
20
<PAGE> 21
6.2 Promissory Note dated May 2, 1998 executed by the Company in
favor of Metrobank, N.A., in the original principal amount of
$2,000,000.00.
6.3 Security Agreement dated May 2, 1998 executed by the Company
in favor of Metrobank, N.A., in the original principal amount
of $2,000,000.00.
6.4 Promissory Note dated February 2, 1998 executed by the Company
in favor of Metrobank, N. A., in the original principal amount
of $644,465.00.
6.5 Security Agreement dated February 2, 1998 executed by the
Company in favor of Metrobank, N.A., in the original principal
amount of $644,465.00.
10.1 Consent of Simonton, Kutac & Barnidge
27.1 Financial Data Schedule
Pursuant to Section 12 of the Securities Exchange Act of 1934, the
registrant certifies that it meets all of the requirements for filing on
Form 10-SB and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN ENERGY SERVICES, INC.,
a Texas corporation
By: /s/ LARRY S. ELLIOTT
Larry S. Elliott
Vice President and Chairman of the Board
21
<PAGE> 22
AMERICAN ENERGY SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors................................ F-1
Balance Sheets as of February 28, 1997 and February 28, 1998... F-2
Statements of Operations for years ended February 28, 1997
and February 28, 1998.......................................... F-4
Statements of Changes in Stockholder's Equity for years ended
February 28, 1997 and February 28, 1998........................ F-5
Statements of Cash Flows for years ended February 28, 1997 and
February 28, 1998.............................................. F-6
Notes to the Financial Statements.............................. F-8
Balance Sheet as of May 31, 1998 (Unaudited)................... F-18
Statement of Operations for the three-month periods ended
May 31, 1997 and 1998 (Unaudited).............................. F-20
Statements of Cash Flows for the three-month periods ended
May 31, 1997 and 1998 (Unaudited).............................. F-21
Notes to Unaudited Financial Statements........................ F-22
-22-
<PAGE> 23
[SIMONTON, KUTAC & BARNIDGE, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
May 21, 1998
The Board of Directors
American Energy Services, Inc.
We have audited the accompanying balance sheets of American Energy Services,
Inc. as of February 28, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for the years then
ended. 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 generally accepted auditing
standards. These standards require that we plan and perform the audits 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 American Energy Services, Inc.
as of February 28, 1998 and 1997, and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
SIMONTON, KUTAC & BARNIDGE, L.L.P.
Houston, Texas
F-1
<PAGE> 24
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS
ASSETS
FEBRUARY 28,
--------------------------
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents .................. $ 13,786 $ 471,796
Certificates of deposit .................... 17,380 5,216
Accounts receivable - trade net of allowance
for doubtful accounts of $20,000 and $0 . 516,921 1,408,587
Accounts receivable - other ................ 60,686 61,919
Income tax receivable ...................... 147,543 157,543
Prepaids and other ......................... 100,081 31,057
Costs in excess of billings on
uncompleted contracts ................... 1,169,885 64,936
Inventories ................................ 1,495,016 2,419,579
----------- -----------
Total Current Assets ................... 3,521,298 4,620,633
Property, Plant and Equipment:
Machinery and equipment .................. 1,307,682 1,224,948
Furniture and fixtures ................... 219,840 191,085
Vehicles ................................. 81,553 81,553
Building and improvements ................ 219,741 204,511
Land ..................................... 76,894 86,570
----------- -----------
1,905,710 1,788,667
Less accumulated depreciation ............... (614,725) (477,035)
----------- -----------
1,290,985 1,311,632
Trademarks, patents and drawings ............ 877,967 536,184
Less accumulated amortization ............... (163,937) (92,220)
----------- -----------
714,030 443,964
Deferred tax asset ......................... 500,224 568,883
Other Assets ............................... 154,399 60,768
----------- -----------
Total Assets ........................... $ 6,180,936 $ 7,005,880
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 25
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current Liabilities:
Notes payable ............................. $ 2,668,000 $ 3,922,212
Current portion of long-term obligations .. 144,122 258,900
Accounts payable and accrued expenses ..... 1,658,970 2,078,076
Billings in excess of costs on uncompleted
contracts ............................... 199,029 179,041
Notes payable to shareholders ............. -- 80,645
----------- -----------
Total Current Liabilities ............. 4,670,121 6,518,874
----------- -----------
Long-term obligation, net of current portion 1,341,328 491,115
Commitments and Contingencies
Stockholders' Equity (Deficit):
Capital stock - no par value, 10,000,000
shares authorized; 6,198,966 shares
issued and outstanding ................. 218,583 154,105
Accumulated other comprehensive loss....... -- --
Accumulated deficit ....................... (49,096) (158,214)
----------- -----------
Total Stockholders' Equity (Deficit) .. 169,487 (4,109)
----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) .................... $ 6,180,936 $ 7,005,880
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 26
AMERICAN ENERGY SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
FEBRUARY 28,
-----------------------------
1998 1997
------------ ------------
Net sales ............................... $ 11,988,693 $ 10,717,563
Cost of sales ........................... 9,601,222 8,339,696
------------ ------------
Gross Profit ........................ 2,387,471 2,377,867
Operating expenses ...................... 1,726,878 3,686,306
------------ ------------
Income (loss) from operations .......... 660,593 (1,308,439)
Other expenses (income):
Interest, net .......................... 499,955 504,982
Other, net ............................. (17,139) 6,829
------------ ------------
482,816 511,811
------------ ------------
Net income (loss) before taxes ...... 177,777 (1,820,250)
Income tax (expense) benefit ............ (68,659) 595,625
------------ ------------
Net income (loss) ................... $ 109,118 $ (1,224,625)
============ ============
Basic and diluted income (loss) per share $ 0.02 $ (0.20)
============ ============
AMERICAN ENERGY SERVICES, INC.
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Audited Unaudited
------------------------------- --------------------------------
Year Ended Year Ended Quarter Ended Quarter Ended
February 28, February 28, May 31, May 31,
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 109,118 $(1,224,625) $ 92,839 $ (20,355)
Other comprehensive income (loss) -- -- -- --
----------- ----------- ----------- ------------
Comprehensive income (loss) $ 109,118 $(1,224,625) $ 92,839 $ (20,355)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 27
AMERICAN ENERGY SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 28, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
CAPITAL STOCK EARNINGS/ STOCKHOLDERS'
-------------------- (ACCUM. EQUITY/
SHARES AMOUNT DEFICIT) (DEFICIT)
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at February 29, 1996 ......... 6,198,966 $154,105 $ 1,066,411 $ 1,220,516
Net loss ............................. -- -- (1,224,625) (1,224,625)
--------- -------- ----------- -----------
Balance at February 28, 1997 ......... 6,198,966 154,105 (158,214) (4,109)
Preferential distribution of
net Seahawk assets ................. -- 64,478 -- 64,478
Net income ........................... -- -- 109,118 109,118
--------- -------- ----------- -----------
Balance at February 28, 1998 ......... 6,198,966 $218,583 $ (49,096) $ 169,487
========= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 28
AMERICAN ENERGY SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FEBRUARY 28,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ............................... $ 109,118 $(1,224,625)
Adjustments to reconcile net income (loss) to
cash provided (used )by operating activities:
Depreciation and amortization ................ 209,407 145,196
Provision for bad debts ...................... 20,000 --
Loss on disposal of fixed assets ............. -- 3,392
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable .. 872,899 (742,199)
Decrease in income tax receivable ........... 10,000 75,990
(Increase) decrease in costs in excess of
billings on uncompleted contracts .......... (1,104,949) 392,677
Decrease in inventories ..................... 924,563 122,252
(Increase) decrease in prepaids and other ... (69,024) 78,982
Decrease (increase) in deferred tax asset ... 68,659 (568,883)
Increase in other assets .................... (93,631) (37,107)
(Decrease) increase in accounts payable ..... (419,106) 60,649
Increase in billings in excess of costs
on uncompleted contracts ................... 19,988 179,041
Decrease deferred income tax liability ...... -- (26,742)
----------- -----------
Net Cash Provided (Used) by Operating
Activities............................... 547,924 (1,541,377)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment ..... (49,527) (176,014)
Purchase of trademarks, patents and drawings .. (341,783) (284,452)
Purchase of certificates of deposit ........... (12,164) --
----------- -----------
Net Cash Used in Investing Activities ...... (403,474) (460,466)
Cash Flows from Financing Activities:
Proceeds from long-term obligations ........... 1,199,460 13,749
Payments of long-term obligations ............. (541,217) (192,468)
Proceeds from note payable .................... 1,554,589 5,451,094
Payments of note payable ...................... (2,808,801) (2,908,777)
Cash distribution to pre-merger shareholders
of Seahawk .................................. (6,491) --
----------- -----------
Net Cash (Used) Provided by Financing
Activities................................. (602,460) 2,363,598
----------- -----------
Net (decrease) increase in cash and cash
equivalents.................................... (458,010) 361,755
Cash and cash equivalents at beginning of year .. 471,796 110,041
----------- -----------
Cash and cash equivalents at end of year ........ $ 13,786 $ 471,796
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 29
AMERICAN ENERGY SERVICES. INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED
FEBRUARY 28,
---------------------
1998 1997
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the years for
Interest ....................................... $505,929 $536,187
======== ========
Income taxes ................................... $ -- $ --
======== ========
Noncash transactions
Equipment acquired under long-term obligations . $ 77,192 $490,404
======== ========
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 30
AMERICAN ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND 1997
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Energy Services, Inc. ("Company" or "AES") is a manufacturer of
custom-engineered flow control valves. The Company has sales to customers
located throughout the world.
In January 1996, AES completed a merger with Seahawk Overseas Exploration
Company (Seahawk), a California corporation. Seahawk acquired 100% of the
outstanding common shares of AES through the issuance of 58,918,677 shares of
its common stock. The acquisition was accounted for as a purchase with AES as
the acquirer (reverse acquisition). The Company absorbed the net liabilities of
Seahawk and any additional merger costs as a period loss in the fiscal year
ended February 29, 1996. A summary of Seahawk assets (liabilities) and related
merger costs are detailed below:
<TABLE>
<S> <C>
Cash $ 6,581
Other assets 18,676
Notes payable to shareholders (76,756)
-----------
Net Seahawk assets (liabilities) $ (51,499)
Related merger costs (99,309)
-----------
AES expense fiscal year ended 2/28/99 $ 150,808
</TABLE>
AES's previous shareholders received 95% of the outstanding stock of the
combined enterprise. Under the terms of the merger agreement, the Company merged
with AES in to a newly formed Texas corporation primarily for the purpose of
changing both its domicile from California to Texas and its name to "American
Energy Services, Inc." In addition, the merger was intended to provide the
Company with a legal entity which could enter the public company domain and
ultimately, provide potential capital through the sale of registered securities.
The effect of this merger has been that the Company was able to acquire
approximately 1,500 shareholders formerly owning shares of Seahawk stock. A
capitalization schedule for the fiscal years ended February 29, 1996 and 1995
per financial statements as audited by Grant Thornton LLP, Houston, TX follows:
AMERICAN ENERGY SERVICES, INC.
AS MERGED INTO
SEAHAWK OVERSEAS EXPLORATION CORPORATION
CAPITALIZATION SCHEDULE
<TABLE>
<CAPTION>
Balance at Balance at
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Long-Term Debt $458,682 $465,745
======== ========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity:
Capital Stock
-------------------------
Total
Retained stockholders'
Shares Amount earnings equity
---------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at March 1, 1994 10,000 $ 2,000 $1,748,830 $1,750,830
Stock dividend 2,586 -- -- --
Stock issued to employees 4,655 302,913 -- 302,913
Net earnings -- -- 2,340 2,340
---------- --------- ---------- ----------
Balance at February 28, 1995 17,241 304,913 1,751,170 2,056,083
Balance at January 16, 1996
Seahawk Overseas Exploration Corporation 3,070,983 277,000 (328,499) (51,499)
Assumed retirement of American Energy
Services, Inc. shares (17,241) -- -- --
Issuance of Seahawk Overseas Exploration
Corporation shares and contribution of
Seahawk net assets to American Energy
Services, Inc. 58,918,677 (328,499) 328,499 --
Merger costs -- (99,309) -- (99,309)
Net loss -- -- (684,759) (684,759)
---------- --------- ---------- ----------
Balance at February 29, 1996 61,989,660 $ 154,105 $1,066,411 $1,220,516
========== ========= ========== ==========
</TABLE>
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statement follows.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid short-term
investments with a maturity of ninety days or less from the purchase date to be
cash equivalents. At February 28, 1998, all certificates of deposit have a
maturity of greater than ninety days and secure outstanding letters of credit.
INVENTORIES - Inventories consist of valve parts and finished goods. Inventories
are valued at the lower of cost or market using the average cost method, which
approximates First-in and First-out (FIFO).
REVENUE RECOGNITION - Revenues from the sale of flow control valves are recorded
when the products are shipped or when title passes. Title normally passes from
seller to buyer when goods are shipped. In some instances, the buyer will pay
for completed goods just prior to shipment. At that point, AES considers title
to have passed to the buyer.
Revenues on long-term contracts involving a system of control flow valves for a
single installation are recorded using the percentage-of-completion method
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. The portion of the total
contract price accrued is based on the ratio of costs incurred to date to total
estimated costs on each contract. Losses, if any to be incurred on contracts in
progress, are charged to income in full as soon as they become apparent.
F-8
<PAGE> 31
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives on a
straight-line basis. Estimated service lives are as follows:
ESTIMATED
SERVICE
LIVES
------------
Machinery and equipment 15 years
Furniture and fixtures 5 - 10 years
Vehicles 5 years
Building and improvements 5 - 31.5 years
TRADEMARKS, PATENTS AND DRAWINGS - Trademarks, patents and drawings are stated
at cost. Amortization is provided in amounts sufficient to relate the cost of
amortizable assets to operations over their estimated services lives on a
straight-line basis. Estimated service lives are as follows:
ESTIMATED
SERVICE
LIVES
--------
Trademarks 10 years
Patents 17 years
Drawings 10 years
INCOME TAXES - Deferred income taxes are reported for temporary differences
between items of income or expense reported in the financial statements and
those reported for income tax purposes. For income tax purposes, the Company
depreciates property, plant and equipment using accelerated methods.
USE OF ESTIMATES - In preparing the financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
the financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
balances to conform to the 1998 presentation.
F-9
<PAGE> 32
NEW ACCOUNTING STANDARDS - As of January 1, 1998, AES adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards of reporting for
comprehensive income and its components in a full set of general-purpose
financial statements. Adoption of this statement had no impact on the Company's
net income or stockholders' equity for any of the periods presented.
AES intends to adopt SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," which is effective for fiscal years beginning after
December 15, 1997. This statement requires disclosures about operating segments
an enterprise is engaged in and the different economic environments in which it
operates. Operating segments are components of the Company that are used
internally for evaluating segment performance and in the determination of
resource allocation to those segments. AES is currently operating as one segment
and is reviewed regularly in aggregate. However, when necessary to better
understand performance, or assess future net cash flows, the Company will
segregate into segments those components of the business as warranted.
EARNINGS (LOSS) PER SHARE - Basic earnings per share has been computed by
dividing net income by the weighted average number of shares outstanding during
the period. Diluted earnings per share has been computed by dividing net income
by the weighted average number of shares plus common stock equivalents
outstanding during the period, computed using the treasury stock method.
NOTE 2 - CONTRACTS IN PROGRESS
Information regarding long-term contracts in progress at February 28, 1998, are
as follows:
1998 1997
----------- -----------
Expenditures on uncompleted contracts .. $ 1,416,787 $ 2,077,228
Estimated earnings thereon ............. 565,943 723,883
----------- -----------
1,982,730 2,801,111
Less billings applicable thereto ....... 1,011,874 2,915,216
----------- -----------
$ 970,856 $ (114,105)
=========== ===========
Included in accompanying balance sheet under following captions:
1998 1997
----------- ------------
Costs in excess of billings on
uncompleted contracts .................. $ 1,169,885 $ 64,936
Billings in excess of costs on
uncompleted contracts .................. (199,029) (179,041)
----------- ------------
$ 970,856 $ (114,105)
=========== ============
F-10
<PAGE> 33
NOTE 3 - NOTES PAYABLE
Notes payable consists of the following at February 28, 1998:
Note payable to a bank with interest at prime (8.5% at February
28, 1998) due with principal, principal advances are due on
demand, but if no demand is made, then in monthly installments
of $18,658 including interest, secured by substantially all
assets of the Company ....................................... $ 644,465
Line of credit agreement with a bank with interest at prime plus
0.5% (9% at February 28, 1998) due monthly, providing for
maximum borrowings of $2,000,000, secured by substantially all
assets of the Company. Principal advances are due on demand;
line matures on May 2, 1998 and is collateralized by
substantially all assets of the Company ...................... 2,000,000
An unsecured line of credit agreement, with a bank with
interest at prime plus 1.5% (10% at February 28, 1998) due on
demand, providing for maximum borrowings of $24,000 .......... 23,535
----------
$2,668,000
==========
At February 28, 1997, the Company had five line of credit agreements with a bank
with monthly interest varying from prime plus 1% to prime plus 1.5% (9.25% to
9.75% at February 28, 1997), providing for maximum borrowings of $5,000,000 and
collateralized by substantially all assets of the Company. Principal advances
were due 180 days from the date of drawdown, or at maturity.
NOTE 4 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
FOR THE YEARS ENDED
FEBRUARY 28,
------------------
1998 1997
----------- ----
Note payable to a bank due in monthly installments of $16,192,
including interest at prime plus 2% (IO. 5% at February 28,
1998); due February 17, 2008, collateralized by machinery
equipment, furniture, fixtures and patents ................ $ 1,200,000 $--
F-11
<PAGE> 34
NOTE 4 - LONG-TERM OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FEBRUARY 28,
---------------------
1998 1997
---------- --------
<S> <C> <C>
Note payable to a bank; due in monthly installments of $3,410,
including interest at 10.5%; due October 5, 2002; collateralized
by land, building, equipment and inventory .......................... 156,093 239,513
Four notes payable to a bank; due in monthly installments of
$371, $231, $533, and $479, including interest at 7.5%, 10.5%,
8.5% and 9.75%; due May 1997, February 1998 and August 21, 1999;
collateralized by automobiles ....................................... 33,345 45,161
Obligations under capital leases; due in monthly installments
ranging from $532 to $4,899, including interest at various
rates ranging from 3.0% to 13.4%; collateralized by the related
assets .............................................................. 96,012 465,341
---------- --------
1,485,450 750,015
Less current portion ............................................ 144,122 258,900
---------- --------
$1,341,328 $491,115
========== ========
</TABLE>
Approximate future maturities of long-term obligations as of February 28, 1998
are as follows:
FOR THE YEARS ENDED
-------------------
1999 $144,122
2000 143,119
2001 151,483
2002 149,055
2003 144,334
Thereafter 753,337
----------
$1,485,450
==========
F-12
<PAGE> 35
NOTE 5 - CAPITAL LEASES
The Company is the lessee of certain equipment under capital leases expiring in
various years through 2001. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the lower of the
related lease terms or their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.
Following is a summary of equipment held under capital leases:
FOR THE YEARS ENDED
FEBRUARY 28,
--------------------------
1998 1997
--------- --------
Machinery and equipment ................ $ 56,782 $ 519,042
Furniture and fixtures ................. 73,976 50,368
--------- --------
130,758 569,410
Less accumulated depreciation ......... (20,324) (37,345)
--------- --------
$ 110,434 $ 532,065
========= ========
Future minimum lease payments under capital leases as of February 28, 1998 are
as follows:
FOR THE YEARS ENDED
-------------------
1999 ....................................... $ 36,520
2000 ....................................... 29,371
2001 ....................................... 27,091
2002 ....................................... 14,247
2003 ....................................... 9,498
---------
Total minimum lease payments .............. 116,727
Less amount representing interest .......... (20,715)
---------
Present value of net minimum lease payments. $ 96,012
=========
Interest rates on capitalized leases vary and are imputed based on the lower of
the Company's incremental borrowing rate at the inception of each lease or the
lessor's implicit rate of return.
F-13
<PAGE> 36
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease expiring in 1999. For
the years ended February 28, 1998 and 1997, such lease payments amounted to
$49,642 and $61,491.
The minimum rental commitments under operating leases are as follows:
FOR THE YEAR ENDED
------------------
1999................................................... $30,540
-------
Total minimum payments required ....................... $30,540
=======
At February 28, 1998, the Company had $314,249 of outstanding letters of credit.
The Company is engaged in various lawsuits either as plaintiff or defendant. In
the opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
statements.
NOTE 7 - INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities.
The expense (benefit) for income taxes consists of the following:
FOR THE YEARS ENDED
FEBRUARY 28,
----------------------------
1998 1997
------- ---------
Current ......................... $ -- $ --
Deferred ........................ 68,659 (595,625)
------- ---------
Total ......................... $ 68,659 $ (595,625)
======= =========
F-14
<PAGE> 37
A reconciliation of income taxes computed at the statutory Federal income tax
rate and income taxes reported in the statements of earnings follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FEBRUARY 28,
-------------------------
1998 1997
------- ---------
<S> <C> <C>
Tax at statutory rate .................. $ 60,444 $ (618,885)
Non-deductible expenses ................ 6,614 20,740
Other .................................. 1,60l 2,520
------- ---------
Total expense (benefit) ............ $68,659 $(595,625)
======= =========
</TABLE>
The long-term deferred tax asset at February 28, 1998 and 1997, results from
the following:
FEBRUARY 28,
----------------------
1998 1997
--------- ---------
Bases differences in intangibles and fixed assets $(448,551) $(304,055)
Net operating loss carryforward ................ 938,148 862,311
Miscellaneous costs capitalized for tax purposes 10,627 10,627
--------- ---------
$ 500,224 $ 568,883
========= =========
The Internal Revenue Service is examining the Company's Federal Income Tax
return for the year ended February 28, 1993. Management believes that the
ultimate resolution of the examination will not have a substantial effect upon
the Company's financial condition or results of operation.
NOTE 8 - SIGNIFICANT CUSTOMERS
The Company had sales to one customer that constituted 31% of net sales for the
year ended February 28, 1998. The following are sales constituting more than 10%
of net sales for the year ended February 28, 1997:
Customer A ..................................................... 17%
Customer B ..................................................... 15%
Customer C ..................................................... 15%
Customer D ..................................................... 12%
Foreign sales were 91% and 89% of total sales in 1998 and 1997, respectively.
F-15
<PAGE> 38
NOTE 9 - WARRANTS
The Company has issued warrants to the lead investment banker to purchase 5% of
the equity of the Company for approximately $51,000 and are exerciseable for a
period of five years after the date of the merger. The number of shares
authorized for grant under this warrant agreement amounted to 309,948 as of
February 28, 1998 and 1997. No warrants have been exercised.
NOTE 10 - REVERSE STOCK SPLIT
On August 28, 1997, the Company effected a one for ten reverse stock split. To
effect the split, the Company's authorized, no par stock decreased to 10,000,000
shares and issued and outstanding shares decreased to 6,198,966 shares.
All references in the accompanying financial statements to the number of common
shares and per share amounts for 1997 have been restated to reflect the stock
split.
NOTE 11 - EARNINGS (LOSS) PER SHARE
The following data shows the amounts used in computing earnings (loss) per share
and the effect on the weighted average number of shares of dilutive potential
common stock.
FEBRUARY 28,
-------------------------
1998 1997
---------- -----------
Income (loss) available to common stockholders
used in basic and diluted earnings per share $ 109,118 $(1,224,625)
---------- -----------
Weighted average number of common shares used
in basic earnings (loss) per share ......... 6,198,966 6,198,966
Effect of stock warrants .................... -- (16,452)
---------- -----------
Weighted number of common shares and diluted
potential common stock used in dilutive
earnings (loss) per share .................. 6,198,966 6,182,514
========== ===========
The effects of stock warrants were not included in computing diluted earnings
(loss) per share in 1998 because their effects were antidilutive.
F-16
<PAGE> 39
NOTE 12 - PREFERENTIAL DISTRIBUTION
In accordance with the merger agreement, the Company made a preferential
distribution of the net assets of Seahawk to the pre-merger shareholders of
Seahawk. The net assets distributed were as follows:
Cash .............................................. $ 6,491
Land .............................................. 9,676
Note payable to Directors of Seahawk .............. (80,645)
--------
$(64,478)
========
NOTE 13 - GEOGRAPHIC INFORMATION
The Company's revenues by geographical area for the fiscal years ended February
28, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
----------------------------------------- ------------------------------------------
<S> <C> <C> <C>
United States $ 1,078,982 United States $ 1,178,932
Colombia 5,035,251 Colombia 3,751,147
Other 5,874,460 Philippines 1,607,634
------------
Saudi Arabia 1,286,107
Total Revenues $11,988,693 Other 2,893,743
============ -----------
Total Revenues $10,717,563
==============
</TABLE>
AES recognizes the point of delivery as the basis for attributing revenues from
external customers to individual countries.
F-17
<PAGE> 40
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS
UNAUDITED
ASSETS
MAY 31
----------------------------
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents .............. $ 1,916 $ 695,543
Certificates of deposit ................ 32,380 5,216
Accounts receivable - trade net
of allowance for doubtful
accounts of $20,000 and $0
182,069 1,894,310
Accounts receivable - other ............ 63,111 174,953
Income tax receivable .................. 147,543 157,543
Prepaids and other ..................... 109,801 24,077
Costs in excess of billings on
uncompleted contracts ............... 2,135,573 1,200,673
Inventories ............................ 1,610,408 1,987,921
----------- -----------
Total Current Assets ................ 4,282,801 6,140,236
Property, Plant and Equipment:
Machinery and equipment ................ 1,307,682 1,234,647
Furniture and fixtures ................. 225,081 191,085
Vehicles ............................... 81,553 81,553
Building and improvements .............. 219,741 217,184
Land ................................... 76,894 86,570
----------- -----------
1,910,951 1,811,039
Less accumulated depreciation ................ (648,956) (511,452)
----------- -----------
1,261,995 1,299,587
Trademarks, patents and drawings ............. 884,348 542,980
Less accumulated amortization ................ (178,747) (108,534)
----------- -----------
705,601 434,446
Deferred tax asset ........................... 454,474 568,883
Other assets ................................. 154,399 60,968
----------- -----------
Total Assets ........................... $ 6,859,270 $ 8,504,120
=========== ===========
F-18
<PAGE> 41
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS (CONTINUED)
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
MAY 31
----------------------------
1998 1997
----------- -----------
Current Liabilities:
Notes payable .......................... $ 2,466,912 $ 4,137,701
Current portion of long-term
obligations ............................ 142,213 257,030
Accounts payable and accrued
expenses ............................... 1,948,694 2,259,048
Billings in excess of costs on
uncompleted contracts .................. 707,037 1,372,107
Notes payable to shareholders .......... -- 80,645
----------- -----------
Total Current Liabilities ........... 5,264,856 8,106,531
Long-term obligation, net of current
portion ...................................... 1,332,088 422,053
Commitments and Contingencies ................ -- --
Stockholders' Equity (Deficit)
Capital stock - .001 par value,
100,000,000 shares authorized;
6,201,966 shares issued and
outstanding ........................... 6,202
Additional paid in capital ............. 212,381 147,903
Accumulated (deficit) earnings -
Beginning ............................... (49,096) (158,214)
Current period earnings (loss) ..... 92,839 (20,355)
----------- -----------
Total Stockholders'
Equity (Deficit) .................... 262,326 (24,464)
----------- -----------
Total Liabilities and
Stockholders' Equity (Deficit) ...... $ 6,859,270 $ 8,504,120
=========== ===========
F-19
<PAGE> 42
AMERICAN ENERGY SERVICES
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION> QUARTER ENDED MAY 31
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales .................................... $ 2,404,918 $ 3,036,612
Cost of sales ................................ 1,759,825 2,475,693
----------- -----------
Gross Profit ........................... 645,093 560,919
Operating expenses ........................... 407,203 455,725
----------- -----------
Income from operations ................ 237,890 105,194
Other expenses (income)
Interest, net .......................... 100,475 135,755
Other, net ............................. (1,174) (10,206)
----------- -----------
99,301 125,549
----------- -----------
Net income (loss) before taxes ...... 138,589 (20,355)
Income tax expense ........................... 45,750 0
----------- -----------
Net income (loss) ................... $ 92,839 $ (20,355)
=========== ===========
Basic and diluted income
(loss) per share ....................... $ 0.02 $ (0.01)
=========== ===========
</TABLE>
F-20
<PAGE> 43
AMERICAN ENERGY SERVICES, INC.
STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MAY 31
------------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) ................................. $ 92,839 $ (20,355)
Adjustments to reconcile net income (loss) to
cash provided (used) by operating activities:
Depreciation and amortization ................... 49,041 50,731
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ... 332,427 (598,757)
(Increase) in costs in excess of billings
on uncompleted contracts ................... (965,688) (1,135,737)
(Increase) Decrease in inventories ........... (115,392) 431,658
(Increase) Decrease in prepaids and other .... (9,720) 6,780
Decrease in deferred tax asset ............... 45,750 --
Increase in accounts payable ................. 271,371 180,972
Increase in billings in excess of cost
on uncompleted contracts ................... 508,008 1,193,066
--------- -----------
Net Cash Provided (used) by Operating Activities . 208,636 108,358
Cash Flows from Investing Activities:
Purchase of property, plant and equipment ......... (5,241) (22,372)
Purchase of trademarks, patterns and drawings ..... (6,381) (6,796)
Purchase of certificates of deposit ............... (15,000) --
--------- -----------
Net Cash Used in Investing Activities .......... (26,622) (29,168)
Cash Flows from Financing Activities:
Payments of long-term obligations ................. (11,150) (70,932)
Proceeds from note payable ........................ 116,340 1,002,408
Payment of note payable ........................... (299,074) (786,919)
--------- -----------
Net cash (Used) provided by Financing Activities (193,884) 144,557
Net (Decrease) increase in cash and cash equivalents .. (11,870) 223,747
Cash and cash equivalents at beginning of period ...... 13,786 471,796
--------- -----------
Cash and cash equivalents at end of period ............ $ 1,916 $ 695,543
========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the quarters for Interest ....... $ 109,591 $ 135,755
========= ===========
Taxes ........................................ $ -- $ --
========= ===========
</TABLE>
F-21
<PAGE> 44
AMERICAN ENERGY SERVICES, INC.
Note 1. General
The unaudited financial statements included herein for the Company for the
quarters ended May 31, 1997 and 1998 have been prepared without audit pursuant
to the rules and regulations of the Securities and Exchange Commission and
include all adjustments which are, in the opinion of management, necessary for a
fair presentation. Certain information and footnote disclosures required by
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. These financial statements should be read in
conjunction with the audited financial statements and related notes thereto
included with this filing for the annual periods ended February 28, 1997 and
1998.
The results for interim periods are not necessarily indicative of trends or of
results to be expected for the full year.
Note 2. Earnings per share
All references in the accompanying financial statements to the number of common
shares and per share amounts for May 31, 1997 have been restated to reflect
reverse split of August 28, 1997.
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed similarly, but also provides the effect of convertible securities, such
as common stock warrants or options, if dilutive, would have on net income and
average common shares outstanding if converted. Earnings per share calculations
for the quarters ended May 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
For the Quarter Ended May 31, 1998 For the Quarter Ended May 31, 1997
-------------------------------------------- --------------------------------------------
Income (Loss) Shares Per Share Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- -------------- ---------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $ 92,839 6,198,966 $ 0.02 ($ 20,335) 6,198,966 ($ 0.01)
========= =========
EFFECT OF DILUTIVE SECURITIES
Warrants issued 12/95 309,948 309,948
--------- --------- --------- ---------
DILUTED EPS
Income available to common
shareholders & assumed
conversion $ 92,839 6,508,914 $ 0.02 ($ 20,335) 6,508,914 ($ 0.01)
========= ========= ========= ========= ========= =========
</TABLE>
F-22
<PAGE> 45
AMERICAN ENERGY SERVICES, INC.
INDEX TO EXHIBITS
2.1 Articles of Incorporation of the Company
2.2 Articles of Merger of Seahawk Overseas Exploration Corporation with
and into the Company
2.3 Bylaws of the Company
2.4 Form of Common Stock Certificate
2.5 Common Stock Purchase Warrant of Murphy & Co
6.1 Promissory Note dated November 17, 1997 executed by the
Company in favor of Metrobank, N.A., in the original principal
amount of $1,200,000.00.
6.2 Promissory Note dated May 2, 1998 executed by the Company in
favor of Metrobank, N.A., in the original principal amount of
$2,000,000.00.
6.3 Security Agreement dated May 2, 1998 executed by the Company
in favor of Metrobank, N.A., in the original principal amount
of $2,000,000.00.
6.4 Promissory Note dated February 2, 1998 executed by the Company
in favor of Metrobank, N. A., in the original principal amount
of $644,465.00.
6.5 Security Agreement dated February 2, 1998 executed by the
Company in favor of Metrobank, N.A., in the original principal
amount of $644,465.00.
10.1 Consent of Simonton, Kutac & Barnidge
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 3 MONTHS ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> FEB-28-1998 FEB-28-1998
<PERIOD-END> MAY-31-1998 FEB-28-1998
<CASH> 1,916 31,167
<SECURITIES> 32,380 0
<RECEIVABLES> 412,723 597,607
<ALLOWANCES> (20,000) (20,000)
<INVENTORY> 1,610,408 1,495,016
<CURRENT-ASSETS> 4,282,801 3,521,299
<PP&E> 1,910,951 1,905,710
<DEPRECIATION> (648,956) 614,725
<TOTAL-ASSETS> 6,859,270 6,180,938
<CURRENT-LIABILITIES> 5,264,856 4,670,122
<BONDS> 0 0
0 0
0 0
<COMMON> 6,202 218,583
<OTHER-SE> 256,124 169,488
<TOTAL-LIABILITY-AND-EQUITY> 6,859,270 6,180,938
<SALES> 2,404,918 11,988,694
<TOTAL-REVENUES> 2,404,918 11,994,520
<CGS> 1,759,825 9,601,221
<TOTAL-COSTS> 2,167,028 11,328,101
<OTHER-EXPENSES> (1,174) 482,817
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 100,475 505,929
<INCOME-PRETAX> 138,589 177,776
<INCOME-TAX> 45,750 68,658
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 92,839 109,117
<EPS-BASIC> .02 .02
<EPS-DILUTED> .02 .02
</TABLE>
