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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________
FORM 10-SB/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
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AMERICAN INTERNATIONAL INDUSTRIES, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 88-0326480
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
601 CIEN ROAD, SUITE 235
KEMAH, TEXAS 77565
(Address of principal executive offices) (Zip Code)
(281) 334-9479
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is to Be Registered
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None None
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of Class)
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All references to American International Industries, Inc. common stock
reflect a three for one common stock split effective July 1996.
PART I
Item 1. Description of Business
Some of the statements contained in this Form 10-SB/A for American
International Industries, Inc. ("AIII" or "Company"), discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. The term "AIII" or the
"Company" refers to American International Industries, Inc. or to American
International Industries, Inc. and its consolidated subsidiaries, as applicable.
These statements are subject to known and unknown risks, uncertainties, and
other factors that could cause the actual results to differ materially from
those contemplated by the statements. The forward-looking information is based
on various factors and is derived using numerous assumptions. Important factors
that may cause actual results to differ from projections include, for example:
. the success or failure of management's efforts to implement their
business strategy;
. the ability of the Company to raise sufficient capital to meet
operating requirements;
. the ability of the Company to protect its intellectual property
rights;
. the ability of the Company to compete with major established
companies;
. the effect of changing economic conditions;
. the ability of the Company to attract and retain quality
employees; and
. other risks which may be described in future filings with the
SEC.
General
American International Industries, Inc. is a Nevada corporation which
began conducting its current operations in September 1996, when it made its
first acquisition. The Company is a holding company currently operating six
subsidiaries:
. Acqueren, Inc. (whose sole business operating entity is
Northeastern Plastics Inc. which is a supplier of automotive
after-market products and consumer durables),
. Brenham Oil & Gas, Inc. (an owner of an oil and gas royalty
interest),
. Har-Whit/Pitt's & Spitt's, Inc. (a manufacturer and distributor
of barbeque pits and a custom sheet metal fabricator),
. Modern Film Effects, Inc., doing business as, Cinema Research
Corporation, (a provider of optical title and credits services
and digital special effects for the motion picture industry),
. Texas Real Estate Enterprises, Inc. (which owns certain
undeveloped real estate in Harris, Galveston, and Chambers
counties in Texas, some of which is held by its wholly-owned
subsidiary Midtowne Properties, Inc.), and
. Marald, Inc., doing business as, Unlimited Coatings, and Tough
Truck and Accessories, Inc., doing business as, Armor linings
(which provide spray-on bed liners as well as other related
products).
The Company's long-term strategy is to expand the operations of each of its
subsidiaries in their respective fields.
The Company encounters substantial competition, in each of its product
and service areas, with businesses producing the same or similar products or
services, or with businesses producing different products designed for the
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same uses. Such competition is expected to continue. Depending on the particular
market involved, the Company's businesses compete on a variety of factors, such
as price, quality, delivery, customer service, performance, product innovation
and product recognition. Other competitive factors for certain products include
breadth of product line, research and development efforts and technical and
managerial capability.
American International Industries, Inc.
In September 1994, the Company was incorporated in Nevada under the
name Black Tie Affair, Inc. for the purposes of engaging in catering services.
In July 1996, an unaffiliated group of investors purchased shares of Company
common stock constituting 90% of the outstanding shares of Black Tie Affair,
Inc. This group changed the name of the Company to Pitts and Spitts of Texas,
Inc., and acquired Pitt's & Spitts, Inc. and Har-Whit, Inc. in September 1996.
In September and October 1997, a new investor group ("1997 Group") including Mr.
Daniel Dror, Sr., gained control of the Company through the following arms-
length negotiated transactions with the Company and unaffiliated third parties:
(i) Elk International Corporation, Ltd., an entity controlled by Mr. Dror's
brother, purchased 5,000,000 shares of Company common stock at a purchase price
of $0.03 per share from the Company, received an option to purchase 2,000,000
shares of Company common stock at an exercise price of $0.02 per share from the
Company, and purchased 1,200,000 shares of Company common stock at a purchase
price of $0.03 per share from an individual (Mr. Dror has never owned any shares
of Elk International Corporation, Ltd., nor has he ever served as an officer or
director of such entity), (ii) Jack Talan, a former director of the Company,
purchased 500,000 shares of Company common stock from the Company at a purchase
price of $0.10 per share, and (iii) Daniel Dror & Company, Inc., formerly
controlled by Mr. Dror, purchased 200,000 shares of Company common stock at a
purchase price of $0.03 per share from an individual. At the closing of this
transaction, the sole operating entities of the Company were its two
subsidiaries Pitt's & Spitt's, Inc. and Har-Whit, Inc. This group elected a new
board of directors, appointed current management, and appointed Mr. Dror
chairman of the board and chief executive officer. In December 1997, the name of
the Company was changed to Energy Drilling Industries, Inc., and in June 1998,
the Company changed its name to American International Industries, Inc.
In January 1998, the Company amended its Articles of Incorporation to
increase its authorized common shares to 100,000,000 and to authorize 10,000,000
preferred shares. In September 1998, the Company amended its Articles of
Incorporation to increase its authorized common shares to 200,000,000 ("Common
Stock"). The Company is located at 601 Cien St., Suite 235 in Kemah, Texas
77565. Its telephone number is (281) 334-9479.
As of October 18, 1999, the Company, excluding its subsidiaries,
employed four persons, on a full-time basis, none of which are covered by a
collective bargaining agreement.
Har-Whit/Pitt's & Spitt's, Inc.
In September 1996, prior to the 1997 Group gaining control of AIII,
the Company purchased all of the capital stock of Pitt's & Spitt's, Inc., a
Texas corporation, incorporated in December 1989, and Har-Whit, Inc., a Texas
corporation, incorporated in January 1975, for 2,527,000 shares of Common Stock
and $500,000 in exchange for non-compete agreements with the previous owners.
Messrs. Hartis and Whitworth, two of the prior owners of the above corporations
who served as directors for fiscal year 1998, each received 631,750 shares of
Common Stock and $250,000 in connection with the acquisitions. In August 1998,
Pitt's & Spitt's, Inc. was merged into Har-Whit, Inc., which subsequently
changed its name to Har-Whit/Pitt's & Spitt's, Inc. ("Har-Whit"). Har-Whit is
located at 14221 Eastex Freeway in Houston, Texas 77032. Its telephone number is
(281) 442-5013.
Brenham Oil & Gas, Inc.
In December 1997, the Company purchased all of the capital stock of
Brenham Oil and Gas, Inc., a Texas corporation, incorporated in November 1997
("Brenham"), for 6,000,000 shares of Common Stock from Daniel Dror II 1976
Trust. At the time of the transaction, Mr. Dror was the trustee of the Daniel
Dror II 1976 Trust, but he has never had any financial interest in such trust,
the sole beneficiary being Mr. Dror's son. Brenham's sole asset is an oil and
gas royalty interest which was owned by the Daniel Dror II 1976 Trust prior to
December 1995. The mineral rights which resulted in the royalty interest, were
retained by the Daniel Dror II 1976 Trust in a real estate sale transaction. All
of the cost basis which the Daniel Dror II 1976 Trust had in that property was
attributed to the property which was sold, thus no basis is attributed to the
mineral interest. Brenham is located at 601 Cien Road, Suite 235 in Kemah, Texas
77565. Its telephone number is (281) 334-9479.
Texas Real Estate Enterprises, Inc.
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In December 1997, the Company purchased all of the capital stock of
Texas Real Estate Enterprises, Inc. a Texas corporation, incorporated in March
1996 ("TRE"), for 10,000,000 shares of Common Stock from Elk International
Corporation, Ltd., which is controlled by Mr. Dror's brother. The Company also
purchased G.C.A. Incorporated ("GCA") (wholly owned by an unrelated individual)
for 6,000,000 shares of AIII Common Stock. TRE and GCA are collectively referred
to as TRE. In May 1998, the Company through TRE issued 8,000,000 shares of AIII
Common Stock to Daniel Dror & Company, Inc., which at the time of the
transaction was controlled by Mr. Dror in exchange for additional property. In
June 1998, the Company through TRE purchased all of the capital stock of
Midtowne Properties, Inc. ("Midtowne") for 1,100,000 shares of AIII Common
Stock, from two parties, one of which was the Daniel Dror II 1976 Trust, which
received 660,000 shares of AIII Common Stock. In December 1998, because the
appraisals on the properties exceeded the preliminary values of the properties
as estimated by both parties to the transaction, the Company authorized the
issuance of an additional 1,000,000 shares of AIII Common Stock, of which the
party with which Mr. Dror was affiliated was to receive 600,000 shares. The
purchase price of TRE, GCA, Midtowne Properties, Inc., and the additional
property was established based on the fair market value of the assets acquired
as determined by independent, certified appraisals. Management believes the
terms of the purchases were fair and reasonable based on such appraisals. TRE is
located at 601 Cien Road, Suite 235 in Kemah, Texas 77565. Its telephone number
is (281) 334-9479.
Acqueren, Inc.
In June 1998, the Company entered into a purchase agreement to acquire
all of the capital stock of Acqueren, Inc., a Delaware corporation, incorporated
in December 1995 ("Acqueren"), which operates through its wholly-owned
subsidiary Northeastern Plastics, Inc., a New York corporation, incorporated in
January 1986 ("NPI"). The purchase agreement provided for the issuance of
6,750,000 shares of Common Stock to the two largest shareholders of Acqueren in
exchange for approximately 55% of the outstanding capital stock of Acqueren, and
provided for the remaining shareholders of Acqueren to receive approximately
25.02 shares of Common Stock for each share of Acqueren common stock exchanged
(these remaining shares of Acqueren common stock had been issued pursuant to a
private placement and included a warrant to purchase one share of Acqueren
common stock, which is included in the above exchange). The transaction was
closed effective July 1, 1998, and through July 1, 1999, the Company had
exchanged shares representing a total of approximately 99% of the outstanding
shares of Acqueren. Based upon the estimated fair value of the restricted common
stock of AIII ($.08 per share at date of acquisition), the total purchase
consideration for Acqueren was approximately $2,140,000. Based on the
representations made to it at the time of the transaction, management believed
the terms of the acquisition were fair and reasonable being based on arms-length
negotiations. NPI is located at 11601 Highway 32 in Nicholls, Georgia 31554. Its
telephone number is (912) 345-2030.
Modern Film Effects, Inc.
In September 1998, the Company purchased all of the capital stock of
Electronic Pictures California, Inc., a California corporation, incorporated in
August 1997, in exchange for 1,900,000 shares of Common Stock. Electronic
Pictures California, Inc. owned an option to purchase all of the capital stock
of Modern Film Effects, Inc., a California corporation, incorporated in June
1962, doing business as Cinema Research Corporation, and Digital Research
Corporation, a California corporation, incorporated in June 1993. In September
1998, the Company exercised such option and purchased all of the capital stock
of Modern Film Effects, Inc. and Digital Research Corporation (referred to
collectively as "CRC"), for 4,400,000 shares of Common Stock and options to
purchase 400,000 shares of Common Stock over five years at $0.20 per share to
Jordan Friedberg. In November 1998, Digital Research Corporation became a
wholly-owned subsidiary of Modern Film Effects, Inc. Based upon the estimated
fair value of the restricted common stock at the date of closing of $1,260,000
($.20 per share), stock options valued at $32,000, and the discounted present
value of the note payable to a selling stockholder ($303,300), the total
purchase consideration was $1,595,300. Management believes the terms of the
acquisitions were fair and reasonable being based on arms-length negotiations.
CRC is located at 6860 Lexington Avenue in Hollywood, California 90038. Its
telephone number is (323) 460-4111.
Marald, Inc. and Tough Truck and Accessories, Inc.
Effective January 7, 1999, the Company purchased all of the capital
stock of Marald, Inc., doing business as Unlimited Coatings, a Texas
corporation, incorporated in July 1996, in exchange for 3,500,000 restricted
shares of Common Stock of AIII valued at fair market value of approximately
$652,000 at $.19 per share plus a finders fee of $45,000 paid in part to a party
related to Mr. Dror. In addition, under the terms of the acquisition agreement,
the Company agreed to provide chemicals at a discount to Toro Spray-On Liners,
Inc. an entity partially owned by the above related party, for a period of six
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months. The six month period has expired and the total amount of the discount
was $4,800. The Unlimited Coatings acquisition has been accounted for as a
purchase. In April 1999, the Company acquired all of the outstanding shares of
Tough Truck and Accessories, Inc., doing business as Armor Linings, a Texas
corporation, incorporated in March 1996. The Company paid cash in the amount of
$143,000 and assumed approximately $85,000 related to certain equipment lease
obligations. The acquisition is accounted for as a purchase. Unlimited Coatings
and Armor are located at 1107-B Upland, Houston, Texas 77043. Their telephone
number is (713) 647-8676.
Recent Developments
In May 1999, the Company purchased for investment purposes, 400,000
shares of common stock of World Wide Net, Inc. ("WWN") (giving effect to a 1 for
5 reverse split) for a total of $300,000 representing 20% of the total
outstanding shares of WWN. WWN is an inactive public company with nominal assets
traded on the OTC Bulletin Board. Accordingly, the Company has attributed its
investment in WWN primarily to goodwill.
In September 1999, the Company entered into an agreement with
WWN, to exchange all of the outstanding shares of CRC for 3,100,000 shares of
WWN common stock representing 62% of the total outstanding capital stock of WWN.
In June 1999, the Company entered into an agreement to acquire all of
the optical title, special effects and the scan and record operations of Pacific
Title/Mirage Studios. The agreement was subsequently assigned to WWN, and in
September 1999, WWN determined that the transaction would not close as it
believed the transaction not to be in the best interest of WWN.
Business Operations of Har-Whit/Pitt's & Spitt's, Inc.
Har-Whit is (i) a manufacturer and seller of barbeque pits and
accessories, and (ii) a custom sheet metal and light structural fabrication
company specializing in stainless steel and aluminum. Har-Whit began selling
barbeque pits in 1983, and began its fabrication business in 1973.
Products and Services
Har-Whit manufacturers ten standard styles of high quality barbeque
pits that it sells at retail at prices ranging from $625 to $4,395. In addition,
Har-Whit manufacturers custom barbeque pits which have been sold at prices as
high as approximately $35,000. Har-Whit's barbeque pits are sold under the name
"Pitt's & Spitt's," which management believes has established a reputation for
quality in the industry. In addition, Har-Whit offers a number of related
spices, sauces, accessories, cooking tools, and cookbooks in its retail showroom
and, on a very limited basis, through catalogs.
Har-Whit's custom fabrication business specializes in fabrication for
commercial and industrial customers predominantly in the energy and
environmental fields. Har-Whit also builds custom products for other
manufacturers under sub-contract agreements, on an as needed basis, from
specifications and drawings provided by the customer.
Har-Whit's primary raw material for both its barbeque pits and custom
fabrication business is steel, and its
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principal suppliers are Triple S-Steel Supply, Vincent Metal Goods, and White
Star Steel, which are all located in Houston, Texas. To date, Har-Whit has been
able to receive shipments of raw materials within 48 hours of order.
Sales and Marketing
Har-Whit distributes its barbeque pits primarily through its retail
outlet in Houston, Texas, as well as through individual mail orders. Har-Whit
has over the years, advertised in various publications, in addition to
television and radio. Har-Whit does little advertising and primarily markets its
barbeque products and custom fabrication business through limited advertising,
the Internet, and word of mouth.
Currently, Har-Whit has no contracts with distributors, no retail
agreements, and no marketing plan. Management believes its ability to increase
production is dependent, among other items, on its ability to increase its
facilities. In addition, even if Har-Whit is able to increase production, there
can be no assurance that there will be sufficient demand for its products.
In December 1998, Har-Whit entered into an agreement with Shabang!
Shopping Service ("Shabang"). Shabang hosts an online shopping service on the
Internet and provides merchants with the ability to create a "virtual" store
where customers can order products directly from the Internet. Har-Whit's
agreement expires in December 1999 and the monthly fee paid to Shabang is
approximately $300.
Competition
Har-Whit competes against other manufacturers of barbeque pits, some
of which have far greater financial, marketing, and other resources than Har-
Whit. Har-Whit competes primarily on the basis of customer service and quality.
Management believes its primary and most recognizable competitors in its primary
sales markets are Klose Custom Barbeque Pits of Houston and Oklahoma Joe's of
Oklahoma. There can be no assurance that Har-Whit will be able to successfully
compete in this highly competitive marketplace.
Har-Whit competes in its custom fabrication business primarily on the
basis of quality and service. Har-Whit competes against other custom fabricators
for a limited amount of fabrication business. The recent downturn in oilfield
activity has increased competitive pressures, and Har-Whit intends to increase
its marketing emphasis on other industries, although currently no marketing plan
has been developed. Due to Har-Whit's narrow specialization in stainless and
aluminum products, it competes with a relatively small number of entities.
Management believes its primary and most recognizable competitors in the custom
fabrication field in the Houston area are Walkup Company, Robertson Metal
Fabrication, Campo Sheet Metal Works, Inc., Maudlin & Son, and Precision Metal
Fab Co. There can be no assurance that Har-Whit will be able to successfully
compete in this marketplace.
Employees
As of October 18, 1999, Har-Whit employed 28 persons, on a full-time
basis, including management, sales, office, and manufacturing employees. No
employees are covered by a collective bargaining agreement. Management considers
relations with its employees to be satisfactory.
Facilities
Har-Whit currently operates from one office in Houston, Texas, that it
owns. In addition, Har-Whit has acquired land for expansion adjoining its
current facility consisting of approximately 26,000 square feet for $28,000 and
a five year note of $30,000. Har-Whit is planning to add an additional 9,000
square feet to the existing manufacturing facilities on this land at a cost of
approximately $250,000 if sufficient funding can be obtained, to effect its
business strategy of increased sales as management believes a greater demand
exists for its products. One of AIII's primary functions is to assist its
subsidiaries to raise the necessary capital to support such growth, however,
there is no assurance that Har-Whit will be able to raise adequate proceeds to
effectuate any expansion plans. If Har-Whit is unable to raise sufficient
proceeds to fund such expansion, it will continue to operate out of its current
facilities and with its current equipment. If Har-Whit is unable to fund plant
expansion and purchase new production equipment, it may not be able to
effectuate its business strategy of increased sales.
Business Operations of Brenham Oil & Gas, Inc.
Brenham's sole asset is an oil, gas, and mineral royalty interest
covering a twenty-four acre tract of land
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located in Washington County, Texas. The royalty interest is currently leased by
Union Pacific Resources Company ("Union Pacific") for a term continuing until
the covered minerals are no longer produced in paying quantities from the leased
premises. Royalties on the covered minerals produced are paid to Brenham as
follows: (i) for oil and other liquid hydrocarbons, the royalty is one-sixth of
such production, (ii) for gas (including casinghead gas) the royalty is one-
sixth of the net proceeds realized by Union Pacific on the sale thereof, less a
proportionate part of ad valorem taxes and production, severance, or other
excise taxes. In addition, Brenham is entitled to shut-in royalties of $1 per
acre of land for every ninety-day period within which one or more of the wells
on the leased premises, or lands pooled therewith, are capable of producing in
paying quantities, but such wells are either shut-in or production is not being
sold. Currently, Brenham is not actively seeking further royalty agreements.
Brenham is operated from AIII's office in Kemah, Texas.
Competition
Brenham's profitability is dependent on Union Pacific's ability to
generate profits from the tract of land on which Brenham owns its royalty
interest. The oil and gas industry is highly competitive, and Union Pacific
competes against companies with substantially larger financial and other
resources. Union Pacific's competitors include major integrated oil and gas
companies and numerous other independent oil and gas companies and individual
producers and operators. Competitive factors include price, contract terms, and
types and quality of service, including pipeline distribution logistics and
efficiencies, all of which may reduce any royalty payments made to Brenham.
Government Regulation
As stated previously, Brenham's profitability is dependent on Union
Pacific's profitability. As Union Pacific is regulated by various state and
federal authorities, there is no assurance that Union Pacific's profitability,
and therefore Brenham's profitability, will not be adversely affected. As
Brenham only owns a royalty interest on the subject land it is not directly
responsible for any costs in connection with environmental laws, nor is it
subject to penalties for non-compliance with any such laws. Union Pacific is
subject to the following governmental regulations:
STATE REGULATION OF OIL AND GAS PRODUCTION. The State of Texas
regulates the production and sale of oil and natural gas, including requirements
for obtaining drilling permits, the method of developing new fields, the spacing
and operation of wells and the prevention of waste of oil and gas resources. In
addition, Texas regulates the rate of production and may establish maximum daily
production allowable from both oil and gas wells on a market demand or
conservation basis.
ENVIRONMENTAL REGULATIONS. Union Pacific's activities are also subject
to existing federal and state laws and regulations governing environmental
quality and pollution control. As of March 15, 1999, Union Pacific is in
compliance, in all material respects, with applicable environmental
requirements. There can be no assurance that future developments, such as
increasingly stringent environmental laws or enforcement thereof, will not cause
Union Pacific to incur material environmental liabilities or costs, which may
adversely effect its business.
OIL PRICE REGULATION. Historically, regulatory policy affecting crude
oil pricing was derived from the Emergency Petroleum Allocation Act of 1973, as
amended, which provided for mandatory crude oil price controls until June 1,
1979, and discretionary controls through September 30, 1981. On April 5, 1979,
President Carter directed the Department of Energy to complete administrative
procedures designed to phase out, commencing June 1, 1979, price controls on all
domestically produced crude oil by October 1, 1981. However, on January 28,
1981, President Reagan ordered the elimination of remaining federal controls on
domestic oil production, effective immediately. Consequently, oil may currently
be sold at unregulated prices.
GAS PRICE REGULATION. The Natural Gas Act of 1938 regulates the
interstate transportation and certain sales for resale of natural gas. The
Natural Gas Policy Act of 1978 ("NGPA") regulates the maximum selling prices of
certain categories of natural gas and provided for graduated deregulation of
price controls for first sales of several categories of natural gas. With
certain exceptions, all price deregulation contemplated under the NGPA as
originally enacted in 1978 has already taken place. Under current market
conditions, deregulated gas prices under new contracts tend to be substantially
lower than most regulated price ceilings prescribed by the NGPA.
Business Operations of Texas Real Estate Enterprises, Inc.
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TRE and its wholly-owned subsidiary Midtowne Properties, Inc. own nine
tracts of land in Harris, Chambers, and Galveston counties in Texas. See "Item
2. Description of Property." TRE is operated from AIII's office in Kemah, Texas.
All the properties owned by TRE are undeveloped commercial properties
free of any mortgage obligations, however certain properties are subject to
property taxes in the amount of approximately $357,000 in the aggregate. Such
properties are available for sale, however, management will explore development
possibilities of its properties if such possibilities are presented. At this
time no development plans are being considered.
Competition
There is intense competition among companies in the real estate
investment and development business. Sales and payments on real estate sales
obligations depend, in part, on available financing and disposable income and,
therefore, are affected by changes in general economic conditions and other
factors.
The real estate development business and commercial real estate
business are subject to other risks such as shifts in population, fluctuations
in the real estate market, and unpredictable changes in the desirability of
residential, commercial and industrial areas. There is no assurance that TRE
will be able to compete in this market.
Employees
As of October 18, 1999, TRE employed one person, its president, on a
full-time basis, all other operating functions are handled by the Company's
personnel.
Regulation
TRE's real estate operations are subject to comprehensive federal,
state, and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and credit
policies. In the future, if TRE decides to develop its properties, periodic
approval is required from various agencies in connection with the design of
developments, the nature and extent of improvements, construction activity, land
use, zoning, and numerous other matters. Failure to obtain such approval, or
periodic renewal thereof, could adversely affect the real estate development and
marketing operations of TRE. Various jurisdictions also require inspection of
properties by appropriate authorities, approval of sales literature, disclosure
to purchasers of specific information, bonding for property improvements,
approval of real estate contract forms and delivery to purchasers of a report
describing the property.
A number of states and localities have adopted laws and regulations
imposing environmental controls, disclosure rules and zoning restrictions which
have impacted the management, development, use, and/or sale of real estate. Such
laws and regulations tend to discourage sales and leasing activities and
mortgage lending with respect to some properties, and may therefore adversely
affect TRE. Failure of TRE to disclose environmental issues in connection with a
real estate transaction may subject it to liability to a buyer or lessee of
property. Property management services also could subject TRE to environmental
liabilities pursuant to applicable laws and contractual obligations to property
owners. Insurance for such matters may not be available. Additionally, new or
modified environmental regulations could develop in a manner which have not, but
could adversely affect TRE. TRE's financial results for the fiscal year 1998
have not been materially impacted by its compliance with environmental laws or
regulations, and no material capital expenditures relating to such compliance
are planned.
Business Operations of Acqueren, Inc.
Acqueren through its wholly-owned subsidiary NPI, is a supplier of
products to retailers and wholesalers (i) in the automotive after-market, and
(ii) in the consumer durable electrical products markets.
Products and Services
NPI's products in the automotive after-market include a variety of
booster cables sold under the brand name "Mechanix Choice" and "Bitty Booster
Cable." Also supplied under the brand name "Mechanix Choice," NPI markets
portable hand lamps, cord sets, and a variety of battery testers, battery repair
kits, and miscellaneous battery accessories.
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The "Mechanix Choice" brand of booster cables was introduced in 1995,
and its products are currently available at CSK Automotive, Family Dollar,
Victor Automotive Products, Sam's Club, Caldor, and Bradlees, among others.
NPI's "Bitty Booster Cable" brand of booster cables are currently distributed in
the automotive after-market and through well established food and drug retail
channels.
NPI's consumer durable electrical products include flood light kits,
clamp on lamps, household extension cords, tri-tap extension cords, heavy duty
extension cords, night lights, and surge protection devices. All of NPI's
consumer durable electrical products are UL Listed.
Beginning in late 1996, management changed its business strategy, and
began to target what it believed to be the less competitive food and drug and
variety retail industry. By adding more food and drug related items such as
power strips, multiple outlet devices, cord sets, and night lights, NPI has been
able to enter the consumer durables market at such locations as Family Dollar
Stores, Bills Dollar Stores, and Dollar Tree Stores.
Currently, virtually all of NPI's products are manufactured overseas.
NPI's products are manufactured based on NPI's specifications and design. Since
1995, NPI has changed all but one of its overseas suppliers, and as a result
management believes it has been able to reduce purchasing costs and increase
product quality. Currently, NPI has no long-term agreements with any overseas or
domestic manufacturers for its products, but relies on management's personal
contacts with such manufacturers in renewing its present agreements. There is no
assurance that NPI will be able to renew its present agreements with
manufacturers on terms economically favorable to NPI, if at all. The inability
of NPI to renew its agreements on economically favorable terms would have a
material adverse effect on NPI.
NPI orders the materials for its principal products from the following
manufacturers: Apollo Wire and Cable supplies NPI's electrical cord sets;
Longqou Dongli Wire and Cable supplies NPI's booster cables; Rite Tech supplies
NPI's surge strips; and Dashing Electric supplies NPI's night lights. To date,
NPI has typically received shipments from the above suppliers within 8-10 weeks
of order. Management believes that if NPI should be unable to utilize any of the
above suppliers, it would be able to find alternative suppliers on comparable
terms.
Sales and Marketing
Currently, NPI has no agreements with distributors, wholesalers, or
retailers, but sells its products from its warehouse through the use of
independent sales agents and through its in-house personnel. NPI contracts with
agents, which are responsible for contacting potential customers and clients in
a pre-determined sales area. NPI provides these agents with manuals, brochures,
and other promotional materials which are used in the selling process. After
sales are completed through the use of an agent, NPI directly bills the
customer, and all payments are made directly to NPI. Agents are compensated
solely on a commission basis, calculated on the net sales price of products
which are invoiced to customers. No commissions are paid until NPI receives
payment from customers.
NPI also sells a substantial portion of its products under a customer
friendly direct import program ("D/I program"). The D/I program offers NPI
customers the additional services of arranging for overseas manufacturing and
delivery to overseas freight forwarders. NPI can also arrange for the complete
turn key deliveries of its products to its customers place of business in the
United States. Under a turn key D/I program, NPI arranges, at an additional cost
to its customers, on site factory inspections of the goods prior to the
container loading, ocean and domestic freight services, customs and brokerage
services, as well as container unloading at the customer's facility. NPI's
direct import sales are primarily guaranteed through a customer irrevocable bank
letter of credit issued by the customer. Currently, management estimates that
over one half of sales are made through the use of its D/I program. Management
believes the D/I program provides to its customers the most cost effective means
of obtaining large volumes of products. The average volume of NPI's direct
import shipments are substantially larger than its warehouse shipments
(management estimates that D/I program orders average a minimum of $40,000 to a
high of $1,200,000, as compared to warehouse shipments which average $1,200),
however, NPI is unable to realize the same gross profit margins on D/I program
orders, as compared to warehouse shipments. Management estimates that D/I
program gross profit margins range from a low of 8% to a high of 19%, while the
gross profit margins on its warehouse sales range from a low of 19% to a high of
40%.
NPI has chosen not to target several of the larger retailers in the
consumer market such as Home Depot, Lowes, Builders Square, Wal-Mart, K-Mart,
and Ace Hardware due to its capital limitations and due to the extreme
competitive market conditions for such accounts. While there is no assurance,
management believes it will be able to increase margins by focusing solely on
smaller and mid-market retailers which management believes have been
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ignored by larger producers.
In fiscal year 1998, Family Dollar Stores, West Coast Liquidations,
and Consolidated Stores accounted for a large amount of NPI's revenues. There is
no assurance that NPI will be able to retain these customers, and the loss of
any of these customers may have an adverse effect on NPI.
In December 1998, NPI entered into an agreement with Shabang! Shopping
Service. Shabang hosts an online shopping service on the Internet and provides
merchants with the ability to create a "virtual" store where customers can order
products directly from the Internet. NPI's agreement expires in December 1999
and the monthly fee paid to Shabang is approximately $350.
Competition
In the safety products category of the automotive after-market, of
which a substantial portion of NPI's products fall, NPI competes against a large
number of suppliers many of which have far greater financial resources than NPI.
In addition, management has seen little movement between suppliers at major
national retailers, and as such, NPI's ability to increase market share will be
limited. Management believes its primary competitors in the safety products
market include General Cable, Coleman Cable, East Penn, Champion, and many other
producers and importers. Based on current sales, management believes its market
share of this safety products category to be approximately 4%. There can be no
assurance that NPI will be able to successfully compete in this marketplace.
In the consumer durables electrical products market, NPI competes
against a large number of suppliers many of which have far greater financial
resources than NPI. Management believes its primary competitors in the consumer
durables market include Pacific Electricord Company, Woods Wire, General Cable,
Coleman Cable, and various other producers. Based on current sales, management
believes its market share of the consumer durables electrical product market to
be approximately 1.4%. There can be no assurance that NPI will be able to
successfully compete in this marketplace.
Price is a highly significant factor in the safety products market and
the consumer durables electrical products markets. Many of NPI's products are
made to industry specifications, and are therefore essentially functionally
interchangeable with those of competitors. However, NPI believes that
significant opportunities exist to differentiate all of its products on the
basis of quality, reliability, and customer service.
Intellectual Property
NPI has been issued the following trademarks: "Northeastern" (TM),
expiring December 2006, "Jumpower" (TM), expiring February 2009, "The Bitty
Booster Cable" (TM), expiring August 2008, "connections with quality" (TM),
expiring October 2006, and "small enough to fit in your glove box strong enough
to start your car" (TM), expiring October 2007.
Employees
As of October 18, 1999, NPI employed seven persons, on a full-time
basis, including management, customer service, and warehouse employees. No
employees are covered by a collective bargaining agreement. Management considers
relations with its employees to be satisfactory.
Facilities
NPI currently operates from one facility in Nicholls, Georgia. Its
facility is 30,000 square feet and is leased for $3,275 per month. The lease
expires in October 1999 and NPI has exercised an option to renew such lease for
an additional two-year period with the monthly lease payments increased based on
the consumer price index.
Business Operations of Modern Film Effects, Inc.
Modern Film Effects, Inc. consists of two divisions, Cinema Research
Optical and Title and Cinema Research Digital, which together provide full
technical, optical, and digital services for motion pictures, television,
commercial, and industrial producers, directors, editors, special effects
supervisors, and title designers. CRC's two divisions are distinct California
corporations, Modern Film Effects, Inc., d/b/a Cinema Research Corporation and
its
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wholly-owned subsidiary Digital Research Corporation, which are collectively
referred to as CRC.
Management estimates that it completed more than 250 optical services
projects in its last fiscal year, and its client list consists of many of the
major studios in Hollywood, including Sony Film's Tri-Star Pictures, Columbia
Pictures, Paramount Studios, Universal Studios, and Disney Studios.
In addition, CRC is conducting initial investigations as to the
feasibility of offering high-definition television ("HDTV") production to the
marketplace through Electronic Pictures California, Inc., a wholly-owned
subsidiary of AIII. CRC has engaged the services of a person, on an at-will
employment basis, with prior experience in HDTV in Japan. CRC has no agreements
with any manufacturers, distributors, or retailers of HDTV. CRC has no
agreements with any customers for the sale or marketing of HDTV. This possible
venture is in the preliminary stages and there can be no assurance that the
production of HDTV will ever become viable within CRC.
Products and Services
CRC's services include both optical and digital services. Its optical
services, which encompass all items that can be performed on a 35mm camera
printing system, include the following:
. Photographic creation of titles and credits - The artistic
creation of the main or opening titles and end credits, and
composting them on film.
. Correcting optical defects - The correction of defects found on
the original film that can be corrected optically.
. Wire removal - The removal of an object that is not wanted in the
viewing frame.
. Blue screen composites - The process of adding the background
scene behind a person or object that has been shot first with a
blue screen behind it, or the ability to add a person or object
into the scene that was not present in the scene when it was
shot.
. Optical special effects - The creation of special effects by
optical cameras.
CRC's digital services consist of the production of digital special
effects, or special effects that are created on a computer system and then
transferred to film or videotape. CRC's digital services are provided by
digitizing film, creating special effects in the digitized format, and
subsequently transferring the digitized images back to film. Digitizing film
involves the process of transferring and storing film frame by frame into a
computerized storage system. Once this process is complete, the film in this
digitized format may be manipulated, corrected, changed, or altered from its
original created in film or video. After this process, the digitized images are
converted back to film or video.
Sales and Marketing
CRC believes it can exploit its market share in the optical services
industry to promote its digital services. Previously, CRC had marketed its
digital services to large scale special effect projects involving significant
labor and technological costs. CRC no longer intends to pursue these large scale
projects, and instead will only market its digital services at the post-
production stage along with its optical services to smaller projects with fewer
special effects. The larger projects required CRC to competitively bid for
services, which often times produced losses when unexpected costs occurred.
These smaller projects are priced by the special effect, thereby allowing CRC to
better estimate its costs. While management believes CRC's business strategy may
reduce gross revenues attributable to digital services, it believes that it will
be better able to control costs.
CRC's primary marketing method is through David R. Miller's
relationships with studios in the industry. Mr. Miller, CRC's vice-president of
marketing, has been involved in the industry for over twenty years, and has
cultivated relationships with such studios as Tri-Star Pictures and Columbia
Pictures. Management estimates that Mr. Miller's contacts have accounted for
over 65% of CRC's optical business, with 60% derived solely from business
conducted with Tri-Star Pictures and Columbia Pictures. The loss of Mr. Miller
for any reason would severely limit CRC's ability to compete in the industry. In
September 1998, CRC entered into a six-year employment agreement with Mr.
Miller. CRC does not maintain life insurance on Mr. Miller.
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If adequate funding is obtained, CRC intends to update its digital
software and film equipment. If CRC is unable to raise sufficient proceeds to
fund such upgrades, it will continue to operate with its current equipment. CRC
competes in a high technology industry which is characterized by rapid
technological changes. Development by others of new or improved products,
processes, or technologies may make CRC's equipment obsolete or less
competitive. One of AIII's primary functions is to assist its subsidiaries to
raise the necessary capital to support such growth, however, there is no
assurance that CRC will be able to raise adequate proceeds to fund any updates
to its equipment. In addition, even if it is able to update its equipment, there
can be no assurance that its new equipment will not be obsolete in the near
future. While management believes that its optical services business is based on
more established technology, its digital services business is more susceptible
to rapid technological change.
Assuming adequate funding is obtained, CRC intends to market its
services through the use of brochures, videos, and personal contact with
studios. CRC currently employs three sales persons, including Mr. Miller, and
intends to hire one additional sales person in the future. CRC relies on its
ability to package both its optical and digital services for its clients. The
digital services industry is highly competitive and CRC's ability to compete
will depend on its maintaining current technology. There is no assurance that
its market position in the optical industry will enable CRC to compete in the
digital industry. Currently, CRC has no contracts or commitments with any
studios for its services.
Competition
CRC competes primarily against two corporations in the optical
services industry, Pacific Title/Mirage Studio ("PTM") and Howard Anderson
Optical. CRC believes it competes for business through quality production,
personal relationships with studios, long-standing reputation in the industry,
and timely delivery of products. There can be no assurance that CRC will be able
to successfully compete in this marketplace.
CRC is a relatively new entrant in the digital market and is currently
competing on the basis of technology. The cost of digital services machinery and
computers are extensive and are increasing. Therefore, the ability of CRC to
compete in the digital services industry is directly related to its ability to
update its technology. CRC competes against a large number of corporations in
the digital services industry, many with greater financial resources than CRC.
Assuming CRC is able to execute its business strategy, it will begin to focus
solely on the post-production, digital special effects market. Although CRC
believes there will be fewer participants in this market, the market will be
smaller than the current digital market and CRC will be competing for fewer
projects. In addition, CRC believes that its market share in the optical
industry will allow it to more effectively compete in the post-production,
digital special effects market. There can be no assurance that CRC will be able
to successfully compete in this marketplace.
The Company had entered into an agreement to purchase CRC's largest
competitor, PTM. During the pendency of that transaction, a significant portion
of revenues which would normally have been generated by CRC, shifted to PTM. CRC
believes the movie studios desired to avoid any disruption in their work due to
a transition of operations from CRC's facilities to PTM's facilities following
the acquisition. During this period, the operating results of CRC have suffered.
It was later determined that the proposed acquisition would not close due to
unforeseen circumstances, and CRC is working to restore the company to
profitability.
Intellectual Property
CRC has not filed for any patent protection with the United States
Government. There is no assurance that employees of CRC, consultants, advisors
or others will maintain the confidentiality of its technology, or that its
technology will not otherwise become known, or be independently developed, by
competitors. Additionally, there is no assurance that CRC's technology does not
violate patent protections of other companies. The inability of CRC to utilize
its technology or obtain patents may have a material adverse effect on CRC.
Employees
As of October 18, 1999, CRC employed thirty-five persons on a full-
time basis and ten persons on a part-time basis, including management, sales,
office, and manufacturing employees of which twenty persons are covered by
various industry-wide collective bargaining agreements. A strike, job action, or
labor disturbance by the members of any of these organizations may have a
material adverse effect on the Company. Management considers relations with its
employees to be satisfactory.
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Facilities
In December 1998, CRC consolidated its optical and digital facilities
in order to eliminate duplicate administrative costs and reduce personnel. The
consolidation was completed and CRC currently operates out of one facility.
CRC's consolidated facility is located in Hollywood, California. The facility is
20,000 square feet and is leased for $13,000 per month. The lease on the
facility expires on November 30, 1999. CRC had acquired for $50,000 an option on
the facility, expiring on July 31, 1999, which allowed it to purchase the
facility for $1,170,000. In June 1999, the Company reached an agreement with
David R. Miller in which CRC assigned him the option agreement as part of an
equity contribution he made to CRC.
Management has determined that its current facility is in need of
renovations, including interior redecoration and earthquake preparedness
repairs. One of AIII's primary functions is to assist its subsidiaries raise the
necessary capital to support such transactions, however, there is no assurance
that CRC will be able to obtain such funds to complete the renovations. In
addition, there is no assurance that CRC will be able to extend its current
lease on a long term basis, or on terms economically favorable to CRC, if at
all.
Business Operations of Unlimited Coatings and Armor Linings
Unlimited Coatings is a wholesaler of sprayed-on systems, technology
and chemicals throughout the United States. Unlimited Coatings began its
wholesale business in November 1995. Armor Linings is a retailer that applies a
polyurethane sprayed-on liners to truck beds and other products.
Products and Services
Armor Linings operates a facility in Houston, Texas for the
application of spray-on liners for truck beds, undercoating and rust-proofing of
vehicles, and wholesale and retail sales of truck accessories. Armor Linings has
established commercial applications of the coatings, which are applied for
corrosion resistance and noise suppression in diverse uses. Applications include
surfaces exposed to corrosive materials in chemical and refining plants, lining
the interior of refuse containers (dumpsters), spraying floors and decks, and
other applications where a tough surface, resistant to corrosion, moisture and
wear is needed. The chemicals are supplied by Unlimited Coatings.
Unlimited Coatings uses a two-component polyurethane formula that
within minutes of being sprayed into a truck bed, bonds directly to the metal
thereby forming a protective cushion between cargo and the truck bed. The bed
liner also reduces noise, prevents rust, mildew, corrosion and prevents
scratches and dings to the surface of the truck bed. The bed liners are crack
and abrasion resistant, yet are flexible enough to expand and contract in
extreme temperature conditions. In addition, the bed liners are skid resistant
and will not break down or corrode when exposed to fertilizers and other
corrosive chemicals. The bed liners come in various colors, including but not
limited to, black, blue, brown, burgundy, green, and grey.
Unlimited Coatings wholesale operation is in the business of selling
the sprayed-on polyurethane lining systems, technology, and chemicals. After the
initial sale of the system, Unlimited Coatings installs the system and trains
the purchaser to safely and properly operate and maintain the lining system.
After selling the system, Unlimited Coatings will typically continue to provide
chemicals necessary for operation.
Unlimited Coatings purchases the sprayed-on lining systems and
chemicals from Artlux, S.A., and typically receives shipments within 48 hours of
request.
Sales and Marketing
Unlimited Coatings has recently begun to advertise nationally for its
wholesale operation in various trade publications, such as Body Shop Business,
Truck Accessories News, Sema News, Trucking Times, and Restyling. In addition,
Unlimited Coatings has, over the years, attended industry trade shows to market
its wholesale business. Currently, Armor Linings' retail operation does not
advertise its services except as in the Houston, Texas yellow pages, and relies
primarily on word of mouth from former customers and truck dealers in and around
the Houston area.
Unlimited Coatings currently has no marketing plan. Management
believes its ability to increase sales of its sprayed-on polyurethane lining
systems, technology and chemicals is dependent upon, among other items, its
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ability to acquire smaller or equally sized companies in the same industry. In
addition, even if Unlimited Coatings is able to acquire competitors, there can
be no assurance that it will be successful in integrating the competitor into
its business or that it will provide added value.
Competition
As the majority of Unlimited Coatings' revenues are generated from the
wholesale operation, it competes primarily on a national level. Its current
competitors include Rhino Liners, TOFF Liners, Linex, and Ultimate Linings.
Armor Linings' current competitors include licensed distributors of products
offered by Rhino Liners, TOFF Liners, Linex and Ultimate Linings.
Employees
As of October 18, 1999, Unlimited Coatings employed four persons, on a
full-time basis, including management, sales, and office employees. As of
October 18, 1999, Armor Linings employed seven persons, on a full-time basis,
including management, sales, and office employees. No employees are covered by a
collective bargaining agreement. Management considers relations with its
employees to be satisfactory.
Facilities
Unlimited Coatings and Armor Linings currently operate from one location in
Houston, Texas, leased for approximately $3,400 per month. The facilities are
approximately 8,750 sq. ft. and the lease expires June 2003. Both companies
believe their present facility is adequate for their current needs.
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Item 2. Management's Discussion and Analysis
General
The Company is a holding company, which currently has six operating
subsidiaries. Har-Whit is a manufacturer and distributor of barbeque pits and a
custom sheet metal fabricator. TRE which owns certain undeveloped real estate
in Harris, Galveston and Chambers counties in Texas, some of which is held by
its wholly-owned subsidiary, Midtowne Properties, Inc. TRE has no operating
activities other than acquiring and holding real estate for investment purposes.
Brenham has a non-operating royalty interest in a producing gas well. Acqueren
which has no separate operations other than its investment in NPI and
investments in marketable securities. NPI is a supplier of automotive after-
market products and consumer durable goods. CRC and its subsidiary, Digital
Research Corporation, is a provider of optical title and credits services and
digital special effects for the motion picture industry. Marald which, along
with Armor, provide spray-on bed liners as well as other related products. The
acquisitions of Har-Whit, Acqueren, CRC, Marald, and Armor Linings were
accounted for using the purchase method of accounting whereby the purchase price
of the acquisition was allocated based upon the fair value of the assets
acquired and liabilities assumed. If the purchase price exceeded the net fair
market value of the assets acquired, any remaining purchase price was allocated
to goodwill.
The historical financial statements of AIII include the acquisitions of
acquired companies as of the effective dates of the purchases and the results of
these companies subsequent to closing, as these transactions were accounted for
under the purchase method of accounting.
The Company intends to continue to grow through the acquisition of
companies, which can be acquired at reasonable earnings multiples and present
opportunity for growth and profitability through the application of improved
access to financing and management expertise afforded by synergistic
relationships with the holding company and the other companies in the AIII
group. Potential acquisitions are evaluated to determine that they would be
accretive to earnings and equity, that the projected growth in earnings and cash
flows are attainable and consistent with minimum expectations to yield desired
returns to investors, and that management is capable of guiding the growth of
operations, working in concert with others in the group to maximize opportunity.
The Company intends to grow through the acquisition of additional and
complimentary businesses and to expand its holdings in its various businesses.
The Company expects to face competition for acquisition candidates, which may
limit the number of acquisition opportunities and may lead to higher acquisition
prices. There can be no assurance that the Company will be able to identify,
acquire or manage profitably additional businesses or to integrate any acquired
businesses into the Company without substantial costs, delays or other
operational or financial problems. Further, acquisitions involve a number of
risks, including possible adverse effects on the Company's operating results,
diversion of management's attention, failure to retain key personnel of the
acquired business and risks associated with unanticipated events or liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The timing, size and
success of the Company's acquisition efforts and the associated capital
commitments cannot be readily predicted. The Company currently intends to
finance future acquisitions by using shares of its Common Stock and other forms
of financing as the consideration to be paid. In the event that the Common
Stock does not maintain a sufficient market value, or potential acquisition
candidates are otherwise unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
seek other forms of financing in order to maintain its acquisition program. If
the Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional equity or debt financing.
As the Company's business strategy has been to acquire various companies,
it has collected excess cash to effect such acquisitions. The Company has
invested, at various times, a portion of its excess cash in investment
securities. The Company chooses stocks that it believes are undervalued, with
the expectation that they will rise in value. There is a risk that the value of
these investments will not rise as high as the Company expects, or will fall.
The Company only invests in liquid securities, in order to have immediate access
to its cash reserves.
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Restatement of Prior Periods
The Company's financial statements for the years ended December 31, 1997
and 1998, and June 30, 1998 and 1999 have been restated to reflect the
acquisitions of TRE, Brenham, Midtowne and real estate held for sale at the
seller's historical cost plus assumed liabilities. The acquisitions were
previously recorded at fair values. The transactions have been recorded at
carry-over cost since the shareholders of the entities of all these acquisition
transactions are under common control. Accordingly, the Company restated its
financial statements to reflect the real estate held for sales and natural gas
and mineral interests at the seller's historical carry-over cost. The effects of
the restatement are described in Note 18 to the Company's consolidated financial
statements. The Company's financial statements at June 30, 1999 and for the six
months then ended have also been restated to give effect to additional accrued
liabilities and to certain reclassifications.
New Accounting Pronouncements:
Derivative and Hedging Activities - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect adoption of the new standard
on January 1, 2001 to affect its financial statements.
Results of Operations - Consolidated AIII
Year Ended December 31, 1998 Compared With the Year Ended December 31,
1997.
Net loss for the year ended December 31, 1998, was $645,973, as compared to
$870,027 for the year ended December 31, 1997. The factors contributing to the
decrease in the loss are discussed below:
The net sales for the year ended December 31, 1998, were $10,213,039 as
compared to $2,501,860 for December 31, 1997, such 308% increase being primarily
attributable to the inclusion of Acqueren's sales since its acquisition as of
July 1, 1998 and CRC's sales since acquisition as of October 1, 1998. NPI, a
wholly-owned subsidiary of Acqueren, had sales for the six-month period of
$6,211,170. CRC's revenues for the three-month period ended December 31, 1998
were $1,305,422. Har-Whit's sales for the year ended December 31, 1998 were
$2,696,447, a 7.8% increase over the $2,501,860 reported in the prior year.
Brenham reported royalty income of $72,048 in the current year, while no
royalties were included in 1997, as Brenham was acquired in late December 1997.
The only activity of Acqueren consisted of investments in various trading and
available-for-sale equity securities. TRE and its subsidiary, Midtowne
Properties Inc., had no sales of properties during the year 1998 and the
operating expenses consisted primarily of property tax accruals.
Cost of sales as a percentage of net sales for the year ended December 31,
1998, was approximately 79.5%, with gross margins of 20.5%, as compared to
approximately 65.4% cost of sales and 34.6% gross margins during the year ended
December 31, 1997. The change is the result of the inclusion of NPI which
sustained gross margins averaging 13.9%. CRC posted margins averaging 34.5% and
Har-Whit sustained 28.9% margins in 1998 as compared to 34.6% margins in 1997.
The decreased margins at Har-Whit in 1998 are attributable to increased
competitive pressures in bidding for fabrication jobs due to the slowing of oil
and gas related work.
Operating expenses for the year ended December 31, 1998, were $3,113,504,
as compared to $1,674,172 for 1997. This increase is primarily the result of
the acquisition of NPI, which had operating expenses of $504,755 since July 1,
1998; CRC incurred operating expenses of $642,743 between October and December
1998, including certain costs of relocating its digital operations to its
optical facility. TRE incurred operating expenses, primarily property taxes, of
$115,291. AIII incurred expenses at the corporate level of $892,265, including
$150,000 in compensation expense to Mr. Dror. Corporate expenses also included
the following expenses: $145,900 of professional fees related to the Company
becoming a reporting entity, $55,700 non-cash compensation expense related to
shares of stock granted to key employees, $80,100 of travel expenses, much of
which related to the acquisition activity of management personnel. Management
believes fiscal 1998 was a particularly active year for mergers and
acquisitions, therefore related expenses were higher than would otherwise have
been incurred.
Other income amounted to $76,203 for the year 1998, including interest
income of $45,936, investment income of $129,034, other income of $5,277, and
$104,044 of interest expense. This compares to total other expense for 1997 of
$61,860 which consisted of interest expense of $63,908 and other income of
$2,048. The increased interest expense for 1998 results from the bank debt
attributable to acquired companies and the financing cost associated with
equipment leases of CRC. Investment income in 1998 was generated through net
gains realized in the Company's sale of investments in trading and available-
for-sale equity securities.
Net Loss and Comprehensive Loss
Consolidated net loss for the year ended December 31, 1998 was $645,973 as
compared to the net loss
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sustained in 1997 of $870,027. Of the 1998 loss, $219,533 was incurred by CRC,
$97,791 by TRE, and $800,174 by AIII. NPI realized net income of $394,581,
Har-Whit had net income of $13,181, and Brenham had net income of $63,763. Tax
benefits of $298,804 offset the consolidated losses. Unrealized losses on
available-for-sale investments in equity securities of $18,964 are included as a
component of stockholders' equity. Such unrealized investment losses are
included as a component of comprehensive loss which totaled $664,937 for the
year ended December 31, 1998.
The prior year loss was attributable to the Har-Whit's operations as no
other subsidiaries were owned at that time.
Liquidity and Capital Resources - AIII
Total assets at December 31, 1998, were $13,568,181, as compared to
$2,683,081 at December 31, 1997, an increase of 406%. The increase is primarily
attributable to AIII's acquisition of Acqueren and CRC.
Total liabilities at December 31, 1998, were $6,372,479, as compared to
$1,069,353 at December 31, 1997, and the increase is the result of 1998
acquisitions of Acqueren and CRC.
At December 31, 1998, AIII's current working capital was $1,963,458 as
compared to $344,093 at December 31, 1997. Cash flows during 1998 increased the
beginning cash balance of $62,991 at December 31, 1997 to $2,149,916 at December
31, 1998.
Cash flows used by operating activities were $625,576 in 1998 compared to
$678,282 in 1997. The cash flows used in the operating activities was primarily
the result of net loss from operations of $645,973 offset by non-cash items of
$20,397 resulting in net cash flows used in operating activities of $625,576.
Accounts receivable, inventory and other current assets decreased by $1,431,007,
net of amounts acquired, due primarily to NPI's lower seasonal activity in the
fourth quarter. Other assets increased $125,793 primarily due to a deposit for
an option to purchase a building in downtown Houston, Texas. Accounts payable
and accruals decreased due to the timing of payments of payables. Accrued
property taxes increased due to the acquisition of additional land.
Cash flows provided by investing activities were $471,973 in 1998 compared
to $26,262 used in 1997 for capital expenditures. The cash flows provided by
investing activities were primarily due to cash received in acquisitions of
$1,036,242 from Acqueren. Investments in available-for-sale equity securities,
net of unrealized losses, increased by $134,848 resulting from the Company's
strategy to invest excess funds. Also, CRC and TRE used funds for capital
expenditures and the purchase of real estate of $338,231. Net notes receivable
of $91,190 were issued during the year including a note to the CEO.
Cash flows provided by financing activities were $2,240,528 in 1998
compared to $708,276 provided in 1997. This is primarily due to the issuance of
stock during 1998 which provided cash flows of $2,377,500 offset by CRC's
principal payments on lease obligations, net of amounts acquired, of $137,661.
To date, the Company has no commitments for any additional financing and
there can be no assurance that any such financing will be available or, if it is
available, that it will be available on acceptable terms. If adequate funds are
not available to satisfy either short or long-term capital requirements, the
Company may be required to limit its operations significantly. At December 31,
1998, the Company was in violation of certain financial ratios on its capital
leases and has received a waiver for those violations from the lessor.
Media/Entertainment Segment:
Results of Operations -- CRC
For the three months ended December 31, 1998, CRC had net sales of
$1,305,422, operating expenses of $642,743 and sustained an operating loss of
$192,215.
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For the three months ended December 31, 1998, CRC cost of sales were
$854,894 or 65.5% of net sales and margins of $450,528 averaged 34.5%.
Operating expenses of $642,743 comprised 49.2% of net sales. Net loss for the
period was $219,533.
Liquidity and Capital Resources -- CRC
Total assets of CRC at December 31, 1998, were $4,391,898, total
liabilities were $3,319,431, and CRC had negative current working capital of
$1,531,235. CRC had $154,502 net cash provided from operations, $42,088 net cash
provided by investing activities, and $99,335 net cash provided by financing
activities from the date of acquisition through December 31, 1998.
CRC has arranged a line of credit, guaranteed by the parent, AIII to
provide the financing necessary to support its operations and to meet its
ongoing cash requirements. Management believes CRC has achieved significant
economies and savings by relocating the operations of its digital operations
into the building occupied by its optical operations. These changes reduced
rent expenditures and eliminated some duplicate functions such as administrative
support, equipment costs and supplies. Management believes that the
consolidation has resulted in better co-ordination of projects involving both
optical and digital work. CRC management identified the need to invest in
improvements to the building it is leasing related to the relocation including
improvements to comply with the California earthquake code. The Company
estimates these costs to be approximately $150,000 and were agreed to in
connection with a modification in the lease to extend the term and to obtain an
option to buy the building which expires in July 1999.
In September 1998, CRC borrowed $1,000,000 in the form of a balloon
promissory note from a financial institution at the institution's prime interest
rate, which matures in November 2000. That borrowing was used to retire bank and
other indebtedness which existed prior to the acquisition by AIII. Beginning in
February 1999, CRC is making quarterly payments of accrued interest. CRC has (i)
an outstanding note payable to a former stockholder of CRC of $196,225, due in
monthly payments of $6,325 through September 2003, and (ii) an outstanding note
payable to an officer and director of CRC payable on demand of $284,072 at an
interest rate of 8% per annum. In June 1999, the $196,225 note was forgiven in
consideration for the assignment of an option to purchase the building occupied
by CRC. AIII has committed to funding the operations of CRC until December 31,
1999.
Industrial/Commercial Segment:
Results of Operations -- NPI
From the date of its acquisition through December 31, 1998 NPI had net
sales of $6,211,170, operating expenses of $541,092, and operating income of
$322,946. Other expense of $71,635, includes net interest expense of $9,355 and
loss on disposition of equipment of $21,994. Net income for the six months ended
December 31, 1998 was $301,685.
Liquidity and Capital Resources NPI
NPI has financed its operations to date primarily through advances from its
parent company, Acqueren, which had raised equity financing through sales of its
equity securities prior to the acquisition of Acqueren by AIII. Total assets of
NPI at December 31, 1998, were $2,357,916, total liabilities were $1,477,542 and
current working capital of $1,043,135 existed at December 31, 1998.
NPI and Acqueren had $112,648 combined net cash provided from operations,
$480,016 combined net cash provided by investing activities, and $10,626
combined net cash used in financing activities for the six months ended December
31, 1998.
At December 31, 1998 NPI had an outstanding note payable to a former stock
holder of Acqueren of $300,000 at an interest rate of 6% per annum, with a
payment of $100,000 due in August 1999 and 2000 and the remainder due in August
2001. As the Company is involved in litigation with the former principal
stockholder of Acqueren, the Company paid the entire note plus accrued interest
through the court.
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<PAGE>
Results of Operations - Har-Whit
Net sales of Har-Whit for the year ended December 31, 1998 totaled
$2,696,447, an increase of 7.8% over the $2,501,860 sustained in 1997. Little
marketing and advertising has been done to promote sales of barbeque pits as
"word of mouth" advertising has been the principal marketing approach.
For 1998, Har-Whit had cost of sales of $1,918,489 or 71.1% of sales as
compared to $1,635,835 or 65.4% during 1997. Reduced margins result from
competitive pressures in fabrication work. In 1998, Har-Whit had operating
expenses of $887,832 or 32.9% of sales compared to $1,027,255 or 41.1% of sales
for 1997. The reduction of operating expenses is primarily attributable to
reduced insurance costs resulting from renegotiations of all insurance policies.
Har-Whit also had decreases in its freight and supplies expenses in 1998
compared to 1997. Har-Whit had an operating loss for 1998 of $109,874 as
compared to an operating loss of $161,250 for 1997.
Liquidity and Capital Resources - Har-Whit
Har-Whit has arranged for a $150,000 line of credit with a financial
institution secured by its accounts receivables. The interest rate for the line
of credit is 10.50% and matured on March 18, 1999. Minimum monthly payments of
accrued unpaid interest began on April 18, 1998. As the borrowing is secured by
Har-Whit's accounts receivable, the amount actually available under the line of
credit will fluctuate, and based on accounts receivables at December 31, 1998,
approximately $50,000 additional borrowing is currently available. Har-Whit has
an outstanding note payable to another financial institution of $574,276 at an
interest rate of 9.75% per annum due in monthly payments of $7,895 through
February 2003 with the remaining amount due in March 2003.
During 1998 Har-Whit had $170,623 provided by operations, used $146,341 in
investing activities, used $23,527 in financing activities and had resulting net
cash flows of $755 for the year ended December 31, 1998. This compares to
$397,351 used by operations, $26,262 used in investing activities and $404,820
provided by financing activities, resulting in an decrease in cash of $18,793
during 1997.
Results of Operations - Consolidated AIII
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998.
Consolidated net loss for the six-month period ended June 30, 1999 was
$164,646 as compared to a loss during the six months ended June 30, 1998 of
$386,011. The factors contributing to the consolidated net loss for the period
are discussed below:
The net sales for the six months ended June 30, 1999, were $9,913 as
compared to $1,150,082 for June 30, 1998, such 762% increase being primarily
attributable to the inclusion of the sales of NPI, CRC, Marald, Armor Linings
and TRE. NPI had sales for the six-month period of $5,276,066. CRC revenues for
the six month period ended June 30,1999 were $2,011,321. Marald had revenues of
$935,145 net of inter-company sales of $39,414, while Armor Linings revenues
amounted to $131,407. Har-Whit sales for the six months ended June 30, 1999 were
$959,946 as compared to $1,150,082 for the six months ended June 30, 1998. TRE
recognized a real estate option sale of $600,000 for the six-month period ended
June 30, 1999, while it had no sales activity for the comparable six months of
1998. Brenham reported royalty income of $5,821 in the current six months
compared to $24,630 during the first six months of 1998. The activity of
Acqueren during the six months ended June 30, 1999, consisted of investments and
trading in various investment and available-for-sale equity securities; such
activity resulting in unrealized investment losses of $242,603 and realized
investment earnings of $1,145,033. Cost of sales as a percentage of net sales
for the six months ended June 30, 1999 was approximately 80.8%, with gross
margins of 19.2%, as compared to approximately 67.6% cost of sales and 32.4%
gross margins during the six-month period ended June 30, 1998. The change is the
result of the inclusion of NPI, which sustained gross margins averaging
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11.5% during the six months. CRC posted margins averaging 7.7% during the six
months ended June 30, 1999, while Har-Whit sustained 30.7% margins in 1999, as
compared to 32.4% margins in 1998. During the first six months of 1999, TRE
experienced margins of 83.3% on its $600,000 sale of a real estate option, as
the $100,000 cost associated with the contract constituted 16.7% of sales.
Operating expenses for the six months ended June 30, 1999 were $2,876,136
as compared to $771,285 for the six months ended June 30, 1998. NPI had
operating expenses of $510,357 during the six months ended June 30, 1999. CRC
incurred operating expenses of $848,187 including certain costs of relocating
the digital operations to the optical facility. Marald incurred $192,822 in
operating expenses during the six months ended June 30, 1999. Armor Linings
operating expenses during the six months were $38,198. TRE incurred operating
expenses, primarily property taxes, of $48,398. Har-Whit sustained operating
expenses of $310,326 during the six months ended June 30, 1999 as compared to
$450,230 during the comparable period last year. During the six months ended
June 30, 1999 operating expenses of Brenham totaled $5,014. During the six
months ended June 30, 1999, AIII incurred expenses at the corporate level of
$890,784, including $406,521 of legal & professional fees and $50,000
amortization of goodwill, as compared to $290,630 during the comparable period
last year.
Other income (expense) amounted to $804,273 for the six-month period ended
June 30, 1999, including interest and dividend income of $30,279. Acqueren
reported unrealized investment losses of $242,603 and realized investment income
of $1,145,033 during the six months ended June 30, 1999. Interest expense of
$204,322 during the first six months of 1999 compares to $27,100 of interest
expense in the comparable period last year. The increase is primarily
attributable to the increase in debt of CRC and the increase in equipment leases
of CRC. Other income (expense) for the six-month period ended June 30, 1998 was
$39,392. The increase over the prior year is attributable to the increased
activity of the Company.
Net Income and Comprehensive Income
Consolidated net loss for the six-month period ended June 30, 1999 was
$164,646 as compared to the net loss of $386,011 sustained in the six months
ended June 30, 1998. During the six months ended June 30, 1999, TRE had net
income of $458,022, NPI posted net income of $95,449, Har-Whit had a net loss of
$44,034, CRC posted a loss of $799,184 and Brenham had net income of $1,809.
Marald earned $103,572 and Armor Linings earned $13,123. AIII sustained a loss
of $885,514 at the corporate level. Acqueren reported income of $892,111. Of the
prior year loss, $467,577 was incurred by AIII at the corporate level, $16,363
loss by Brenham, $12,143 loss by TRE, offset by earnings of $77,346 by Har-Whit.
Liquidity and Capital Resources - AIII
Total assets at June 30, 1999, were $17,473,279, as compared to $13,568,181
at December 31, 1998, an increase of 28.8%. The increase is primarily
attributable to increase in the value of trading securities, increased
inventories and accounts receivable at NPI and Har-Whit, and the acquisition of
Marald and Armor Linings.
Total liabilities at June 30, 1999, were $8,923,908, as compared to
$6,372,479 at December 31, 1998. The increase is primarily attributable to
increased activity by NPI and the acquisitions of Marald and Armor Linings.
At June 30, 1999, AIII's current working capital was $998,581 as compared to
$1,963,458 at December 31, 1998. The decrease in working capital is primarily
attributable to the purchase of certificates of deposit securing borrowings of
CRC and Har-Whit. AIII's consolidated cash position at June 30, 1999, was
$1,794,941, including
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$1,150,000 in restricted certificates of deposit, as compared to $2,149,916 at
December 31, 1998. The value of investments in marketable securities at June 30,
1999 was $1,431,262 compared to $534,654 at December 31, 1998. Accounts
receivable, net of allowance for doubtful accounts, at June 30, 1999 were
$3,908,030 compared to $1,641,469 at December 31 1998. Inventories were
$1,241,645 at June 30, 1999 as compared to $1,055,091 at December 31, 1998.
In November 1998 the Board of Directors authorized management to purchase
from time to time up to 10 million shares of the Company's common stock, as
deemed appropriate by management. To date the Company has purchased a total of
220,000 shares from two former officers of the Company. The purchases were made
in two separate transactions in November 1998. In one transaction $20,000 was
paid for 110,000 of the Company's shares and in the other transaction $12,500
was paid for 110,000 of the Company's shares. In both instances, the Company
either paid at market or below market value for the treasury shares. Those
transactions were funded from the Company's general operating funds. The
Company does not intend to repurchase significant numbers of its shares in the
future.
To date, the Company has no commitment for any additional financing and there
can be no assurance that any such financing will be available or, if it is
available, that it will be available on acceptable terms. If adequate funds are
not available to satisfy either short or long-term capital requirements, the
Company may be required to limit its operations significantly.
Media/Entertainment Segment:
Results of Operations - CRC
For the six-month period ended June 30, 1999, CRC recorded sales of
$2,011,321, operating expenses of $848,187 and sustained an operating loss of
$693,514. Interest expense of $106,001 brings the year-to-date losses to
$799,184. Sales for the period were adversely affected by general downturn
affecting the movie industry and seasonal influences as well as the anticipation
by the studios, of the merger with PTM. Expecting that the new work would be
performed at the PTM facilities, several of the studios began booking their
work at PTM. It is expected that those influences will continue to be reflected
in operating results for some time. In anticipation of the merger, staff
reductions resulted in additional payroll expense due to payment of severance
and accrued vacation time. In September 1999, it was determined that the PTM
transaction would not close due to unforeseen circumstances.
Liquidity and Capital Resources - CRC
Total assets of CRC at June 30, 1999, were $3,954,360, total liabilities were
$3,315,918, and CRC had negative current working capital of $1,543,306. For six
months ended June 30, 1999, CRC had $188,598 net cash provided from operations,
$124,840 net cash used in investing activities, and $36,658 net cash used by
financing activities.
CRC has arranged a line of credit, secured by the certificate of deposit of
AIII, to provide the financing necessary to support its operations and to meet
the ongoing cash requirements of the company. Expenditures for upgrading
equipment may be made to maintain the ability to provide quality services.
Losses and costs associated with the attempted merger with PTM added to the
financing requirements of CRC.
In September 1998, CRC borrowed $1,000,000 in the form of a promissory note
from a financial institution at the institution's prime rate, which matures in
November 2000. That borrowing was used to retire bank and other indebtedness,
which existed prior to the acquisition by AIII. The $1,000,000 note is secured
by the assets of CRC and the pledge of a certificate of deposit in the amount of
$1,000,000, owned by AIII. AIII has committed to funding the operations of CRC
until at least December 31, 1999.
In June 1999, an agreement was reached with David Miller, a former selling
stockholder of CRC, whereby in exchange for assigning to Miller the Company's
option to purchase the building currently leased by CRC, Miller granted CRC
forgiveness of $365,158 owed to him as reimbursement of various expenses and
advances made by him on behalf of CRC. CRC recorded a contribution to equity
related to such forgiveness.
Industrial/Commercial Segment
Results of Operations - NPI
For the six months ended June 30, 1999 NPI had net sales of $5,276,066,
operating expenses were $510,357,
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and operating income of $97,358. Other expense of $1,909 includes net interest
expense of $9,635. Net income for the six months was $95,449.
Liquidity and Capital Resources - NPI
NPI financed its operations during the six months ended June 30, 1999 through
internally generated cash flows. For the six months ended June 30, 1999 NPI had
$586,856 used by operations, used $6,855 in investing activities and had
$165,000 provided through financing activities.
The Company has been involved in litigation through the suit filed against
the former principal stockholder of Acqueren. That action, filed in Galveston
County, Texas, related to representations made by certain selling shareholders
of Acqueren, prior to the acquisition. On August 17, 1999, those selling
shareholders filed an action in New York alleging misrepresentations by AIII.
The parties are currently in negotiations to settle both law suits. Management
expects the outcome of such litigation will not have a material adverse effect
on the Company.
Results of Operations - Har-Whit
For the six months ended June 30, 1999 sales amounted to $959,946, a decrease
of 16.5% compared to the $1,150,082 sustained in 1998. The decrease in sales is
attributable to increased competitive pressures in bidding for fabrication work,
due to the downturn in oil and gas related work. Little marketing and
advertising has been done to promote sales of barbecue pits, as "word of mouth"
advertising has been the principal marketing approach. Management believes an
opportunity exists to create significantly greater demand through expanded
marketing and promotion.
Har-Whit cost of sales amounted to $664,881 or 69.3% of sales and margins of
$295,065 represent 30.7% of sales during the six months ended June 30, 1999.
During the six-month period ended June 30, 1998, Har-Whit cost of sales of
$777,100 constituted 67.5%, and margins of $372,982 were 32.5% of sales.
Operating expenses of $310,326 comprised 32.3% of sales during the six-month
period ended June 30, 1999 as compared to $450,230, 39.2%, in the comparable
period in 1998. The operating loss of $15,261 for the six months ended June 30,
1999 compares to an operating loss of $77,248 during the six-month period ended
June 30, 1998. Interest expense in the six months ended June 30, 1999 of $31,762
compares to $27,100 in the comparable period in 1998.
Liquidity and Capital Resources - Har-Whit
Har-Whit has arranged a $150,000 line of credit with a financial institution
secured by its accounts receivable and pledge of the parent company's $150,000
certificate of deposit. The interest rate for the line of credit is at 8% per
annum and the note matures in May 2000. At June 30, 1999, Har-Whit had an
outstanding note payable to a financial institution of $552,286 at an interest
rate of 9.75% per annum due in monthly payments of $7,895 through February 2003
with the remaining amount due in March 2003. During the six months ended June
30, 1998, Har-Whit had $159,273 provided by operating activities, $16,449 used
in investing activities, and used $144,186 in financing activities. During the
six months ended June 30, 1999, Har-Whit had $9,477 provided by operating
activities, $3,750 used in investing activities, and provided $9,127 through
financing activities.
Results of Operations - Marald
During the six-month period ended June 30, 1999, Marald had sales of
$974,559, cost of sales of $675,258, comprising 69.3% of sales, and margins of
$299,301 represent 30.7% of sales. Operating expenses of $192,822 were 19.8% of
sales. Interest expense was $2,909 and net income of $103,572 represented 10.6%
of sales. Management believes truck sales and the demand for spray-on liners
will increase. As such, Marald has launched an enhanced marketing and dealer
support program to capture market share and introduce additional products
through the dealer network.
Liquidity and Capital Resources - Marald
In August 1999 Marald arranged a $100,000 working capital line of credit,
with interest at prime plus two percent, secured by its inventory and accounts
receivable and parent guarantee, in addition to a $125,000 line of credit
secured by the parent, at prime plus two percent. As of June 30, 1999, the
Company has drawn $105,000 from the line of credit arrangement. Increasing sales
levels may require additional working capital financing. Although there is no
assurance, Marald expects to be able to secure such financing on favorable
terms. During the
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During the six months ended June 30, 1999, Marald had $11,355 used by operating
activities, $8,071 used in investing activities, and provided $74,193 through
financing activities.
Results of Operations - Armor Linings
Since its acquisition on April 29,1999, Armor Linings sales amounted to
$131,407, cost of sales of $80,944 were 61.6% of sales, operating expenses were
$38,198 and net income was $13,123.
Liquidity and Capital Resources - Armor Linings
At June 30, 1999 Armor had no financing requirements as its operations have
been financed through its internal cash flows. Although there is no assurance,
it is expected that working capital financing will be available at favorable
terms when the growth of the company requires such arrangements. For the period
from acquisition through June 30, 1999, Armor generated $8,117 from operations,
used $714 in investing activities, and used $5,183 in financing activities.
Year 2000 Compliance
The Year 2000 issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such systems
from accurately processing dates ending in the year 2000 and after. This could
result in system failures or in miscalculations causing disruption of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.
Management has spoken to all management personnel at each of its subsidiaries
regarding their company's reliance on computer systems. Based upon these
discussions, management believes that the Company does not have significant
exposure to the Year 2000 issue. The subsidiaries operations do not rely on
computer operations for conducting the significant parts of its business, and
accordingly, the Company does not believe that its products and services involve
any material Year 2000 risks.
In the first quarter of 1999, the Company established a formal Year 2000 task
force to develop and implement a Year 2000 readiness program. As a result, the
Company has substantially completed the implementation of Year 2000 compliant
accounting systems, policies and procedures throughout all of the subsidiaries.
The implementation of standardized systems and procedures should facilitate
improved and more efficient reporting and analysis of data.
In addition to reviewing its internal systems, the Company is in
communications with its significant customers and vendors concerning Year 2000
compliance, including electronic commerce. There can be no assurance that the
systems of other companies that interact with the Company will be sufficiently
Year 2000 compliant so as to avoid an adverse impact on the Company's
operations, financial condition and results of operations.
The Company's costs incurred to address the Year 2000 issue has not had a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
The Company believes that it has satisfactorily remedied its Year 2000 issues
and believes it is substantially Year 2000 compliant. However, the Company may
be adversely affected by the inability of other companies whose systems interact
with the Company to become Year 2000 compliant and by potential interruptions of
utility, communication or transportation systems as a result of Year 2000
issues.
Although the Company believes its internal systems to be Year 2000 compliant
as described above, the Company has substantially completed its contingency plan
that specifies what it plans to do if it or important external companies are not
Year 2000 compliant in a timely manner.
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Item 3. Description of Property
The Company operates Brenham and TRE from its office in Kemah, Texas. In
June 1999, the Company entered into a five-year lease agreement for the
Company's office in Kemah, Texas at a monthly rental rate of $1,335. See Item 1.
Description of Business: "Business Operations of Har-Whit/Pitt's & Spitt's,
Inc.," "Business Operations of Acqueren, Inc.," and "Business Operations of
Modern Film Effects, Inc.," and "Business Operations of Unlimited Coatings and
Armor Linings," for a description of properties for Har-Whit, NPI, CRC,
Unlimited Coatings, and Armor Linings. The Company believes its various
facilities are adequate to meet current business needs, except as discussed in
Item 1, and that its properties are adequately covered by insurance.
The following table sets forth the properties owned by TRE, including all
properties owned by its wholly-owned subsidiary Midtowne Properties, Inc. All
properties listed are owned free of any mortgage obligations, however certain
properties are subject to property taxes in the amount of approximately
$357,000, as designated below, in the aggregate. TRE holds undeveloped
commercial properties for sale, although management may pursue, without a vote
of shareholders, development opportunities it believes to be economically
favorable. At the present time TRE has no plans to develop any of its
properties.
Property Description and Location
286 acres, State Highway 146, 736 acres, Anahuac,
Galveston County, Texas Chambers County, Texas
23 acres, North U.S. 59, Houston, 15 acres, North U.S. 59, Houston,
Harris County, Texas Harris County, Texas
1 acre, Greens Road, Houston, 43 acres, Airport Blvd., Houston,
Harris County, Texas Harris County, Texas ($193,000 of
property tax)
17,346 sq. ft., S.E. Corner of South 4,410 sq. ft., N.E. Corner of Fannin
Main St. and Ruth St., Houston, Harris and Blodgett, Houston, Harris
County, Texas ($71,000 property tax) County, Texas ($56,000 property tax)
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22,248 sq. ft., N.E. Corner Almeda and
Riverside Dr., Houston, Harris County,
Texas ($37,000 of property tax)
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 18, 1999, the number and
percentage of outstanding shares of Company Common Stock owned by (i) each
person known to the Company to beneficially own more than 5% of its outstanding
Common Stock, (ii) each director, (iii) each named executive officer, and (iv)
all executive officers and directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF
BENEFICIAL OWNER/(1)/ BENEFICIALLY OWNED OWNERSHIP
<S> <C> <C>
Daniel Dror Sr. 2,000,000/(3)/ 1.5%
Elk International Corporation, Ltd. 20,560,000/(2)/ 15.3%
William Dartmouth 110,000 *
Marc Fields -- --
Erick Friedman 3,200,000 2.4%
John W. Stump III 220,000/(4)/ *
Rebekah Laird-Ruthstrom 16,081,000/(5)/ 12.0%
All executive officers and directors as a 21,611,000 16.1%
group (5 persons)
</TABLE>
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(*) Indicates ownership of less than one percent.
(1) The business address of each principal stockholder is the same as the
address of the Company's principal executive offices except Mr. Fields
whose business address is 11601 Highway 32 in Nicholls, Georgia 31554.
(2) The principal of Elk International Corporation, Ltd. is Elkana
Faiwuszewicz, Mr. Dror's brother. Mr. Dror has no interest nor is he an
officer or director of Elk International Corporation, Ltd.
(3) Consists of an option to purchase 2,000,000 shares of Common Stock at an
exercise price of $0.12 per share.
(4) Consists of (a) an option to purchase 20,000 shares of Common Stock at an
exercise price of $0.34 per share; (b) an option to purchase 100,000 shares
of Common Stock at an exercise price of $0.02 per share, and (c) an option
to purchase 100,000 shares of Common Stock at an exercise price of $0.19
per share.
(5) Includes: (a) 7,901,0000 shares of Common Stock held by the Daniel Dror II
1976 Trust, of which Ms. Ruthstrom is trustee, and (b) 8,080,000 shares of
Common Stock held by Daniel Dror & Company, Inc., of which Ms. Ruthstrom is
an officer.
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Item 5. Directors, Executive Officers, Promoters and Control Persons
Pursuant to the Company's Certificate of Incorporation and its By-Laws, the
members of the Board of Directors serve for one-year terms. The Company's
directors and executive officers are:
Name Age Position
Daniel Dror, Senior 59 Chairman of the Board, Chief
Executive Officer
William Dartmouth 50 Director
Erick Friedman 60 Director
John W. Stump III 55 Chief Financial Officer
Rebekah Laird-Ruthstrom 45 Secretary and Treasurer
Daniel Dror has served as chairman of the board and chief executive
officer of the Company since September 1997. Since September 1993, Mr. Dror has
served as chairman of the board and chief executive officer of Daniel Dror and
Company, Inc. an investment and business management company. From April 1994 to
November 1996, Mr. Dror served as chairman of the board and chief executive
officer of Microtel International, Inc., a public company in the
telecommunication business. From 1982 until 1993, Mr. Dror served as chairman of
the board and chief executive officer of Kleer-Vu Industries, Inc., a public
company.
William Dartmouth has served as director of the Company since
September 1997 and as a director of Brenham since January 1998. From 1985 until
1990, Mr. Dartmouth was a director of Carricke Communications, a distributor of
satellite dishes. In 1989 he was a founder of Kirklees Cable, a cable franchise
company which was acquired by International Cable Tel in 1993. In 1990 he was a
founder of White Rose Television Ltd., a regional television franchisee. Mr.
Dartmouth served as a director of Kleer-Vu Industries, Inc. from 1983 until
1993. Since 1994, Mr. Dartmouth has been a director of Microtel International,
Inc., a public company in the telecommunication business.
Erick Friedman has served as director of the Company since May 1998.
Since 1989, Mr. Friedman has been employed by Yale University School of Music as
a professor of music. Since 1968, Mr. Friedman has invested in various
companies.
John W. Stump III has served as chief financial officer of the Company
since August 1998. From December 1996 to October 1997, Mr. Stump served as chief
executive officer of Changes International. From April 1996 to December 1996,
Mr. Stump served as chief operating officer and chief financial officer of
Nutrition Resources, Inc. From February 1993 to April 1996, Mr. Stump served as
Acquisitions Analyst for Movie Gallery, Inc. Mr. Stump is a Certified Public
Accountant and has over twenty years of financial and accounting management
experience including public reporting and investor relations.
Rebekah Laird-Ruthstrom has served as secretary, treasurer, and
executive assistant secretary of the Company since February 1998. Since
September 1993, Ms. Laird-Ruthstrom has served as assistant secretary,
treasurer, and executive assistant of Daniel Dror and Company, Inc. and since
April 1999 she has served as vice president. From July 1994 to April 1997, Ms.
Laird-Ruthstrom served as executive assistant of Microtel International,
Inc.
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<PAGE>
Item 6. Executive Compensation
The following tables contain compensation data for the Chief Executive
Officer and other named executive officers of the Company for the fiscal year
ended December 31, 1998; with respect to this information for Mr. Fields,
compensation is reported for the Company's fiscal year (NPI's fiscal year end is
June 30):
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Bonus/ Securities
Other Annual Underlying All Other
Name and Principal Fiscal Compensation Stock Award/(1)/ Options/ Compen-
Position Year Salary SARs sation
<S> <C> <C> <C> <C> <C> <C>
Daniel Dror, Sr./(2)/, 1998 $150,000 $5,750/(3)/ $23,640/(4)/ 2,000,000/(5)/
CEO
1997 -- -- -- -- --
Marc Fields, 1998 $124,000 -- -- -- --
President NPI
1997 $127,483 -- -- -- --
1996 $117,616 -- -- -- --
</TABLE>
_______________
(1) The issuance of Common Stock was awarded for services rendered.
(2) Mr. Dror began serving as CEO of the Company in September 1997.
(3) Represents total payments made by the Company for automobile owned by the
Company which Mr. Dror utilizes for the fiscal year.
(4) Consists of: (a) 100,000 shares of Common Stock granted in January 1998,
and (b) 100,000 shares of Common Stock granted in May 1998, pursuant to an
employment agreement.
(5) In May 1998, Mr. Dror was granted an option to purchase 2,000,000 shares of
Common Stock at an exercise price of $0.12 per share expiring in May
2001.
Employment Agreements
In May 1998, Mr. Dror entered into a three-year employment agreement with
the Company which provided for compensation of 100,000 shares of Common Stock
and options to purchase 2,000,000 shares of Common Stock at $0.12 per share
expiring in May 2001. In October 1998, Mr. Dror terminated the employment
agreement dated May 1998, and entered into a new three-year employment agreement
with the Company, which provides for a monthly salary of $1,000. The employment
agreement provides for a bonus to be determined by the Board of Directors. The
employment agreement may be terminated by the Company, upon death or disability
of Mr. Dror, or with cause, which includes, without limitation, gross
negligence, the failure to perform essential duties, and the willful engaging in
misconduct injurious to the Company.
In September 1994, Mr. Fields entered into an employment agreement with NPI
to serve as president and chief operating officer of NPI on an at-will basis,
which provided for an annual salary of $110,000, which was raised to $124,000 in
1998. The employment agreement provides for a bonus of 10% of the amount equal
to NPI's operating income, less rent and interest expense, which exceeds
$500,000. The employment agreement grants Mr. Fields an option to purchase NPI
common stock equal to 5% of NPI's equity at an exercise price of 5% of the total
shareholder's equity, if NPI conducts an initial public offering of its common
stock during Mr. Field's employment. The employment agreement provides for a
disability insurance policy as well as a life insurance policy in the name of
Mr. Fields' spouse in the amount of approximately three times Mr. Fields salary.
The employment agreement provides that upon termination NPI has the option to
have Mr. Fields sign a one-year non-compete agreement in
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<PAGE>
exchange for one year's base salary.
In September 1998, Mr. Jordan Friedberg entered into a five-year employment
agreement with Modern Film Effects and Digital Research Corporation
collectively, which provides that Mr. Friedberg serve as chief executive officer
and president to the companies at an annual salary of $65,000 for the initial
year to be increased annually thereafter at a rate of 10% per annum. The
agreement provides for reimbursement for an automobile lease with lease payments
not to exceed $1,000 per month. The employment agreement may be terminated only
upon the permanent disability of Mr. Friedberg or with cause.
In April 1999, Mr. Stump entered into a three-year employment agreement
with the Company, which provides for a monthly salary of $8,500. The employment
agreement provides for a bonus to be determined by the Board of Directors. The
employment agreement may be terminated by the Company, upon death or disability
of Mr. Stump, or with cause, which includes, without limitation, gross
negligence, the failure to perform essential duties, and the willful engaging in
misconduct injurious to the Company.
In March 1999, Juan Carlos Martinez, president of Marald, entered into a
two-year employment agreement with the Company, which provides for a monthly
salary of $7,500. The employment agreement provides for a bonus to be determined
by the Board of Directors. The employment agreement may be terminated by the
Company, upon death or disability of Mr. Martinez, or with cause, which
includes, without limitation, gross negligence, the failure to perform essential
duties, and the willful engaging in misconduct injurious to the Company.
In September 1998, David R. Miller entered into a six-year employment
agreement with Modern Film Effects, Inc. and Digital Research Corporation
collectively, which provides that Mr. Miller serve as a consultant to the
companies for the initial year at a monthly salary of $6,000 and subsequently to
serve as an employee for the remaining five years at a to be determined salary.
The employment agreement provides for reimbursement for an automobile lease with
lease payments not to exceed $1,200 per month. The employment agreement may be
terminated only upon the permanent disability of Mr. Miller or with cause.
The Company or its subsidiaries do not maintain life insurance on any of
its directors or employees. The directors serve without cash compensation, but
can be granted stock as discussed in "Certain Relationships and Transactions."
-27-
<PAGE>
Stock Options And Warrants
The following table provides information on the warrants and options
granted to the indicated officer and director during the fiscal year ended
December 31, 1998:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Name Shares Underlying Percent of Total Grants Exercise Expiration
Options Granted To Employees Price Date
<S> <C> <C> <C> <C>
Daniel Dror, Sr./(1)/ 2,000,000/(1)/ 99% $0.12 5/14/01
Marc Fields/(1)/ -- -- -- --
</TABLE>
______________
(1) As of December 31, 1998, options to purchase 7,720,000 additional shares of
Common Stock were outstanding at prices between $0.02 and $0.34 per share,
which expire no later than December 2002.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of
Name Acquired Value Underlying Unexercised Unexercised
on Realized Options in-the-money
Exercise Options/(1)/
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Daniel Dror, Sr. -- -- 2,000,000 -- $260,000 $-0-
Marc Fields -- -- -- -- -- --
</TABLE>
_______________
(1) Computed based on the differences between the fair market value on December
31, 1998 and aggregate exercise prices.
Item 7. Certain Relationships and Related Transactions
In January 1998, Mr. Dror was issued 100,000 shares of Common Stock in
exchange for services rendered. In May 1998, Mr. Dror was granted 100,000 shares
of Common Stock, pursuant to an employment agreement. In May 1998, Mr. Dror was
issued an option to purchase 2,000,000 shares of Common Stock at an exercise
price of $0.12 per share, which expires in May 2001, pursuant to an employment
agreement. During fiscal year 1998, the Company advanced Mr. Dror a total of
$74,404, and in November 1998 Mr. Dror executed a promissory note payable to the
Company in the amount of $74,404 payable on demand at prime interest rate. In
September 1997, Elk International Corporation, Ltd., which is controlled by Mr.
Dror's brother, was issued an option to purchase 2,000,000 shares of Common
Stock at a purchase price of $0.02 per share, which was exercised in June 1998.
In September 1997, Elk International Corporation, Ltd., which is controlled by
Mr. Dror's brother, was issued 5,000,000 shares of Common Stock at a purchase
price of $0.03 per share. In May 1998, Elk International Corporation, Ltd.,
which is controlled by Mr. Dror's brother, was issued 3,500,000 shares of Common
Stock for an aggregate purchase price of $300,000. In December 1998, Daniel Dror
II was employed by the Company at a monthly salary of $750. In November 1998,
Mr. Dror purchased GCA, Inc., a Texas corporation from the Company for $100.
GCA, Inc. was purchased by the Company in December 1997 from an unrelated
individual for 6,000,000 shares of Common Stock. Prior to Mr. Dror's acquisition
of GCA, Inc., and as of November 1998, all assets of GCA, Inc. had been
transferred to TRE and GCA, Inc. was not in good standing with the State of
Texas. See "Item 1. Description of Business --General" for further
discussion.
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<PAGE>
In September 1998, Mr. Friedberg was issued an option to purchase 400,000
shares of Common Stock at an exercise price of $0.20 per share, which expires in
September 2003. See "Item 1. Description of Business -- General" for further
discussion.
In September 1997, Mr. Hartis, a director of the Company at that time, was
issued an option to purchase 500,000 shares of Common Stock at an exercise price
of $0.02 per share, which expires in December 2002. In January 1998, Mr. Hartis
was issued 100,000 shares of Common Stock in exchange for management services
rendered. Based upon the market value of the restricted Common Stock ($.05 per
share), $5,000 of compensation expense was recorded. In May 1998, Mr. Hartis was
issued 250,000 shares of Common Stock at an aggregate purchase price of $25,000.
As of November 9, 1998, the Company had not received payment. See "Item 1.
Description of Business -- General" for further discussion.
In September 1997, Mr. Whitworth, a director of the Company at that time,
was issued an option to purchase 500,000 shares of Common Stock at an exercise
price of $0.02 per share, which expires in December 2002. In January 1998, Mr.
Whitworth was issued 100,000 shares of Common Stock in exchange for management
services rendered. Based upon the market value of the restricted Common Stock
($.05 per share), $5,000 of compensation expense was recorded. In May 1998, Mr.
Whitworth was issued 250,000 shares of Common Stock at an aggregate purchase
price of $25,000. As of November 9, 1998, the Company had not received payment.
See "Item 1. Description of Business -- General" for further discussion.
In January 1998, Mr. Talan, a director of the Company at that time, was
issued 100,000 shares of Common Stock in exchange for services rendered. In
March 1999, Mr. Talan purchased 2,500,000 shares of Common Stock from the
Company at an aggregate purchase price of $250,000. Mr. Talan served as chairman
of the board of WWN and resigned as a director of the Company in July 1999.
In January 1998, Mr. Dartmouth was issued 100,000 shares of Common Stock in
exchange for services rendered.
In May 1998, Ms. Laird-Ruthstrom was issued 50,000 shares of Common Stock
in exchange for services rendered. In January 1999, Ms. Laird-Ruthstrom was
issued an option to purchase 45,000 shares of Common Stock at an exercise price
of $0.24 per share for services rendered.
In May 1998, the Company entered into a one-year renewable lease agreement
with a corporation affiliated with Mr. Dror, for the Company's office in Kemah,
Texas at a monthly rental rate of $750. The Company did not renew the lease.
In May 1998, the Company entered into a one-year renewable lease agreement
with Elk International Corporation, Ltd., which is controlled by Mr. Dror's
brother, for Mr. Dror's home office in Houston, Texas at a monthly rental rate
of $800. The Company has renewed the lease.
In January 1999, the Company issued Mr. Stump an option to purchase 100,000
shares of Common Stock at an exercise price of $0.24 per share and in March
1999, the Company issued an option to purchase 100,000 shares of Common Stock at
an exercise price of $0.19 per share for services rendered.
Effective January 1, the Company purchased Marald, Inc. in exchange for
3,500,000 shares of Common Stock, and a finders fee of $45,000 paid in part to a
party related to Mr. Dror. In addition, under the terms of the acquisition
agreement, the Company has agreed to provide chemicals at a discount to Toro
Spray-On Liners, Inc. an entity partially owned by the above related party.
The Company obtains approval from its entire Board of Directors prior to
any acquisitions. If any transactions are executed or contemplated with a
related party or affiliate of the Company, such relationship is disclosed prior
to a vote of the Board of Directors. Prior to entering into any real estate
transaction with affiliated parties, the Company obtains appraisals from MAI
Appraisers for Board of Director consideration. The Company believes that the
terms of each transaction made with related parties or affiliates are as fair as
those obtainable from independent third parties. As of April 1999, any advances
or loans made by the Company to any related parties or affiliates will be made
at an interest rate no lower than the current prime rate plus 2%.
-29-
<PAGE>
Item 8. Description of Securities
Common Stock
The Company is authorized to issue up to 200,000,000 shares of Common
Stock, of which 134,182,018 shares are issued and outstanding (includes 10
million restricted shares held in escrow relating to the Signal Products, Inc.
investment) as of October 18, 1999 and 7,680,000 shares are reserved for
issuance pursuant to the exercise of outstanding options.
The holders of shares of Common Stock are entitled to one vote per share on
each matter submitted to a vote of stockholders. In the event of liquidation,
holders of Common Stock are entitled to share ratably in the distribution of
assets remaining after payment of liabilities. Holders of Common Stock have no
cumulative voting rights, and, accordingly, the holders of a majority of the
outstanding shares have the ability to elect all of the directors. Holders of
Common Stock have no preemptive or other rights to subscribe for shares. Holders
of Common Stock are entitled to such dividends as may be declared by the Board
of Directors out of funds legally available therefor.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, $.001 par value per share of which none are presently outstanding. The
Preferred Stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion, redemption rights and sinking fund provisions. The
Company has no present plans for the issuance of Preferred Stock. The issuance
of Preferred Stock could adversely affect the rights of the holders of Common
Stock and, therefore, reduce the value of the Common Stock.
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<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
The Company's Common Stock trades under the symbol "EDII" on the OTC
Electronic Bulletin Board. The market for the Common Stock on the OTC Electronic
Bulletin Board is limited, sporadic and highly volatile. The following table
sets forth the high and low bid prices per share of the Common Stock for the
last two fiscal years as reported by the OTC Electronic Bulletin Board. These
prices reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
HIGH LOW
FISCAL 1997
-----------
First Quarter 1.3636 .5545
Second Quarter .7955 .0455
Third Quarter .1364 .0273
Fourth Quarter .1455 .0727
FISCAL 1998
-----------
First Quarter .2091 .0909
Second Quarter .6364 .1091
Third Quarter .4818 .20
Fourth Quarter .27 .16
FISCAL 1999
-----------
First Quarter .33 .18
Second Quarter .34 .19
Third Quarter .24 .08
On October 19, 1999, the last bid price of the Common Stock as reported by
the OTC Electronic Bulletin Board was $0.09. The Company believes that as of
October 8, 1999, there were approximately 227 record owners of its Common Stock.
It is the present policy of the Company not to pay cash dividends and to
retain future earnings to support the Company's growth. Any payment of cash
dividends in the future will be dependent upon the amount of funds legally
available therefor, the Company's earnings, financial condition, capital
requirements and other factors that the Board of Directors may deem relevant.
The Company does not anticipate paying any cash dividends in the foreseeable
future.
Item 2. Legal Proceedings
On December 10, 1998, the Company filed an Original Petition and Request
for Temporary Injunction for breach of contract and common law and stock fraud
in connection with the Company's acquisition of Acqueren, Inc. against TDA
Industries, Inc. and Fred Friedman in the 56th Judicial District Court of
Galveston, Texas. The Company has claimed the defendants misrepresented the
amount of equity in Acqueren as represented in the acquisition agreement. The
Company is seeking actual damages in the amount of not less than $1,100,000, in
addition to further relief which it may be entitled to. On August 17, 1999, TDA
Industries, Inc. filed an action in the United District Court in the Southern
District of New York, alleging violations of various securities laws, common law
fraud, and breach of contract. TDA Industries, Inc. has requested monetary
damages, and has requested a receiver be appointed for Acqueren, Inc. pending
litigation. The parties are currently in negotiations to settle both law suits.
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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<PAGE>
In September and October 1997, Mr. Daniel Dror, Sr. and his affiliates
gained control of the Company and subsequently elected a new board of directors,
appointed current management and appointed BDO Seidman, LLP as auditors of the
Company whose appointment was approved by the new board. Prior to the
appointment of BDO Seidman, LLP as auditors of the Company, KPMG LLP ("KPMG")
audited Har-Whit, Inc. ("Har-Whit") and Pitt's and Spitt's, Inc. ("P&S") as of
and for the year ended December 31, 1995. KPMG also audited these entities for
the nine months ended September 30, 1996 and audited the combined balance sheet
for Har-Whit and P&S as of September 30, 1996. In addition, KPMG audited the
balance sheet of the Company (formerly, Pitt's and Spitt's of Texas, Inc.) as of
October 13, 1996 and the combined balance sheet of its subsidiaries, Pitt's &
Spitt's Inc. and Har-Whit, Inc. as of September 30, 1996. Unqualified audit
opinions were issued for each of those audits. Upon appointment of BDO Seidman,
LLP, KPMG was authorized to respond fully to inquiries by BDO Seidman, LLP.
During the two year period prior to selection of BDO Seidman, LLP, the Company
did not consult with them on matters of accounting principles or practices.
The change in accountants occurred as a result of the change in control of
ownership of the Company, as discussed in the preceding paragraph. Prior to the
change in control and BDO Seidman, LLP's appointment as auditors of the Company
as discussed in the preceding paragraph, KPMG had effectively resigned as
auditors of the Company principally due to non-payment of fees and scope
limitations resulting from the inability to obtain sufficient records from prior
management to perform auditing procedures subsequent to the dates referred to in
the first paragraph of this letter. On January 5, 1998, KPMG issued written
notice to the Company that circulation of its audit report on the October 13,
1996 consolidated balance sheet of PST be ceased, after learning that there was
a material misstatement resulting from certain parcels of land being excluded by
PST in the purchase price allocation. In addition, KPMG has stated that its
opinions on the financial statements of the entities referred to in the first
paragraph, for any period, should not be relied upon.
Upon appointment of current management, accounting records were updated and
reconstructed to properly reflect the transactions of the companies, enabling
BDO Seidman, LLP to conduct their audits of the Company for 1997 and subsequent
periods.
Item 4. Recent Sales of Unregistered Securities
Recent Sales of Unregistered Securities
Current management gained control of the Company in October 1997.
Management believes that all prior issuances of Common Stock aggregating
7,028,060 for a total purchase price of $178,456 were made in reliance on
Section 4(2) of the Act.
The following information sets forth certain information, as of May 13,
1999, for all securities the Company sold since the Company began current
operations in September 1996, without registration under the Act. There were no
underwriters in any of these transactions, nor were any sales commissions paid
thereon.
Securities Issued for Cash
(1) In September 1997, the Company issued 500,000 shares of Common Stock to a
current director of the Company at a purchase price of $0.10 per share. In
September 1997 and May 1998, the Company issued 5,000,000 shares of Common
Stock at a purchase price of $0.03 per share and 3,500,000 shares of Common
Stock at an aggregate purchase price of $300,000 ($0.086 per share) to the
brother of the CEO of the Company.
(2) In December 1997, the Company issued 200,000 shares of Common Stock in
exchange for shares of another corporation valued at $40,000. In August
1998, the Company returned such shares to their previous owner for $40,000
cash.
(3) In May 1998, the Company issued 1,500,000 shares of Common Stock to
directors and to a party associated with the Company at a purchase price of
$0.10 per share. As of December 31, 1998, the Company had not received the
purchase price for 500,000 of these shares.
The Company believes transactions in (1) through (3) were exempt from
registration pursuant to Section 4(2) of the Act as privately negotiated,
isolated, non-recurring transactions not involving any public solicitation. The
purchasers in each case represented their intention to acquire the securities
for investment only and not with a view to the distribution thereof. Appropriate
restrictive legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Company or had access, through employment or other relationships, to such
information. In addition, the purchasers described above were "accredited
investors" (as that term is defined in Rule 501(a)(3) promulgated under the
Act).
(4) In October 1997, the Company issued 250,000 shares of Common Stock to two
accredited investors at a purchase price of $0.10 per share. In February
1998, the Company issued 50,000 shares of Common Stock to an accredited
investor at a purchase price of $0.20 per share. In May 1998, the Company
issued 100,000 shares of Common Stock to one accredited investor at a
purchase price of $0.25 per share. In June 1998, the Company issued 110,000
shares of Common Stock to one accredited investor at a purchase price of
$0.35 per share. In June 1998, the Company agreed to issue 4,500,000 shares
of Common Stock to one accredited investor at an aggregate purchase price
of $1,000,000 of which 2,000,000 shares had been paid for as of December
31, 1998, and of which $350,000 was still to be paid to the Company.
Subsequent to year end, the subscription right was canceled and
accordingly, the amount was eliminated against the related equity balance.
In June 1998, the Company issued 500,000 shares of Common Stock to one
accredited investor at a purchase price of $0.40 per share. In June 1998,
the Company agreed to issue 1,000,000 shares of Common Stock to one
accredited investor at a purchase price of $0.15 per share. The Company
received the purchase price of $150,000 subsequent to year end.
The Company believes the transactions in (4) were exempt from registration
pursuant to Section 4(2) and Rule 506 of Regulation D of the Act as privately
negotiated, isolated, non-recurring transactions not involving any public
solicitation. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate restrictive legends are affix ed to the stock certificates
issued
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<PAGE>
in such transactions. All recipients either received adequate information about
the Company or had access to such information. In addition, the purchasers
described above were "accredited investors" (as that term is defined in Rule
501(a)(3) promulgated under the Act).
(5) From January 1998 to February 1998, the Company issued 5,000,000 shares of
Common Stock to one accredited investor at an aggregate purchase price of
$500,000 ($0.10 per share). From February 1998 to April 1998, the Company
issued 1,400,000 shares of Common Stock to one accredited investor at an
aggregate purchase price of $200,000 ($0.143 per share). From May 1998 to
June 1998, the Company issued 1,500,000 shares of Common Stock to one
accredited investor at an aggregate purchase price of $300,000 ($0.20 per
share).
The Company believes the transactions in (5) were exempt from registration
pursuant to Rule 504 of Regulation D of the Act.
Securities Issued for Services Rendered
(6) In July 1996, the Company issued 550,000 shares of Common Stock to former
directors for management advisory services rendered. The value of these
shares were deemed to be immaterial by prior management. In October 1996,
the Company issued 10,000 shares of Common Stock to a former officer for
management services rendered. The value of these shares were deemed to be
immaterial by prior management. In September 1996, the Company issued
10,000 shares of Common Stock to an employee for receptionist services
rendered.
(7) In December 1997, the Company issued 1,400,000 shares of restricted common
stock to a consulting firm for strategic planning assistance rendered to
the Company. Such shares were valued at the market price of $.05 per share
resulting in a $70,000 charge to general and administrative expense in
1997. In May 1997, the Company issued 40,000 shares of Common Stock to an
advertising consultant for services rendered. The value of these shares
were deemed to be immaterial by prior management.
(8) In September 1997, the Company issued options to purchase 3,300,000 shares
of Common Stock at an exercise price of $0.02 per share to current and
former directors of the Company and to a party related to a director of the
Company. In addition, 600,000 options to purchase shares were issued in
September 1997 to a former officer and director. In October 1998, 500,000
of these options were repurchased by the Company. The remaining options to
purchase 100,000 shares were transferred to an unrelated party who
exercised these options in August 1998. In June 1998, options to purchase
2,000,000 shares of Common Stock were exercised by the brother of the CEO
of the Company.
(9) In October 1997, the Company issued 100,000 shares of Common Stock to a
consultant of the Company for management advisory services rendered. Such
shares were valued at the market value of $.05 per share. Accordingly, a
$5,000 compensation expense was recorded. In October 1997, the Company
issued six options each to purchase 200,000 shares of Common Stock to a
party pursuant to a finders fee agreement in connection with equity raising
transactions at exercise prices of $0.02, $0.04, $0.06, $0.08, $0.10, and
$0.20 per share. In February 1998, the options to purchase 200,000 shares
of Common Stock at $0.02 and $0.04 were exercised, and as of December 1998
all remaining options were canceled.
(10) In January 1998, the Company issued 610,000 shares of Common Stock to
officers, directors, and employees for management advisory services
rendered. These shares were valued at the market value of $.05 per share
resulting in a $30,500 compensation expense.
(11) In January 1998, the Company issued 100,000 shares of Common Stock to a
former employee in exchange for the surrender of a previously issued option
to purchase 100,000 shares of Common Stock at an exercise price of $0.02
per share. The issuance was recorded as $5,000 of compensation expense
($.05 per share). In January 1998, the Company issued 100,000 shares of
Common Stock to a former director as part of a severance payment. This
issuance was recorded as $5,000 compensation expense ($.05 per share).
(12) In May 1998, the Company issued 190,000 shares of Common Stock to key
employees of one of its subsidiaries, to an officer of the Company, and to
a director of the Company for management advisory services rendered. The
issuance of such shares was recorded at the market value ($.08 per share)
at the date of grant as $15,200 of compensation expense. In May 1998, the
Company issued an option to
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<PAGE>
purchase 2,000,000 shares of Common Stock to the CEO of the Company at an
exercise price of $0.12 per share.
(13) In May 1998, the Company issued an option to purchase 4,000,000 of Common
Stock to a party in connection with an exempt offering at an exercise price
of $0.25 per share.
(14) In August 1998, the Company issued an option to purchase 20,000 shares of
Common Stock at an exercise price of $0.34 per share to an officer of the
Company as part of an employment agreement.
(15) In January 1999, the Company issued options to purchase 160,000 shares of
Common Stock at an exercise price of $0.24 per share for services rendered,
and in March 1999 the Company issued an option to purchase 100,000 shares
of Common Stock at an exercise price of $0.19 per share to an officer for
services rendered.
(16) In June 1999, the Company issued 10,000 shares of Common Stock to the child
of a former director, as a gift.
The Company believes transactions in (6) through (16) were exempt from
registration pursuant to Section 4(2) of the Act as privately negotiated,
isolated, non-recurring transactions not involving any public solicitation. All
of the recipients were either: (a) accredited investors due to their positions
with the Company as officers and directors, or (b) sophisticated persons with
specific knowledge of the Company and with general expertise in financial and
business matters that they were able to evaluate the merits and risks of an
investment in the Company.
Securities Issued in Acquisitions
See Item 1 "Description of Business" for detailed discussion of these
transactions and related values and values per share.
(17) In October 1996, the Company issued 2,527,000 of Common Stock, one-half of
which was issued to current directors of the Company, in exchange for the
outstanding shares of Pitt's & Spitt's, Inc. and Har-Whit, Inc.
(18) In December 1997, the Company issued 22,000,000 shares of Common Stock in
exchange for the outstanding shares of Brenham Oil & Gas, Inc., Texas Real
Estate Enterprises, Inc., and GCA, Inc.to the Daniel Dror II 1976 Trust,
Elk International Corporation, Ltd., and a former director of the Company.
In May 1998, the Company on behalf of one of its subsidiaries issued
8,000,000 shares of Common Stock to Daniel Dror & Company, Inc. in exchange
for a piece of property. In June 1998 and in December 1998, the Company on
behalf of one of its subsidiaries issued a total of 2,100,000 shares of
Common Stock to party associated with the Company and to the Daniel Dror II
1976 Trust in exchange for the outstanding shares of Midtowne Properties,
Inc.
(19) In June 1998 the Company entered into a purchase agreement to acquire
Acqueren Inc. which provided for the issuance of 6,750,000 shares of Common
Stock to the two primary shareholders of Acqueren, Inc, and provided for
the remaining shareholders of Acqueren, Inc. to receive approximately 25.02
shares of common stock for each share of Acqueren, Inc. common stock
exchanged for a total of 26,750,000 shares of AIII Common Stock. As of
December 31, 1998, the Company had exchanged approximately 19,577,000
shares of Common Stock pursuant to the purchase agreement with the
remaining shares held by the Company until the Acqueren shares are
exchanged.
(20) In September 1998, the Company issued 6,300,000 shares of Common Stock, and
an option to purchase 400,000 shares of Common Stock at an exercise price
of $0.20 per share to a current director in exchange for the outstanding
shares of Modern Film Effects, Inc., Digital Research Corporation, and
Electronic Pictures California, Inc.
(21) In January 1999, the Company purchased all of the capital stock of Marald,
Inc., doing business as Unlimited Coatings, in exchange for 3,500,000
restricted shares of Common Stock of AIII valued at fair market value of
approximately $652,000 at $.19 per share plus a finders fee of $45,000 paid
in part to a party related to Mr. Dror.
-34-
<PAGE>
(22) In March 1999, the Company agreed to acquire a minority interest
(approximately 20%) in Signal Products, Inc. (Signal), a California
corporation, which owns the exclusive license to market handbags and
leather accessories bearing the "Guess" trademark. Signal develops,
manufactures and markets its products throughout the United States. The
investment in Signal will be accomplished through the issuance of
10,000,000 restricted shares of common stock of AIII, valued at fair market
value of approximately $2,000,000. The shares have been placed in escrow
pending the completion of a business valuation of Signal. The shares will
be released from escrow upon satisfactory determination of Signal's value;
5,000,000 shares to Hardee Capital Partners and 5,000,000 shares to Elk
International, a related party, both of which had claims against the shares
of Signal. Should the determination of the value of the Signal shares,
after valuation of Signal yield a value less than $2,000,000, the number of
shares to be released from escrow shall be reduced accordingly; however, no
additional shares shall be issuable should the valuation indicate a greater
value. To-date, the valuation has not been completed, and the Company is in
negotiations to rescind the transaction. Since the restricted shares of
common stock of the Company are held in escrow and are not likely to be
issued to consummate this transaction, such shares are not considered
outstanding for purposes of EPS calculations.
The Company believes transactions in (17) through (22) were exempt from
registration pursuant to Section 4(2) of the Act as privately negotiated,
isolated, non-recurring transactions not involving any public solicitation. The
recipients in each case represented their intention to acquire the securities
for investment only and not with a view to the distribution thereof. Appropriate
restrictive legends are affixed to the stock certificates issued in such
transactions. In addition, the recipients described above were "accredited
investors" (as that term is defined in Rule 501(a)(3) promulgated under the
Act).
Item 5. Indemnification of Directors and Officers
Section 78.7502 of the Nevada General Corporation Law allows the Company to
indemnify any person who was or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Company or is or was serving at the request of the Company as a director,
officer, employee or agent of any corporation, partnership, joint venture, trust
or other enterprise. The Company may advance expenses in connection with
defending any such proceeding, provided the indemnitee undertakes to pay any
such amounts if it is later determined that such person was not entitled to be
indemnified by the Company. In addition, the Company's Certificate of
Incorporation and Bylaws provide for indemnification of all directors, officers,
and control persons.
Insofar as indemnification by the Company for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to provisions of the Certificate of Incorporation and Bylaws,
or otherwise, the Company has been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
-35-
<PAGE>
PART III
Item 1. Exhibits
The following exhibits are to be filed as part of the Registration
Statement:
Exhibit No. Identification of Exhibit
-------------------------
3(i)(1) Certificate of Incorporation of the Company, and Amendments
thereto.
3(ii)(1) Amended and Restated By-laws of the Company
4.1(1) Common Stock Certificate, American International Industries,
Inc.
4.2(1) Common Stock Certificate, Acqueren, Inc.
4.3(1) Common Stock Certificate, Har-Whit/Pitt's & Spitt's, Inc.
10.1(1) Daniel Dror, Sr. Employment Agreement dated May 14, 1998
10.2(1) Daniel Dror, Sr. Employment Agreement dated October 16, 1998
10.3(1) Raymond C. Hartis Employment Agreement
10.4(1) D. Wayne Whitworth Employment Agreement
10.5(1) Marc Fields Employment Agreement
10.6(1) Jordan Friedberg Employment Agreement
10.7(2) Shabang! Merchant Service Agreement
10.8(3) American International Industries, Inc. Lease
10.9(2) Brenham Oil and Gas, Inc. Royalty Interest
10.10(2) Brenham Oil and Gas Interest Lease
10.11(2) Modern Film Effects, Inc. Lease
10.12(2) Northeastern Plastics, Inc. Lease
10.13(4) John W. Stump Employment Agreement
10.14(4) David R. Miller Employment Agreement
10.15(4) Juan Carlos Martinez Employment Agreement
10.16(4) Marald, Inc. Acquisition Agreement
10.17(4) Armor Linings Acquisition Agreement
21.1(2) List of Subsidiaries
27(4) Financial Data Schedule
_____________________
(1) Filed previously on registration statement Form 10-SB SEC File No.
000-25223.
(2) Filed previously on the Company's annual report for the fiscal year ended
December 31, 1998 on Form 10-KSB SEC File No. 000-25223.
(3) Filed previously on registration statement Form 10-SB/A File No. 000-25223.
(4) Filed herewith.
-36-
<PAGE>
Item 2. Description of Exhibits
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN INTERNATIONAL INDUSTRIES, INC.
Dated: October 29, 1999 By: /s/ Daniel Dror, Sr.
-----------------------------------------
DANIEL DROR, SR., Chief Executive Officer
-37-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN INTERNATIONAL INDUSTRIES, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.................. F-2
Consolidated Balance Sheets.................................... F-3 - F-4
Consolidated Statements of Operations and Comprehensive Loss... F-5
Consolidated Statements of Stockholders' Equity................ F-6 - F-7
Consolidated Statements of Cash Flows.......................... F-8 - F-9
Notes to Consolidated Financial Statements..................... F-10 - F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American International Industries, Inc.
Kemah, Texas
We have audited the accompanying consolidated balance sheets of American
International Industries, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
International Industries, Inc. at December 31, 1997 and 1998, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 18, the Company's financial statements for the years
ended December 31, 1997 and 1998 have been restated to reflect predecessor
carryover cost basis of certain real estate properties and of a non-operating
royalty interest acquired.
BDO SEIDMAN, LLP
Houston, Texas
March 26, 1999, except with
respect to Notes 14, 17 and
18 to which date is
October 25, 1999
F-2
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
(Restated- (Restated- (Restated-
Note 18) Note 18) Note 18)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash (Note 9)..................................... $ 62,991 $2,149,916 $ 644,941
Trading securities (Note 4)....................... -- 418,770 1,431,262
Securities available-for-sale (Note 4)............ -- 115,884 --
Restricted certificate of deposit (Note 9)........ -- -- 150,000
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $19,000, $179,000 and $117,000,
respectively (Note 9)........................... 253,553 1,641,469 3,908,030
Related party (Note 15).......................... -- -- 141,571
Notes receivable (Note 15)........................ -- 116,190 62,190
Inventories, net of reserve of $62,682 in 1998 and
1999 (Notes 5 and 9)............................. 180,022 1,055,091 1,241,645
Other............................................. 46,160 141,996 112,290
---------- ----------- -----------
Total current assets............................ 542,726 5,639,316 7,691,929
Real estate held for sale (Note 6)................. 408,700 1,239,584 1,239,584
Property and equipment, net of accumulated
depreciation (Notes 7 and 9)...................... 1,335,713 5,060,372 4,995,310
Goodwill, net of amortization of $0, $32,297 and
$87,753, respectively (Note 3).................... -- 1,085,616 1,812,160
Non-compete agreements, net of amortization of
$125,000, $232,500 and $297,500,
respectively...................................... 375,000 417,500 352,500
Restricted certificate of deposit (Note 9)......... -- -- 1,000,000
Investment in equity investee (Note 8)............. -- -- 300,000
Other.............................................. 20,942 125,793 81,796
---------- ----------- -----------
Total assets.................................... $2,683,081 $13,568,181 $17,473,279
========== =========== ===========
</TABLE>
F-3
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1997 1998 1999
----------- ---------- -----------
(unaudited)
(Restated- (Restated- (Restated-
Note 18) Note 18) Note 18)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................. $ 87,085 $ 1,451,717 $ 3,469,088
Accrued expenses (Note 14)....................... 29,412 481,227 669,476
Margin loan from a financial institution
(Note 4)........................................ -- 195,645 344,717
Accrued property taxes........................... -- 386,601 361,188
Note payable, current portion (Note 9)........... 72,962 116,144 655,674
Notes payable to related parties, current
portion (Note 10)............................... -- 459,972 175,912
Capital lease obligations, current portion
(Note 11)....................................... 9,174 584,552 1,017,293
----------- ----------- -----------
Total current liabilities...................... 198,633 3,675,858 6,693,348
Notes payable, less current portion (Note 9)...... 571,916 1,599,909 1,568,276
Notes payable to related parties, less
current portion (Note 10)........................ -- 320,324 376,531
Capital lease obligations, less current portion
(Note 11)........................................ -- 776,388 266,024
Deferred tax liability (Note 13).................. 298,804 -- --
Other............................................. -- -- 19,729
----------- ----------- -----------
Total liabilities.............................. 1,069,353 6,372,479 8,923,908
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value;
10,000,000 shares authorized,
none issued (Note 12)........................... -- -- --
Common stock, $.001 par value,
200,000,000 shares authorized (Note 12)......... 46,117 121,116 124,926
Additional paid-in capital....................... 4,540,482 15,726,799 16,768,147
Deficit.......................................... (2,972,871) (8,045,998) (8,211,202)
----------- ----------- -----------
1,613,728 7,801,917 (8,681,871)
Less: Common stock subscriptions receivable...... -- (550,000) (100,000)
Treasury stock, at cost, 238,000 shares in 1998
and 220,000 shares in 1999...................... -- (37,251) (32,500)
Accumulated other comprehensive loss (Note 4)..... -- (18,964) --
----------- ----------- -----------
Total stockholders' equity..................... 1,613,728 7,195,702 8,549,371
----------- ----------- -----------
Total liabilities and stockholders' equity........ $ 2,683,081 $13,568,181 $17,473,279
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ ------------ -------------
(unaudited) (unaudited)
(Restated - (Restated - (Restated -
Note 18) Note 18) Note 18)
<S> <C> <C> <C> <C>
Net sales....................................... $ 2,501,860 $10,213,039 $ 1,150,082 $ 9,913,885
Cost of sales................................... 1,635,855 8,120,515 777,100 8,006,668
----------- ----------- ----------- ------------
Gross profit.................................... 866,005 2,092,524 372,982 1,907,217
Operating expenses.............................. 1,674,172 3,113,504 771,285 2,876,136
----------- ----------- ----------- ------------
Operating loss.................................. (808,167) (1,020,980) (398,303) (968,919)
----------- ----------- ----------- ------------
Other income (expense):
Interest expense (Note 10).................... (63,908) (104,044) (27,100) (204,322)
Interest income............................... -- 45,936 -- 30,279
Investment income, net (Note 4)............... -- 129,034 -- 902,430
Other......................................... 2,048 5,277 39,392 75,886
----------- ----------- ----------- ------------
(61,860) 76,203 12,292 804,273
----------- ----------- ----------- ------------
Net loss before income tax benefit.............. (870,027) (944,777) (386,011) (164,646)
Deferred income tax benefit (Note 13)........... -- (298,804) -- --
----------- ----------- ----------- ------------
Net loss before deemed dividends................ (870,027) (645,973) (386,011) (164,646)
Deemed dividends (Notes 3 and 6)................ (1,875,000) (2,038,038) (2,038,038) --
----------- ----------- ----------- ------------
Net loss applicable to common stockholders..... $(2,745,027) $(2,684,011) $(2,424,049) $ (164,646)
=========== =========== =========== ============
Net loss per common share - basic
and diluted................................... $(.19) $(.03) $(.03) $(.00)
=========== =========== =========== ============
Weighted average number of common
shares outstanding........................... 14,121,344 87,985,486 70,675,734 124,853,043
=========== =========== =========== ============
Consolidated Statements of Comprehensive Loss
Net loss........................................ $ (870,027) $ (645,973) $ (386,011) $ (164,646)
Other comprehensive items:
Unrealized gain (loss) on shares
available-for-sale........................... -- (18,964) -- 18,964
----------- ----------- ----------- ------------
Comprehensive loss.............................. $ (870,027) $ (664,937) $ (386,011) $ (145,682)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in
Shares Amount Capital
---------- -------- ----------
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(as restated - Note 18)
BALANCE at January 1, 1997...................... 9,739,000 $ 9,739 $ 1,963,404
Issuance of restricted shares for:
Brenham Oil and Gas (Note 3)................... 6,000,000 6,000 294,000
Texas Real Estate Enterprises, Inc. and
G.C.A. Incorporated (Note 3).................. 16,000,000 16,000 1,784,000
Consulting services (Note 12).................. 1,400,000 1,400 68,600
Other assets (Note 12)......................... 200,000 200 39,800
Sale of shares for cash (Note 12)............... 12,778,060 12,778 390,678
Deemed dividend (Note 3)........................ -- -- --
Net loss........................................ -- -- --
----------- -------- -----------
BALANCE at December 31, 1997.................... 46,117,060 46,117 4,540,482
Issuance of restricted shares for:
Acqueren, Inc. (Note 3)........................ 26,750,000 26,750 2,113,250
Cinema Research Corporation and
D-Rez Corporation (Note 3).................... 6,300,000 6,300 1,285,700
Investment properties (Note 6)................. 8,000,000 8,000 728,000
Midtowne Properties (Note 6)................... 2,100,000 2,100 1,662,900
Employee Compensation (Note 12)................ 1,000,000 1,000 110,700
Sale of shares for cash (Note 12)............... 15,160,000 15,160 2,308,340
Exercise of stock options (Note 12)............. 2,500,000 2,500 51,500
Common stock subscribed (Note 12)............... 4,000,000 4,000 546,000
Treasury stock acquired......................... -- -- --
Stock Dividend Issued (Note 12)................. 9,188,911 9,189 2,379,927
Unrealized loss on shares available-for-sale.... -- -- --
Deemed dividend (Note 6)........................ -- -- --
Net loss........................................ -- -- --
----------- -------- -----------
BALANCE at December 31, 1998.................... 121,115,971 121,116 15,726,799
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(as restated - Note 18)
Issuance of restricted shares for:
Marald Inc. (Note 3)........................... 3,500,000 3,500 648,500
Gift........................................... 10,000 10 (10)
Subscriptions received......................... -- -- --
Exercise of stock options...................... 300,000 300 5,700
Unrealized gain on shares available-for-sale.... -- -- --
Treasury stock activity......................... -- -- --
Executive compensation.......................... -- -- 22,000
Stockholder debt forgiveness (Note 14).......... -- -- 365,158
Net loss........................................ -- -- --
----------- -------- -----------
BALANCE at June 30, 1999........................ 124,925,971 $124,926 $16,768,147
=========== ======== ===========
</TABLE>
F-6
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Stock Other
Subscription Treasury Comprehensive
Deficit Receivable Stock Loss Total
------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
$ (227,844) $ -- $ -- $ -- $1,745,299
-- -- -- -- 300,000
-- -- -- -- 1,800,000
-- -- -- -- 70,000
-- -- -- -- 40,000
-- -- -- -- 403,456
(1,875,000) -- -- -- (1,875,000)
(870,027) -- -- -- (870,027)
----------- --------- -------- -------- ----------
(2,972,871) -- -- -- 1,613,728
-- -- -- -- 2,140,000
-- -- -- -- 1,292,000
-- -- -- -- 736,000
-- -- -- -- 1,665,000
-- -- -- -- 111,700
-- -- -- -- 2,323,500
-- -- -- -- 54,000
-- (550,000) -- -- --
-- -- (37,251) -- (37,251)
(2,389,116) -- -- -- --
-- -- (18,964) (18,964)
(2,038,038) -- -- -- (2,038,038)
(645,973) -- -- -- (645,973)
----------- --------- -------- -------- ----------
(8,045,998) (550,000) (37,251) (18,964) 7,195,702
-- -- -- -- 652,000
-- -- -- -- --
-- 450,000 -- -- 450,000
-- -- -- -- 6,000
-- -- -- 18,964 18,964
(558) -- 4,751 -- 4,193
-- -- -- -- 22,000
-- -- -- -- 365,158
(164,646) -- -- -- (164,646)
----------- --------- -------- -------- ----------
$(8,211,202) $(100,000) $(32,500) $ -- $8,549,371
=========== ========= ======== ======== ==========
</TABLE>
These accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -------------------------------
1997 1998 1998 1999
------------ ------------ ----------- -----------------
(unaudited) (unaudited)
(Restated - (Restated - (Restated -
Note 18) Note 18) Note 18)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(870,027) $ (645,973) $ (386,011) $ (164,646)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.............................. 194,107 428,588 102,296 508,938
Bad debt................................................... -- -- -- (61,490)
Common stock issued for services........................... 70,000 111,700 -- --
Inventory reserve.......................................... -- 62,682 -- (8,468)
Loss on disposal of equipment.............................. -- 21,994 210 --
Deferred tax benefit....................................... -- (298,804) -- --
Realized gain on sale of securities........................ -- (91,135) -- (1,145,033)
(Increase) decrease in market value of equity securities... -- (37,899) -- 242,603
Changes in assets and liabilities:
Accounts receivable..................................... 125,109 1,244,635 43,443 (2,282,955)
Inventories............................................. (3,360) 158,777 (29,887) (111,629)
Other current assets.................................... (6,160) 27,595 -- (38,657)
Purchase of trading securities, net..................... -- (94,091) -- (1,167,967)
Other assets............................................ -- (125,793) (3,000) 115,839
Accounts payable and accruals........................... (187,951) (1,474,453) 25,407 2,388,261
Deferred revenue........................................ -- -- -- 19,756
Accrued property taxes.................................. -- 86,601 -- (50,756)
--------- ----------- ---------- -----------
Net cash used in operating activities....................... (678,282) (625,576) (247,542) (1,756,204)
--------- ----------- ---------- -----------
Cash flows from investing activities:
Proceeds (purchase) of available-for-sale investment
securities........................................... -- (134,848) (6,983) 1,167,605
Capital expenditures..................................... (26,262) (170,309) (10,489) (161,956)
Purchase of real estate properties....................... -- (167,922) -- --
Notes receivable......................................... -- (116,190) (68,442) (7,000)
Proceeds from disposition of assets...................... -- 25,000 -- --
Cash received in acquisitions............................ -- 1,036,242 -- (141,306)
Purchase of certificate of deposit.......................... -- -- -- (1,150,000)
Acquisition of equity investee.............................. -- -- -- (300,000)
--------- ----------- ---------- -----------
Net cash provided by (used in) investing activities...... (26,262) 471,973 (85,914) (592,657)
--------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock.......................... 403,456 2,377,500 1,576,000 456,000
Proceeds from notes payable.............................. 644,878 121,467 94,000 1,135,311
Repayments of notes payable.............................. (333,952) (83,527) (54,830) (555,528)
Principal payments on capital lease obligations.......... (6,106) (137,661) (3,294) (196,087)
Purchase of treasury stock............................... -- (37,251) -- 4,190
--------- ----------- ---------- -----------
Net cash provided by financing activities................ 708,276 2,240,528 1,611,876 843,886
--------- ----------- ---------- -----------
Net increase (decrease) in cash............................. 3,732 2,086,925 1,278,420 (1,504,975)
Cash, beginning of period................................ 59,259 62,991 62,991 2,149,916
--------- ----------- ---------- -----------
Cash, end of period...................................... $ 62,991 $ 2,149,916 $1,341,411 $ 644,941
========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------------- ------------------------
1997 1998 1998 1999
------------- ----------------- ----------- ----------
(unaudited) (unaudited)
(Restated - (Restated - (Restated -
Note 18) Note 18) Note 18)
<S> <C> <C> <C> <C>
Supplemental Cash Flow Information:
Interest paid............................................ $ 62,635 $ 72,941 $ 27,100 $ 204,332
Non-Cash Transactions:
Acquisition of land for common stock..................... $ 225,000 $ 305,444 $ 305,444 $ --
Acquisition of property and equipment for note payable... $ -- $ 79,682 $ -- $ --
Exchange of common stock for securities.................. $ 40,000 $ -- $ -- $ --
Assumption of property taxes on purchase of land......... $ -- $ 300,000 $ 300,000 $ --
Net purchases of securities on margin.................... $ -- $ 195,645 $ -- $ 149,072
Issuance of note payable in acquisition.................. $ -- $ (303,300) $ -- $ --
Subscriptions of common stock............................ $ -- $ 550,000 $ 550,000 $ --
Stockholder debt forgiveness............................. $ -- $ -- $ -- $ 365,158
Deemed Dividend.......................................... $1,875,000 $2,038,038 $2,038,838 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, OWNERSHIP AND BUSINESS
In July 1996, a previous group of investors (unrelated to the 1997 Group)
purchased 90% of the outstanding shares of a dormant company (A Black Tie
Affair, Incorporated ("BTA")). This investor group changed the name of BTA to
Pitt's & Spitt's of Texas, Inc.("PST").
PST purchased Har-Whit, Inc. ("Har-Whit") and Pitt's and Spitt's, Inc.
("P&S") on September 30, 1996. The purchase was consummated for 2,527,000
shares of PST common stock valued at $1.2 million and $500,000 in cash for
noncompete agreements to the previous owners of Har-Whit and P&S. Har-Whit and
P&S were affiliated by common ownership and were merged in 1998. The merged
entities operate a custom metal working facility specializing in steel
fabrication, designs and manufactures custom barbecue and smoker pits and
performs welding services primarily for the oil and gas industry. Its customer
base is primarily Southeast Texas, except for barbeque pits which are
distributed throughout the United States.
In September 1997 a new investor group ("1997 Group"), unrelated to the
1996 group, acquired control of Pitts & Spitts of Texas, Inc. and changed the
name to American International Industries, Inc. (the "Company" or "AIII").
As discussed in Note 3 the Company acquired two additional businesses in
1998 as part of its acquisition and expansion plans. These acquisitions were
accounted for as purchases and resulted in the Company owning 100% of the stock
of the acquired companies. One of the acquired companies sells wholesale
automobile products to retail outlets throughout the United States. The second
acquired company is in the post-production film industry with customers
primarily in the Los Angeles, California area.
During the first six months of 1999 the Company completed the acquisitions of
two companies whose principal business involves spray-on liners for truck beds
(See Note 3).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Information
The financial information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
Results for interim periods are not necessarily indicative of results to be
expected for an entire year.
Inventories - Inventories are valued at the lower of cost or market on a first
in, first out basis.
Investment Securities -
Trading
The Company records trading securities and call options sold on such
securities at market value with any changes in the market value included as a
component of net income for the period. The Company only sells call options for
the number of shares purchased, with the proceeds of such sales recorded as a
liability. The Company has not entered into any uncovered option transactions
at December 31, 1997 and 1998 and June 30, 1999.
Available-for-Sale
Changes in market value of investments in equity securities available-for-
sale are included as a component of stockholders' equity.
Property, equipment and depreciation - Property and equipment are recorded
at cost less accumulated depreciation. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are removed from the
accounts, with any resultant gain or loss being recognized as a component of
other income or expense. Depreciation is computed over the estimated useful
lives of the assets (5-20 years) using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Maintenance
and repairs are charged to operations as incurred.
Investment properties - Investment properties are carried at the lower of
cost, predecessor carryover historical cost basis or fair market value, net of
selling costs.
F-10
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets - The Company's intangible assets represent goodwill
acquired in the acquisitions discussed in Note 3 and the non-compete agreements.
The Company amortizes goodwill over a 15 year period and the non-compete
agreements over their term of 5 to 6 years on a straight-line basis.
Impairment of Long-Lived Assets - Realization of long-lived assets,
including goodwill, is periodically assessed by the management of the Company.
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value is
necessary. In management's opinion, there is no impairment of such assets at
December 31, 1997 and 1998 and June 30, 1999.
Revenue recognition - The Company recognizes revenue at the time of
shipment of product to its customers or completion of services provided.
Income taxes - The Company is a taxable entity and recognizes deferred tax
assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be in effect when
the temporary differences reverse. The effect on the deferred tax assets and
liabilities of a change in tax rates is recognized in income in the year that
includes the enactment date of the rate change. A valuation allowance is used to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
Loss Per Share - The basic net loss per common share is computed by
dividing the net loss by the weighted average number of shares outstanding
during a period. Diluted net loss per common share is computed by dividing the
net loss, adjusted on an as if converted basis, by the weighted average number
of common shares outstanding plus potential dilutive securities. For the years
ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and
1999, potential dilutive securities had an anti-dilutive effect and were not
included in the calculation of diluted net loss per common share. These
securities include options to purchase 3,300,000, 7,720,000, 7,000,000 and
3,160,000 shares of common stock at December 31, 1997 and 1998 and June 30, 1998
and 1999, respectively, and subscriptions to purchase 4,000,000 and 1,000,000
shares of common stock at December 31, 1998 and June 30, 1999, respectively.
Management's estimates and assumptions - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from these
estimates.
Stock-based compensation - The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations and to elect the disclosure option of
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
compensation cost for stock options issued to employees is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock (see Note
12).
Concentration of Credit Risk -
The Company maintains its cash with major domestic banks in amounts which
exceed the insured limit of $100,000 from time to time. The terms of these
deposits are on demand to minimize risk. The Company has not incurred losses
related to these deposits.
F-11
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments - The Company estimates the fair value
of its financial instruments using available market information and appropriate
valuation methodologies. However, considerable judgement is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the Company estimates of fair value are not necessarily indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumption and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The interest rates payable by the
Company on its notes payable approximate market rates. The Company believes
that the fair value of its financial instruments comprising accounts receivable,
notes receivable, accounts payable, and notes payable approximate their carrying
amounts.
New Accounting Pronouncements:
Derivative and Hedging Activities - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect adoption of the new standard
on January 1, 2001 to affect its financial statements.
NOTE 3 - ACQUISITIONS
In December 1997, the Company purchased the outstanding stock of Brenham
Oil and Gas ("Brenham") for 6,000,000 shares of restricted common stock. Brenham
owns a non-operating royalty interest in a gas well and has no other operations.
Also in December 1997, the Company purchased Texas Real Estate Enterprises, Inc.
("TRE") and G.C.A. Incorporated ("GCA"), an unaffiliated entity, for a total,
combined consideration of 16,000,000 shares of restricted common stock. TRE and
GCA jointly owned a 286 acre parcel of real estate on Galveston Bay, Texas and
have no other operations.
Brenham and TRE were acquired from a trust for the benefit of the son of
the Chief Executive Officer (CEO) of the Company and the brother of the CEO of
the Company, respectively. The purchase price for Brenham was based upon the
present value of estimated future cash flows from this interest over a 5 year
period which amount totaled $300,000. The purchase price of TRE and GCA was
based upon the fair market value of the underlying real estate as determined by
an independent appraisal. Since the Brenham and TRE acquisitions were made
through entities under common control, the Company has accounted for such
acquisitions at the predecessor carry-over historical cost basis. The difference
between such costs and the estimated fair value of the assets acquired was
recognized as a deemed (non-cash) dividend. Shown below is a summary of the
recorded transactions as of December 31, 1997.
Carry-over Fair Deemed
Cost Basis Value Dividend
---------- ---------- ---------
Brenham........ $ 0 $ 300,000 $ 300,000
TRE (Note 6)... $225,000 $1,800,000 $1,575,000
Since the purchases of these companies were completed in late December
1997, results of operations on these acquisitions are included in the
accompanying financial statements beginning January 1, 1998. The gas well had
production in 1997 that resulted in approximately $80,000 of royalty payments to
Brenham; TRE and GCA had no material operations in 1997.
Acqueren Acquisition
Effective July 1, 1998, the acquisition by AIII of 100% of the outstanding
stock of Acqueren, Inc. and its wholly-owned subsidiary, Northeastern Plastics
Inc., (NPI) (collectively referred to as "Acqueren") was closed and the
transaction was accounted for as a purchase. Operations of Acqueren have been
recorded by the Company since July 1, 1998 in the accompanying statement of
operations for the year ended December 31, 1998 and the six months ended
June 30, 1999 (Note 14).
The purchase agreement provides for the two primary shareholders of
Acqueren to receive 5,000,000 and 1,750,000 shares of AIII's common stock in
exchange for their 700,000 and 150,000 shares, respectively, of the Acqueren's
stock. The purchase agreement further provides for the remaining stockholders
of Acqueren to receive 25.02 shares of AIII's common stock for each share of the
Acqueren's stock. In total, the terms of the sale required AIII to issue
26,750,000 shares of restricted common stock in exchange for 100% of the
outstanding common stock of Acqueren. Based upon the estimated fair value of
the restricted common stock of AIII, the total purchase consideration of the
Company was approximately $2,140,000 ($.08 per share). As of June 30, 1999,
1,331,550 shares of AIII's restricted common stock had not been exchanged by
various shareholders of Acqueren for their share of Acqueren's common stock.
Accordingly, those shares of AIII's common stock are not considered outstanding
for purposes of EPS calculations.
F-12
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CRC Acquisition
On September 24, 1998, the shareholders of Cinema Research Corporation and
Digital Research Corporation, entities under common ownership and collectively
referred to as "CRC", completed an agreement to sell 100% of the outstanding
stock to AIII. As a part of the purchase, AIII acquired Electronic Pictures
Corporation, a company that owned an option to purchase CRC and D-Rez as its
only asset and AIII exercised this option. Terms of the sale required AIII to
issue 6,300,000 shares of its restricted common stock and give options to
purchase 400,000 shares of the acquirer's common stock exercisable in whole or
in part, over a 5 year period at $.20 per share. In addition, the acquirer
issued a $379,500 non-interest bearing note payable to the seller due in sixty
equal, monthly installments. Based upon the estimated fair value of AIII's
restricted common stock of $1,260,000 ($.20 per share), stock options valued at
$32,000 and the discounted present value note payable to selling shareholder of
$303,300, the total purchase consideration of the Company was $1,595,300.
As a condition to selling CRC, the president and chief executive officer,
and vice-president of marketing, who were selling shareholders of CRC, signed
five and six year employment contracts, respectively, which included covenants
not-to-compete with the Company for the term of the contract. These contracts
require aggregate compensation payments of approximately $175,000 annually to
these individuals. Further, the contracts provide for the payment of incentives
based upon individual and operating performance.
Accounting for Acquisitions - The allocation of the purchase prices in the
Acqueren and CRC acquisitions are shown below and are based upon the fair market
values of the acquired assets and liabilities assumed.
<TABLE>
<CAPTION>
Acqueren CRC
-------- ---
<S> <C> <C>
Purchase consideration:
Note payable to selling stockholder (discounted value)... $ -- $ 303,300
Common stock and options (restricted).................... 2,140,000 1,292,000
----------- -----------
$ 2,140,000 $ 1,595,300
=========== ===========
Assets acquired and liabilities assumed:
Current assets............................................. $ 4,034,626 $ 843,359
Property and equipment..................................... 100,000 3,706,265
Other assets............................................... -- 14,019
Non-compete agreements..................................... -- 150,000
Goodwill................................................... 879,834 238,079
Current liabilities........................................ (2,581,079) (709,821)
Capital lease obligations.................................. -- (1,498,601)
Notes payable.............................................. -- (975,000)
Notes payable to related parties........................... (293,381) (173,000)
----------- -----------
$ 2,140,000 $ 1,595,300
=========== ===========
</TABLE>
The following presents the unaudited pro forma results of operation of AIII
for the years ended December 31, 1997 and 1998, as if these purchase
transactions would have been consummated as of January 1, 1997 and 1998.
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Pro forma sales....................................... $16,808,397 $17,375,536
Pro forma operating loss.............................. $(2,182,907) $(2,746,743)
Pro forma net loss applicable to common shareholders.. $(4,323,212) $(5,014,751)
Pro forma basic and diluted net loss per share....... $ (.06) $ (.05)
Weighted average shares outstanding................... 69,171,344 97,097,221
</TABLE>
Unlimited Coatings Acquisition
Effective January 1, 1999 the Company acquired 100% of the outstanding
common stock of Marald, Inc. d/b/a Unlimited Coatings ("UC"), through the
issuance of 3,500,000 restricted shares of common stock of AIII valued at fair
market value of approximately $652,000 at $.19 per share. In addition, a finders
fee of $45,000 was paid in part to a party related to the CEO. The transaction
has been accounted for as a purchase.
UC is a distributor of specialty chemicals, such as rust proofing,
undercoating, fabric protectants, and fuel additives to the automotive
after-market. Best known for its spray-on bed-liners for truck beds, UC products
are marketed under the "Toro Liner" name through a network of independent
distributors.
The allocation of the purchase price of UC is shown below:
<TABLE>
<CAPTION>
Amount
---------
(Unaudited)
<S> <C>
Purchase consideration:
Common stock (restricted)........................... $ 652,000
Finders fee......................................... 45,000
---------
Total............................................... 697,000
---------
Assets acquired and liabilities assumed:
Assets:
Current........................................... $ 123,000
Fixed............................................. 43,000
Other............................................. 2,000
Liabilities......................................... (183,000)
---------
Excess Purchase Price over Net Assets Acquired........ $ 712,000
=========
</TABLE>
UC's operations and its results from operations are not significant to the
Company's consolidated financial statements and, accordingly, there is no
presentation of the pro forma results from operations of the Company giving
effect to UC as if the purchase transaction had been consummated as of January
1, 1997 and 1998 and 1999.
Armor Linings Acquisition
In April 1999, the Company acquired 100% of the outstanding shares of
Tough Trucks and Accessories, Inc., dba Armor Linings ("Armor"). Armor operates
a facility in Houston, principally for the application of spray-on liners for
trust beds, undercoating and rust-proofing of vehicles, and wholesale and retail
sales of truck accessories. The chemicals are supplied by Unlimited Coatings.
The Company paid cash in the amount of $143,000 and assumed approximately
$85,000 related to certain equipment lease obligations. The acquisition was
accounted for as a purchase.
The allocation of the purchase price of Armor is shown below:
<TABLE>
<S> <C>
Purchase consideration:
Cash............................................. $143,000
--------
Assets acquired and liabilities assumed:
Assets:
Current........................................ 42,000
Fixed.......................................... 116,000
Liabilities...................................... (85,000)
--------
Excess Purchase Price over Net Assets Acquired... $ 70,000
========
</TABLE>
Armor's operations and its results from operations are not significant to
the Company's consolidated financial statements and, accordingly, there is
no presentation of the pro forma results from operations of the Company, giving
effect to Armor as if the purchase transaction had been consummated as of
January 1, 1997, 1998 and 1999.
F-13
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES
Trading
In the third quarter of 1998, the Company began investing excess funds in
marketable equity securities. In order to reduce the cost of the investment and
associated risk in such securities, the Company sold call options for the number
of shares purchased. The securities and related call options are carried at
market value with any changes in market value during the period of the stock or
call option included as a component of net income. For the year ended December
31, 1998 and for the six months ended June 30, 1999, the Company recognized a
$37,899 net increase and $242,603 decrease in the market value of such equity
securities as a component of net loss, respectively. The Company can borrow up
to 80% of the security market value at 8.25% at June 30, 1999. As of December
31, 1998 and June 30, 1999 the Company had borrowed $195,645 and $344,717,
respectively.
As of December 31, 1998, the trading securities and related call options
are summarized below.
<TABLE>
<CAPTION>
Security Option
Security Market Option Market
Equity Security Cost Value Proceeds Value
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Billing Concepts Corp.
20,000 shares of common stock... $223,256 $220,000 $ -- $ --
Loral Space and Communications
10,000 shares of common stock... 132,289 178,120 18,812 28,750
Ciena Corporation
2,000 shares of common stock.... 25,326 29,250 3,462 2,124
-------- -------- -------- -------
$380,871 $427,370 $22,274 $30,874
======== ======== ======== =======
</TABLE>
As of June 30, 1999 the trading securities and related call options are
summarized below (unaudited):
<TABLE>
<CAPTION>
Security Option
Security Market Option Market
Cost Value Proceeds Value
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Equity Securities $1,511,236 $1,458,906 $27,606 $55,250
========== ========== ======== =======
</TABLE>
Available-for-Sale
In accordance with the provisions of SFAS No. 115, the Company's investment
in the common stock of a publicly-traded Company was classified as
available-for-sale equity securities and, accordingly, are carried at fair
value. Unrealized losses of such securities at December 31, 1998 of $18,964 are
included as a component of stockholders' equity and is a comprehensive loss item
in the consolidated statement of operations. The Company's cost in these
securities, determined under the average cost method, was $134,848 at December
31, 1998. Subsequent to year-end, the Company acquired additional shares of
Common Stock of the publicly-traded company for an aggregate cost of $258,326.
In April and May 1999, all such available-for-sale equity securities were sold
in a sequence of transactions. The total proceeds of those sales amounted to
$1,272,117 and the Company recognized an unrealized gain of $18,964 included in
comprehensive loss, and a realized gain of $1,013,792 and is shown as a
component of investment income in the accompanying statement of operations for
the six months ended June 30, 1999.
F-14
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- -------- ----------
(unaudited)
<S> <C> <C> <C>
Raw materials............................. $ 44,125 $ 78,683 $ 163,217
Work-in-process........................... 102,489 169,618 229,340
Finished goods............................ 33,408 806,790 849,088
-------- ---------- ----------
$180,022 $1,055,091 $1,241,645
======== ========== ==========
</TABLE>
NOTE 6 - REAL ESTATE HELD FOR SALE
Real estate held for sale includes the following:
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1997 1998 1999
---------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
286 undeveloped acres on
Galveston Bay, Texas (Note 3).... $ 225,000 $ 225,000 $ 225,000
42.6 undeveloped acres of land in
Southeast Houston, Texas and
Commercial properties in
Harris County, Texas (1)......... -- 486,390 486,390
736 undeveloped acres of land in
Anahuac, Texas(2)................ -- 176,572 176,572
23 acres of undeveloped land in
Harris County, Texas............. -- 164,800 164,800
Other properties.................... 183,700 186,822 186,822
---------- ---------- ----------
$ 408,700 $1,239,584 $1,239,584
========== ========== ==========
</TABLE>
(1) In June 1998, the Company purchased a real estate company, Mid-Towne
Properties, Inc. ("Mid-Towne") for 2,100,000 shares of AIII plus the assumption
of property taxes of approximately $300,000. Mid-Towne has no operations other
than its ownership of the 42.6 acres of land. Mid-Towne was 60% owned by a trust
for the benefit of the son of the CEO of the Company. Since the Mid-Towne
acquisition was made through an entity under common control, the Company has
accounted for the acquisition at the predecessor carry-over historical cost
basis of $186,390 plus the $300,000 in property tax liability assumed. The
difference between the total cost basis and the fair value of the asset acquired
of $1,965,000 was recognized as a deemed (non-cash) dividend. Mid-Towne had no
material activity in 1998 and 1997.
(2) In May 1998, the Company purchased 736 acres of undeveloped land in Anahuac,
Texas ("Anahuac") from a company then owned by the CEO of the Company who is
also a stockholder in the Company. The consideration paid for the land consisted
of 8,000,000 shares of newly issued, restricted common stock of AIII. Since the
Anahuac acquisition was made through an entity under common control, the Company
has accounted for the acquisition at the predecessor carry-over historical cost
basis of $176,572. The difference between the cost basis and the fair value of
the asset acquired of $736,000 was recognized as a deemed (non-cash) dividend.
This acreage had no material activity in 1998 and 1997.
F-15
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PROPERTY AND EQUIPMENT
Major classes of property and equipment together with their estimated
useful lives, consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- June 30,
Years 1997 1998 1999
----- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Land................................ $ 328,000 $ 386,812 $ 386,812
Building and improvements........... 20 665,246 876,466 1,147,237
Machinery and equipment............. 8 404,117 5,144,632 4,899,774
Office equipment.................... 7 29,735 403,640 735,133
Automobiles......................... 5 25,800 93,900 117,235
---------- ----------- -----------
1,452,898 6,905,450 7,286,191
Less accumulated depreciation and
amortization...................... (117,185) (1,845,078) (2,290,881)
---------- ----------- -----------
Net property and equipment.......... $1,335,713 $ 5,060,372 $ 4,995,310
========== =========== ===========
</TABLE>
Included in the above balances as of December 31, 1998 are assets used by
the Company for CRC's operation under capital leases (see Note 11). Such leased
assets include approximately $1,896,000 net of accumulated depreciation of
$971,000 of digital film and computer equipment as of December 31, 1998.
NOTE 8 - OTHER INVESTMENTS
Investment in Signal Products, Inc.
In March 1999, the Company agreed to acquire a minority interest
(approximately 20%) in Signal Products, Inc. (Signal), a California corporation,
which owns the exclusive license to market handbags and leather accessories
bearing the "Guess" trademark. Signal develops, manufactures and markets its
products throughout the United States. The investment in Signal will be
accomplished through the issuance of 10,000,000 restricted shares of common
stock of AIII, valued at fair market value of approximately $2,000,000. The
shares have been placed in escrow pending the completion of a business valuation
of Signal. The shares will be released from escrow upon satisfactory
determination of Signal's value; 5,000,000 shares to Hardee Capital Partners and
5,000,000 shares to Elk International, a related party, both of which had claims
against the shares of Signal. Should the determination of the value of the
Signal shares, after valuation of Signal yield a value less than $2,000,000, the
number of shares to be released from escrow shall be reduced accordingly;
however, no additional shares shall be issuable should the valuation indicate a
greater value. To-date, the valuation has not been completed, and the Company is
in negotiations to rescind the transaction. Since the restricted shares of
common stock of the Company are held in escrow and are not likely to be issued
to consummate this transaction, such shares are not considered outstanding for
purposes of EPS calculations.
Sale of Real Estate Option
In November 1998, Acqueren deposited $100,000 on behalf of TRE as earnest
money on a contract with a third party for the option to buy a building in
downtown Houston, Texas. The earnest money deposit is included in other assets
in the accompanying consolidated balance sheet at December 31, 1998. In February
1999, TRE sold such option to unrelated third parties for $600,000, realizing a
gain on sale of $500,000.
Investment in Equity Investee
In May 1999, the Company purchased for investment purposes 400,000 freely
tradable shares (giving effect to a 1 for 5 reverse split) of Worldwide Net,
Inc. ("WWN") for a total of $300,000 representing 20% of the total outstanding
common shares of WWN. WWN is an inactive public company traded as an over-the-
counter-bulletin-board company with nominal assets (See Note 17). Accordingly,
the Company has attributed its investment in WWN primarily to goodwill.
NOTE 9 - NOTES PAYABLE TO BANK
Notes payable to banks consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------- June 30,
1997 1998 1999
----------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Note payable to a bank, 9.75% per
annum, due in monthly payments
of principal and interest of $7,895
through February 2003 with
remaining amount due in
March 2003 for Har-Whit............... $ 644,878 $574,276 $ 552,286
Note payable to a bank, 7.75% per
annum, due in November 2000 with
only interest due quarterly for CRC
(collateralized by AIII's $1,000,000
certificates of deposit).............. -- 1,000,000 1,000,000
Line of credit to a bank for 200,000, at
prime, interest only due monthly with
payment of principal due at maturity
in February 2000 for CRC.............. -- -- 200,000
Line of credit with a bank for $150,000,
8% per annum, interest only due
monthly with payment of principal due
at maturity, (collateralized by AIII's
$150,000 certificate of deposit) in
May 2000 for Har-Whit................. -- 60,000 115,000
Line of credit with a bank for $165,000,
7.75% per annum, interest only due
monthly with payment of principal due
at maturity in September 1999 for
Northeastern Plastics.................. -- -- 165,000
Line of credit with a bank for $125,000,
8.75% per annum interest only due
monthly with payment of principal due
at maturity in May 2000 for Marald..... -- -- 105,000
Other notes payable...................... -- 81,777 86,664
---------- ---------- ----------
644,876 1,716,053 2,223,950
Less current portion..................... (72,962) (116,144) (655,674)
---------- ---------- ----------
$ 571,916 $1,599,909 $1,568,276
========== ========== ==========
</TABLE>
F-16
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of AIII's subsidiaries that have outstanding notes payable have
secured such notes by that subsidiary's inventory, accounts receivable and
property and equipment and are guaranteed by AIII. In addition, as of December
31, 1998 and June 30, 1999 the notes payable totaling $1,000,000 and $1,115,000,
respectively, were collateralized by $1,000,000 of restricted cash and
$1,150,000 of certificates of deposit, respectively.
On December 31, 1997, the Company's 9.5% note payable to a bank for the
amount of $644,878 matured. In March 1998, the Company refinanced this loan
with a long-term note payable. Due to the refinancing of the note in 1998, the
amount of note payable to bank reported as current and long-term portions in the
December 31, 1997 balance sheet are based upon the terms of the refinanced note.
In August 1999, Marald arranged a $100,000 working capital line of credit,
with interest at prime plus two percent. This line is secured by its inventory
and accounts receivable and is guaranteed by AIII.
Principal repayment provisions of long-term debt are as follows at
December 31, 1998:
Amount
----------
1999................................................. $ 116,144
2000................................................. 1,061,721
2001................................................. 63,125
2002................................................. 90,565
2003................................................. 384,498
----------
Total................................................ $1,716,053
==========
NOTE 10 - NOTES PAYABLE TO RELATED PARTIES
In connection with the acquisitions discussed in Note 3, the Company has
the following notes payable to related parties at December 31, 1998, and June
30, 1999 none of which were outstanding at December 31, 1997:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
Notes payable to selling stockholders of CRC,
without interest, due in monthly payments
through September 2003 of $6,325, recorded
using an 8% discount rate (discount of $69,850)...... $ 284,071 $ 252,443
Note payable to principal selling stockholder of
Acqueren, 6% per annum, annual payment of $100,000
due in August 1999 and 2000 with remainder due in
August 2001.......................................... 300,000 300,000
Note payable to officer of CRC, 8% per
annum, due upon demand............................... 196,225 0
--------- ---------
Total notes payable to related parties................ 780,296 552,443
Less-current portion.................................. (459,972) (175,912)
--------- ---------
Notes payable to related parties, long-term portion... $ 320,324 $ 376,531
========= =========
</TABLE>
Interest expense for the year ended December 31, 1998 and for the six
months ended June 30, 1999 on these related party notes was approximately
$15,000 and $16,500, respectively.
F-17
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CAPITAL LEASES
The Company, through its CRC acquisition (Note 3), has the following future
aggregate minimum annual lease payments required under capital leases as of
December 31, 1998:
Amount
----------
1999.......................................... $ 690,460
2000.......................................... 644,500
2001.......................................... 194,684
----------
Total minimum lease payments.................. 1,529,644
Less amount representing interest............. (168,704)
----------
Present value of net minimum lease payments... 1,360,940
Less current portion.......................... (584,552)
----------
Long-term portion............................. $ 776,388
==========
Interest rates on the capitalized leases range from 7.3% to 22.7%. Certain
of the leases contain restrictive covenants regarding various financial ratios
and capital distributions. At December 31, 1998 and June 30, 1999, the Company
was in violation of certain financial ratios and has received a waiver for those
violations from the lessor through January, 2000. At June 30, 1999, such capital
leases with covenant violations are classified as current.
NOTE 12 - CAPITAL STOCK AND STOCK OPTIONS
The Company is authorized to issue up to 10,000,000 shares of
Preferred Stock, $.001 par value per share of which none are presently
outstanding. The Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by stockholders, and may include voting rights (including
the right to vote as a series of particular matters), preferences as to
dividends and liquidation, conversion, redemption rights and sinking fund
provisions. The Company has no present plans for the issuance of Preferred
Stock.
The Company is authorized to issue up to 200,000,000 shares of Common
Stock, of which 121,115,971 shares were issued and 120,877,971 were outstanding,
4,000,000 shares were subscribed at December 31, 1998, and 7,720,000 were
reserved for issuance pursuant to the exercise of outstanding stock options as
of December 31, 1998.
In September 1997, the Company issued options to purchase 600,000 shares of
common stock at an exercise price of $.02 per share to a former officer and
director in connection with the acquisition of control of the Company by the
1997 Group. Of these, options to purchase 100,000 shares of common stock were
transferred to an unrelated party who exercised these options in June 1998.
In November 1998, the Board of Directors ratified the purchase of 110,000
shares and the remaining options to buy 500,000 shares of the Company for
$20,000 from this former director. The Company then canceled the option
acquired. Since the option had been determined to have nominal value at the time
of issuance, no purchase cost was assigned to it. Accordingly, the $20,000 was
recorded as the cost of the purchase of treasury stock.
In September 1997, the Company sold 5,000,000 newly issued restricted
shares to a corporation controlled by the brother of the CEO of the Company for
$150,000. In connection with this sale, the Company granted this related party
the option to purchase an additional 2,000,000 shares at $.02 per share and such
option was for three years and vested immediately. In June 1998, this option was
exercised by the related party and the Company received $40,000.
Also during 1997, the Company sold 500,000 restricted common shares to a
director of the Company for $.10 per share. In December 1997, the Company
issued 200,000 shares of common stock in exchange for shares of another
corporate valued at $40,000. In August 1998, the Company returned such shares
to their previous owner for $40,000. Further in 1997, the Company sold an
additional 7,278,060 shares of common stock through various private sales for
between $.02 and $.10 per share for total net proceeds of $203,456.
F-18
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the change in control of the Company to the 1997 Group
(Note 1) in October 1997 the Company issued 500,000 options to each of two
individuals as an enticement to return to manage the operations of Har-Whit and
P&S and also issued 300,000 options to the outside legal counsel of the Company
to purchase common stock of AIII for legal services performed. These options
are exercisable at $.02 per share through December 2002 and such options were
immediately exercisable. At the date of grant those options were determined to
have no material value. Further, the two individuals who manage Har-Whit and
P&S were issued 100,000 shares individually of the Company's common stock in
January 1998 for management services rendered. This issuance was recorded as
$10,000 of compensation expense in 1998 based on the market value of the shares
($.05 per share) at the date of grant. In May 1998, these two individuals each
were granted the right to purchase 250,000 shares of the Company's common stock
at $.25 per share. These shares have not been paid for and are classified as
subscribed shares.
In December 1997, the Company issued 1,400,000 shares of restricted common
stock to a consulting firm for strategic planning assistance rendered to the
Company. Such shares were valued at the market price of $.05 per share
resulting in a $70,000 charge to general and administrative expense in 1997.
In connection with sale of newly issued restricted common stock in May
1998, the Company granted an investor the option to purchase an additional
4,000,000 shares at $.25 per share, which were immediately exercisable through
the year 2002.
In 1998, the Company issued 200,000 shares of common stock to its CEO in
exchange for executive and management services rendered. Such award was
recorded at the date of grant as a $13,000 compensation expense based on the
market value (approximately $.07 per share) of the shares issued. Further, in
accordance with a May 1998 employment agreement, the Company granted an option
to purchase 2,000,000 shares at $.12 per share through May 2001, which were
immediately exercisable, to its Chief Executive Officer. Since the option price
exceeded the market value of AIII's stock at the time of the grant, there was no
charge to expenses for this option. In addition, the Company recorded
additional paid-in capital and compensation expense of $56,000 representing the
fair value of services rendered to the Company.
In May 1998, the Company sold 3,500,000 newly issued restricted shares to a
corporation controlled by the brother of the CEO of the Company for a total
consideration of $300,000.
In May 1998, an employee was issued 50,000 shares of Common Stock in
exchange for services rendered.
In addition in January and May 1998, the Company issued 600,000 shares of
restricted common stock to employees and directors for management advisory
services. These awards were recorded as $32,700 of compensation expense at the
market value (ranging from $.05 to $.08 per share) of the shares issued at the
date of grant.
During 1998, the Company sold 11,660,000 of restricted common stock through
various private sales for between $.10 and $.40 per share for total proceeds of
$2,023,500. Also in 1998, holders of 500,000 options exercised their rights and
purchased stock for between $.02 and $.04 per share. This issuance resulted in
$14,000 being paid to the Company. At December 31, 1998, the Company had a
total of 4,000,000 shares of stock subscribed for between $.10 and $.22 per
share with expected total proceeds of $550,000. Subsequent to year end, the
subscription right for $350,000 was cancelled and accordingly the amount was
eliminated against the related equity balance. Also, the purchase price of
$150,000 for certain subscribed shares was received during April 1999.
In July 1998, the Company declared a 10% stock dividend that was payable to
stockholders of record as of August 30, 1998. Such dividend resulted in
issuance of 9,188,911 shares to stockholders and was accounted for at the market
value as of August 30, 1998 ($.26 per share).
In August 1998, the Company issued an option to purchase 20,000 shares of
Common Stock at an exercise price of $0.34 per share to an officer of the
Company as part of an employment agreement.
In November 1998 the Board of Directors authorized management to purchase
from time to time up to 10 million shares of the Company's common stock, as
deemed appropriate by management. To date the Company has purchased a total of
220,000 shares from two former officers of the Company. The purchases were made
in two separate transactions in November 1998. In one transaction $20,000 was
paid for 110,000 of the Company's shares and in the other transaction $12,500
was paid for 110,000 of the Company's shares. In both instances, the Company
either paid at market or below market value for the treasury shares. Those
transactions were funded from the Company's general operating funds. The Company
does not intend to repurchase significant numbers of its shares in the future.
In January 1999 the Company issued options to employees to purchase 160,000
shares of Common Stock at an exercise price of $0.24 per share which was the
market price at that time for services rendered.
In March 1999 the Company issued an option to an employee to purchase
100,000 shares at an exercise price of .19 per share which was the market price
at that time for services rendered.
In June 1999 the Company issued 10,000 shares of Common Stock to the child
of a former director, as a gift.
F-19
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective December 31, 1996, the Company was required to adopt the
disclosure portion of SFAS No. 123. This statement requires the Company to
provide pro forma information regarding net loss applicable to common
stockholders and loss per share as if compensation cost for the Company's stock
options granted had been determined in accordance with the fair value based
method prescribed in SFAS 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997,
1998 and 1999 as follows:
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
------- ------- --------
(unaudited)
<S> <C> <C> <C>
Dividend yield........ 0% 0% 0%
Expected volatility... 90% 90% 90%
Risk free interest.... 6.5% 6.5% 5.4%
Expected lives........ 5 years 5 years 5 years
</TABLE>
Under the accounting provisions of SFAS 123, the Company's net loss
applicable to common stockholders and loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1997 1998 1999
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.............................. $(2,745,027) $(2,684,011) $(164,646)
Pro forma................................ $(2,755,027) $(2,828,211) $(177,572)
Loss per share:
As reported.............................. $ (.19) $ (.03) $ (.00)
Pro forma................................ $ (.20) $ (.03) $ (.00)
</TABLE>
A summary of the status of the Company's stock options to employees as of
December 31, 1997, 1998 and June 30, 1999 and changes during the periods ending
on those dates is presented below:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
December 31, December 31, June 30,
Shares 1997 Shares 1998 1999
--------- ----- -------- ----- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period........... $ -- -- 1,000,000 $ .02 3,020,000 $.09
Granted.......................... 1,000,000 .02 2,020,000 .12 260,000 .22
---------- ----- --------- ----- --------- ----
Outstanding and exercisable at
End of period................. 1,000,000 $ .02 3,020,000 $ .09 3,280,000 $.10
========== ===== ========= ===== ========= ====
Weighted-average fair value of
Options granted during the
Period........................ 1,000,000 $ .01 2,020,000 $ .12 260,000 $.22
========== ===== ========= ===== ========= ====
</TABLE>
F-20
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options to
employees outstanding at December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Number Out- Average Number Out- Average
standing and Remaining standing and Remaining
Exercisable at Contractual Exercisable at Contractual
Exercise December 31, Life (Years) at Exercise December 31, Life (Years) at
Price 1998 December 31, 1998 Price 1999 December 31, 1998
- -------- ------------ ----------------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$ .02 1,000,000 3.73 $ .02 1,000,000 3.24
$ .12 2,000,000 4.37 $ .12 2,000,000 3.87
$ -- -- -- $ .19 100,000 4.65
$ -- -- -- $ .24 160,000 4.51
$ .34 20,000 4.59 $ .34 20,000 4.10
- -------- --------- ---- -------- --------- ----
$.02-.34 3,020,000 3.83 $.02-.34 3,280,000 3.73
======== ========= ==== ======== ========= ====
</TABLE>
NOTE 13 - INCOME TAXES
A reconciliation of income taxes at the federal statutory rate to amounts
provided for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
--------- ---------
<S> <C> <C>
Tax benefit computed at statutory rate............ $(295,000) $(341,000)
Non-deductible permanent difference............... -- 42,196
Change in valuation allowance, net of valuation
Allowance of acquired subsidiaries............... 295,000 --
--------- ---------
$ -- $(298,804)
========= =========
</TABLE>
Deferred taxes are determined based on the temporary differences between
the financial statement and income tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. The components of deferred income tax assets are as follows:
December 31,
-------------------------
1997 1998
----------- ---------
Deferred tax assets:
Net operating loss............................. $ 295,000 $ 1,829,000
Provision for doubtful accounts................ 7,000 21,000
Other.......................................... -- 18,000
--------- -----------
Total deferred tax asset........................ 302,000 1,868,000
Valuation allowance............................. (302,000) (1,169,000)
--------- -----------
Net deferred tax asset.......................... -- 699,000
Deferred tax liability:
Capital leases................................. -- 122,000
Difference in carrying value of property and
equipment..................................... 298,804 577,000
--------- -----------
Total deferred tax liability.................... 298,804 699,000
--------- -----------
Net deferred tax liability...................... $ 298,804 $ --
========= ===========
F-21
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the Company provided a 100% valuation allowance for
the deferred tax asset because it could not be determined whether it was more
likely than not that the deferred tax asset would be realized.
The Company has net operating loss carryforwards of approximately
$1,981,000 as of December 31, 1998, to offset future taxable income which expire
through 2018. In addition, the acquired subsidiaries (Note 3) have individual
net operating loss carryforwards in excess of $3,400,000. However, such net
operating loss carryforwards are limited due to separate company limitations in
accordance with income tax regulations.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of November 1, 1997, Acqueren relocated its operations from Brooklyn,
NY, to Nicholls, GA. In accordance with the move the Company executed a lease
from an unrelated party for the Company's new facility for a term of two years
through October 9, 1999 and provides for annual rent of $39,300. The lease
provides for an option to renew for an additional term of two years. For the
year ended December 31, 1998, $31,600 was recorded as rent expense under this
lease.
In connection with the relocation to Nicholls, GA in 1997, Acqueren
terminated its union contract in New York. The union has claimed a deficiency
for unfunded pension liabilities. Management has accrued $125,000 in 1998
relating to this potential liability. Management estimates that such an amount
will be sufficient to cover any potential obligation to this union.
Various key officials of the Company have entered into employment
agreements with the Company. The CEO of the Company entered into a three-year
employment agreement which provides for a monthly salary of $1,000 plus a bonus
as determined by the Board of Directors. The two key management personnel of
Har-Whit/Pitts and Spitts, who were also Directors of the Company, entered into
three-year employment contracts expiring in 2000 that require payments of $5,000
per month to each director plus a bonus at the discretion of the Board of
Directors. The president of NPI previously entered into an at-will employment
agreement that provides an annual salary of $124,000 plus a bonus based upon
operating results of this subsidiary. The employment agreement also grants the
president of NPI an option to purchase NPI common stock equal to 5% of NPI's
equity at an exercise price of 5% of the total stockholder's equity, if NPI
conducts an initial public offering of its common stock during the time of his
employment. The Company entered into other employment agreements in connection
with the purchase of CRC as discussed in Note 3.
CRC leases office space, at $13,000 per month, under a non-cancelable
operating lease expiring November 30, 1999 from the father-in-law of the prior
stockholder of CRC who became a shareholder in the Company after the CRC
acquisition in Note 3. Prior to the date of acquisition by AIII, CRC owed
approximately $160,000 of unpaid rent under this lease. At the date of
acquisition, the Company settled the unpaid rent for $50,000 and renegotiated
the lease terms, including the commitment to make the necessary building
improvements for earthquake compliance. The Company estimates these costs to be
approximately $150,000. As part of the acquisition of CRC, the Company acquired
CRC's option (expiring on July 31, 1999) to purchase the leased building
occupied by CRC for $1,170,000. In June 1999, the Company reached an agreement
with one of the two selling shareholders of CRC to assign him the option to
purchase the building in exchange for the forgiveness of $365,158 owed to him as
reimbursement for various expenses and advances made on behalf of the Company.
Considering the related party nature of the transaction, the Company recognized
the forgiveness of debt amount to the shareholder as additional paid-in
capital.
The Company leases automobiles under operating leases expiring in various
years through June 30, 2001. Future aggregate rental payments under these non-
cancelable operating leases require annual payments of approximately $20,000
through 2001.
On December 10, 1998, the Company filed an Original Petition and Request
for Temporary Injunction for breach of contract and common law and stock fraud
in connection with the Company's acquisition of Acqueren, Inc. against TDA
Industries, Inc. ("TDA") and its former principal stockholder in the 56th
Judicial District Court of Galveston, Texas. The Company claims that the
defendants misrepresented the amount of Acqueren's equity as of the date of the
purchase agreement. The Company is seeking actual damages in the amount of not
less than $1,100,000, in addition to further relief which it may be entitled to.
In August 1999, the selling shareholders of TDA filed an action in New York
alleging misrepresentations by AIII. Currently, the parties are in negotiation
to settle both lawsuits. Management expects the outcome of either the litigation
or the settlement of such litigation will not have a material adverse effect on
the Company.
F-22
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company advanced the Chief Executive Officer $27,190 and $29,190 as of
December 31, 1998 and June 30, 1999, respectively. The officer executed a
promissory note to the Company due upon demand. This note bears interest at
prime and is included in notes receivable as of December 31, 1998 and June 30,
1999, respectively.
The Company advanced the Chief Executive Officer $108,531 during the six
months ended June 30, 1999, the advances are included in accounts receivable
related party as of June 30, 1999.
Other related party transactions are discussed in Notes 3, 6, 10, 12 and
14.
NOTE 16 - SEGMENT INFORMATION
The Company has four reportable segments and corporate overhead:
industrial/commercial, oil and gas, real estate and media/entertainment. The
industrial/commercial segment includes (1) a supplier of automotive after-market
products; (2) a manufacturer and distributor of barbecue pits and custom sheet
metal products for customers predominantly in the energy industry; and (3)
distributions of speciality chemicals for the automotive after-market, including
specializing in the application of spray-on bed-liners for truck beds. The oil
and gas segment owns an oil, gas and mineral royalty interest in Washington
county, Texas. The media/entertainment segment is a provider of technical,
optical and digital services to the motion picture and television industry. The
corporate overhead includes the Company's investment holdings including
financing current operations and expansion of its current holdings as well as
evaluating the feasibility of entering into additional businesses.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes, not
including nonrecurring gains and losses and foreign exchanges gains and losses.
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. Most of the businesses were
acquired as a subsidiary and the management at the time of the acquisition was
retained.
Consolidated net sales and net operating losses were as follows:
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
-------------------------- --------------------------
1997 1998 1998 1999
------------ ----------- ------------ -----------
A (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales:
Industrial/Commercial........... $2,501,860 $ 8,907,617 $1,150,082 $7,302,564
Media/Entertainment............. -- 1,305,422 -- 2,011,321
Oil and gas..................... -- -- -- --
Real estate..................... -- -- -- 600,000
Corporate....................... -- -- -- --
---------- ----------- ---------- ----------
Consolidated net sales........... $2,501,860 $10,213,039 $1,150,082 $9,913,885
---------- ----------- ---------- ----------
Income (loss) from operations:
Industrial/Commercial........... $ (161,250) $ 249,409 $ (77,248) $ 168,791
Media/Entertainment............. -- (192,215) -- (693,514)
Oil and gas..................... -- 63,763 (8,282) (5,014)
Real estate..................... -- (115,291) (22,143) 451,602
Corporate....................... (646,917) (1,026,646) (290,630) (890,784)
---------- ----------- ---------- ----------
Consolidated operating loss...... $ (808,167) $(1,020,980) $ (398,303) $ (968,919)
========== =========== ========== ==========
</TABLE>
F-23
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of identifiable assets, depreciation and amortization, and
capital additions of continuing operations is as follows:
<TABLE>
<CAPTION>
Depreciation
Identifiable and Capital
Assets Amortization Additions
------------ ------------ ---------
<S> <C> <C> <C>
Year ended December 31, 1997:
Industrial/commercial... $ 2,286,098 $194,107 $ 26,262
Media/Entertainment..... -- -- --
Oil and gas............. -- -- --
Real estate............. 225,000 -- --
Corporate............... 171,983 -- --
----------- -------- --------
Consolidated............ $ 2,683,081 $194,107 $ 26,262
=========== ======== ========
Year ended December 31, 1998:
Industrial/Commercial... $ 4,274,845 $104,200 $ 68,872
Media/Entertainment..... 4,391,898 183,687 97,197
Oil and gas............. 63,763 -- 1,331
Real estate............. 944,515 -- 167,922
Corporate............... 3,893,160 140,701 82,591
----------- -------- --------
Consolidated............ $13,568,181 $428,588 $417,913
=========== ======== ========
Six months ended (unaudited)
June 30, 1999:
Industrial/commercial... $10,293,211 $ 87,888 $ 19,390
Media/Entertainment..... 3,954,360 339,684 124,840
Oil and gas............. 65,573 -- --
Real estate............. 1,439,736 963 13,485
Corporate............... 1,720,399 80,403 4,241
----------- -------- --------
Consolidated............ $17,473,279 $508,938 $161,956
=========== ======== ========
</TABLE>
The Company's areas of operations are principally in the United States. No
single foreign country or geographic area is significant to the consolidated
financial statements.
NOTE 17 - SUBSEQUENT EVENTS (UNAUDITED)
In September 1999 the Company exchanged 100% of the shares of its wholly
owned subsidiary, Modern Film Effects, Inc (CRC) for 3,100,000 newly issued
shares (approximately 62%) of World Wide Net, Inc. ("WWN").
The intent of this transaction was to afford a separate public trading
presence for CRC under WWN. In June 1999, the Company entered into an agreement
to acquire the optical title, special effects and the scan and record operations
of Pacific Title/Mirage Studios ("PT"), an unrelated company with similar
business operations as CRC. The agreement was subsequently assigned to WWN and
as of September 1999, negotiations regarding that PT acquisition have since been
discontinued.
F-24
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - RESTATEMENT OF PRIOR PERIODS
The Company's financial statements for the years ended December 31, 1997
and 1998 and for the six months ended June 30, 1998 and 1999, have been restated
to reflect the acquisitions of TRE, Brenham, Midtowne and real estate held for
sale at the seller's historical cost plus assumed liabilities. The acquisitions
were previously recorded at fair value. The transactions have been recorded at
carry-over cost since the shareholders of the entities of all these acquisition
transactions are under common control. Accordingly, the Company restated its
financial statements to reflect the real estate held for sale and natural gas
and mineral interests at the seller's carry-over cost. The Company recorded a
deemed dividend which represents the fair value of the asset acquired in excess
of the predecessor carry-over historical cost. The Company's financial
statements at June 30, 1999 and for the six months then ended have also been
restated to give effect to additional accrued liabilities and to certain
reclassifications.
The effects of the restatements are as follows:
For the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
As Previously Reported As Restated
December 31, December 31,
---------------------------------- --------------------------------
1997 1998 1997 1998
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheets:
Real estate held for sale.............. $ 1,983,700 $ 4,910,140 $ 408,700 $ 1,239,584
Natural gas and mineral interests, net
of amortization of $45,000 and
$105,000.............................. 300,000 240,000 -- --
Deficit................................ (1,097,871) (4,192,960) (2,972,871) (8,045,998)
Consolidated Statements of Loss:
Operating Expenses..................... n/a 3,173,504 n/a 3,113,504
Operating Loss......................... n/a (1,080,980) n/a (1,020,980)
Net Loss applicable to common
stockholders.......................... (870,027) (705,973) (2,745,027) (2,684,011)
Loss per share - basic and diluted...... (.06) $ (.01) (.19) $ (.03)
</TABLE>
For the six months ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
As Previously Reported As Restated
June 30 June 30
---------------------------------- --------------------------------
1998 1999 1998 1999
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheets:
Real estate held for sale.............. n/a $ 4,852,622 n/a $ 1,239,584
Natural gas and mineral interests, net
of amortization of $135,000........... n/a 210,000 n/a --
Deficit................................ n/a (3,781,156) n/a (8,211,202)
Consolidated Statements of Loss:
Operating Expenses..................... 801,285 2,664,286 771,285 2,876,136
Operating Loss......................... (428,303) (757,069) (398,303) (968,919)
Extraordinary item - debt
forgiveness........................... -- 365,159 -- --
Net income (loss) applicable to common
stockholders.......................... (416,011) 412,363 (386,011) (164,646)
Loss per share - basic and diluted...... $ (.01) $ .00 $ (.03) $ (.00)
Consolidated Statements of Comprehensive
Income (Loss):
Unrealized gain on shares available for sale. -- $ 625,000 -- --
</TABLE>
F-25
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated this 22nd day of February, 1999 between
American International Industries, Inc., a Nevada corporation, currently having
its principal place of business at 601 Hanson Road, Kemah, Texas 77565 (the
"Company"), and John W. Stump, III (the "Executive") an individual.
WHEREAS, the Company desires to employ Executive and Executive desires to
be employed by the Company, as a Chief Financial Officer of the Company.
WHEREAS, the Executive is willing to enter into an agreement with the
Company upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the parties hereto agree as follows:
1. Term of Agreement. Subject to the terms and conditions hereof, the
-----------------
term of employment of the Executive under this Employment Agreement shall be for
the period commencing on the date hereof (the "Commencement Date) and
terminating on February 21, 2002, unless sooner terminated as provided in
accordance with the provisions of Section 5 hereof. (Such term of employment is
herein sometimes called the "Employment Term.")
2. Employment. As of the Commencement Date, the Company hereby agrees to
----------
employ the Executive as Chief Financial Officer of the Company, and the
Executive hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder in accordance with the terms and conditions
hereinafter set forth.
3. Duties and Responsibilities. Executive shall serve as Chief Financial
---------------------------
Officer during the Employment Term. Executive shall report to and be subject to
the direction of the Directors of the Company and shall perform duties which are
consistent with his current title and position as Chief Financial Officer of the
Company and such other duties as may be assigned to him from time to time by the
Directors which are consistent with his position of management and leadership.
During the Employment Term, Executive shall devote his full time, skill, energy
and attention to the business of the Company and shall perform his duties in a
diligent, trustworthy, loyal and businesslike manner.
4. Compensation and Benefits During the Employment Term:
----------------------------------------------------
(a) The Executive's base compensation shall be at the rate of $8,500
per month, for the term of this Agreement, payable in regular semi-
monthly installments in accordance with the Company's practice for its
executives, less applicable withholding for income and employment
taxes as required by law and other deductions as to which the
Executive shall agree. Such base compensation shall be subject to
increases as and when determined by the Company's Directors at their
sole discretion.
<PAGE>
(b) In addition to the Executive's base compensation, Executive will
be entitled to a bonus as determined by the Company's Directors.
(c) The Executive shall be granted a Stock Option for 100,000 shares
of the Company's common stock at $0.19 per share for 3 years (3/1/99-
3/1/2002).
(d) The Executive shall be entitled to reimbursement of all
reasonable, ordinary and necessary business related expenses incurred
by him in the course of his duties and upon compliance with the
Company's procedures.
(e) The Executive shall be entitled to an allowance for continuing
education and professional license renewal (5 eight hour courses at
$150+$750, license $250) total $1,000 per year.
5. Termination. A termination of this agreement is either (1) for death
-----------
or disability under Section 5 (a) or 5 (b); (2) with cause under Section 5 (c);
or for good reason under Section 5 (d). All other terminations which may occur
shall constitute a breach of this agreement.
(a) The Company shall have the right to terminate the employment of
the Executive under this Agreement for disability in the event
Executive suffers an injury, illness or incapacity of such character
as to substantially disable him from performing his duties without
reasonable accommodation by the Company hereunder for a period of more
than sixty (60) consecutive days upon the Company giving at least
thirty (30) days written notice of termination; provided, however,
that if the Executive is eligible to receive disability payments
pursuant to a disability policy paid for by the Company, the Executive
shall assign such benefits to the Company for all periods as to which
he is receiving full payment under this agreement.
(b) This agreement shall terminate upon the death of Executive.
(c) The Company may terminate this agreement at any time because of
(i) Executive's material breach of any term of this agreement, (ii)
the willful engaging by the Executive in misconduct which is
materially injurious to the Company, monetarily or otherwise;
provided, in each case, however, that the Company shall not terminate
this Agreement pursuant to this Section 5(c) unless the Company shall
first have delivered to the Executive, a notice which specifically
identifies such breach or misconduct and the Executive shall not have
cured the same within fifteen (15) days after receipt of such notice,
(iii) Executive's gross negligence in the performance of his duties or
(iv) the failure of Executive to perform his essential duties or
comply with reasonable directions of the Directors.
(d) The Executive may terminate his employment for "Good Reason" if:
(i) he is assigned, without his express written consent, any
duties inconsistent with his positions, duties, responsibilities,
authority and status with the Company as of the date hereof, or a
change in his reporting responsibilities
2
<PAGE>
or titles as in effect as of the date hereof;
(ii) his compensation is reduced;
(iii) (1) the Company shall file a petition for bankruptcy or re-
organization under the federal bankruptcy statues or an
involuntary petition is filed against the Company and not removed
or withdrawn within thirty (30) days or (2) the Company does not
pay any material amount of compensation due hereunder and then
fails either to pay such amount within the ten (10) day notice
period required for termination hereunder or to contest in good
faith said notice. Further, if such contest is not resolved within
thirty (30) days the Company shall submit such dispute to
arbitration, under Section 7.
6. Revealing of Trade Secrets, etc. Executive acknowledges the interest
--------------------------------
of the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the supplier lists, customer lists or other confidential business information of
the Company; provided, however, that the parties acknowledge that it is not the
intention of this paragraph to include within its subject matter (a) information
not proprietary to the Company, (b) information which is then in the public
domain, or (c) information required to be disclosed by law.
7. Arbitration. If a dispute should arise regarding this agreement, all
-----------
claims, disputes, controversies, differences or other matters in question
arising out of this relationship shall be settled finally, completely and
conclusively by arbitration of a single arbitrator in Harris County, Texas, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "Rules"). Arbitration shall be initiated by written demand.
This agreement to arbitrate shall be specifically enforceable only in the
District Court of Harris County, Texas. A decision of the arbitrator shall be
final, conclusive and binding on the Company and the Executive, and judgement
may be entered in the District Court of Harris County, Texas, for enforcement
and other benefits. On appointment, the arbitrator shall then proceed to decide
the arbitration subjects in accordance with the Rules. Any arbitration held in
accordance with this paragraph shall be private and confidential and no person
shall be entitled to attend the hearings except the arbitrator, Executive,
Executive's attorneys, and an designated representatives of the Company and
their respective attorneys. The matters submitted for arbitration, the hearings
and proceedings and the arbitration award shall be kept and maintained in
strictest confidence by Executive and the Company and shall not be discussed,
disclosed or communicated to any persons. On request of any party, the record
of the proceeding shall be sealed and may not be disclosed except insofar, and
only insofar, as may be necessary to enforce the award of the arbitrator and any
judgement enforcing an award. The prevailing party shall be entitled to recover
reasonable and necessary attorneys' fees and costs from the non-prevailing
party.
8. Covenants Not to Compete.
------------------------
(a) Executive's Acknowledgment. Executive agrees and acknowledges that
in order to assure the Company that it will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his
special knowledge of the business and his relationships with customers
and suppliers to compete with the Company.
3
<PAGE>
Executive further acknowledges that:
(i) the Company is and will be engaged in the business;
(ii) Executive will occupy a position of trust and confidence
with the Company prior to the date of this agreement and,
during such period and Executive's employment under this
agreement, Executive has, and will become familiar with the
Company's trade secrets and with other proprietary and
confidential information concerning the Company;
(iii) the agreements and covenants contained in this Section 8 are
essential to protect the Company and the goodwill of the
business; and
(iv) Executive's employment with the Company has special, unique
and extraordinary value to the Company and the Company would
be irreparably damaged if Executive were to provide services
to any person or entity in violation of the provisions of
this agreement.
(b) Competitive Activities. Executive hereby agrees that for a period
----------------------
commencing on the date hereof and ending one year following the later
of (i) termination of Executive's employment with the Company for
whatever reason, and (ii) the conclusion of the period, if any, during
which the Company is making payments to Executive, he will not,
directly or indirectly, as employee, agent, consultant, stockholder,
director, co-partner or in any other individual or representative
capacity, own, operate, manage, control, engage in, invest in or
participate in any manner in, act as a consultant or advisor to, render
services for (alone or in association with any person, firm,
corporation or entity), or otherwise assist any person or entity (other
than the Company) that engages in or owns, invests in, operates,
manages or controls any venture or enterprise that directly or
indirectly engages or proposes in engage in the business of the
manufacturing, distribution or sale of (i) products manufactured,
distributed, sold or licensed by the Company at the time of termination
or (ii) products proposed at the time of such termination to be
manufactured, distributed, sold or licensed by the Company within sixty
(60) miles of the Company's operations (the "Territory"); provided,
however, that nothing contained herein shall be construed to prevent
Executive form investing in the stock of any competing corporation
listed on a national securities exchange or traded in the over-the-
counter market, but only if Executive is not involved in the business
of said corporation and if Executive and his associates (as such term
is defined in Regulation 14(A) promulgated under the Securities
Exchange Act of 1934, as in effect on the date hereof), collectively,
do not own more than an aggregate of two percent of the stock of such
corporation ("Permitted Investments"). With respect to the Territory,
Executive specifically acknowledges that the Company has conducted the
business throughout those areas comprising the Territory and the
Company intends to continue to expand the business throughout the
Territory.
9. Opportunities. During his employment with the Company, and for one year
-------------
thereafter,
4
<PAGE>
Executive shall not take any action which might divert from the Company any
opportunity learned about by him during his employment with the Company
(including without limitation during the Employment Term) which would be within
the scope of any of the businesses then engaged in or planned to be engaged in
by the Company.
10. Survival. In the event that this Agreement shall be terminated, then
--------
notwithstanding such termination, the obligations of Executive pursuant to
Sections 6 and 8 of this agreement shall survive such termination.
11. Contents of Agreement, Parties in Interest, Assignment, etc. This
-----------------------------------------------------------
Agreement sets forth the entire understanding of the parties hereto with respect
to the subject matter hereof. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, representatives, successors and assigns of the parties hereto,
except that the duties and responsibilities of Executive hereunder which are of
a personal nature shall neither be assigned nor transferred in whole or in part
by Executive. This Agreement shall not be amended except by a written
instrument duly executed by the parties.
12. Severability. If any term or provision of this Agreement shall be held
------------
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforceable term or provision had not been
contained herein.
13. Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the other party shall be in writing and shall be
deemed to have been duly given when delivered personally or five (5) days after
dispatch by registered or certified mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company addressed to:
American International Industries, Inc.
601 Hanson Road
Kemah, Texas 77565
with a copy to:
Brewer & Pritchard, P.C.
1111 Bagby, Suite 2450
Houston, Texas 77002
If to Executive addressed to:
John W. Stump, III
15800 Hwy 3, #1721
Webster, TX 77598
or to such other address as the one party shall specify to the other party in
writing.
5
<PAGE>
14. Counterparts and Headings. This agreement may be executed in one or
-------------------------
more counterparts, each of which shall be deemed an original and all which
together shall constitute one and the same instrument. All headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
American International Industries, Inc.
By: /s/ Daniel Dror
------------------------------------
Daniel Dror, Chairman & C.E.O.
EXECUTIVE
By: /s/ John W. Stump, III
------------------------------------
John W. Stump, III
6
<PAGE>
EXHIBIT 10.14
EXECUTIVE CONSULTING AND EMPLOYMENT AGREEMENT
---------------------------------------------
THIS EXECUTIVE CONSULTING AND EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of September 10 , 1998, between Modern Film Effects, Inc., a
California corporation, Digital Research Corporation, a California Corporation,
or any successor company (hereinafter collectively referred to as the "Company")
and David R. Miller, an individual ("Executive"), with reference to the
following.
RECITALS
--------
A. The Company is in the business of post-production film opticals and
titles, as well as special digital and visual effects development and title
design for the television and motion picture industries, and such other related
businesses as the Company may from time to time engage in.
B. Executive is a former co-owner and Chief Executive Officer for the
Company and is experienced in financial, operational, sales and promotional
matters involving the Company.
C. Pursuant to that certain Acquisition Agreement of even date herewith
(the "Purchase Agreement") between Executive and American International
Industries, Inc. ("AIII").
D. The Company desires to retain and employ Executive as its Chief
Executive Officer and Director of the Company's sales and marketing efforts and
such other areas as Company may from time to time seek Executive's assistance
with, and Executive desires to accept such retention and employment, subject to
the terms and conditions set forth in this Agreement.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing premises, the provisions
set forth below, and other good and valuable consideration, the parties agree as
follows:
1. Employment. The Company hereby retains and employs Executive and
----------
Executive hereby accepts such retention and employment, for the term and subject
to the provisions set forth below.
2. Term. Unless sooner terminated as set forth below, Executive shall be
----
retained during the first year and paid as a consultant for Company. Thereafter,
this Agreement shall remain in force
1
<PAGE>
for a period of five (5) years whereby Executive is an employee of the Company
and at the end of the five (5) year term, Executive and the Company will each
have an option to renew the employment for an additional five (5) years. The
actual period of time that Executive remains in the employ of the Company
pursuant to this Agreement is referred to herein as the "Employment Period."
3. Duties.
------
(a) Executive shall devote such time as Executive deems necessary for
the performance of the Executive's duties hereunder. Executive shall use his
best efforts to promote, market and sell the Company's business and affairs for
the maximum benefit of the Company and shall act in the capacity as the
Company's Chief Executive Officer and Director of its sales and marketing
efforts. Executive shall work with the President, Chief Operating Officer and/or
the Board of Directors of the Company and shall report to the Chairman of the
Board when requested to do so. Executive shall have the following specific
duties, which he shall at all times faithfully, industriously and to the best of
his ability perform: supervise the sales and marketing activities of the
Company, including, without limitation, advertising, promotions, sales and
marketing for the Company; promote the sale and distribution of the Company's
services, visit existing and potential customers of the Company to promote the
Company's services; and handle the Company's public relations issues, together
with performing the duties as Chief Executive Officer.
(b) Executive shall be named as a Director of the Company and as long
as this Agreement shall remain in full force and effect, Executive shall have a
seat on the Board of Directors of the Company.
4. Compensation. Executive shall be entitled to the following forms of
------------
compensation for the performance of his duties.
(a) Annual Salary. The Company shall pay or cause to be paid to
-------------
Executive a base salary during the first year in the monthly amount of Six
Thousand Dollars ($6,000.00), with no deductions for Federal and State taxes,
and the like. Thereafter, Executive shall be paid as an employee of the Company.
(b) Vacation. Executive shall be entitled to a minimum of two weeks
--------
paid vacation for years one and two (1 and 2), three (3) weeks vacation for
years three and four (3 and 4), and four (4) weeks vacation for the fifth (5th)
year of employment. The time for such vacations shall be mutually agreed upon
between Company and Executive. Further, vacation pay can and will be accrued
from year to year and any amount accrued in excess of five (5) weeks shall be
paid to Executive as additional salary.
(c) Medical Insurance. The Company shall provide Executive and his
-----------------
spouse insurance at the Company's sole cost and expense. Insurance shall include
health, dental and optical
2
<PAGE>
insurance in accordance with the general Company practices, as well as long-term
disability insurance at a level in accordance with an executive in a similar
entertainment company.
(d) Expenses. Executive shall be entitled to use his own credit charge
--------
cards during the period of his retention and employment for travel and other
out-of-pocket expenses incurred in the performance of his duties hereunder, and
in compliance with policies and procedures published from time to time by AIII,
in an amount not to exceed Five Thousand Dollars ($5,000.00) per month in
Company related business expenses, including cash advances, all of which shall
be paid directly by the Company, pursuant to the terms and conditions of each
respective credit card disclosure agreement.
(e) Automobile. Executive shall have the use of the existing gas
----------
credit cards of the Company to use on business related automobile and gasoline
expenses for one automobile. Further, Executive shall be entitled to be
reimbursed for an automobile lease, with a lease payment not to exceed One
Thousand Two Hundred Dollars ($1,200.00) per month, plus insurance and
maintenance costs.
6. Termination. The Employment Period shall be immediately and
-----------
automatically terminated upon Executive's death. The Employment Period shall
also terminate under the following conditions.
(a) Termination for Cause. Notwithstanding anything in this Agreement
---------------------
to the contrary, the Company may terminate Executive's employment hereunder at
any time if Executive:
(i) Is convicted of, or pleads guilty or nolo contendere to (i)
any felony, or (ii) misdemeanor involving moral turpitude;
(ii) Is adjudicated to be incompetent or, in the reasonable
opinion of a licensed physician or psychiatrist retained by the Company, is
unable by reason of mental or physical illness or incapacity;
(iii) In the reasonable opinion of a licensed physician or
psychiatrist retained by the Company, is substantially unable by reason of drug
(including alcohol) abuse or addiction, to reasonably and effectively carry out
Executive's duties hereunder for any period of time in excess of Executive's
accrued vacation time or sick leave, if any;
(iv) Fails or refuses to perform Executive's reasonable and
customary duties hereunder for a period of thirty (30) days after written notice
describing the duty or duties which Executive has failed or refused to perform
is given to Executive by the Company;
(v) Is in violation of any provisions of this Agreement;
provided, however, that if such violation can be cured in a manner that will
restore the Company to the position it would have
3
<PAGE>
enjoyed in the absence of the violation, Executive shall have a period of ten
(10) days after written notice describing the violation is given to Executive by
the Company to completely cure such violation and, if completely cured, this
Agreement shall not be subject to termination of such violation.
Should Executive be terminated for cause, his severance
shall be equivalent to four (4) months salary and full benefits for a period of
two (2) years.
(b) By Permanent Disability. The Employment Period shall terminate
-----------------------
upon "Permanent Disability" of Executive. "Permanent Disability" shall mean,
with respect to Executive, (i) the suffering of any mental or physical illness,
disability or incapacity to the extent that Executive shall be unable to perform
his duties or (ii) the absence of Executive from his employment by reason of any
mental or physical illness, disability or incapacity for a period of four (4)
months during any six (6) month period; provided, however, in either case, that
such illness, disability or incapacity shall be determined to be of a permanent
nature by a licensed physician selected by the Board of Directors. The
termination date in the event of a clause (i) of the immediately preceding
sentence, shall be the date of determination by the physician, and in the case
of clause (ii) of the immediately preceding sentence, the last day of such three
(3) month period. In the case of Permanent Disability, the Company shall
promptly pay to Executive (or his representative) the sum of (A) the unpaid
Annual Base Salary to which he is entitled pursuant to Section 4(a) through the
termination date and (B) any earned but unpaid commissions or profit
participation due to Executive pursuant to Section 5, and all benefits under
Executive's Disability Insurance Plan, if any.
(c) Termination Without Cause. Notwithstanding anything in the
-------------------------
Agreement to the contrary, should the Executive be terminated from employment
without cause, Executive shall be entitled to a salary and full benefits
package, including automobile expenses, for one (1) year, or the balance of this
employment contract, whichever is greater.
7. Affirmative Covenants. Executive makes the following promises and
---------------------
covenants to the Company.
(a) Non-Competition. Executive agrees that at all times during the
---------------
Term:
(i) For a period of five (5) years from and after the termination
of Executive's employment with the Company, D-Rez or AIII, whichever is later,
Executive shall not, directly or indirectly, as a partner, joint venturer,
employer, employee, contractor, consultant, shareholder, director, officer,
trustee, principal or agent engage in, control, advise with respect to, manage,
act as a consultant to, receive any economic benefit from or exert any influence
upon the development, marketing, manufacture, sale, distribution, offering or
promoting for sale in the California counties listed in Exhibit "A", any state
-----------
of the United States, North America, the European Union, Asia or Africa of
titles, post-production services or high definition conversion or work for any
company that provides such services (the "Competitive Services"); provided,
however that Executive may, without
4
<PAGE>
violating this covenant, own a passive investment not in excess of fifteen
percent (15%) of the securities of a corporation which engages in such
competition if such securities are traded on a national securities exchange or
traded publicly in the over-the-counter market.
(ii) Executive acknowledges that the foregoing territorial and
time limitations are reasonable and properly required for the adequate
protection of Buyer and that in the event that any such territorial or time
limitation is deemed to be unreasonable and is then reduced by a court of
competent jurisdiction, then, as reduced, the territorial and/or time limitation
shall be enforced.
(iii) Executive shall not directly or indirectly: (A) employ,
intend to employ or otherwise solicit for employment any of the Company's
executive officers, department managers at the Company for any business or
venture that is competitive with the Company, including and without limitation,
any business or enterprises which Executive may be a consultant or recruiter; or
(B) contact, communicate with, inquire or otherwise solicit any executive
officers, director, shareholder, department managers at the Company of the
Company to invest in or to purchase, or to offer or subscribe to purchase, any
security or general or equity interest in any venture that is competitive with
or similar to the business of the Company. As used in this Section the terms
"employ" and "employment" are used in the broadcast sense to encompass all
associations, including and without limitation, that of employee, agent,
independent contractor, owner, officer, director, shareholder, partner,
associate, representative and consultant.
(iv) If the scope of any restrictions contained in paragraph (i)
and (ii) of this Section is too broad to permit enforcement of such restrictions
of their full extent, then such restrictions shall be enforced to the maximum
extent permitted by law, and Executive hereby consents and agrees that such
scope may be judicially modified accordingly in any proceeding brought to
enforce such restrictions.
(v) The ideas, developments, writings and designs developed in
whole or in part by the Executive during the Executive's employment with the
Company, D-Rez and AIII which relate to the business of the Company, D-Rez or
AIII (the "Work Product") are, and shall remain, the exclusive property of the
Company, D-Rez or AIII. To the extent that any of the Work Product is capable of
protection by copyright, the Executive acknowledges that it is created within
the scope of the Executive's employment with the Company, D-Rez or AIII and is a
"work-made-for-hire."
(b) Remedies for Breach of Affirmative Covenants of Executive.
---------------------------------------------------------
(i) Subject to the limitations provided by applicable law, the
covenants set forth in this Section 7 shall continue to be binding upon
Executive in accordance with their terms, notwithstanding the termination of his
employment with Company for any reason whatsoever. Such covenants shall be
deemed and construed as separate agreements independent of any other provisions
of this Agreement and any other agreement between the Company and Executive. The
existence of
5
<PAGE>
any claim or cause of action by Executive against the Company, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Company of any or all of such covenants in accordance with
their terms.
(ii) The parties hereby agree that any breach or threatened
breach of Section 7 of this Agreement will cause substantial and irreparable
damage to the other in an amount and of a character difficult to ascertain.
Accordingly, for their mutual benefit and to prevent any such breach or
threatened breach, and in addition to any other relief to which a party may
otherwise be entitled, the non-breaching party shall be entitled to immediate
temporary, preliminary and permanent injunctive relief through appropriate legal
proceedings, without proof that actual damages have been incurred or may be
incurred by such a party with respect to such breach or threatened breach. The
parties expressly agree that the party seeking this relief shall not be required
to post any bond or other security as a condition to obtaining any injunctive
relief pursuant to this Section and each of the parties expressly waive any
rights to the contrary. The parties intend for the covenants of this Agreement
to be enforceable to the maximum extent permitted by law, and if any reviewing
court deems any of such covenants to be unenforceable or invalid, Sellers and
Buyer authorize any such court to reform (A) the unenforceable or invalid
provisions and to impose such restrictions as reformed, and (B) the remaining
provisions as it deems reasonable.
(c) Further Duties. Executive shall perform such other duties and
--------------
work for, consult to, or assist such other entities as may be requested from
time to time by the Company.
8. Representations and Warranties of Executive. Executive represents and
-------------------------------------------
warrants to the Company that (i) Executive is under no contractual or other
restriction or obligation that is inconsistent with the execution of this
Agreement, the performance of Executive's duties hereunder or any of the rights
of the Company hereunder, (ii) Executive is under no physical or mental
disability that would impair the performance of Executive's duties under this
Agreement; and (iii) Executive has reviewed this Agreement with Executive's
legal counsel.
9. Notices. All notices, requests, demands or other communication
-------
(collectively, "Notice") given to any party pursuant to this Agreement shall not
be effective unless given in writing and addressed to the parties at their
respective addresses as set forth below.
If to Executive: With a Copy to:
David R. Miller Bruce P. Needleman, Esq.
6860 Lexington Avenue Needleman & Schulman
Hollywood, CA 90038 Warner Center - Plaza VI
21700 Oxnard Street
Suite 1290
Woodland Hills, CA 91367-3669
6
<PAGE>
Telephone: (818) 715-7007
Telecopier: (818) 715-7090
If to the Company: With a Copy to:
American International Industries, Inc.
601 Hanson Road
Kemah, Texas 77565-2701
Notice shall be deemed duly given when delivered personally or by
telegram, telex or courier, or, if mailed, forty-eight (48) hours after deposit
in the United States mail, certified mail, postage pre-paid. The addresses of
the parties for the purpose of providing Notice pursuant to this paragraph may
be changed from time to time by Notice to the other party duly given in the
foregoing manner.
10. Governing Law; Disputes. This Agreement will be interpreted in
-----------------------
accordance with California law, including all matters of construction, validity,
performance and enforcement, without giving effect to any principles of conflict
of laws. Any dispute or proceeding concerning this Agreement except an action
pursuant to Section 7 hereof will be resolved by binding arbitration to be held
in Los Angeles County, California. Any party may demand arbitration through
written notice sent by certified mail to the other (an "Arbitration Demand").
Within fifteen (15) days after the date that the Arbitration Demand is first
mailed, each of the parties will confer to select a mutually acceptable
arbitrator from JAMS/Endispute ("JAMS"). If the arbitrator so selected is
unavailable, the parties will confer to select another arbitrator. If the
parties cannot mutually agree to the selection of an arbitrator, or if one party
refuses to participate in the selection process, JAMS will appoint an
arbitrator. The arbitrator will be governed by the provisions of this Agreement
rather than the rules of JAMS.
If JAMS is unable or unwilling to select an arbitrator, the Presiding
Judge of the Los Angeles County Superior Court will select an arbitrator upon
the request of either party, and such selection will be binding on the parties.
The arbitrator so selected will schedule the arbitration hearing within sixty
(60) days after he or she is first selected. The parties will be permitted
written discovery and one deposition each. The arbitrator will have authority to
enter a binding judgment even if the parties do not appear at the arbitration
and may also grant any remedy or relief that the arbitrator reasonably believes
to be just and appropriate, provided that such remedy or relief is within the
scope of this Agreement.
All fees and expenses of the arbitration will be paid equally by the
parties participating in the arbitration. At the conclusion of the arbitration,
the arbitrator will award the prevailing party reasonable attorneys' fees,
including all arbitration costs. If the arbitration award is made, the
7
<PAGE>
prevailing party may convert the award into a judgment and execute upon that
judgment.
11. Attorneys' Fees. If any arbitration, litigation, action, suit or other
---------------
proceedings is instituted to remedy, prevent or obtain relief from a breach of
this Agreement, in relation to a breach of this Agreement or pertaining to a
declaration of rights under this Agreement, the prevailing party will recover
all such party's attorneys' fees incurred in each and every such action, suit or
other proceeding, including any and all appeals or petitioner therefrom. As used
in this Agreement, attorneys' fees will be deemed to be the full and actual
costs of any legal services actually performed in connection with the matters
involved, including those related to any appeal or the enforcement of any
judgment, calculated on the basis of the usual fee charged by attorneys
performing such services, and will not be limited to "reasonable attorneys'
fees" as defined in any statute or rule of court.
12. Amendments/Waivers. This Agreement may be amended, supplemented,
------------------
modified or rescinded only through an express written instrument signed by all
the parties or their respective successors and assigns; provided, however, that
this Agreement may only be amended or modified upon the express written consent
of AIII, which may be withheld by AIII in its sole and absolute discretion.
Either party may specifically and expressly waive in writing any portion of this
Agreement or any breach hereof, but no such waiver shall constitute a further or
continuing waiver of any preceding or succeeding breach of the same or any other
provision. The consent by one party to any action for which such consent was
required shall not be deemed to imply consent or waiver of the necessity of
obtaining such consent for the same or similar acts in the future.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument. All faxed signatures
shall be deemed originals.
14. Severability. Each provision of this Agreement is intended to be
------------
severable and if any term of provision herein is determined invalid or
unenforceable for any reason, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement and, wherever possible, intent shall
be given to the invalid or unenforceable provision.
15. Entire Agreement. This Agreement contains the entire and complete
----------------
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written, have been fully merged herein and are
superseded hereby.
16. Remedies. All rights, remedies, undertakings, obligations, options,
--------
covenants, conditions and agreements contained in this Agreement shall be
cumulative and no one of them shall be exclusive of any other.
17. Assignment. Neither this Agreement, nor any interest herein, shall be
----------
assignable
8
<PAGE>
(voluntarily, involuntarily, by judicial process or otherwise) Executive to any
person or entity without the prior written consent of the Company. Any attempt
to assign this Agreement without such consent shall be void and, at that option
of the Company, shall be an incurable breach of this Agreement resulting in the
termination of this Agreement.
18. Successors. Subject to the foregoing paragraph, this Agreement shall
----------
be binding upon and inure to the benefit of the parties and their respective
heirs, legatees, legal representatives, successors and permitted assigns.
19. Interpretation. The language in all parties of this Agreement shall be
--------------
in all cases construed simply according to its fair meaning and not strictly for
or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural and vice versa, and
each gender will include any other gender. The captions of the paragraphs of
this Agreement are for convenience only and shall not affect the construction or
interpretation of any of the provisions herein.
20. Benefit of Agreement. This Agreement is for the sole and exclusive
--------------------
benefit of the signators hereto and nothing in this Agreement shall be construed
to give any person or entity other than the parties hereto any legal or
equitable right, claim or remedy, except AIII, which is an intended third party
beneficiary of this Agreement.
21. Limitation on Actions. Any claim, dispute, controversy or action for
---------------------
breach relative to this Agreement must be brought and legal process or
arbitration, as the case may be, initiated within one (1) year after the cause
of action for such claim first accrued or the breach first occurred, whichever
is sooner.
22. Miscellaneous. The recitals and all exhibits, attachments or other
-------------
documents referenced in this Agreement are fully incorporated into this
Agreement by reference. Unless expressly set forth otherwise herein, all
references herein to a "day," "month," or "year" shall be deemed to be a
reference to a calendar day, month or year, as the case may be. All cross-
references herein shall refer to provisions within this Agreement, and shall not
be deemed to be references to the overall transaction or to any other agreement
or document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
"EXECUTIVE"
______________________________
DAVID R. MILLER, an individual
9
<PAGE>
"THE COMPANY"
MODERN FILM EFFECTS, INC.,
a California corporation
/s/ Jordan S. Friedberg
- ----------------------------------
By: Jordan S. Friedberg
Its: President
Approved by AMERICAN INTERNATIONAL
INDUSTRIES, INC.
/s/ Daniel Dror
- ----------------------------------
DANIEL DROR, Chairman of the Board
Dated: September 10, 1998
10
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated this 23rd day of March, 1999 between Marald,
Inc., a Texas corporation, currently having its principal place of business at
11020 Old Katy Rd., #217, Houston, Texas (the "Company"), and Juan Carlos
Martinez (the "Executive") an individual.
WHEREAS, the Company desires to employ Executive and Executive desires to
be employed by the Company, as a President of the Company.
WHEREAS, the Executive is willing to enter into an agreement with the
Company upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the parties hereto agree as follows:
1. Term of Agreement. Subject to the terms and conditions hereof, the
-----------------
term of employment of the Executive under this Employment Agreement shall be for
the period commencing on the date hereof (the "Commencement Date) and
terminating on February 25, 2001, unless sooner terminated as provided in
accordance with the provisions of Section 5 hereof. (Such term of employment is
herein sometimes called the "Employment Term.")
2. Employment. As of the Commencement Date, the Company hereby agrees to
----------
employ the Executive as President of the Company, and the Executive hereby
accepts such employment and agrees to perform his duties and responsibilities
hereunder in accordance with the terms and conditions hereinafter set forth.
3. Duties and Responsibilities. Executive shall serve as President
---------------------------
during the Employment Term. Executive shall report to and be subject to the
direction of the Chief Executive Officer and the Directors of the Company ,and
shall perform duties which are consistent with his current title and position as
President of the Company and such other duties as may be assigned to him from
time to time by the CEO or Directors which are consistent with his position of
management and leadership. During the Employment Term, Executive shall devote
his full time, skill, energy and attention to the business of the Company and
shall perform his duties in a diligent, trustworthy, loyal and businesslike
manner.
4. Compensation and Benefits During the Employment Term:
----------------------------------------------------
(a) The Executive's base compensation shall be at the rate of $7,500
per month, for the term of this Agreement, payable in regular semi-
monthly installments in accordance with the Company's practice for its
executives, less applicable withholding for income and employment
taxes as required by law and other deductions as to which the
Executive shall agree. Such base compensation shall be subject to
increases as and when determined by the Company's Directors at their
sole discretion.
<PAGE>
(b) In addition to the Executive's base compensation, Executive will
be entitled to a bonus as determined by the Company's Directors.
(c) The Executive shall be entitled to reimbursement of all
reasonable, ordinary and necessary business related expenses incurred
by him in the course of his duties and upon compliance with the
Company's procedures.
5. Termination. A termination of this agreement is either (1) for death
-----------
or disability under Section 5 (a) or 5 (b); (2) with cause under
Section 5 (c); or for good reason under Section 5 (d). All other
terminations which may occur shall constitute a breach of this
agreement.
(a) The Company shall have the right to terminate the employment of
the Executive under this Agreement for disability in the event
Executive suffers an injury, illness or incapacity of such character
as to substantially disable him from performing his duties without
reasonable accommodation by the Company hereunder for a period of more
than sixty (60) consecutive days upon the Company giving at least
thirty (30) days written notice of termination; provided, however,
that if the Executive is eligible to receive disability payments
pursuant to a disability policy paid for by the Company, the Executive
shall assign such benefits to the Company for all periods as to which
he is receiving full payment under this agreement.
(b) This agreement shall terminate upon the death of Executive.
(c) The Company may terminate this agreement at any time because of
(i) Executive's material breach of any term of this agreement, (ii)
the willful engaging by the Executive in misconduct which is
materially injurious to the Company, monetarily or otherwise;
provided, in each case, however, that the Company shall not terminate
this Agreement pursuant to this Section 5(c) unless the Company shall
first have delivered to the Executive, a notice which specifically
identifies such breach or misconduct and the Executive shall not have
cured the same within fifteen (15) days after receipt of such notice,
(iii) Executive's gross negligence in the performance of his duties or
(iv) the failure of Executive to perform his essential duties or
comply with reasonable directions of the Directors.
(d) The Executive may terminate his employment for "Good Reason" if:
(i) he is assigned, without his express written consent, any
duties inconsistent with his positions, duties, responsibilities,
authority and status with the Company as of the date hereof, or a
change in his reporting responsibilities or titles as in effect as
of the date hereof;
(ii) his compensation is reduced;
(iii) (1) the Company shall file a petition for bankruptcy or re-
organization under the federal bankruptcy statues or an
involuntary petition is filed against the Company and not removed
or withdrawn within thirty
<PAGE>
(30) days or (2) the Company does not pay any material amount of
compensation due hereunder and then fails either to pay such
amount within the ten (10) day notice period required for
termination hereunder or to contest in good faith said notice.
Further, if such contest is not resolved within thirty (30) days
the Company shall submit such dispute to arbitration, under
Section 7.
6. Revealing of Trade Secrets, etc. Executive acknowledges the interest
--------------------------------
of the Company in maintaining the confidentiality of information
related to its business and shall not at any time during the
Employment Term or thereafter, directly or indirectly, reveal or cause
to be revealed to any person or entity the supplier lists, customer
lists or other confidential business information of the Company;
provided, however, that the parties acknowledge that it is not the
intention of this paragraph to include within its subject matter (a)
information not proprietary to the Company, (b) information which is
then in the public domain, or (c) information required to be disclosed
by law.
7. Arbitration. If a dispute should arise regarding this agreement, all
-----------
claims, disputes, controversies, differences or other matters in
question arising out of this relationship shall be settled finally,
completely and conclusively by arbitration of a single arbitrator in
Harris County, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association (the "Rules").
Arbitration shall be initiated by written demand. This agreement to
arbitrate shall be specifically enforceable only in the District Court
of Harris County, Texas. A decision of the arbitrator shall be final,
conclusive and binding on the Company and the Executive, and judgement
may be entered in the District Court of Harris County, Texas, for
enforcement and other benefits. On appointment, the arbitrator shall
then proceed to decide the arbitration subjects in accordance with the
Rules. Any arbitration held in accordance with this paragraph shall
be private and confidential and no person shall be entitled to attend
the hearings except the arbitrator, Executive, Executive's attorneys,
and an designated representatives of the Company and their respective
attorneys. The matters submitted for arbitration, the hearings and
proceedings and the arbitration award shall be kept and maintained in
strictest confidence by Executive and the Company and shall not be
discussed, disclosed or communicated to any persons. On request of
any party, the record of the proceeding shall be sealed and may not be
disclosed except insofar, and only insofar, as may be necessary to
enforce the award of the arbitrator and any judgement enforcing an
award. The prevailing party shall be entitled to recover reasonable
and necessary attorneys' fees and costs from the non-prevailing party.
8. Covenants Not to Compete.
------------------------
(a) Executive's Acknowledgment. Executive agrees and acknowledges
--------------------------
that in order to assure the Company that it will retain its value as a
going concern, it is necessary that Executive undertake not to utilize
his special knowledge of the business and his relationships with
customers and suppliers to compete with the Company. Executive
further acknowledges that:
<PAGE>
(i) the Company is and will be engaged in the business;
(ii) Executive will occupy a position of trust and confidence
with the Company prior to the date of this agreement and,
during such period and Executive's employment under this
agreement, Executive has, and will become familiar with the
Company's trade secrets and with other proprietary and
confidential information concerning the Company;
(iii) the agreements and covenants contained in this Section 8
are essential to protect the Company and the goodwill of the
business; and
(iv) Executive's employment with the Company has special, unique
and extraordinary value to the Company and the Company would
be irreparably damaged if Executive were to provide services
to any person or entity in violation of the provisions of
this agreement.
(b) Competitive Activities. Executive hereby agrees that for a period
----------------------
commencing on the date hereof and ending one year following the later
of (i) termination of Executive's employment with the Company for
whatever reason, and (ii) the conclusion of the period, if any, during
which the Company is making payments to Executive, he will not,
directly or indirectly, as employee, agent, consultant, stockholder,
director, co-partner or in any other individual or representative
capacity, own, operate, manage, control, engage in, invest in or
participate in any manner in, act as a consultant or advisor to,
render services for (alone or in association with any person, firm,
corporation or entity), or otherwise assist any person or entity
(other than the Company) that engages in or owns, invests in,
operates, manages or controls any venture or enterprise that directly
or indirectly engages or proposes in engage in the business of the
manufacturing, distribution or sale of (i) products manufactured,
distributed, sold or licensed by the Company at the time of
termination or (ii) products proposed at the time of such termination
to be manufactured, distributed, sold or licensed by the Company
within sixty (60) miles of the Company's operations (the "Territory");
provided, however, that nothing contained herein shall be construed to
prevent Executive form investing in the stock of any competing
corporation listed on a national securities exchange or traded in the
over-the-counter market, but only if Executive is not involved in the
business of said corporation and if Executive and his associates (as
such term is defined in Regulation 14(A) promulgated under the
Securities Exchange Act of 1934, as in effect on the date hereof),
collectively, do not own more than an aggregate of two percent of the
stock of such corporation ("Permitted Investments"). With respect to
the Territory, Executive specifically acknowledges that the Company
has conducted the business throughout those areas comprising the
Territory and the Company intends to continue to expand the business
throughout the Territory.
<PAGE>
9. Opportunities. During his employment with the Company, and for one
-------------
year thereafter, Executive shall not take any action which might
divert from the Company any opportunity learned about by him during
his employment with the Company (including without limitation during
the Employment Term) which would be within the scope of any of the
businesses then engaged in or planned to be engaged in by the Company.
10. Survival. In the event that this Agreement shall be terminated, then
--------
notwithstanding such termination, the obligations of Executive
pursuant to Sections 6 and 8 of this agreement shall survive such
termination.
11. Contents of Agreement, Parties in Interest, Assignment, etc. This
-----------------------------------------------------------
Agreement sets forth the entire understanding of the parties hereto
with respect to the subject matter hereof. All of the terms and
provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective heirs,
representatives, successors and assigns of the parties hereto, except
that the duties and responsibilities of Executive hereunder which are
of a personal nature shall neither be assigned nor transferred in
whole or in part by Executive. This Agreement shall not be amended
except by a written instrument duly executed by the parties.
12. Severability. If any term or provision of this Agreement shall be
------------
held to be invalid or unenforceable for any reason, such term or
provision shall be ineffective to the extent of such invalidity or
unenforceability without invalidating the remaining terms and
provisions hereof, and this Agreement shall be construed as if such
invalid or unenforceable term or provision had not been contained
herein.
13. Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the other party shall be in writing
and shall be deemed to have been duly given when delivered personally
or five (5) days after dispatch by registered or certified mail,
postage prepaid, return receipt requested, to the party to whom the
same is so given or made:
If to the Company addressed to:
American International Industries, Inc.
601 Hanson Road
Kemah, Texas 77565
with a copy to:
Brewer & Pritchard, P.C.
1111 Bagby, Suite 2450
Houston, Texas 77002
<PAGE>
If to Executive addressed to:
__Juan Carlos Martinez_____
__2111 Augnida La Quinta__
__Houston, TX 77077______
or to such other address as the one party shall specify to the other party in
writing.
14. Counterparts and Headings. This agreement may be executed in one or
-------------------------
more counterparts, each of which shall be deemed an original and all
which together shall constitute one and the same instrument. All
headings are inserted for convenience of reference only and shall not
affect the meaning or interpretation of this agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
Marald, Inc.
By: __________________________________
John W. Stump III, Vice President
EXECUTIVE
By: _________________________________
Juan Carlos Martinez
<PAGE>
EXHIBIT 10.16
ACQUISITION AGREEMENT
---------------------
This Acquisition Agreement is made by American International Industries,
Inc. ("AIII") and Juan Carlos Martinez (the "Transferor".)
INTRODUCTION
------------
The Transferor wishes to transfer to AIII, and AIII wishes to acquire from
the Transferor, all of the outstanding shares of common stock of Marald, Inc.
d/b/a "Unlimited Coatings" in exchange for the consideration described in this
Agreement.
NOW, THEREFORE, AIII and the Transferor agree as follows:
1
DEFINITIONS
-----------
When used in this Agreement:
All accounting terms not otherwise defined in this Agreement have the meanings
assigned to them in accordance with generally accepted accounting principles
consistently applied.
"Agreement" means this Acquisition Agreement.
---------
"AIII" means American International Industries, Inc., a Nevada corporation.
----
"Closing" is defined in section 3.0
-------
"Company" means Marald, Inc. dba "Unlimited Coatings" and/or "Toro Liners".
-------
"Marald Financial Statements" are defined in section 4.2.
-----------------------------
"Marald Shares" means all of the outstanding and validly issued shares of the
-------------
common stock of Marald, Inc.
"AIII Shares" means 3.5 million restricted shares of the common stock of
-----------
American International Industries, Inc. referred to as Exchange Securities.
"Effective Date" means January 1, 1999.
--------------
"Exchange Securities" means 3.5 million AIII shares, restricted pursuant to
-------------------
rule 144 and bearing a legend reflecting such restriction on the sale or
transfer of such shares.
"Exchange Shares" means the shares of the common stock of AIII and each such
---------------
share is herein referred to as an "Exchange Share".
1
<PAGE>
"Governmental Authority" means any foreign governmental authority, the United
----------------------
States of America, any state of the United States, and any political
subdivision of any of the foregoing, and any agency, department, commission,
board, bureau, court, or similar entity, having jurisdiction over a party to
this Agreement or its assets or properties.
"Indemnified Party" is defined in section 11.0.
-----------------
"Indemnifying Party" is defined in section 11.0.
------------------
"Legal Requirement" means any material law, statute, ordinance, writ,
-----------------
injunction, decree, requirement, order, judgment, rule, or regulation (or
interpretation of any of the foregoing) of and the terms of any license or
permit issued by, any Governmental Authority.
"Permitted Liens" means (i) liens for taxes, assessments, and other
---------------
governmental charges or levies, the payment of which is not past due, (ii)
mechanics', workmen's, repairmen's, warehousemen's, vendors', or carriers'
liens, or similar liens arising in the ordinary course of business and
securing sums that are not past due, or deposits or pledges to obtain the
release of any such liens, or (iii) easements, reservations, encroachments, or
minor defects in title that do not materially impair the use of the property
affected thereby.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Transferor" means Juan Carlos Martinez.
----------
2
THE TRANSACTION
---------------
Subject to the terms and conditions set forth in this Agreement, and based on
the covenants, warranties and representations in this Agreement, the Transferor
hereby agrees to transfer and deliver all of the Marald, Inc. Shares to AIII in
exchange for the issuance and delivery to Transferor of 3,500,000 restricted
shares of AIII common stock (the "Exchange Securities"). AIII shall instruct its
transfer agent to issue such securities in the form of seven certificates
representing 500,000 shares each, and bearing the restrictive legend pursuant to
Rule 144.
3
THE CLOSING
-----------
3.0 The Closing. The closing (the "Closing") of the transaction
-----------
contemplated in this Agreement shall be at the offices of AIII at 601 Hanson
Rd., Kemah, Texas 77565 at 3:00 PM on March 19, 1999 or such other place, time
and date as may be agreed by the Transferor and AIII.
3.1 Documents to be Delivered by the Transferor at the Closing. At the
----------------------------------------------------------
Closing, the Transferor shall deliver or cause to be delivered to AIII:
2
<PAGE>
3.1.1 Certificates for the Marald Shares being sold pursuant to this
Agreement, duly endorsed for transfer to AIII;
3.1.2 The minute books, stock transfer records, seals, all books of
account, records, contracts, tax returns, and all other original documents,
and records of the Companies;
3.1.3 The resignations, effective upon their acceptance by AIII, of
all the directors and officers of the Companies; and
3.1.4 Such other instruments of transfer, conveyance, and assignment
as AIII may reasonably request to more effectively consummate the
transactions contemplated in this Agreement.
3.2 Documents to be Delivered by AIII at the Closing. At the
------------------------------------------------
Closing, AIII shall deliver or cause to be delivered to Transferor:
3.2.1 Delivery of the Exchange Securities by AIII at the Closing.
----------------------------------------------------------
Upon delivery to AIII of the documents described in section 3.1, AIII
shall deliver to Transferor a certificate in Transferor's name for the
Exchange Securities duly registered on the stock transfer records of AIII.
3.2.2 Employment agreement for Juan Carlos Martinez.
3.2.3 AIII will make available to Unlimited Coatings a $75,000
secured line of credit.
4
THE TRANSFERORS' REPRESENTATIONS AND WARRANTIES
-----------------------------------------------
The Transferor represents and warrants to AIII that:
4.0 Organization and Corporate Status of the Companies. The Company is a
--------------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the state of Texas and has all corporate power and authority and has
satisfied all Legal Requirements necessary to own and operate its properties and
to carry on its business as presently conducted. The Company is not qualified or
licensed to do business as a foreign corporation in any jurisdiction, and, to
the best knowledge of the Transferor, after due inquiry, in no jurisdiction does
the character of either Company's properties or the nature of its business make
such qualification necessary. Except as set forth at 4.15.5, the Company is not
a party to or subject to any agreement or commitment which will or may restrict
the conduct of its business in any jurisdiction or location. Complete and
correct copies of the Company's Articles of Incorporation and Bylaws, as
presently in effect, have been delivered to AIII. The Company does not own,
directly or indirectly, any capital shares or any equity, profit sharing,
participation or other interest in any other person.
3
<PAGE>
4.1 Capitalization. The authorized capital stock of Marald, Inc. consists
--------------
of one million shares of common stock of $1.00 par value. One million shares of
such common stock are issued and outstanding on the Effective Date; one million
of those shares are owned beneficially and of record by Transferor and no other
shares are owned by any other party or parties. Each of the outstanding Marald
Shares is validly issued, fully paid, and non-assessable and none has been
issued in violation of any pre-emptive right or other agreement of any
shareholder. There are no outstanding subscriptions, options, rights, warrants,
convertible securities, or other agreements or commitments by which either
Company is or may become obligated to issue or to transfer from treasury any
additional shares of its capital stock of any class.
4.2 Marald Financial Statements. Exhibit 1 consists of the unaudited
--------------------------- ---------
balance sheets of Marald as of November 30, 1998 and the related unaudited
income statements for the periods then ended (collectively, the "Marald
Financial Statements"). The unaudited balance sheets included in the Marald
Financial Statements present fairly, subject to the usual disclaimers made in
such unaudited balance sheets, the financial position of the Company as of their
dates. The unaudited income statements included in the Marald Financial
Statements present fairly, subject to the usual disclaimers made in such
unaudited income statements, the results of operations of the Company for the
periods indicated. Transferor warrants that no significant transactions,
transfers, or commitments other than in the normal course of business have
occurred subsequent to the November 30, 1998 financial statements.
4.3 Absence of Undisclosed Liabilities. The Company has not incurred any
----------------------------------
liabilities which have not been disclosed.
4.4 Taxes and Tax Returns. The Company has duly filed with the
---------------------
appropriate governmental agencies all federal tax returns and reports, all state
and local tax returns and reports with respect to income, payroll, sales and
franchise taxes and all other tax returns and reports, the filing of which is
necessary for the conduct of its business. All such tax returns properly reflect
the taxes of the Company for the periods covered. All federal, state, and local
taxes, assessments, interest, penalties, deficiencies, fees, or other
governmental charges or impositions called for by such tax returns, or claimed
to be due by any taxing authority, have been properly accrued or paid and all
deposits required by law to be made with respect to employees' withholding taxes
have been made. There are no material unresolved questions or claims concerning
Marald's tax liability. The Company has not received any notice of audit,
deficiency, or assessment or proposed deficiency or assessment by the Internal
Revenue Service or any other taxing authority, nor has the Company waived any
statute of limitations with respect to taxes or agreed to any extensions of time
with respect to a tax assessment or deficiency.
4.5 Material Contracts. Except as listed in Exhibit 2 there are no
------------------ ---------
material agreements, contracts, and commitments written or oral, not in the
ordinary course or not consistent with prior practice, to which the Company is a
party or by which it or any of its properties are bound as of the date of the
Effective Date. None of the customers or suppliers of the Company has refused,
or communicated that it will or may refuse to purchase or supply goods or
services, as the case may
4
<PAGE>
be, or has communicated that it will or intends to substantially reduce the
amounts of goods or services that it is willing to purchase from or sell to the
Company.
4.6 Equipment. Exhibit 3 is a schedule of all of the material machinery,
--------- ---------
equipment, motor vehicles, furniture, fixtures, and other capital assets of
every kind and description of each Company as of the Effective Date (the
"Equipment"). All of the tangible properties and assets owned by the Company, or
in which it has an interest, currently being used by it are in good and normal
operating condition and repair, normal wear and tear excepted, free from defects
(except such minor defects as do not interfere with the continued use thereof in
the conduct of normal operations), are sufficient to carry on each Company's
business as conducted during the preceding three months, and conform with all
applicable governmental regulations, including, without limitation, those
governing the discharge of materials into the environment or the storage or
disposition of hazardous or toxic wastes.
4.7 Litigation. There are no judicial or administrative actions, suits,
----------
proceedings, or, to the knowledge of the Transferors, investigations pending or
threatened against or affecting either Company or the business assets or
goodwill of either Company, or the transactions contemplated by this Agreement
at law or equity or before any court, governmental agency or arbitrator, and the
Transferors know of no basis or grounds for any such investigation, action,
suit, proceeding, or claims against either Company, nor is there any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against either
Company.
4.8 Compliance with Laws. The Company is conducting its business and
--------------------
operations in compliance with all Legal Requirements applicable to its business
and operations, and the Transferors have no knowledge or reason to believe that
either Company is in violation or default under any Legal Requirement applicable
to it or any of its properties which violation or default resulted in or could
result in a material adverse effect.
4.9 Government Authorizations. Except as described in Exhibit 4 no
------------------------- ---------
material permit, concession, grant, franchise, license, or other governmental
authorization or approval is necessary for the conduct of the business of the
Company.
4.10 Intellectual Property Rights. Exhibit 5 identifies all of the
---------------------------- ---------
material computer software programs, patents, patent applications, licenses,
trade names, assumed names, trademarks, service marks, brandmarks, brandnames,
copyrights, and registrations and applications therefor, franchises, technology,
know-how or other assets of like kind (the "Rights"), used in the business of
the Company, or which are presently owned by or registered in the name of the
Company or under which the Company owns or holds any license or other interest.
The expiration date, if any, of each of the Rights (other than processes,
formulae and trade secrets) is set forth in Exhibit 5 The Rights are adequate
---------
for the conduct of the Company's business. All of the Rights are free of all
liens and encumbrances, and the Company has not granted any licenses or
sublicenses under any of the Rights to others except as set forth in Exhibit 6.
---------
The Company has the sole and exclusive right to use the Rights, and the
consummation of the transactions contemplated by this Agreement will not alter
or impair the Rights. No proceedings
5
<PAGE>
have been instituted, are pending or threatened which challenge any Rights or
their validity, and, to the knowledge of the Transferor, none of the Rights or
their use by the Company infringes or otherwise violates the rights of others or
is being infringed by others. The Company has not received notice of
interference or infringement of any of the Rights. Except by virtue of the
Transferor's ownership of the Marald Shares, no shareholder, director, officer
or employee of the Company owns, directly or indirectly, in whole or in part,
any Rights which the Company has used, or the use of which is necessary for the
business of the Company as now conducted.
4.11 Employees; Employee Benefit Plans.
---------------------------------
4.11.1 Employees. Except for amounts accrued on the books of the
---------
Company, at the Closing no present or former employee of the Companies will
have any claim against the Company (whether under federal or state law,
under any employee agreement or otherwise) on account of or for (a)
overtime pay, other than overtime pay for the payroll period ending on or
after the Closing, (b) wages or salaries, or (c) vacations, time off or pay
in lieu of vacation or time off, other than vacation or time off (or pay in
lieu thereof) earned with respect to the current fiscal year of the
Company. To the knowledge of the Transferor, at the Closing no present or
former employee of the Company will have any claim against the Company
(whether under federal or state law, under any employee agreement or
otherwise) on account of or for any violation of any law related to minimum
wages or maximum hours of work.
4.11.2 Employee Benefit Plans. The Company has no employee benefit
----------------------
plan or arrangement, whether formal or informal, and whether legally
binding or not, under which or to which it contributes to or for the
benefit of its employees (including, without limitation, life insurance,
hospitalization medical, dental, bonus, incentive, deferred compensation
and similar plans, severance or termination pay, club memberships, and
similar benefits and perquisites) (the "Plans").
4.11.3 Qualified Plans. The Company is not and has never been a
---------------
party to any Plan which is an "employee pension benefit plan", as such
terms defined in section 3(2) of ERISA and the rules and regulations
promulgated thereunder, and the Company is not and never has been a party
to a "multi-employer plan" as that term is defined in section 3(37) of
ERISA.
4.12 Labor Matters.
-------------
4.12.1 No employees of the Company are currently represented by any
labor union, nor is the Company a party to any collective bargaining
agreement, and, to the knowledge of the Transferors, there is no
organizational effort presently being made or threatened by or on behalf of
any labor union with respect to employees of either Company;
4.12.2 The Company has substantially complied with the Occupational
Safety and Health Act, the regulations promulgated thereunder, and all
other applicable laws
6
<PAGE>
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and is not engaged in any unfair labor
practice;
4.12.3 There is no unfair labor practice complaint against the
Company pending before the National Labor Relations Board or any comparable
state agency;
4.12.4 There is no labor strike, dispute, slowdown, representation
campaign or work stoppage actually pending or, to the knowledge of the
Transferors, threatened against or affecting either Company; and
4.12.5 No grievance or arbitration proceeding is pending and no
claim therefor has been asserted against either Company.
4.13 Transactions with Related Parties. Except as described in Exhibit 7
--------------------------------- ---------
the Company is not a party to any material transaction or proposed transaction,
including, without limitation, the leasing of property, the purchase or sale of
raw materials or finished goods, or the furnishing of services, with either
Transferor, and neither has the Company, directly or indirectly, entered into
any agreement or commitment which could result in it becoming obligated to
provide funds in respect of or to guarantee or assume any debt or obligation of
either Transferor, or of any director, officer or employee of the Company. It is
understood that the purchases from the manufacturer owned by the family of Juan
Carlos Martinez will be at best terms being offered to any purchaser except the
single customer which currently has a supply agreement with said manufacturer on
terms slightly more favorable than those offered to Marald. Negotiations with
any entities owned or controlled by relatives of Juan Carlos Martinez will be
conducted at arms length, with full and complete disclosure, in writing to the
Chief Financial Officer or Chief Executive Officer of AIII, prior to entering
into any commitment to purchase materials in quantities or at terms other than
those which have been the usual practice in such dealings.
4.14 Books and Records. The financial books and records of the Company
-----------------
accurately reflect the transactions to which it is or was a party or by which
its properties are or were bound. All of the corporate records of each Company
have been made available to representatives of AIII and are substantially
complete, accurate, and current.
4.15 Warranties. The Company has not given or made any warranties to
----------
third parties with respect to any products sold or services performed by it,
except for the limited warranties stated in standard forms of warranty used by
it, copies of which have been delivered to AIII. There is no claim against or
liability of the Company on account of product warranties or with respect to the
manufacture, sale, or rental of defective products and there is no basis for any
such claim on account of defective products heretofore manufactured, sold, or
rented which is not covered by insurance.
4.15.5 The Company has entered into a contract with Custom Sprayed on
Liners and Edwardo De Lachica, according to the terms of which, the Company may
not establish distributorships within the "Greater Houston" trade area. That
contract expires in March, 2001 and will not be renewed. The Company has not
entered into any similar agreements, will not do
7
<PAGE>
so, and transferor warrants and represents that, other than the "one mile
radius" protected trade territories granted to distributors, no agreements have
been entered into limiting the geographic area in which distributorships may be
established or products sold. Transferor also represents that no similar
agreements exist between the Mexican manufacturing company controlled by
Transferor's family and affecting the ability of the Company to sell any of the
products manufactured by that company. Transferor also represents that the
Company shall have notice of any negotiations, activities, or circumstances of
the Mexican company which might limit the Company's access to products or the
ability to sell such products.
4.16 Title and Related Matters. Other than properties leased by the
-------------------------
Companies or as noted on Exhibit 8, the Company has good, marketable, and
---------
insurable title to all of the properties and assets owned or used by it or in
its possession free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (a) statutory liens for property
taxes not yet delinquent or payable subsequent to the Effective Date; (b) such
imperfections or irregularities of title, liens, easements, charges or
encumbrances as do not materially detract from or materially interfere with the
use of the properties or assets subject thereto, or affected thereby, or
otherwise materially impair business operations or such properties; (c) such
imperfections or irregularities of title, liens, easements, charges or
encumbrances as would not materially interfere with the sale, or materially
detract from the aggregate value of, such properties and assets; or (d) as
reflected in the Marald Financial Statements. The Transferor has no actual
knowledge of any violations of zoning, building, health or safety laws,
statutes, ordinances or regulations relating to such properties or assets.
4.17 Disclosure. Neither this Agreement nor any of the annexes, exhibits,
----------
schedules, attachments, statements, documents, certificates, or other items
prepared or supplied to AIII by or on behalf of the Transferor with respect to
the transactions contemplated by this Agreement knowingly contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading. No responsible officer or
director of either Company has intentionally concealed any fact known by such
person to have a material adverse effect upon the Companies' existing or
expected financial condition, operating results, assets, customer relations,
employee relations, or business prospects taken as a whole.
4.18 Power of Attorney. No material power of attorney or similar
-----------------
authorization given by the Company is in effect on the Effective Date.
4.19 Accounts Receivable. All accounts receivable of Marald reflected in
-------------------
the marald Financial Statements represent bona fide sales actually made in the
ordinary course of business.
4.20 Real Property. Exhibit 9 lists all real property currently owned or
------------- ---------
leased by the Company and used or useful in the conduct of the business
operations of the Company. The Transferor has delivered to AIII copies of all
leases listed in Exhibit 8 (including any and all amendments and other
---------
modifications of such leases), which leases are valid and binding. The Company
is not in material default under any such leases. All of the property listed in
Exhibit 9 (including improvements thereon) is in satisfactory condition and
- ---------
repair consistent with its present use and is available for immediate use in the
conduct of the business of the Company. None of the
8
<PAGE>
property listed in Exhibit 9 violates in any material respect any applicable
---------
environmental, building or zoning code or regulation of any governmental
authority having jurisdiction. The property and leases described in Exhibit 8
---------
include all such property or property interests necessary to conduct the
business and operations of the Companies as they are presently conducted.
4.21 Power and Authority of the Transferors. The execution, delivery, and
--------------------------------------
performance by each Transferor of this Agreement are within his requisite power.
4.22 Enforceability. This Agreement, when duly executed and delivered in
--------------
accordance with its terms, will constitute the legal, valid, and binding
obligations of the Transferor, enforceable against him in accordance with its
terms, except as may be limited by bankruptcy, insolvency, and other similar
laws affecting creditors' rights generally or by general equitable principles.
4.23 No Violation of Law. The execution, delivery, and performance of this
-------------------
Agreement by the Transferor do not materially conflict with, violate, or
constitute a breach of or a default under, or result in the creation or
imposition of any lien, claim, or encumbrance of any kind upon, any of his
Marald Shares being sold pursuant to this Agreement.
4.24 Brokers and Finders. Finders fees of $45,000.00 are payable by
-------------------
Marald, Inc. in conjunction with services provided on behalf of Marald in
connection with negotiations relative to this Agreement and the transactions
contemplated by this Agreement. Additionally, a discount of $150.00 per drum of
chemicals sold to Toro Spray on Liners, Inc. will be applied to sales to them
--------------------------
over the next twenty-four months.
4.25 Investment Representations.
--------------------------
4.25.1 The Transferor is an "accredited investor" as defined by the
Rule 1(a) of Regulation D promulgated under the Securities Act, and has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to AIII so that he is
capable of evaluating the merits and risks of his investment in AIII and
has the capacity to protect his own interests.
4.25.2 The Transferor is acquiring the Exchange Securities for
investment for his own account, not as a nominee or agent, and not with the
view to, or for resale in connection with, any distribution thereof. Each
Transferor understands that the Exchange Securities have not been, and will
not be, registered under the Securities Act or the securities laws of any
state by reason of a specific exemption from the registration provisions of
the Securities Act and the applicable state securities laws, the
availability of which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of his representations as
expressed in this Agreement. Each Transferor is acquiring the Exchange
Securities without expectation, desire, or need for resale and not with the
view toward distribution, resale, subdivision, or fractionalization of the
Exchange Securities.
9
<PAGE>
4.25.3 During the course of the negotiation of this Agreement, each
Transferor has had an opportunity to discuss AIII's business, management
and financial affairs with AIII's management and the opportunity to review
AIII's financial statements, books and records, facilities and business
plan. Each Transferor has also had an opportunity to ask questions of the
officers of AIII, which questions were answered to his satisfaction.
4.25.4 The Transferor understands that the Exchange Securities
cannot be resold in a transaction to which the Securities Act and state
securities laws apply unless (i) subsequently registered under the
Securities Act and applicable state securities laws or (ii) exemptions from
such registrations are available. Each Transferor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit
limited resale of shares purchased in a private transaction subject to the
satisfaction of certain conditions.
4.25.5 Each Transferor understands that the certificates for the
Exchange Shares will bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES STATUTES. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF WITHOUT THE PRIOR
WRITTEN CONSENT OF THE CORPORATION UNLESS THE SALE OR OTHER
DISPOSITION (1) IS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE 1933 ACT AND ALL RELEVANT STATE SECURITIES
ACTS GOVERNING SUCH SALE OR OTHER DISPOSITION; OR (2) IS ONE WITH
RESPECT TO WHICH THE CORPORATION SHALL HAVE BEEN ADVISED BY ITS
COUNSEL THAT REGISTRATION UNDER THE 1933 ACT AND RELEVANT STATE
SECURITIES ACTS IS NOT REQUIRED."
5
AIII'S REPRESENTATIONS AND WARRANTIES
-------------------------------------
AIII represents and warrants to the Transferors that:
5.0 Organization and Corporate Status of AIII. AIII is a corporation duly
-----------------------------------------
organized, validly existing, and in good standing under the laws of the State of
Nevada, and is duly licensed, qualified to do business, and in good standing in
each jurisdiction in which such qualification is necessary, and has all
corporate power and authority and has satisfied all Legal Requirements necessary
to own and operate its properties and to carry on its business as presently
conducted.
5.1 Power and Authority of AIII. The execution, delivery, and performance
---------------------------
by AIII of this Agreement are within the requisite corporate power and authority
of AIII and have been duly
10
<PAGE>
authorized and approved by all necessary parties, including, without limitation,
the Board of Directors of AIII.
5.2 Enforceability. This Agreement, when duly executed and delivered in
--------------
accordance with its terms, will constitute the legal, valid, and binding
obligation of AIII in accordance with its terms, except as may be limited by
bankruptcy, insolvency, and other similar laws affecting creditors' rights
generally and by general equitable principles.
5.3 Brokers and Finders. No person has acted on behalf of AIII in
-------------------
connection with any negotiations relative to this Agreement and the transactions
contemplated by it, and such negotiations have been carried on by AIII without
the intervention of any person acting on behalf of AIII in such a manner as to
give rise to any valid claim for a brokerage commission, finder's fee, or other
like payment.
5.4 Investment Representations. The Marald Shares to be received by AIII
---------------------------
will be acquired for investment, for AIII's own account, not as a nominee or
agent, and not with a view to sale or distribution of any of them, and AIII has
no present intention of selling, granting participation in, or otherwise
distributing the Marald Shares. AIII understands that the Marald Shares have not
been registered under the Securities Act or any state securities laws, that the
sale of the Marald Shares pursuant to this Agreement is exempt from registration
under the Securities Act pursuant to section 4(2) of the Securities Act, and
that the Transferors are relying upon AIII's representations with respect to the
availability of the exemption from registration. AIII further understands that
the following paragraph may be stamped or typed on any certificate evidencing
the Marald Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES STATUTES. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF WITHOUT THE PRIOR
WRITTEN CONSENT OF THE CORPORATION UNLESS THE SALE OR OTHER
DISPOSITION (1) IS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE 1933 ACT AND ALL RELEVANT STATE SECURITIES
ACTS GOVERNING SUCH SALE OR OTHER DISPOSITION; OR (2) IS ONE WITH
RESPECT TO WHICH THE CORPORATION SHALL HAVE BEEN ADVISED BY ITS
COUNSEL THAT REGISTRATION UNDER THE 1933 ACT AND RELEVANT STATE
SECURITIES ACTS IS NOT REQUIRED."
5.5 No Violation of Law. The execution, delivery, and performance of this
-------------------
Agreement by AIII do not materially: (i) conflict with, violate, or constitute a
breach of or a default under, (ii) result in the creation or imposition of any
lien, claim, or encumbrance of any kind upon any of the Exchange Securities
pursuant to the terms of, (iii) require any authorization, consent, approval,
exemption, or other action by or notice to or filing with any governmental
authority under any provision of, or (iv) accelerate or permit the acceleration
of the performance required by: (x) the Articles of Incorporation or Bylaws of
AIII, (y) any applicable Legal Requirement, or (z) any
11
<PAGE>
credit or loan agreement, mortgage, indenture, promissory note, or any other
agreement or instrument to which AIII is a party or by which the Exchange
Securities may be bound or affected.
5.6 Compliance with Laws. AIII is conducting its business and operations
--------------------
in compliance with all Legal Requirements applicable to its business and
operations, and has no knowledge or reason to believe that it is in violation or
default under any Legal Requirement applicable to it or any of its properties
which violation or default resulted in or could result in a material adverse
effect.
5.7 Books and Records. The financial books and records of AIII accurately
-----------------
reflect the transactions to which it is or was a party or by which its
properties are or were bound, and such books and records are and have been
properly kept and maintained in accordance with generally accepted accounting
principles applied on a consistent basis. All of the corporate records of AIII
have been made available to representatives of the Transferors and are complete,
accurate, and current.
5.8 The Exchange Securities. The Exchange Shares have been duly authorized
-----------------------
and reserved for issuance and, when issued in accordance with this Agreement or
the Exchange Options, as the case may be, will be validly issued, fully paid,
non-assessable and free of preemptive rights. Upon the Closing, the Transferors
shall acquire from AIII legal and beneficial ownership of, good and valid title
to, and all right to vote the Exchange Shares, free from any charge, lien,
encumbrance or adverse claim of any kind whatsoever. The issuance and delivery
of the Exchange Securities will not violate the Securities Act, the Securities
Exchange Act of 1934, as amended, or any rule or regulation promulgated by any
state securities law or regulation.
5.9 Disclosure. Neither this Agreement nor any of the annexes, exhibits,
----------
schedules, attachments, statements, documents, certificates, or other items
prepared or supplied to the Transferor by or on behalf of AIII with respect to
the transactions contemplated by this Agreement knowingly contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading. No responsible officer or
director of AIII has intentionally concealed any fact known by such person to
have a material adverse effect upon AIII's existing or expected financial
condition, operating results, assets, customer relations, employee relations, or
business prospects taken as a whole.
6
CONDUCT OF THE COMPANIES' BUSINESS PENDING THE CLOSING
------------------------------------------------------
6.0 In General. Pending the Closing, each Company shall conduct its
----------
business in the ordinary course. Without limiting the generality of the
foregoing, the Company shall comply with the subsequent sections of this
Article.
6.1 Regular Course of Business. Each Company will operate its business
--------------------------
diligently and in good faith, consistent with past management practices, keep
available the services of its present officers and employees (other than planned
retirements) and preserve its present relationships with
12
<PAGE>
persons having business dealings with it (in each case without incurring any
additional obligations not disclosed in this Agreement).
6.2 Books of Account. Each Company shall keep its books of account and
----------------
records in the usual, regular and ordinary manner, in accordance with generally
accepted accounting principles, practices and standards applied on a consistent
basis, and shall make no changes in accounting methods and policies.
6.3 Notice to AIII. The Transferor shall give prompt notice to AIII of:
--------------
(i) any notice of, or order or communication relating to, any default or event
which, with notice or lapse of time or both would become a default, received by
either Company subsequent to the Effective Date and on or before the Closing
under any indenture, instrument, lease or agreement to which the Company is a
party or to which any of its property is bound or subject; and (ii) any notice
or other communication from any third party alleging that the consent of such
third party may be required in connection with the transactions contemplated by
this Agreement. Further, the Transferors will promptly advise AIII of (a) any
event occurring subsequent to the Effective Date which would render any
representation or warranty contained in this Agreement, if made on or as of the
date of the event or the Effective Date, untrue in any material respect and (b)
any material change in the business or operations of either Company.
6.4 Full Access. The Company shall afford to AIII and to its counsel,
-----------
accountants and other authorized representatives, full access to its plant,
properties, books and records in order that AIII may have the full opportunity
to make such investigations as AIII shall desire to make of the affairs of the
Company; and the Company will cause its officers and employees to furnish such
additional financial and operating data and other information as AIII may from
time to time reasonably request.
6.5 Consents. The Transferor will obtain, before the Closing, all consents
--------
necessary for the consummation of the transactions contemplated by this
Agreement. All such consents will be in writing and executed counterparts of the
consents will be delivered to AIII no later than immediately before to the
Closing.
6.6 Exclusivity. During the period beginning on the Effective Date and
-----------
ending on the Closing or the termination of this Agreement, whichever first
occurs, neither the Transferor nor the Company will solicit or furnish
information to any prospective buyer, commence, or conduct negotiations with any
other party or enter into any agreement, contract or letter of intent with any
other party concerning the sale of any or all of the Marald Shares or any or all
of the assets of the Company. The Transferor will immediately advise AIII of the
receipt of any acquisition proposal.
7
CONDUCT OF AIII'S BUSINESS PENDING THE CLOSING
----------------------------------------------
13
<PAGE>
7.0 In General. Pending the Closing, AIII shall conduct its business in
----------
the ordinary course. Without limiting the generality of the foregoing AIII shall
comply with the subsequent sections of this Article 8.
7.1 Regular Course of Business. AIII will operate its business diligently
--------------------------
and in good faith, consistent with past management practices, keep available the
services of its present officers and employees (other than planned retirements)
and preserve its present relationships with persons having business dealings
with it (in each case without incurring any additional obligations not disclosed
in this Agreement).
7.2 Books of Account. AIII shall keep its books of account and records in
----------------
the usual, regular and ordinary manner, in accordance with generally accepted
accounting principles, practices and standards applied on a consistent basis,
and shall make no changes in accounting methods and policies.
7.3 Notice to the Transferor. AIII shall give prompt notice to the
------------------------
Transferor of: (i) any notice of, or order or communication relating to, any
default or event which, with notice or lapse of time or both would become a
default, received by AIII subsequent to the Effective Date and on or before the
Closing under any indenture, instrument, lease or agreement to which AIII is a
party or to which any of its property is bound or subject; and (ii) any notice
or other communication from any third party alleging that the consent of such
third party may be required in connection with the transactions contemplated by
this Agreement. Further, AIII will promptly advise the Transferor of (a) any
event occurring subsequent to the Effective Date which would render any
representation or warranty contained in this Agreement, if made on or as of the
date of the event or the Effective Date, untrue in any material respect and (b)
any material change in the business or operations of AIII.
7.4 Full Access. AIII shall afford the Transferor and his respective
-----------
counsel, accountants and other authorized representatives, full access to its
plant, properties, books and records in order that they may have the full
opportunity to make such investigations as they shall desire to make of the
affairs of AIII; and AIII will cause its officers and employees to furnish such
additional financial and operating data and other information as the Transferors
may from time to time reasonably request.
7.5 Consents. AIII will obtain, before the Closing, all consents necessary
--------
for its consummation of the transactions contemplated by this Agreement. All
such consents will be in writing and executed counterparts of the consents will
be delivered to CRC the Transferors no later than immediately before to the
Closing.
8
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF AIII
-----------------------------------------------
8.0 Each and every obligation of AIII under this Agreement to be performed
on or before the Closing shall be subject to the satisfaction, on or before the
Closing, of each of the conditions contained in this Article 9.
14
<PAGE>
8.1 No Governmental or Other Proceedings. No action, suit, proceeding or
------------------------------------
investigation by or before any court or governmental, administrative or
regulatory authority shall have been commenced or threatened against any
Company, AIII or the Transferors seeking to restrain, prevent or change the
transactions contemplated by this Agreement or questioning the validity or
legality of the transactions or seeking damages in connection with the
transactions.
8.2 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties of the Transferor contained in this Agreement and
the Exhibits shall be true and correct in all material respects on the Closing
with the same effect as though made on that date. The Transferor and the Company
shall each have duly performed and complied with all covenants, agreements and
conditions required by this Agreement to be performed or complied with before or
at the Closing.
8.3 No Material Adverse Change. There shall have been no material adverse
--------------------------
change since the Effective Date in the business, condition (financial or
otherwise), assets, liabilities (absolute, accrued, contingent or otherwise),
prospects or operations of either Company.
8.4 Absence of Certain Changes or Events. In the period from the Effective
------------------------------------
Date to the Closing, neither Companies shall have:
8.4.1 undergone or otherwise experienced any change in its condition
(financial or otherwise), properties, assets, liabilities, business, or
operations, other than changes in the ordinary course of business which in
the aggregate would not have a material adverse effect;
8.4.2 declared, set aside, made, or paid any dividend or other
distribution in respect of its capital stock or purchased or redeemed,
directly or indirectly, any shares of its capital stock;
8.4.3 granted, issued, or sold any shares of its capital stock or any
option, warrant, conversion, or other right to purchase any such shares or
any securities convertible into or exchangeable for such shares;
8.4.4 incurred, except in the normal course of business or pursuant
to credit arrangements in effect or being negotiated on or before the
Effective Date, any indebtedness for borrowed money or issued or sold any
note or any debt securities;
8.4.5 subjected, except in the normal course of business or pursuant
to credit arrangements in effect or being negotiated on or before the
Effective Date, any of its properties or assets, tangible or intangible, to
any mortgage, pledge, lien, charge, or encumbrance of any kind except
Permitted Liens;
8.4.6 acquired or disposed of any Equipment of material value other
than in the ordinary course of business;
15
<PAGE>
8.4.7 suffered any extraordinary loss or forgiven or canceled any
material debt or claim, or waived any right of material value, whether or
not in the ordinary course of business;
8.4.8 entered into any other transaction other than in the ordinary
course of business, or entered into any material transaction, whether or
not in the ordinary course of business;
8.4.9 granted to any officer or salaried employee or any class of
other employee any increase in compensation in any form in excess of the
amount thereof in effect as of the Effective Date (other than ordinary
merit increases consistent with past practice) or any severance or
termination pay (other than in minor amounts consistent with past
practice), prepaid principal on any note to any such person, consummated or
obligated itself to consummate any transaction with any such person, or
entered into any employment agreement or arrangement with any person;
8.4.10 entered into, adopted or amended in any respect any collective
bargaining agreement or adopted or amended any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
insurance, or other similar plan, agreement, trust, or fund for the benefit
of employees;
8.4.11 suffered any material damage, destruction, or casualty loss
(whether or not covered by insurance);
8.4.12 suffered any strike or other labor trouble;
8.4.13 suffered any change in its relationship with, or loss of,
employees or customers which resulted in or could result in a material
adverse effect;
8.4.14 incurred any material liability or obligation (whether
absolute, accrued, contingent or otherwise), except in the ordinary course
of business;
8.4.15 discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent) other than current
liabilities paid in the ordinary course of business which were reflected in
or shown on the Marald Financial Statements or which were incurred in the
ordinary course of business since the Effective Date;
8.4.16 other than in the ordinary course of business, made or
permitted any amendment or termination of any contract, agreement, or
license to which it is a party or by which either it or any of its assets
or properties are subject;
8.4.17 sold, assigned, or transferred any patents, trademarks, trade
names, copyrights, trade secrets, licenses or other intangible assets, or
disclosed any proprietary confidential information;
16
<PAGE>
8.4.18 made any capital expenditure or commitment not in the ordinary
course of business which aggregates in excess of $5,000;
8.4.19 made any loan or advance (other than reasonable travel
advances) to, guaranties for the benefit of, or investments in, any person;
8.4.20 been cited for any violation of any Legal Requirement;
8.4.21 conducted its business in other than the usual and ordinary
manner; or
8.4.22 agreed to do any of the foregoing.
8.5 Legal Matters. All legal matters in connection with this Agreement and
-------------
the transactions it contemplates and the form and substance of all papers,
instruments and documents used or delivered under this Agreement or incidental
to this Agreement shall be reasonably satisfactory to AIII.
9
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE TRANSFERORS
----------------------------------------------------------
9.0 Each and every obligation of the Transferors under this Agreement to
be performed on or before the Closing shall be subject to the satisfaction, on
or before the Closing, of each of the conditions contained in of this Article
10.
9.1 Representations and Warranties. Each of the representations and
------------------------------
warranties of AIII set forth in this Agreement shall be true and correct, both
on the Effective Date and on the Closing as if made at that time.
9.2 Agreements and Obligations. AIII shall have performed and complied
--------------------------
with all agreements, undertakings, and obligations which are required to be
performed or complied with by it at or before the Closing.
9.3 Legal Matters. All legal matters in connection with this Agreement and
-------------
the transactions it contemplates, and the form and substance of all papers,
instruments, and documents used or delivered under this Agreement or incidental
to this Agreement, shall be reasonably satisfactory to the Transferors.
9.4 No Governmental or Other Proceedings. No action, suit, proceeding or
------------------------------------
investigation by or before any court or governmental, administrative or
regulatory authority shall have been commenced or threatened against any
Company, AIII or the Transferors seeking to restrain, prevent or change the
transactions contemplated by this Agreement or questioning the validity or
legality of the transactions or seeking damages in connection with the
transactions.
17
<PAGE>
9.5 No Material Adverse Change. There shall have been no material adverse
--------------------------
change since the Effective Date in the business, condition (financial or
otherwise), assets, liabilities (absolute, accrued, contingent or otherwise),
prospects or operations of AIII.
10
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
-----------------------------------------------------
10.0 Nature of Statements. All statements contained in this Agreement, in
--------------------
any annex, exhibit, or any certificate or other instrument delivered by or on
behalf of the Transferor or AIII pursuant to this Agreement, or in connection
with the transactions it contemplates, shall be considered the representations
and warranties of the Transferor or AIII, as the case may be. No investigation
by any party nor failure by any party, to make any investigation, shall
constitute a waiver of any representation, warranty, covenant, or agreement of
any party, nor relieve the other party of any obligation with respect to the
accuracy or fulfillment thereof.
10.1 Survival of Representations and Warranties. Regardless of any
------------------------------------------
investigation at any time made by or on behalf of any party or of any
information any party may have in respect of this Agreement, all covenants,
agreements, representations, and warranties made in this Agreement or pursuant
to this Agreement or in connection with the transactions it contemplates shall
survive the Closing and shall continue in effect until June 30, 2000.
11
INDEMNIFICATION
---------------
11.0 Indemnification by the Transferor. Transferor individually hereby
---------------------------------
indemnifies and holds harmless AIII and its respective successors and assigns
from and against any taxes, claims, liabilities, damages, losses, costs, and
expenses, including, without limitation, reasonable legal fees, accountants'
fees, costs of investigation, and other expenses of defending any action or
claim, amounts of judgment and amounts paid in settlement, together with
interest thereon at the rate of ten percent per year, compounded annually from
the date incurred until paid, caused by or arising out of: (i) any breach or
default in the performance by him of any covenant or agreement of such
Transferor contained in this Agreement, or (ii) any breach of warranty or
inaccurate or erroneous representation made by him in this Agreement, in any
annex, exhibit, or any other document delivered by or on behalf of the
Transferor pursuant to this Agreement.
11.1 Indemnification by AIII. AIII hereby indemnifies and holds harmless
-----------------------
each of the Transferors and his respective successors and assigns from and
against any taxes, claims, liabilities, damages, losses, costs, and expenses,
including, without limitation, reasonable legal fees, accountants' fees, costs
of investigation, and other expenses of defending any action or claim, amounts
of judgment and amounts paid in settlement, together with interest thereon at
the rate of ten percent per year, compounded annually from the date incurred
until paid, caused by or arising out of: (i) any breach or default in the
performance by AIII of any covenant or agreement of AIII contained in this
Agreement, or (ii) any breach of warranty or inaccurate or erroneous
18
<PAGE>
representation made by AIII in this Agreement, in any annex, exhibit, or any
other document delivered by or on behalf of AIII or pursuant to this Agreement.
11.2 Conditions of Indemnification. With respect to any actual or potential
-----------------------------
claim, any demand, the commencement of any action, or the occurrence of any
other event which involves any matter or related series of matters (a "Claim")
against which a party (the "Indemnified Party") is indemnified by another party
(the "Indemnifying Party") under section 12.1 or 12.2:
11.2.1 Notice. Promptly after the Indemnified Party first receives
------
documents pertaining to the Claim, or if such Claim does not involve a
third party Claim, promptly after the Indemnified Party first has actual
knowledge of the Claim, the Indemnified Party shall give notice to the
Indemnifying Party of the Claim in reasonable detail and stating the amount
involved, if known, together with copies of any such documents.
11.2.2 Failure to Give Notice. The Indemnifying Party shall have no
----------------------
obligation to indemnify the Indemnified Party with respect to any Claim if
(i) the Indemnified Party fails to give the notice of the Claim in
accordance with section 12.3.1 or (ii) the notice of the Claim is not given
on or before the first anniversary of the Closing; however, such limitation
shall not apply to any Claim based upon or arising out of willful
concealment or willful misconduct.
11.2.3 Litigation, Settlement, Resolution of Claim. If the Claim
-------------------------------------------
involves a third party, then the Indemnifying Party may, at its sole cost,
expense and ultimate liability regardless of the outcome, and through
counsel of its choice, litigate, defend, settle or otherwise attempt to
resolve the Claim, except that the Indemnified Party may elect, at any time
and at the Indemnified Party's sole cost, expense and ultimate liability,
regardless of the outcome, and through counsel of its choice, litigate,
defend, settle or otherwise attempt to resolve the Claim. If the
Indemnified Party so elects (for reasons other than the Indemnifying
Party's failure or refusal to provide a defense to the Claim), then the
Indemnifying Party shall have no obligation to indemnify the Indemnified
Party with respect to the Claim, but such disposition will be without
prejudice to any other right the Indemnified Party may have to
indemnification, regardless of the outcome of the Claim. In any event, AIII
and the Transferors shall fully cooperate with each other and their
respective counsel at their own expense in connection with any such
litigation, defense, settlement or other attempted resolution.
12
MISCELLANEOUS
12.0 Construction. The section headings contained in this Agreement are for
------------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever required by the context, any gender
shall include any other gender, the singular shall include the plural, and the
plural shall include the singular.
19
<PAGE>
12.1 Costs, Expenses, and Legal Fees. Each party shall bear its own costs
-------------------------------
and expenses pertaining to the negotiation, preparation and execution of this
Agreement and the consummation of the transactions it contemplates.
12.2 Announcements, Press Releases, and Disclosure. Any press release or
---------------------------------------------
other public announcement concerning this Agreement or the transactions it
contemplates shall be approved by both the Transferor and AIII. In addition, no
party shall disclose the existence of this Agreement or the transactions it
contemplates before the Closing, except as may be necessary to comply with any
Legal Requirement.
12.3 Notice. Any notice required or permitted under this Agreement shall be
------
in writing and shall be considered to be delivered three business days after
deposit in the United States mail, postage prepaid, certified or registered
mail, return receipt requested, addressed as follows:
12.3.1 If to AIII, to it at 601 Hanson Road, Kemah, Houston, Texas
77565-2701, Attention: Mr. Daniel Dror, Sr.; or
12.3.2 If to the Transferor: 11020 Old Katy Rd. #217, Houston, Texas
---------------------------------------
77043
-----
12.3.3 Notice given in any other manner shall be effective when
received by the addressee. The address for notice may be changed by notice
given in accordance with this section 14.4.
12.4 Entire Agreement, Amendment. This Agreement and its annexes and
---------------------------
exhibits constitute the entire agreement between the parties and may not be
amended, supplemented, waived, or terminated except by an instrument executed by
all of the parties. Any previous agreements or understandings among the parties
regarding the subject matter of this Agreement are merged into and superseded by
this Agreement.
12.5 Waiver. No waiver of any provision of this Agreement shall constitute
------
a waiver of any other provision of this Agreement, nor shall such waiver
constitute a waiver of any subsequent breach of the provision.
12.6 Assignment. This Agreement shall not be assignable. Any attempted
----------
assignment shall be null and void.
12.7 Choice of Law. The validity, construction and enforcement of this
-------------
Agreement shall be governed by the laws of the State of Texas.
12.8 Arbitration. If any dispute, difference, or disagreement shall arise
-----------
upon or in respect of the Agreement, and its meaning and construction, every
such dispute, difference, and disagreement shall be referred to a single arbiter
sitting in Houston, Texas, agreed upon by the parties, or if no single arbiter
can be agreed upon, an arbiter or arbiters shall be selected in accordance with
the rules of the American Arbitration Association and such dispute, difference,
or disagreement shall be settled by arbitration in accordance with the then
prevailing commercial rules of the American Arbitration Association, and
judgment upon the award rendered by the arbiter may be entered in any court
having
20
<PAGE>
jurisdiction. In the event of such arbitration, the prevailing party shall be
entitled to reasonable legal fees to be fixed by the arbitrator.
12.9 Severability. If any provision of this Agreement is declared
------------
unenforceable by a court of competent jurisdiction, such provision shall be
enforced to the greatest extent permitted by law, and such declaration shall not
affect the validity of any other provision of this Agreement.
12.10 Time for Performance. If the time for performance of any obligation
--------------------
set forth in this Agreement falls on a Saturday, Sunday or legal holiday,
compliance with the obligation on the next business day following such Saturday,
Sunday, or legal holiday shall be considered acceptable.
12.11 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be considered an original, but all of which
shall be considered one instrument.
12.12 Confidentiality. Each party to this Agreement shall keep all
---------------
information obtained from the other parties as a result of its due diligence
investigation confidential. No party shall release such confidential information
without the consent of the other.
IN WITNESS WHEREOF, this Agreement has been executed as of the Effective
Date.
AMERICAN INTERNATIONAL INDUSTRIES, INC.
______________________________
By: John W. Stump, III
Its: Chief Financial Officer
______________________________
Juan Carlos Martinez
21
<PAGE>
EXHIBIT 10.17
ACQUISITION AGREEMENT
---------------------
This Acquisition Agreement is made by American International Industries,
Inc. ("AIII") and Rod Lovett and John Raymond Winkler, collectively referred to
as Sellers.
INTRODUCTION
------------
The Sellers wish to transfer to AIII, and AIII wishes to acquire from the
Sellers, all of the outstanding shares of common stock of Tough Trucks and
Accessories, Inc. d/b/a "Armor Linings" in exchange for the consideration
described in this Agreement.
NOW, THEREFORE, AIII and the Sellers agree as follows:
1
DEFINITIONS
-----------
When used in this Agreement:
All accounting terms not otherwise defined in this Agreement have the meanings
assigned to them in accordance with generally accepted accounting principles
consistently applied.
"Agreement" means this Acquisition Agreement.
"AIII" means American International Industries, Inc., a Nevada corporation.
"Claim" is defined in section 12.3.
"Closing" is defined in section 3.1.
"Company" means Tough Trucks and Accessories, Inc., a Texas corporation, dba -
"Armor Linings and Truck Accessories".
"Tough Trucks and Accessories, Inc. d/b/a `Armor Linings' Financial Statements"
are defined in section 4.2.
"Tough Trucks and Accessories, Inc. d/b/a `Armor Linings' Shares" means all of
the outstanding and validly issued shares of the common stock of Tough Trucks
and Accessories, Inc.
"Effective Date" means April 28, 1999.
"Governmental Authority" means any foreign governmental authority, the United
States of America, any state of the United States, and any political subdivision
of any of the foregoing, and any agency, department, commission, board, bureau,
court, or similar entity, having jurisdiction over a party to this Agreement or
its assets or properties.
"Indemnified Party" is defined in section 8.1.
<PAGE>
"Indemnifying Party" is defined in section 8.1.
"Legal Requirements" means any material law, statue, ordinance, writ,
injunction, decree, requirement, order, judgment, rule, or regulation (or
interpretation of any of the foregoing requirements) of, and the terms of any
license or permit issued by, any Governmental Authority.
"Permitted Liens" means (i) liens for taxes, assessments, and other governmental
charges or levies, the payment of which is not past due, (ii) mechanics',
workman's, repairman's, warehouseman's, vendors', or carriers' liens, or similar
liens arising in the ordinary course of business and securing sums that are not
past due, or deposits or pledges to obtain the release of any such liens, or
(iii) easements, reservations, encroachments, or minor defects in title that do
not materially impair the use of the property affected thereby.
"Rights" are defined in section 4.10.
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers" means Rod Lovett and John Raymond Winkler.
2
THE TRANSACTION
---------------
Subject to the terms and conditions set forth in this Agreement, and based on
the covenants, warranties and representations in this Agreement, the Sellers
hereby agree to transfer and deliver all of the Tough Trucks and Accessories,
Inc. Shares to AIII in exchange for $132,500.00 in cash at time of closing. At
time of closing, Sellers shall provide a list of all Accounts Receivable
[Exhibit #5 five] existing at that date. Representatives of AIII will review all
accounts to evaluate the collectibility of each. No accounts receivables are
being purchased by Buyer. Any money received by Buyer for work done prior to
5:00 p.m. April 28, 1999 is the property of Seller and shall be promptly
remitted to Seller by Buyer. All accounts receivable not purchased by Buyers
shall become the property of Sellers Rod K. Lovett and John R. Winkler. Sellers
shall pay, or cause to be paid, all accounts payable, accrued expenses and any
other liabilities except the Equipment Lease obligations which are due before
the date of closing. At time of closing, all monthly installment payments for
the month of April relating to the Equipment Lease obligations shall have been
paid. Sellers shall have their Accountant estimate the Federal and State income,
franchise and other taxes related to the operations of the Company through
April 30, 1999, and such amount shall be deducted from amounts otherwise payable
to Sellers, and paid into escrow with such Accountant, securing payment of such
taxes upon the filing of the "short-period" return, which shall be the
responsibility of Sellers. This sum shall be deducted from the money paid to
Sellers for the Accounts Receivable. Buyer shall issue a separate check payable
to Rod K. Lovett and John R. Winkler for $7,937.13 which represents the
---------
refundable deposits paid by the corporation as set out in [Exhibit 1 (one)]
attached. Seller has paid the April lease payments as set out in [Exhibit 10
(ten) and the buyer shall issue its separate check to Rod K. Lovett and
John R. Winkler for $ -0- to reimburse them for any May lease payments made by
-----
the Sellers.
-2-
<PAGE>
3
THE CLOSING
-----------
3.0 The Closing. The closing (the "Closing") of the transaction
contemplated in this Agreement shall be at the offices of American International
Industries, Inc. at 601 Hanson Rd., Kemah, Texas 77565 at 9:00 a.m., on
April 29, 1999 or such other place, time and date as may be agreed by the
Sellers and AIII.
3.1 Documents to be delivered by the Sellers at the Closing. At the
Closing, the Sellers shall deliver or cause to be delivered to AIII:
3.1.1 Certificates for the Tough Truck and Accessories, Inc. Shares
being sold pursuant to this Agreement, duly endorsed for transfer to AIII,
and constituting 100 percent of the outstanding shares of that Company;
fully paid and non-assessable and free of any claims or rights of others.
3.1.2 The minute books, stock transfer records, seals, all books of
account, records, contracts, tax returns, and all other original documents
and records of the Company;
3.1.3 The resignations, effective upon their acceptance by AIII, of
all the directors and officers of the Company; and
3.1.4 Such other instruments of transfer, conveyance, and assignment
as AIII may reasonably request to more effectively consummate the
transactions contemplated in this Agreement.
Payment of the Cash Amount by AIII at the Closing. Upon delivery to AIII of the
- -------------------------------------------------
documents described in section 3.1, AIII shall:
deliver to Sellers, checks in the amount of $66,250.00 payable to Rod
Lovett and $66,250.00 to John Raymond Winkler, being the prorated portion of the
total purchase price of $132,500.00 plus the total of all accounts receivable
less 5% of acceptable accounts receivable which shall be paid, and such
allocation being based on the relative ownership of each in the Sellers Shares.
Buyer will also pay at closing to Sellers, in a separate check the refundable
deposits totaling $7,937.13 as set out in Exhibit 5. Buyers will also issue a
check payable to Rod K. Lovett and John Raymond Winkler in the amount of $ -0-
as reimbursement for May lease payments make before closing [Exhibit 10 (ten)].
4
THE SELLERS' REPRESENTATIONS AND WARRANTIES
-------------------------------------------
The Sellers represents and warrant to AIII that:
4.0 Organization and Corporate Status of the Company. The Company is a
------------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the state of
-3-
<PAGE>
Texas and has all corporate power and authority and has satisfied all Legal
Requirements necessary to own and operate its properties and to carry on its
business as presently conducted. The Company is not qualified or licensed to do
business as a foreign corporation in any jurisdiction, and, to the best
knowledge of the Sellers, after due inquiry, in no jurisdiction does the
character of either Company's properties or the nature of its business make such
qualification necessary. The Company is not a party to or subject to any
agreement or commitment, which will, or may restrict the conduct of its business
in any jurisdiction or location. Complete and correct copies of the Company's
Articles of Incorporation and Bylaws, as presently in effect, have been
delivered to AIII. The Company does not own, directly or indirectly, any capital
shares or any equity, profit sharing, participation or other interest in any
other person.
4.1 Capitalization. The authorized capital stock of Tough Trucks and
--------------
Accessories, Inc. consists of 100,000 shares of common stock of no par value.
200 shares of such common stock are issued and outstanding on the Effective
Date; 7/6/1996 of those shares that are owned beneficially and of record by
Sellers, 100 shares are owned by Rod Lovett and 100shares are owned by John
Raymond Winkler and no other shares are owned by any other party or parties.
Each of the outstanding Tough Trucks and Accessories, Inc. d/b/a "Armor Linings"
shares is validly issued, fully paid, and non-assessable and none has been
issued in violation of any pre-emptive right or other agreement of any
shareholder. At the Closing, there will be no outstanding subscriptions,
options, rights, warrants, convertible securities, or other agreements or
commitments by which, the Company is, or may become obligated to issue or to
transfer from treasury any additional shares of its capital stock of any class.
4.2 Financial Statements. Exhibit 6 consists of the unaudited balance
--------------------
sheets of the Tough Trucks and Accessories, Inc. as of February 1999 and the
related unaudited income statements for the periods then ended (collectively,
the "Financial Statements"). The unaudited balance sheets included in the
Financial Statements present fairly, subject to the usual disclaimers made in
such unaudited balance sheets, the financial position of the Company as of their
dates. The unaudited income statements included in the Financial Statements
present fairly, subject to the usual disclaimers made in such unaudited income
statements, the results of operations of the Company for the periods indicated.
4.3 Absence of Undisclosed Liabilities. The Company has not incurred any
----------------------------------
liabilities which have not been disclosed.
4.4 Taxes and Tax Returns. The Company has duly filed with the appropriate
---------------------
governmental agencies all federal tax returns and reports, all state and local
tax returns and reports with respect to income, payroll, sales and franchise
taxes and all other tax returns and reports, the filing of which is necessary
for the conduct of its business. All such tax returns properly reflect the taxes
of the Company for the periods covered. All federal, state, and local taxes,
assessments, interest, penalties, deficiencies, fees, or other governmental
charges or impositions called for by such tax returns, or claimed to be due by
any taxing authority, have been properly accrued or paid and all deposits
required by law to be made with respect to employees' withholding taxes have
been made. There are no material unresolved questions or claims concerning Tough
Truck and Accessories. Inc. d/b/a/ "Armor Linings" tax liability. The Company
has not received any notice of audit, deficiency, or assessment or proposed
deficiency or assessment by the Internal Revenue Service or any other taxing
authority, nor has the Company
-4-
<PAGE>
waived any statute of limitations with respect to taxes or agreed to any
extensions of time with respect to a tax assessment or deficiency.
4.5 Material Contracts. There are no material agreements, contracts, and
------------------
commitments written or oral, not in the ordinary course or not consistent with
prior practice, to which the Company is a party or by which it or any of its
properties are bound as of the date of the Effective Date. None of the customers
or suppliers of the Company has refused, or communicated that it will or may
refuse to purchase or supply goods or services, as the case may be, or has
communicated that it will or intends to substantially reduce the amounts of
goods or services that it is willing to purchase from or sell to the Company.
4.6 Equipment. [Exhibit 7 (seven)] is a schedule of all of the material
---------
machinery, equipment, motor vehicles, furniture, fixtures, and other capital
assets of every kind and description of each Company as of the April 28, 1999.
All of the tangible properties and assets owned by the Company, or in which it
has an interest, currently being used by it are in good and normal operating
condition and repair, normal wear and tear excepted, free from defects (except
such minor defects as do not interfere with the continued use thereof in the
conduct of normal operations), are sufficient to carry on each Company's
business as conducted during the preceding three months, and conform with all
applicable governmental regulations, including, without limitation, those
governing the discharge of materials into the environment or the storage or
disposition of hazardous or toxic wastes.
4.7 Litigation. There are no judicial or administrative actions, suits,
----------
proceedings, or, to the knowledge of the Transferors, investigations pending or
threatened against or affecting the Company, or the transactions contemplated by
this Agreement at law or equity or before any court, governmental agency or
arbitrator, and the Sellers know of no basis or grounds for any such
investigation, action, suit, proceeding, or claims against the Company, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against either Company.
4.8 Compliance with Laws. The Company is conducting its business and
--------------------
operations in compliance with all Legal Requirements applicable to its business
and operations, and the Sellers have no knowledge or reason to believe that the
Company is in violation or default under any Legal Requirement applicable to it
or any of its properties which violation or default resulted in or could result
in a material adverse effect.
4.9 Government Authorizations. No material permit, concession, grant,
-------------------------
franchise, license, or other governmental authorization or approval is necessary
for the conduct of the business of the Company.
4.10 Intellectual Property Rights. [Exhibit 8 (eight)] identifies all of
----------------------------
the material computer software programs, patents, patent applications, licenses,
trade names, assumed names, trademarks, service marks, brandmarks, brandnames,
copyrights, and registrations and Tough Trucks and Accessories, Inc. d/b/a
"Armor Linings" Lining Trademark and applications therefor, franchises,
technology, know-how or other assets of like kind (the "Rights"), used in the
business of the Company, or which are presently owned by or registered in the
name of the Company or under which the Company owns or holds any license or
other interest. To preserve the rights of
-5-
<PAGE>
Exhibit 8 (eight) the holder must file an affidavit of use between the Fifth and
Sixth anniversary dates of the U.S. Registration which is between November 18,
2002 and November 18, 2003. The rights are adequate for the conduct of the
Company's business. All of the Rights are free of all liens and encumbrances,
and the Company has not granted any licenses or sublicenses under any of the
Rights to others. The Company has the sole and exclusive right to use the
Rights, and the consummation of the transactions contemplated by this Agreement
will not alter or impair the Rights. No proceedings have been instituted, are
pending or threatened which challenge any Rights or their validity, and, to the
knowledge of the Sellers, none of the Rights or their use by the Company
infringes or otherwise violates the rights of others or is being infringed by
others. The Company has not received notice of interference or infringement of
any of the Rights. Except by virtue of the Sellers' ownership of the Tough Truck
and Accessories, Inc. d/b/a "Armor Linings" Shares, no shareholder, director,
officer or employee of the Company owns, directly or indirectly, in whole or in
part, any Rights which the Company has used, or the use of which is necessary
for the business of the Company as now conducted.
4.11 Employees; Employee Benefit Plans.
---------------------------------
4.11.1 Employees. At the Closing no present or former employee of the
---------
Company will have any claim against the Company (whether under
Federal or State law, under any employee agreement or
otherwise) on account of or for (a) overtime pay, other than
overtime pay for the payroll period ending on or after the
Closing, (b) wages or salaries, or (c) vacations, time off or
pay in lieu of vacation or time off, other than vacation or
time off (or pay in lieu thereof) earned with respect to the
current fiscal year of the Company. To the knowledge of the
Sellers, at the Closing no present or former employee of the
Company will have any claim against the Company (whether under
federal or state law, under any employee agreement or
otherwise) on account of or for any violation of any law
related to minimum wages or maximum hours of work.
4.11.2 Employee Benefit Plans. The Company has no employee benefit
----------------------
plan or arrangement, whether formal or informal, and whether
legally binding or not, under which or to which it contributes
to or for the benefit of its employees (including, without
limitation, life insurance, hospitalization medical, dental,
bonus, incentive, deferred compensation and similar plans,
severance or termination pay, club memberships, and similar
benefits and perquisites) (the "Plans").
4.11.3 Qualified Plans. The Company is not and has never been a party
---------------
to any Plan which is an "employee pension benefit plan", as
such terms defined in section 3(2) of ERISA and the rules and
regulations promulgated thereunder, and neither Company is and
never has been a party to a "multi-employer plan" as that term
is defined in section 3(37) of ERISA.
4.12 Labor Matters.
-------------
-6-
<PAGE>
4.12.1 No employees of the Company are currently represented by
any labor union, nor is the Company a party to any
collective bargaining agreement, and, to the knowledge of
the Sellers, there is no organizational effort presently
being made or threatened by or on behalf of any labor
union with respect to employees of either Company;
4.12.2 To the best of their knowledge the Company has
substantially complied with the Occupational Safety and
Health Act, the regulations promulgated thereunder, and
all other applicable laws respecting employment and
employment practices, terms and conditions of employment
and wages and hours, and is not engaged in any unfair
labor practice;
4.12.3 There is no unfair labor practice complaint against the
Company pending before the National Labor Relations Board
or any comparable state agency;
4.12.4 There is no labor strike, dispute, slowdown,
representation campaign or work stoppage actually pending
or, to the knowledge of the Transferors, threatened
against or affecting either Company; and
4.12.5 No grievance or arbitration proceeding is pending and no
claim therefor has been asserted against either Company.
4.13 Transactions with Related Parties. The Company is not a party to any
---------------------------------
material transaction or proposed transaction, including, without limitation, the
leasing of property, the purchase or sale of raw materials or finished goods, or
the furnishing of services, with Sellers, and the Company has not, directly or
indirectly, entered into any agreement or commitment which could result in it
becoming obligated to provide funds in respect of or to guarantee or assume any
debt or obligation of either the Sellers, or of any director, officer or
employee of the Company.
4.14 Books and Records. The financial books and records of the Company
-----------------
accurately reflect the transactions to which it is, or was, a party or by which
its properties are or were bound. All of the corporate records of the Company
have been made available to representatives of AIII and are substantially
complete, accurate, and current.
4.15 Warranties. The Company has not given or made any warranties to third
----------
parties with respect to any products sold or services performed by it, except
for the limited warranties stated in standard forms of warranty used by it,
copies of which have been delivered to AIII. There is no claim against or
liability of the Company on account of product warranties or with respect to the
manufacture, sale, or rental of defective products and there is no basis for any
such claim on account of defective products heretofore manufactured, sold, or
rented which is not covered by insurance.
4.16 Title and Related Matters. Other than properties leased by the
-------------------------
Companies or as noted on [Exhibit 9 (nine)], the Company has good, marketable,
and insurable title to all of the properties and assets owned or used by it or
in its possession free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (a) statutory liens for property
-7-
<PAGE>
taxes not yet delinquent or payable subsequent to the Effective Date; (b) such
imperfections or irregularities of title, liens, easements, charges or
encumbrances as do not materially detract from or materially interfere with the
use of the properties or assets subject thereto, or affected thereby, or
otherwise materially impair business operations or such properties; (c) such
imperfections or irregularities of title, liens, easements, charges or
encumbrances as would not materially interfere with the sale, or materially
detract from the aggregate value of, such properties and assets; or (d) as
reflected in the Financial Statements. The Sellers have no actual knowledge of
any violations of zoning, building, health or safety laws, statutes, ordinances
or regulations relating to such properties or assets.
4.17 Disclosure. Neither this Agreement nor any of the annexes, exhibits,
----------
schedules, attachments, statements, documents, certificates, or other items
prepared or supplied to AIII by or on behalf of the Sellers with respect to the
transactions contemplated by this Agreement knowingly contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading. No responsible officer or
director of the Company has intentionally concealed any fact known by such
person to have a material adverse effect upon the Companies' existing or
expected financial condition, operating results, assets, customer relations,
employee relations, or business prospects taken as a whole.
4.18 Power of Attorney. No material power of attorney or similar
-----------------
authorization given by the Company is in effect on the Effective
Date.
4.19 Accounts Receivable. All accounts receivable of Tough Trucks and
-------------------
Accessories, Inc. reflected in the Financial Statements represent bona-fide
sales actually made in the ordinary course of business.
4.20 Real Property. None
-------------
4.21 Power and Authority of the Sellers. The execution, delivery, and
----------------------------------
performance by each Seller of this Agreement are within his requisite power.
4.22 Enforceability. This Agreement, when duly executed and delivered in
--------------
accordance with its terms, will constitute the legal, valid, and binding
obligations of each Seller enforceable against him in accordance with its terms,
except as may be limited by bankruptcy, insolvency, and other similar laws
affecting creditors' rights generally or by general equitable principles.
4.23 No Violation of Law. The execution, delivery, and performance of this
-------------------
Agreement by each Seller do not materially conflict with, violate, or constitute
a breach of or a default under, or result in the creation or imposition of any
lien, claim, or encumbrance of any kind upon, any of his Tough Truck and
Accessories, Inc. d/b/a "Armor Linings" Shares being sold pursuant to this
Agreement.
4.24 Brokers and Finders. No person has acted on the behalf of the Seller
-------------------
or the Company in connection with any negotiations relative to this Agreement
and the transactions contemplated by this Agreement.
-8-
<PAGE>
5
AIII'S REPRESENTATIONS AND WARRANTIES
-------------------------------------
AIII represents and warrants to the Transferors that:
5.0 Organization and Corporate Status of AIII. AIII is a corporation duly
-----------------------------------------
organized, validly existing, and in good standing under the laws of the State of
Nevada, and is duly licensed, qualified to do business, and in good standing in
each jurisdiction in which such qualification is necessary, and has all
corporate power and authority and has satisfied all Legal Requirements necessary
to own and operate its properties and to carry on its business as presently
conducted.
5.1 Power and Authority of AIII. The execution, delivery, and performance
---------------------------
by AIII of this Agreement are within the requisite corporate power and authority
of AIII and have been duly authorized and approved by all necessary parties,
including, without limitation, the Board of Directors of AIII.
5.2 Enforceability. This Agreement, when duly executed and delivered in
--------------
accordance with its terms, will constitute the legal, valid, and binding
obligation of AIII in accordance with its terms, except as may be limited by
bankruptcy, insolvency, and other similar laws affecting creditors' rights
generally and by general equitable principles.
5.3 Brokers and Finders. No person acted on behalf of AIII in connection
-------------------
with any negotiations relative to this Agreement and the transactions
contemplated by it, and such negotiations have been carried on by AIII without
the intervention of any person acting on behalf of AIII in such a manner as to
give rise to any valid claim for a brokerage commission, finder's fee, or other
like payment.
6
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SELLERS
------------------------------------------------------
6.0 Each and every obligation of the Transferors under this Agreement to
be performed on or before the Closing shall be subject to the satisfaction, on
or before the Closing, of each of the conditions contained in of this Article
10.
6.1 Representations and Warranties. Each of the representations and
------------------------------
warranties of AIII set forth in this Agreement shall be true and correct, both
on the Effective Date and on the Closing as if made at that time.
6.2 Agreements and Obligations. AIII shall have performed and complied
--------------------------
with all agreements, undertakings, and obligations which are required to be
performed or complied with by it at or before the Closing.
6.3 Legal Matters. All legal matters in connection with this Agreement and
-------------
the transactions it contemplates, and the form and substance of all papers,
instruments, and documents used or delivered under this Agreement or incidental
to this Agreement, shall be reasonably satisfactory to the Transferors.
-9-
<PAGE>
6.4 No Governmental or Other Proceedings. No action, suit, proceeding or
------------------------------------
investigation by or before any court or governmental, administrative or
regulatory authority shall have been commenced or threatened against any
Company, AIII or the Sellers seeking to restrain, prevent or change the
transactions contemplated by this Agreement or questioning the validity or
legality of the transactions or seeking damages in connection with the
transactions.
6.5 No Material Adverse Change. There shall be no material adverse change
--------------------------
since the Effective Date in the business, condition (financial or otherwise),
assets, liabilities (absolute, accrued, contingent or otherwise), prospects or
operations of AIII.
7
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
-----------------------------------------------------
7.0 Nature of Statements. All statements contained in this Agreement, in
--------------------
any annex, exhibit, or any certificate or other instrument delivered by or on
behalf of the Sellers or AIII pursuant to this Agreement, or in connection with
the transactions it contemplates, shall be considered the representations and
warranties of the Sellers or AIII, as the case may be. No investigation by any
party nor failure by any party, to make any investigation, shall constitute a
waiver of any representation, warranty, covenant, or agreement of any party, nor
relieve the other party of any obligation with respect to the accuracy or
fulfillment thereof.
8
INDEMNIFICATION
---------------
8.0 Indemnification by the Sellers. Sellers individually hereby indemnify
------------------------------
and hold harmless AIII and its respective successors and assigns from and
against any taxes, claims, liabilities, damages, losses, costs, and expenses,
including, without limitation, reasonable legal fees, accountants' fees, costs
of investigation, and other expenses of defending any action or claim, amounts
of judgment and amounts paid in settlement, together with interest thereon at
the rate of ten percent (10%) per year, compounded annually from the date
incurred until paid, caused by or arising out of: (i) any breach or default in
the performance by him of any covenant or agreement of such Sellers contained in
this Agreement, or (ii) any breach of warranty or inaccurate or erroneous
representation made by him in this Agreement, in any annex, exhibit, or any
other document delivered by or on behalf of the Sellers pursuant to this
Agreement.
8.1 Conditions of Indemnification. With respect to any actual or potential
-----------------------------
claim, any demand, the commencement of any action, or the occurrence of any
other event which involves any matter or related series of matters (a "Claim")
against which a party (the "Indemnified Party") is indemnified by another party
(the "indemnifying party") under section 8.1.1 or 8.1.2:
8.1.1 Notice. Promptly after the Indemnified Party first receives
------
documents pertaining to the Claim, or if such Claim does not involve a third
party Claim, promptly after the Indemnified Party first has actual knowledge of
the Claim, the Indemnified Party shall give notice to the Indemnifying Party of
the Claim in reasonable detail and stating the amount involved, if known,
together with copies of any such documents.
-10-
<PAGE>
8.1.2 Failure to Give Notice. The Indemnifying Party shall have no
----------------------
obligation to indemnify the Indemnified Party with respect to any Claim if (i)
the Indemnified Party fails to give the notice of the Claim in accordance with
section 8.1.1 or (ii) the notice of the Claim is not given on or before the
first anniversary of the Closing; however, such limitation shall not apply to
any Claim based upon or arising out of willful concealment or willful
misconduct.
8.2 Litigation, Settlement, Resolution of Claim. If the Claim involves
-------------------------------------------
a third party, then the Indemnifying Party may, at its sole cost, expense and
ultimate liability regardless of the outcome, and through counsel of its choice,
litigate, defend, settle or otherwise attempt to resolve the Claim, except that
the Indemnified Party may elect, at any time and at the Indemnified Party's sole
cost, expense and ultimate liability, regardless of the outcome, and through
counsel of its choice, litigate, defend, settle or otherwise attempt to resolve
the Claim. If the Indemnified Party so elects (for reasons other than the
Indemnifying Party's failure or refusal to provide a defense to the Claim), then
the Indemnifying Party shall have no obligation to indemnify the Indemnified
Party with respect to the Claim, but such disposition will be without prejudice
to any other right the Indemnified Party may have to indemnification, regardless
of the outcome of the Claim. In any event, AIII and the Transferors shall fully
cooperate with each other and their respective counsel at their own expense in
connection with any such litigation, defense, settlement or other attempted
resolution.
9
MISCELLANEOUS
-------------
9.0 Construction. The section headings contained in this Agreement are for
------------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever required by the context, any gender
shall include any other gender, the singular shall include the plural, and the
plural shall include the singular.
9.1 Costs, Expenses, and Legal Fees. Each party shall bear its own costs
-------------------------------
and expenses pertaining to the negotiation, preparation and execution of this
Agreement and the consummation of the transactions it contemplates.
9.2 Announcements, Press Releases, and Disclosure. Any press release or
---------------------------------------------
other public announcement concerning this Agreement or the transactions it
contemplates shall be approved by both the Sellers and AIII. In addition, no
party shall disclose the existence of this Agreement or the transactions it
contemplates before the Closing, except as may be necessary to comply with any
Legal Requirement.
9.3 Notice. Any notice required or permitted under this Agreement shall
------
be in writing and shall be considered to be delivered three business days after
deposit in the United States mail, postage prepaid, certified or registered
mail, return receipt requested, addressed as follows:
9.3.1 If to AIII, to it at 601 Hanson Road, Kemah, Houston, Texas
77565-2701, Attention: Mr. John Stump; or
-11-
<PAGE>
9.3.2 If to the Transferor: to it at 3318 Mercer Road, Houston,
Texas, 77027-6020
Attention: Clarence F. Kendall, II
9.3.3 Notice given in any other manner shall be effective when
received by the addressee. The address for notice may be
changed by notice given in accordance with this section 9.3.
9.4 Entire Agreement, Amendment. This Agreement and its annexes and
---------------------------
exhibits constitute the entire agreement between the parties and may not be
amended, supplemented, waived, or terminated except by an instrument executed by
all of the parties. Any previous agreements or understandings among the parties
regarding the subject matter of this Agreement are merged into and superseded by
this Agreement.
9.5 Waiver. No waiver of any provision of this Agreement shall constitute
------
a waiver of any other provision of this Agreement, nor shall such waiver
constitute a waiver of any subsequent breach of the provision.
9.6 Assignment. This Agreement shall not be assignable. Any attempted
----------
assignment shall be null and void.
9.7 Choice of Law. The validity, construction and enforcement of this
-------------
Agreement shall be governed by the laws of the State of Texas.
9.8 Arbitration. If any dispute, difference, or disagreement shall
-----------
arise upon or in respect of the Agreement, and its meaning and construction,
every such dispute, difference, and disagreement shall be referred to a single
arbiter sitting in Houston, Texas, agreed upon by the parties, or if no single
arbiter can be agreed upon, an arbiter or arbiters shall be selected in
accordance with the rules of the American Arbitration Association and such
dispute, difference, or disagreement shall be settled by arbitration in
accordance with the then prevailing commercial rules of the American Arbitration
Association, and judgment upon the award rendered by the arbiter may be entered
in any court having jurisdiction. In the event of such arbitration, the
prevailing party shall be entitled to reasonable legal fees to be fixed by the
arbitrator.
9.9 Severability. If any provision of this Agreement is declared
------------
unenforceable by a court of competent jurisdiction, such provision shall be
enforced to the greatest extent permitted by law, and such declaration shall not
affect the validity of any other provision of this Agreement.
10.10 Time for Performance. If the time for performance of any obligation
--------------------
set forth in this Agreement falls on a Saturday, Sunday or legal holiday,
compliance with the obligation on the next business day following such Saturday,
Sunday, or legal holiday shall be considered acceptable.
10.11 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be considered an original, but all of which
shall be considered one instrument.
-12-
<PAGE>
10.12 Confidentiality. Each party to this Agreement shall keep all
---------------
information obtained from the other parties as a result of its due diligence
investigation confidential. No party shall release such confidential information
without the consent of the other.
IN WITNESS WHEREOF, this Agreement has been executed as of the Effective Date
set out on page one (1).
AMERICAN INTERNATIONAL INDUSTRIES, INC.
By: _______________________________
John W. Stump, III
It's: Chief Financial Officer
-----------------------
Tough Trucks and Accessories, Inc. d/b/a/ "Armor Linings"
By: _______________________________
Rod K. Lovett, Shareholder
By: _______________________________
John Raymond Winkler, Shareholder
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 2,149,916 644,941
<SECURITIES> 534,654 1,431,262
<RECEIVABLES> 1,641,469 3,908,030
<ALLOWANCES> 179,000 117,000
<INVENTORY> 1,055,091 1,241,645
<CURRENT-ASSETS> 5,639,316 7,691,929
<PP&E> 5,060,372 4,995,310
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 13,568,181 17,473,279
<CURRENT-LIABILITIES> 3,675,858 6,693,348
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 13,568,181 17,173,279
<SALES> 10,213,039 9,913,885
<TOTAL-REVENUES> 10,213,039 9,913,885
<CGS> 8,120,515 8,006,668
<TOTAL-COSTS> 8,120,515 8,006,668
<OTHER-EXPENSES> 3,113,504 2,876,136
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104,044 204,322
<INCOME-PRETAX> (944,777) (164,646)
<INCOME-TAX> (298,804) 0
<INCOME-CONTINUING> (645,973) (164,646)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (645,973) (164,646)
<EPS-BASIC> (.03) 0
<EPS-DILUTED> (.03) 0
</TABLE>
