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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A - 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended February 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-24819
AMERICAN ENERGY SERVICES, INC.
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Texas 76-0279288
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7224 Lawndale, Houston, TX 77012
--------------------------------
(Address of principal executive offices)
713-928-5311
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(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the most recent fiscal year ended February 28,
1999 were $10,800,686.
At July 14, 1999, the Common Stock, $.001 par value, of the registrant
held by non-affiliates of the registrant was 307,098 shares. As of that date,
there were 6,198,966 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form10-KSB the information contained in the Registrant's Proxy Statement for the
Company's Annual Meeting of Stockholder's to be held on September 15, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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P A R T I
ITEM 1. DESCRIPTION OF BUSINESS
General
American Energy Services, Inc., a Texas corporation, was founded and
incorporated in 1987 ("Old AES"). The Company began active operations in 1989
after acquiring certain operating assets of two other valve manufacturing and
re-manufacturing businesses, CGM Valve, Inc. ("CGM") and American Energy Valves,
Inc. ("AEV"). The Company's current directors, Pat Elliott, Larry Elliott, Sid
McCarra, Mark Elliott and Cary McCarra, were previously associated with CGM and
AEV.
Seahawk Overseas Exploration Corporation, a California corporation
("Seahawk") was formed in November 1988 to conduct the international operations
of Seahawk Oil International Corporation ("SOIC"). In January 1989, in
conjunction with a planned sale of certain domestic producing oil properties by
SOIC, the shares of stock of Seahawk were distributed to the shareholders of
SOIC, who number over 3000. Seahawk continued operations with little or no
success up until the time of the merger with Old AES, a Texas corporation. In
January 1996, Old AES was merged with and into Seahawk pursuant to an Agreement
and Plan of Merger by and between Old AES and Seahawk. In accordance with the
terms of the merger, (I) Seahawk became the surviving entity although its names
was changed to "American Energy Services, Inc." and (ii) shares of Seahawk stock
were issued to the seven stockholders of Old AES (i.e. the current AES
directors). In February 1996, a new corporation was formed under the name
American Energy Services, Inc., a Texas corporation ("New AES"). Subsequent to
the formation of New AES, Seahawk merged with and into New AES to maintain the
historic domicile of Old AES in Texas and to retain the historical 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 captial 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 "AES" or the "Company" refer to New AES, its subsidiaries and predecessors.
Products and Services
The Company is engaged in providing products and services worldwide to
processing manufacturers, energy companies and engineering/construction
contractors. Principal end-user markets include domestic and international
producers, transporters and refiners of oil and natural gas, as well as the
petrochemical, processing and power generation industries. AES designs,
manufactures, markets and services standard or specialty valves of varying sizes
and pressures used to regulate the movement of liquids, gases, and solid
materials.
AES utilizes both Company owned and operated manufacturing facilities
and contractually licensed manufacturing subcontractors that are audited for AES
quality to produce the full line of AES standard and engineered valves.
For much of its standard product manufacturing requirements, the
Company 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. The use of these subcontractors allows the
Company to reduce its fixed costs my minimizing its investment in plant and
equipment. In addition, by maintaining manufacturing relations and capabilities
internationally, AES has been able to attract additional customers worldwide.
In addition, the Company designs, engineers and manufactures various
valves at its Houston plant. The facility has full scale manufacturing
capabilities, including large turning and machine centers, heavy-duty cranes,
and full welding capabilities. AES also houses a fully equipped engineering
department with
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computer-aided design ("CAD") system capabilities and metallurgical equipment to
determine American Society of Testing Materials ("ASTM") specified requirements.
Valve Design and Manufacture
The Company manufactures valves to the following qualifications:
American Petroleum Institute ("API") 6D, API 6A, API 599, API 600, and API 602.
AES 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 estimates 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.
The initial design efforts involve significant communication and
coordination with the customer in order to identify and agree on valve
specifications. For custom-engineered valve projects, design concerts are tested
against established empirical data and previously manufactured valve designs.
AES maintains a source library of valve designs from which to choose and the
Company's CAD capabilities provide readily available and accessible design
parameters. When an order requires standard valve designs, AES' engineering and
quality assurance personnel verify that the Company's "off the shelf" designs
comply with the 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 process involves fabrication and assembly of
component parts to meet specific valve designs and specifications. AES produces
machined assemblies from raw castings and forgings or sourced machined
assemblies from subcontractors, which are inspected fully for material and
tolerance compliance. 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 providing performance and quality guarantees and total concept
capability. After testing is completed, the valves are prepared for shipment.
Because the manufacturing process can take from several weeks to
several months, customers frequently request partial shipment of finished
products and components. AES generally invoices customers as deliveries are
made. However, on certain highly specialized products or on large projects, the
Company invoices under a milestone basis. Receivables represent billings on
delivered products or milestone achievements. Revenue is recognized utilizing
the percentage-of-completion method.
New Products and Services
Since 1993, AES 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, (iii) and other products, including
lubricated plug valves, rotary control valves, linear control valves, geothermal
through conduit gate valves and pressure seal valves. The Company also offers
trunnion mounted ball valves, and reduced or full bore floating ball valves, in
virtually any metallurgy required.
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The Company also designs and manufactures specialty valves, such as
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 Submarine Division of the U.S. Navy, and cyrogenic
valves for service to minus 150 degrees Celsius.
Quality Commitment and Control
The Company's comprehensive quality control program is designed to
ensure that valves it manufactures, as well as components purchased from outside
manufacturers, meet AES' standards of quality. The quality control program of
the Company includes inspections at all stages of the design and manufacturing
process at its facility. All purchased components and products assembled by
subcontractors are also inspected to ensure that they perform properly. Thus
far, the Company's 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 performance
failure of a product could have a material adverse effect on the Company's
business, operating results, and financial condition.
Since 1989, the Company has manufactured over 70,000 valve units. Due
to AES's commitment to quality, less than one-fifth of one percent of these
units 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 ISO 9000 approved.
Additionally, AES has been a member of several standardization societies
including API and 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 good distributors. AES 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
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 year ended February 28,
1999, of all components purchased by AES for its fiscal 1999 sales, the Company
purchased from its leading sub-vendors, DHV and Stoos, 34% and 12%,
respectively. 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 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 ten years, the
Company has placed in service approximately $75 million dollars worth of valve
products.
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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 Daelim Engineering and Construction Corporation
("Daelim"), 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 accounted for 59% of the Company's net sales. For years ended February
28, 1999 and 1998, sales to the Company's largest customer, Daelim in fiscal
1999 and Techint Cotecol S. A. in fiscal 1998, accounted for 30% and 31% of the
Company's net sales, respectively. 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 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.
The Company's products are used by a variety of segments of the general
industries indicated below:
ENERGY INDUSTRY POWER GENERATION
Refiners and Processors Co-generators
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, Canada and Mexico)
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. As of February 28, 1999, AES' distribution backlog was
in excess of $2,000,000.
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:
<TABLE>
<S> <C> <C>
1. Western Hemisphere: Mexico, Venezuela, Argentina, Colombia, Peru,
Ecuador, Brazil
2. Europe: North Sea, Continental Europe, United Kingdom, Russia
</TABLE>
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<TABLE>
<S> <C> <C>
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
</TABLE>
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 even 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
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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.
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
February 28, 1999 was approximately $5,800,000 (excludes aforementioned
distribution backlog). 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. As such, there can be no assurance that
the amount of backlog ultimately will be 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, 1999, 1998, and 1997, approximately $225,000,
$226,000 and $400,500, 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 February 28, 1999, 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. PROPERTIES
The principal offices and manufacturing facilities utilized and owned
by AES are located in Houston, TX. These book value of these facilities amount
to less than ten percent (10%) of the total assets of AES. The Company believes
that its manufacturing facilities will be suitable and adequate to meet
production demands of the near future. In order to take advantage of available
orders, however, AES has plans to build a new facility with greater production
capacity within the next year.
ITEM 3. LEGAL PROCEEDINGS
AES is involved in various legal proceedings and claims arising in the
ordinary course of business. In the opinion of management, the amounts of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position or future results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter during the fiscal quarter ended February 28, 1999
that was submitted to a vote of security holders.
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P A R T II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock of AES is not currently traded on any stock exchange.
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 AES'
stock were issued to the Seahawk stockholders. Since this merger was solely for
the purpose of change the domicile of the Company, this transaction was deemed
not to constitute a sale in accordance with Rule 145 promulgated pursuant to the
Securities Act. There has been no other issuance of stock by AES during the last
three years.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended February 28,
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1999 1998 1997 1996 1995
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(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 10,800 $ 11,989 $ 10,718 $ 5,552 $ 8,551
Net Income (loss) 389 109 (1,225) (685) 2
Total assets 8,854 6,181 7,006 5,184 3,236
Long-term debt 1,288 1,341 491 308 262
Basic and diluted EPS (a) 0.06 0.02 (0.20) (0.11) --
Average shares outstanding - basic (b) 6,199 6,199 6,199 6,199 17
Average shares outstanding - diluted 6,199 6,199 6,199 6,199 17
</TABLE>
(a) The effects of stock warrants were not included in computing diluted
earnings per share because the effect was anti-dilutiive.
(b) On August 28, 1997, AES effected a one for ten reverse stock split. The
number of shares outstanding and per share amounts have been restated to
reflect the split (refer to Note 10 of the Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This material contains "forward-looking" statements as defined in the
Securities and Exchange Acts of 1933 and 1934 that could involve substantial
risk and uncertainties. When expressions include words such as "anticipate",
"believe", "estimate", "intend", "expect", "plan" and when similar expressions
are used, they are intended to identify the statements as forward-looking. The
Company relies on a variety of internal and external information to develop such
statements. Due to the inherent limitations in that development process and the
relatively volatile nature of the industry in which the Company operates, actual
results, performance and achievements may differ materially from results
suggested by these forward-looking statements.
RESULTS OF OPERATIONS
Fiscal Year Ended February 28, 1999 versus Fiscal Year Ended February 28, 1998
Net sales for the Company's fiscal year ended February 28, 1999
("fiscal 1999") decreased $1,187,007 or 10% below the fiscal year ended February
28, 1998 ("fiscal 1998"). This decrease was primarily related to delays in the
completion of certain major valve projects.
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Cost of sales in fiscal 1999 decreased $1,295,984 or 14% below fiscal
1998 to $8,305,238. Gross profit for fiscal 1999 was $2,495,448 or 5% greater
than the previous fiscal year. As a percentage of net sales, the Company's gross
profit margin improved from 20% in fiscal 1998 to 23% in fiscal 1999.
Operating expenses in fiscal 1999 continued the downward trend that
began in fiscal 1998. Fiscal 1999 operating expenses of $1,569,419 were $157,459
or 9% below fiscal 1998. Operating expenses as a percentage of net sales were
essentially the same at 14% for both fiscal years 1999 and 1998.
Other expenses for fiscal 1999 increased $54,503 of 11% over other
expenses in fiscal 1998 largely due to increased interest expense.
Net income improved from $109,118 in fiscal 1998 to $361,857 in fiscal
1999, or an increase of 232%. This increase was largely attributable to
management's continuation of certain cost control measures introduced in fiscal
1998 and further utilized during fiscal 1999.
The increased net income in fiscal 1999 resulted in basic and diluted
earnings per share of $0.05 compared to $0.02 per share in fiscal 1998.
Fiscal Year Ended February 28, 1998 versus Fiscal Year Ended February 28, 1997
Net sales for the Company's fiscal 1998 increased $1,271,000, or 12%
over the Company's fiscal year ended February 28, 1997 ("fiscal 1997"), to
$11,989,000. 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 in fiscal 1998 increased $1,262,000, or 15% over fiscal
1997 to $9,601,000. Gross profit for fiscal 1998 was $2,387,000 and essentially
flat when compared to the gross profit of $2,378,000 in fiscal 1997.
Operating expenses decreased approximately $1,959,000 or 53%, to
$1,727,000 for fiscal 1998 from $3,686,000 in fiscal 1997. The significant
decrease in operating expenses was primarily attributable to the following
factors: (I) fiscal 19978's operating expenses included $900,000 in bad debts
while fiscal 1998 had only $20,000, and (ii) AES management engaged in certain
cost control measures which further reduced expenses in fiscal 1998. Operating
expenses as a percentage of sales decreased from 34% in fiscal 1997 to 14% in
fiscal 1998.
Other expenses were down $29,000 from fiscal 1997. The cost of
financing was virtually unchanged, down $5,000 from fiscal 1997, as AES
continued to utilize its project specific financing and operating lines of
credit to support daily operation and organization of AES project business.
Net income before taxes improved $1,998,000 from a fiscal 1997 pre-tax
loss of $1,820,000 to a fiscal 1998 pre-tax profit of $178,000. The Company
received a future income tax benefit of approximately $596,000 as a result of
those losses from operation in fiscal 1997.
After tax net income improved from a fiscal 1997 loss of $1,225,000 to a fiscal
1998 profit of $109,000.
On August 28, 1997, the Company effected a 1 for 10 reverse stock split
and outstanding shares decreased to approximately 6,199,000. The effect of the
fiscal 1998 stock split and net income resulted in a basic and diluted income
per share of $0.02.
Impact of Inflation
An effect of inflation is to increase the prices of labor and raw
materials used to manufacture AES' products, which may require periodic
increases in the prices for the products to maintain gross profit margins.
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Management does not consider AES to have any unique difficulty in managing the
effects, if any, on its business.
Euro Conversion
On January 1, 1999, eleven of fifteen countries which are members of
the European Union, introduced the new currency unit called the "euro". Prior to
the full implementation of the new currency on January 1, 2002, there will be a
transition period during which parties may either use their existing currencies
or the euro. However, all exchanges between currencies of the participating
countries must first be converted into the euro, and then into the country's
currency. Although AES has not yet completed a full evaluation of the impact of
the euro, the conversion has not had nor is it expected to have a material
effect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of AES' liquidity during the year ended February
28, 1999 were internally generated funds, an increase in accounts payable, and
proceeds from notes payable. These funds were used primarily for costs in excess
of billings on uncompleted projects relating to the percentage of completion
method, and also to pay down notes payable.
During the year ended February 28, 1999, working capital improved by
$325,087 to $(860,256) primarily due to the increase in cash and cash
equivalents, the reduction of notes payable, and the net improvement of costs
and billings on uncompleted projects. Although improved when compared to fiscal
1998, the shortage of working capital during fiscal 1999 has resulted in
inefficiencies as well as lost opportunities. The Company has been successful,
in negotiating advance payments from many customers and has pledged against
letters of credit established by customers, however, the working capital
shortage has hindered operations and to some degree, profitability. For that
reason, AES is actively seeking alternative sources of additional capital that
may include debt restructuring, debt and equity offerings, or borrowings
guaranteed by the EX-IM Bank for export sales. However, there is currently no
assurance that such capital will be available when it is required or on terms
that are acceptable to the Company.
Capital expenditures for fiscal 1999 were $109,201 primarily for an
upgrade of the Company's computer system and software, which was financed by a
capital lease. No additional or significant capital expenditures are expected to
by made in fiscal 2000, unless the efforts to reengineer cash flow and increase
working capital are both successful and significant. Only upon a significant
improvement in working capital and financial position will additional or
significant capital expenditures be considered by management in fiscal 2000, and
then only after exhaustive consideration and within very stringent guidelines.
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.
YEAR 2000
The "Year 2000" issue is the inability of computer systems (both
hardware and software) to recognize the change in date from 1999 to 2000. The
issue affects both information technology ("IT") and non-IT
11
<PAGE> 12
systems. Non-IT systems typically include embedded technology such as
micro-controllers. These systems are more difficult to assess and often require
replacement rather than repair.
The Company has recognized the significant uncertainty associated with
the Year 2000 issue and has tested it products for compliance. It is the
Company's belief that substantially all necessary modifications have been made
to its products.
AES is in the process of reviewing its internal computer systems. The
Company has contracted with an outside vendor to assess its internal hardware
and software with regard to Year 2000 compliance. To date, no "mission critical"
systems have required significant modification or replacement.
The Company is also in the process of identifying and communicating
with its suppliers and vendors where failure by such third parties to achieve
Year 2000 compliance could be expected to have a material impact on the Company.
For those suppliers or vendors who may pose a material risk, contingency plans
will be developed.
AES has not incurred any material expense to date with regard to the
Year 2000 issue and does not expect any future expense related to the issue to
be material. Any costs associated with the issued will be treated as period
costs and expensed as incurred. There can be no assurance, however, that the
Year 2000 will not present problems unforeseen at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
Market risk inherent in financial instruments outside the financial
statements is considered immaterial.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required to be filed under this item are
presented elsewhere in this report. Such financial statements are incorporated
by reference under this Item 8. See the index to this information on page 16 of
this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
12
<PAGE> 13
P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry S. Elliott 51 Chairman of the Board, and Senior
Vice President
Patrick S. Elliott 55 Director, President, and Chief
Executive Officer
Mark P. Elliott 35 Director, Senior Vice President
Cary P. McCarra 36 Director, Senior Vice President
Sidney J. McCarra 47 Director, Senior Vice President
Robert S. Love 46 Vice President, Chief Financial
Officer
</TABLE>
LARRY S. ELLIOTT - Larry Elliott has served as Chairman of the Board of
Directors of AES since October, 1997, as President of the Company from March,
1989 until appointed Chairman, and as a director since October 1992. 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.
PATRICK S. ELLIOTT - Patrick Elliott has served as President of the Company
since October, 1997, Chairman of the Board from March 1989 through September,
1997, as Vice President since March 1989, and as a director since October, 1992.
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 Senior 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 Senior Vice President and is 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 director of the Company since
October 1992 and as Vice President since March 1989, and is currently Senior
Vice President. He has been active in the valve manufacturing and
re-manufacturing industry since 1974. He has served as Vice President of
Procurement and Vice President of Operations. He has been 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.
13
<PAGE> 14
ROBERT S. LOVE - Robert Love is the most recent addition to the Company's
management team (April 1999) and will serve as Vice President and Chief
Financial Officer. He has over twenty years experience in the financial
management of both small companies and Fortune 500 companies. His most recent
experience was with the former Daniel Industries, Inc. a $300 million flow
control company recently acquired by Emerson Electric. While responsible for the
financial management of the company overall, his initial responsibilities
include, but are not limited to, financial reporting, implementation of
(Manufacturing Resource Planning (MRP II), assisting with the implementation of
listing/trading AES stock on a major exchange, and cash flow reengineering.
ITEM 11. EXECUTIVE COMPENSATION
The following compensation table sets forth certain information
regarding compensation paid during the fiscal year ended February 28, 1999 to
the executives of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL FISCAL SALARY BONUS
POSITION YEAR ($) ($)
-------- ------ ------ -----
<S> <C> <C> <C>
Larry S. Elliott
Senior Vice President 1999 $ 111,000 ---
1998 143,000 ---
----------------------------------------
1997 126,000 ---
----------------------------------------
Patrick S. Elliott
President 1999 $ 90,000 ---
1998 107,000 ---
----------------------------------------
1997 100,000 ---
----------------------------------------
Mark P. Elliott
Senior Vice President 1999 $ 90,000 ---
1998 100,500 ---
----------------------------------------
1997 100,000 ---
----------------------------------------
Cary P. McCarra
Senior Vice President 1999 $ 90,000 ---
1998 98,500 ---
----------------------------------------
1997 100,000 ---
----------------------------------------
Sidney J. McCarra
Senior Vice President 1999 $ 90,000 ---
1998 98,500 ---
----------------------------------------
1997 100,000 ---
----------------------------------------
Robert S. Love
Vice President 1999 N/A N/A
</TABLE>
Currently there are no options, benefit plans nor employment agreements
between the Company and the officers, with the following exception:
The Company secured the services of Robert S. Love under an employment
agreement dated April 21, 1999. Further, this agreement includes the issuance of
40,000 stock options granted by the Company to Robert S. Love, to be vested 20%
annually with a strike price of $1.00 per share.
14
<PAGE> 15
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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information concerning the
number of shares of Common Stock owned beneficially as of February 28, 1999 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.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
-------- ------------------- ------------------- --------
<S> <C> <C> <C>
Common Stock Larry S. Elliott (1) 1,708,678.2 27.56%
5319 Mandell
Houston, TX 77005
Common Stock Patrick 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
</TABLE>
Unless otherwise indicated, all shares of Common Stock were 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
15
<PAGE> 16
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
<TABLE>
<CAPTION>
Page
----
1. Financial Statements
<S> <C>
Report of management....................................... 19
Report of independent accountants.......................... 20
Balance sheets at February 28, 1999 and 1998............... 21 - 22
Statements of operations for the years ended February 28,
1999,1998 and 1997................................ 23
Statement of Comprehensive Income for the years ended
February 28, 1999, 1998 and 1997.................. 23
Statements of stockholders' equity for the years ended
February 28, 1999, 1998 and 1997.................. 24
Statements of cash flows for the years ended February 28,
1999 and 1998.................................... 25 - 26
Notes to financial statements.............................. 27 - 35
</TABLE>
2. All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or related notes listed above.
3. Exhibits
Exhibit
Number Description
------ -----------
2.1 Articles of Incorporation of the Company, filed as Exhibit
2.1 of AES' Report on Form 10-SB filed August 19, 1998,
and incorporated by reference herein.
2.2 Articles of Merger of Seahawk Overseas Exploration
Corporation with and into the Company, filed as Exhibit
2.2 of AES' Report on Form 10-SB filed August 19, 1998,
and incorporated by reference herein.
2.3 Bylaws of the Company, filed as Exhibit 2.3 of AES' Report
on Form 10-SB filed August 19, 1998, and incorporated by
reference herein.
2.4 Form of Common Stock Certificate, filed as Exhibit 2.4 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
2.5 Common Stock Purchase Warrant of Murphy & Co., filed as
Exhibit 2.5 of AES' Report on Form 10-SB filed August 19,
1998, and incorporated by reference herein.
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, filed as Exhibit 6.1 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
16
<PAGE> 17
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, filed as Exhibit 6.2 of AES' Report
on Form 10-SB filed August 19, 1998, and incorporated by
reference herein.
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, filed as Exhibit 6.3 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
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, filed as Exhibit 6.4 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
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, filed as Exhibit 6.5 of AES'
Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
10.1 *Employment Agreement dated April 21, 1999 between AES and
Robert S. Love.
23 Consent of Simonton, Kutac & Barnidge, L.L.P.
27 Financial Data Schedule
o Management Contract or compensatory plan or agreement.
The Company will furnish a copy of any exhibit described above to any
beneficial holder of its securities upon receipt of a written request therefor,
and provided further that such holder pays to the Company a fee compensating the
Company for its reasonable expenses in furnishing such exhibits.
(b) AES did not file any report on Form 8-K during the year ended
February 28, 1999.
17
<PAGE> 18
SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned.
AMERICAN ENERGY SERVICES, INC.
(REGISTRANT)
Date: July 14, 1999 By: /s/ LARRY S. ELLIOTT
------------------------------
Larry S. Elliott
Chairman of the Board
As required by the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ LARRY S. ELLIOTT Senior Vice President and Chairman
- --------------------------- of the Board July 14, 1999
/s/ PATRICK S. ELLIOTT President, Chief Executive Officer and
- --------------------------- Director (Principal Executive Officer) July 14, 1999
/s/ ROBERT S. LOVE Vice President and Chief Financial
- --------------------------- Officer (Principal Financial and
Accounting Officer) July 14, 1999
/s/ SIDNEY J. McCARRA Senior Vice President and Director July 14, 1999
- ---------------------------
/s/ MARK P. ELLIOTT Senior Vice President and Director July 14, 1999
- ---------------------------
/s/ CARY P. McCARRA Senior Vice President and Director July 14, 1999
- ---------------------------
</TABLE>
18
<PAGE> 19
REPORT OF MANAGEMENT
The accompanying financial statements of American Energy Services, Inc.
and its consolidated subsidiaries were prepared by management, which is
responsible for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles and include amounts
that are based on management's judgment and estimates.
The Company maintains a system of internal controls, including
accounting controls. AES believes that its system of internal controls provides
reasonable assurance that assets are safeguarded against losses from
unauthorized use or disposition and that financial records are reliable for use
in preparing financial statements.
Management also recognizes its responsibility for conducting the
Company's affairs according to the highest standards of personal and corporate
conduct. This responsibility is characterized and reflected in policy statements
regarding, among other things, conduct of the Company's business activities
within the laws of the countries in which the AES operates and avoidance of
potentially conflicting outside business interests by the Company's employees.
/s/ PATRICK S. ELLIOTT
- -------------------------------------------
Patrick S. Elliott
President and Chief Executive Officer
/s/ ROBERT S. LOVE
- -------------------------------------------
Robert S. Love
Vice President and Chief Financial Officer
July 14, 1999
19
<PAGE> 20
Independent Auditors' Report
June 25, 1999
The Board of Directors
American Energy Services, Inc.
We have audited the accompanying balance sheets of American Energy Services,
Inc. as of February 28, 1999, and 1998 and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for the years ended
February 28, 1999, 1998, and 1997. 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.
February 28, 1999, and 1998 and the results of its operations and cash flows for
the years ended February 28, 1999, 1998, and 1997, in conformity with generally
accepted accounting principles.
SIMONTON, KUTAC & BARNIDGE, L.L.P.
Houston, Texas
20
<PAGE> 21
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28,
-------------------------
1999 1998
----------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 353,510 $ 13,786
Certificates of deposit 11,223 17,380
Accounts receivable - trade net of allowance for
doubtful accounts of $0 and $20,000 153,191 516,921
Accounts receivable - other 68,767 60,686
Income tax receivable 147,543 147,543
Prepaids and other 103,834 100,081
Costs in excess of billings on
uncompleted contracts 4,056,295 1,169,885
Inventories 1,337,095 1,495,016
----------- -----------
Total Current Assets 6,231,458 3,521,298
Property, Plant and Equipment:
Machinery and equipment 1,307,682 1.307,682
Furniture and fixtures 327,541 219,840
Vehicles 81,553 81,553
Building and improvements 221,241 219,741
Land 76,894 76,894
----------- -----------
2,014,911 1,905,710
Less: accumulated depreciation (749,677) (614,725)
----------- -----------
1,265,234 1,290,985
Trademarks, patents and drawings 992,086 877,967
Less: accumulated amortization (254,721) (163,937)
----------- -----------
737,365 714,030
Deferred tax asset 473,371 500,224
Other Assets 147,029 154,399
----------- -----------
Total Assets $ 8,854,457 $ 6,180,936
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
AMERICAN ENERGY SERVICES, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current Liabilities:
Notes payable $ 2,393,763 $ 2,668,000
Current portion of long-term obligations 168,313 144,122
Current portion of capital leases 53,723 36,520
Accounts payable and accrued expenses 4,330,462 1,658,970
Billings in excess of costs on uncompleted contracts 145,153 199,029
----------- -----------
Total Current Liabilities 7,091,414 4,706,641
----------- -----------
Long-term obligation, net of current portion 1,153,374 1,245,316
Capital leases, net of current portion 78,325 59,492
Commitments and Contingencies -- --
Stockholders' Equity:
Capital stock - no par value, 10,000,000 shares
authorized; 6,198,966 shares issued and outstanding 218,583 218,583
Accumulated other comprehensive loss -- --
Retained earnings (accumulated deficit) 312,761 (49,096)
----------- -----------
Total Stockholders' Equity 531,344 169,487
----------- -----------
Total Liabilities and Stockholders' Equity $ 8,854,457 $ 6,180,936
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
AMERICAN ENERGY SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
February 28,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 10,800,686 $ 11,988,693 $ 10,717,563
Cost of sales 8,305,238 9,601,222 8,339,696
------------ ------------ ------------
Gross Profit 2,495,448 2,387,471 2,377,867
Operating expenses 1,569,419 1,726,878 3,686,306
------------ ------------ ------------
Income (loss) from operations 926,029 660,593 (1,308,439)
Other expenses (income):
Interest, net 540,813 499,955 504,982
Other, net (3,494) (17,139) 6,829
------------ ------------ ------------
537,319 482,816 511,811
------------ ------------ ------------
Net income (loss) before taxes 388,710 177,777 (1,820,250)
Income tax (expense) benefit (26,853) (68,659) 595,625
------------ ------------ ------------
Net income (loss) $ 361,857 $ 109,118 $ (1,224,625)
============ ============ ============
Basic and diluted income (loss) per share $ 0.05 $ 0.02 $ (0.20)
============ ============ ============
Basic weighted average shares
Outstanding 6,198,966 6,198,966 6,198,966
============ ============ ============
Diluted weighted average shares
Outstanding 6,508,914 6,508,914 6,508,914
============ ============ ============
</TABLE>
AMERICAN ENERGY SERVICES, INC.
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, February 28, February 28,
1999 1998 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss) $ 361,857 $ 109,118 $ (1,224,625)
Other comprehensive income (loss) -- -- --
--------------- --------------- ---------------
Comprehensive income (loss) $ 361,857 $ 109,118 $ (1,224,625)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
AMERICAN ENERGY SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Retained Total
Capital Stock Earnings / Stockholders'
------------------------ (Accum. Equity /
Shares Amount Deficit) (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at February 28, 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
Net income -- -- 361,857 361,857
----------- ----------- ----------- -----------
Balance at February 28, 1999 6,198,966 $ 218,583 $ 312,761 $ 531,344
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
AMERICAN ENERGY SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
February 28,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 361,857 $ 109,118 $(1,224,625)
Adjustments to reconcile net income (loss) to
cash provided (used )by operating activities:
Depreciation and amortization 25,736 209,407 145,196
Provision for bad debts 105,476 20,000 --
Loss on disposal of fixed assets -- -- 3,392
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 250,173 872,899 (742,199)
Decrease in income tax receivable -- 10,000 75,990
(Increase) decrease in costs in excess of billings
on uncompleted contracts (2,886,410) (1,104,949) 392,677
Decrease in inventories 157,921 924,563 122,252
(Increase) decrease in prepaids and other (3,753) (69,024) 78,982
Decrease (increase) in deferred tax asset 26,853 68,659 (568,883)
Increase in other assets 7,370 (93,631) (37,107)
(Decrease) increase in accounts payable 2,671,792 (419,106) 60,649
(Decrease) increase in other liabilities 2,643 -- --
Increase in billings in excess of costs
on uncompleted contracts (53,876) 19,988 179,041
(Decrease) in deferred income tax liability -- -- (26,742)
----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities 860,496 547,924 (1,541,377)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (109,201) (49,527) (176,014)
Purchase of trademarks, patents and drawings (114,119) (341,783) (284,452)
Purchase of certificates of deposit 6,157 (12,164) --
----------- ----------- -----------
Net Cash Used in Investing Activities (217,163) (403,474) (460,466)
Cash Flows from Financing Activities:
Proceeds from long-term obligations 129,798 1,199,460 13,749
Payments of long-term obligations (159,170) (541,217) (192,468)
Proceeds from note payable 1,053,827 1,554,589 5,451,094
Payments of note payable (1,328,064) (2,808,801) (2,908,777)
Cash distribution to pre-merger shareholders of
Seahawk -- (6,491) --
----------- ----------- -----------
Net Cash (Used) Provided by Financing Activities (303,609) (602,460) 2,363,598
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 319,724 (458,010) 361,755
Cash and cash equivalents at beginning of year 13,786 471,796 110,041
----------- ----------- -----------
Cash and cash equivalents at end of year $ 353,510 $ 13,786 $ 471,796
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
AMERICAN ENERGY SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended
February 28,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the years for
Interest $ 489,571 $ 505,929 $ 536,187
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
Non-cash transactions
Equipment acquired under long-term obligations $ -- $ 77,192 $ 490,404
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
AMERICAN ENERGY SERVICES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Energy Services, Inc. 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 to 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 as a period loss in the
fiscal year ended February, 1996l, A summary of Seahawks assets and 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 end 2/28/96 ($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
February 28, 1995 per financial statements as audited by Grant Thornton LLP,
Houston, TX follows:
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMERICAN ENERGY SERVICES, INC.
AS MERGED INTO
SEAHAWK OVERSEAS EXPLORATION CORPORATION
CAPITALIZATION SCHEDULE
<TABLE>
<CAPTION>
Balance at Balance at
February 29, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Long term debt $ 458,682 $ 465,745
<CAPTION>
Stockholders' Equity: Total
Capital Stock 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 0 0 0
Stock issued to employees 4,655 302913 0 302913
Net earnings 0 0 2340 2340
----------- ----------- ----------- -----------
Balance February 28, 1995 17,241 304,913 1,751,170 $ 2,056,083
Seahawk Overseas Exploration Corporation 3,070,983 277,000 (328,499) (51,499)
Assumed retirement of American Energy
Services, Inc. shares (17,241) 0 0 0
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 0
Merger costs 0 (99,309) 0 (99,309)
Net loss 0 0 (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, 1999, 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).
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION - Revenues from the sale of flow control valves are recorded
when the products are shipped or when title passes. Title passes from seller to
buyer when goods are shipped. In some instances, the buyer will pay in advance
for completed goods just prior to shipment.
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.
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:
<TABLE>
<CAPTION>
Estimated
Service
Lives
----------
<S> <C>
Machinery and equipment 15 years
Furniture and fixtures 5 - 10 years
Vehicles 5 years
Building and improvements 5 - 31.5 years
</TABLE>
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:
<TABLE>
<CAPTION>
Estimated
Service
Lives
----------
<S> <C>
Trademarks 10 years
Patents 17 years
Drawings 10 years
</TABLE>
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.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income." This statement,
established standards for reporting and displaying comprehensive income and its
components in the financial statements. Under this statement, the Company is
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings in the stockholder's equity section of
the balance sheet. The Company has no other items of other comprehensive income.
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.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior year
amounts in order to conform to the current year classifications.
NOTE 2 - CONTRACTS IN PROGRESS
Information regarding long-term contracts in progress are as follows:
<TABLE>
<CAPTION>
February 28,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Expenditures on uncompleted contracts $ 4,876,186 $ 1,416,787
Estimated earnings thereon 2,909,811 565,943
----------- -----------
Costs and estimated earnings on uncompleted contracts 7,785,997 1,982,730
Less billings applicable thereto 3,874,855 1,011,874
----------- -----------
Total contracts in progress $ 3,911,142 $ 970,856
=========== ===========
Included in accompanying balance sheet under following captions:
Costs in excess of billings on uncompleted contracts $ 4,056,295 $ 1,169,885
Billings in excess of costs on uncompleted contracts 145,153 (199,029)
----------- -----------
Total contracts in progress $ 3,911,142 $ 970,856
=========== ===========
</TABLE>
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 28,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Note payable to a bank with interest at prime (7.75% at February 28, 1999) 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 $ 220,771 $ 644,465
Line of credit agreement with a bank with interest at prime plus 0.5% (8.25% at
February 28, 1999) 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 March 31, 1999 and is
collateralized by substantially all assets of the Company 2,000,000 2,000,000
Factoring agreement with Murphy Venture Partners with
26.5% interest; maturing November, 2004 150,000 --
An unsecured line of credit agreement with a bank with interest at prime plus
1.5% (9.25% at February 28, 1999) due on demand, providing for maximum
borrowings of $24,000 22,992 23,535
---------- ----------
Total notes payable $2,393,763 $2,668,000
========== ==========
</TABLE>
NOTE 4 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
February 28,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Note payable to a bank due in monthly installments of $16,192, including
interest at prime plus 2% (9.75% at February 28, 1999); due February 17,
2008, collateralized by machinery equipment, furniture, fixtures and patents $1,144,599 $1,200,000
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 131,627 156,093
Three notes payable to a bank; due in monthly installments of $371, $231,
and $479, including interest at 7.5%, 10.5%, and 9.75%; due February 1999
and August 21, 1999; collateralized by automobiles 20,584 33,345
Revolving credit facility (unsecured); 9.25% interest
at February 28, 1999; payable monthly 24,577 --
---------- ----------
Total long-term debt 1,321,387 1,389,438
Less: portion due within one year 168,313 144,122
---------- ----------
Long-term debt $1,153,374 $1,245,316
========== ==========
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM OBLIGATIONS (CONTINUED)
Approximate future maturities of long-term obligations as of February 28, 1999
are as follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------
<S> <C>
2000 $ 168,313
2001 247,729
2002 237,352
2003 224,988
Thereafter 367,415
-------------
$ 1,245,797
=============
</TABLE>
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:
<TABLE>
<CAPTION>
February 28,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Machinery and equipment $ 56,782 $ 56,782
Furniture and fixtures 146,257 73,976
----------- -----------
203,039 130,758
Less accumulated depreciation (35,074) (20,324)
----------- -----------
$ 167,965 $ 110,434
=========== ===========
</TABLE>
Future minimum lease payments under capital leases as of February 28, 1999 are
as follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------
<S> <C>
2000 $ 53,723
2001 52,566
2002 39,915
2003 13,435
--------------
Total minimum lease payments 159,639
Less amount representing interest (27,591)
--------------
Present value of net minimum lease payments $ 132,048
==============
</TABLE>
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.
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease expiring in 1999. For
the years ended February 28, 1999 and 1998, such lease payments amounted to
$41,891 and $49,642.
The minimum future rental commitments under operating leases total $30,540 and
are to be paid during fiscal year 2000.
At February 28, 1999, the Company had $6,301,218 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:
<TABLE>
<CAPTION>
For the Years Ended
February 28,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current $ -- $ -- --
Deferred 26,853 68,659 (595,625)
--------- --------- ---------
Total expense (benefit) $ 26,853 $ 68,659 $(595,625)
========= ========= =========
</TABLE>
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,
--------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate $ 67,408 $ 60,444 $(618,885)
Non-deductible expenses 2,617 6,614 20,740
Other (43,172) 1,601 1,601
--------- --------- ---------
Total expense (benefit) $ 26,853 $ 68,659 $(595,625)
========= ========= =========
</TABLE>
The long-term deferred tax asset results from the following:
<TABLE>
<CAPTION>
For the Years Ended
February 28,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Bases differences in intangibles and fixed assets $(393,327) $(448,551) $(304,055)
Net operating loss carryforward 870,742 938,148 862,311
Miscellaneous costs capitalized for tax purposes (4,044) 10,627 10,627
--------- --------- ---------
$ 473,371 $ 500,224 $ 568,883
========= ========= =========
</TABLE>
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
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 30% of net sales for the
year ended February 28, 1999 and 31% of net sales for the year ended February
28, 1998.
Foreign sales were 92% and 93% of total sales in 1999 and 1998, respectively.
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 exercisable 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, 1999 and 1998. 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 1998 have been restated to reflect the stock
split.
NOTE 11 - EARNINGS (LOSS) PER SHARE
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 to the impact of convertible
securities, such as common stock warrants, if dilutive, would have on net income
and average common shares outstanding if converted.
For the years ended February 28, 1999, 1998 and 1997, average shares outstanding
were increased for stock warrants assumed exercised by 309,948 to arrive at
weighted average shares outstanding for purposes of calculating diluted earnings
per share.
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
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:
<TABLE>
<S> <C>
Cash $ 6,491
Land 9,676
Note payable to Directors of Seahawk (80,645)
---------------
$ (64,478)
===============
</TABLE>
NOTE 13 - 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 has also adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," whis is effective for fiscal years beginning after
December 31, 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 reviewed regularly in aggregate. However, when necessary to better
understand performance of other segments, or to access future net cash flows,
the Company will segregate in segments, those components of the business as
warranted.
35
<PAGE> 36
NOTE 14 - GEOGRAPHIC INFORMATION
The Company's revenues by geographical area for the fiscal years ended February
28, 1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
February 28, February 28, February 28,
1999 1999 1999
----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
United States $ 1,296,082 United States $ 1,078,982 United States $ 1,178,932
Kuwait 4,320,274 Columbia 5,035,251 Columbia 3,751,147
Mexico 1,404,089 Other 5,874,460 Philippines 1,607,634
Other 3,780,241 Saudi Arabia 1,286,107
Other 2,893,743
------------ ------------ ------------
Totals $ 10,800,686 $ 11,988,693 $ 10,717,563
============ ============ ============
</TABLE>
AES recognizes the point of delivery as the basis for attributing revenues from
external customers to individual countries. The "Other" category on the table
above reflects all customers with less than ten percent of total revenues for
each respective fiscal year.
36
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1 Articles of Incorporation of the Company, filed as Exhibit
2.1 of AES' Report on Form 10-SB filed August 19, 1998,
and incorporated by reference herein.
2.2 Articles of Merger of Seahawk Overseas Exploration
Corporation with and into the Company, filed as Exhibit
2.2 of AES' Report on Form 10-SB filed August 19, 1998,
and incorporated by reference herein.
2.3 Bylaws of the Company, filed as Exhibit 2.3 of AES' Report
on Form 10-SB filed August 19, 1998, and incorporated by
reference herein.
2.4 Form of Common Stock Certificate, filed as Exhibit 2.4 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
2.5 Common Stock Purchase Warrant of Murphy & Co., filed as
Exhibit 2.5 of AES' Report on Form 10-SB filed August 19,
1998, and incorporated by reference herein.
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, filed as Exhibit 6.1 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
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, filed as Exhibit 6.2 of AES' Report
on Form 10-SB filed August 19, 1998, and incorporated by
reference herein.
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, filed as Exhibit 6.3 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
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, filed as Exhibit 6.4 of
AES' Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
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, filed as Exhibit 6.5 of AES'
Report on Form 10-SB filed August 19, 1998, and
incorporated by reference herein.
10.1 *Employment Agreement dated April 21, 1999 between AES and
Robert S. Love.
23 Consent of Simonton, Kutac & Barnidge, L.L.P.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into this 21st day of April 1999
by and between AMERICAN ENERGY SERVICES, INC. a corporation, ("Company"); and
ROBERT S. LOVE ("Employee"). In consideration of the mutual promises and
covenants contained herein Company and Employee agree as follows:
SCOPE, NATURE, AND DUTIES OF EMPLOYMENT
Company hereby employs Employee, and Employee accepts such employment, to render
CFO services to Company ("Services"). The Services may be described in more
detail on the attached Exhibit A. Company shall have the power to determine the
specific duties to be performed by Employee, and the means and the manner by
which those duties shall be performed. The power to supervise the duties to be
performed, the manner of performing such duties, and the terms for performance
of such duties shall be exercised by Company. Hours of employment shall be
determined by Company within the reasonable standards within the profession.
EMPLOYEE'S RESPONSIBILITIES
Employee will:
(A) Use Employee's best efforts to perform the Services;
(B) Devote Employee's full working time and attention to the services
Employee provides to Company. During the term of this Agreement,
Employee shall not, without the written consent of Company,
directly or indirectly render services of a professional nature
to or for any person or firm for compensation, or engage in any
practice that competes in Company's interest.
TERM
The term of this Agreement shall begin on the below-stated effective date and
shall continue until terminated as provided by this Agreement.
COMPENSATION
BASIS SALARY For all services rendered by Employee under this
Agreement, Company will pay Employee basic salary of SEVENTY-FIVE
THOUSAND DOLLARS and NO CENTS ($75,000) per year, payable weekly
beginning on the effective date of this Agreement. The basic salary
may be changed by mutual agreement of the parties at any time.
FRINGE BENEFITS As further consideration for the performance by
Employee under and pursuant to this Agreement, Company shall, within a
reasonable time after the effective date of this Agreement, provide
for Employee the following further benefits and any additional
benefits that may from time to time be made available by Company to
employees employed by Company. In addition, Robert S. Love will be
granted options on 40,000 shares of AES common stock to be vested each
year by grant of 8,000 shares at an option price if $1.00 per share.
OFFICE FACILITIES
Company shall operate and maintain facilities, and shall provide at its expense,
equipment and supplies, suitable to Employee's position and adequate for the
performance of Employee's duties under and pursuant to this Agreement.
<PAGE> 2
FEES
All fees and compensation received or realized by Company as a result of the
rendition of professional services by Employee under and pursuant to this
Agreement shall belong and be paid and delivered to Company.
VACATION
Employee shall be entitled to be paid annual vacation of one week during the
first year and two weeks each year during the continuance of this Agreement.
Without Company's consent, vacation time may not be accumulated, but must be
taken in the year earned. Employee's vacation will be scheduled at those times
most convenient to Company's business as determined by its Board of Directors.
In addition, Employee shall be allowed FIVE (5) days each year to attend
professional meetings or seminars, provided, that attendance at such meetings or
seminars shall be planned for minimum interference in the business of employer.
TERMINATION
This Agreement shall be terminated immediately:
(A) If Employee breaches any of Employee's agreements, obligations,
representations, or warranties herein.
(B) If Employee dies.
(C) If Employee fails, is unable to, or refuses to faithfully or
diligently perform the duties required under and pursuant to this
Agreement.
Company may terminate this Agreement at will upon THIRTY (30) days written
notice to Employee.
Upon termination, the salary due Employee shall be full compensation in payment
for all Employee's claims under this Agreement.
CONFIDENTIAL INFORMATION
Employee agrees to hold all Confidential Information in trust and strict
confidence for Company and its clients, without disclosing such Confidential
Information to any third parties. Confidential Information includes, but is not
limited to: any information that deals with or relates to Company or Company's
clients' past, present, or future business processes or plans; ideas, know-how,
specifications, customer lists, marketing plans, procedures, and software
programs; and financial or other trade secret information.
Confidential Information will not include that information defined as
Confidential Information above which entered the public domain without
Employee's breach of any obligation to Company or Company's clients; became
known to Employee prior to Company or Company's clients disclosure of such
information to Employee; became known to Employee from a source other than
Company or Company's clients, other than by breach of an obligation of
confidentiality; or was independently developed by Employee without reference to
Confidential Information.
Employee may disclose Confidential information as required by governmental or
judicial order, provided Employee give Company prompt notice of such order and
complies with any protective order ( or equivalent) imposed on such disclosure.
Employee may not disclose any Confidential Information to third parties for
three (3) years following the date of its disclosure by Company or Company's
clients to Employee, except to Company consultants, if any, as provided below.
Employee may only use the Confidential Information in connection with Employee's
performance of the Services.
Employee will take reasonable security precautions, at least as great as the
precautions Employee takes to protect Employee's own Confidential Information,
to protect the Company's Confidential Information. Employee may disclose
Confidential Information only to Employee consultants, if any, on a need-to-know
bases. Employee will execute appropriate written agreements with Employee's
consultants and employees, if any, sufficient to enable Employee to comply with
all the provisions of this Agreement. Employee will return all originals,
copies, reproductions, and
<PAGE> 3
summaries of Confidential Information at Company's or Company's clients' request
or, at Company's option, certify the destruction of the same.
These obligations are supplementary to and in addition to any obligations
Employee may have assumed to Company by executing a Nondisclosure Agreement with
Company.
Employee acknowledges that monetary damages may not be a sufficient remedy for
unauthorized disclosure or use of Confidential Information, and the Company
and/or Company's clients will be entitled, without waiving any other rights or
remedies, to such relief as may be deemed proper by a court of competent
jurisdiction. Employee hereby waives the claim that Company or Company's clients
have an adequate remedy at law or in damages with respect to any action
involving unauthorized disclosure or use of Confidential Information.
REPRESENTATIONS AND WARRANTIES
Company represents and warrants that it is a business, duly licensed and in good
standing under the laws of the State of Texas, and has all the requisite power
and authority to execute and perform all of its obligations under this
Agreement.
Employee represents and warrants that:
(A) Employee has the full power and authority to enter into this
Agreement.
(B) Employee's performance of the Services for Company will not
violate any agreement with a prior employer, or with another
person or firm.
(C) Employee is not subject to any existing confidentiality agreement
or obligation that has not been fully disclosed to Company.
(D) In performing the services for Company, Employee will not use or
infringe, or cause Company or Company's clients to use or
infringe, any patent, copyright, trademark, trade secret, or
other proprietary right belonging to any third part, unless
Employee obtains in writing all the necessary waivers and
releases for such use.
INDEMNIFICATION
Employee agrees that Employee will indemnify and defend Company and Company's
clients against any liability, claim, and expense (including reasonable
attorney's fees) arising out of any act or omission on Employee's part in
carrying out Employee's activities under this Agreement or any breach of the
representations and warranties contained in this Agreement.
MISCELLANEOUS PROVISIONS
This Agreement supersedes any and all oral or written communications between
Employee and Company regarding the subject matter of this Agreement, except any
nondisclosure agreement between Employee and Company, and contains the entire
agreement for these Services. Company may, from time to time, require changes in
the Services, provided such changes are mutually agreed upon by Company and
Employee and are incorporated by written amendments referencing or incorporating
this Agreement.
In any litigation arising out of this Agreement, the prevailing party will be
entitled to recover all reasonable attorney's fees and expenses of litigation,
including fees and appeal or petition for review. Venue in any legal action will
exist exclusively in state or federal courts in Houston, Texas. The
unenforceability, invalidity, illegality, or termination of any provision of
this Agreement will not render any other provision of this Agreement
unenforceable, invalid, or illegal, or terminate this Agreement or other rights
or obligations of Company or Employee. This agreement will be governed by the
laws of the State of Texas and applicable United States Federal Law.
This agreement is executed as of the date indicated below (April 21, 1999).
<PAGE> 4
This Agreement creates personal rights, and may not be transferred or assigned
without the express prior written consent of the other party; except that
Company may transfer its rights and delegate its obligations to any corporate
successor of Company. AES agrees to purchase liability insurance for corporate
personnel such as CFO, CEO, etc. to offset any possible legal exposure, coming
from execution of duties; within 90 dys of the signing of this agreement.
In addition, Employee is eligible to provided with bonuses or other compensation
as approved by the Board of Directors. Company will provide Employee with the
cost of tollway costs (EZ Tag), CPA review courses and exams, cellular phone for
business purposes, and other expense as mutually agreed upon between Employee
and Company.
IN WITNESS WHEREOF, the parties have executed this agreement on this 21st day of
April 1999.
Employer:
/s/ PAT S. ELLIOTT, PRESIDENT for AMERICAN ENERGY SERVICES, INC.
Employee:
/s/ ROBERT S. LOVE
<PAGE> 5
DESCRIPTION OF SERVICES
Overall financial, accounting and MIS management, strategic planning, banking
relations, budget management, cost accounting and financial reporting.
<PAGE> 1
Exhibit 23
June 25, 1999
The Board of Directors
American Energy Services, Inc.
In connection with our audits of the financial statements of American Energy
Services, Inc. as of February 28, 1999, 1998, and 1997, and for each of the
three years in the period ended February 28, 1999, which financial statements
are included in the Form 10-KSB, we have also audited the financial statement
schedules listed in Item 14 herein.
In our opinion, these financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
/s/ Simonton, Kutac, & Barnidge, L.L.P.
Simonton, Kutac, & Barnidge, L.L.P.
