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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment to
FORM 10-KSB
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[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
AMERICAN INTERNATIONAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-25223
Nevada 88-0326480
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
601 Cien Street, Suite 235 77565
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(Address of Principal Executive Office) (Zip Code)
281-334-9479
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ ] No [ X ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the 12 months ended December 31, 1998 were $10,213,039.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price quoted by the National Quotation Bureau
on November 30, 1999 was $4,459,450. As of November 30, 1999 registrant had
124,182,018 shares of Common Stock outstanding.
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PART I
All references to American International Industries, Inc. common stock
reflect a three for one common stock split effective July 1996.
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), and
. 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.).
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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 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 March 15, 1999, the Company, excluding its subsidiaries,
employed seven 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.
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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.
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
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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.
Recent Developments
Between November 1998 and January 1999, Acqueren and Erick Friedman, a
Company director, purchased an aggregate of 103,000 shares of Hertz Technology
Group, Inc. ("Hertz") representing approximately 9.7% of Hertz's outstanding
common stock for an aggregate purchase price of $177,131. Hertz operates the
following subsidiaries:
. Hergo Ergonomic Support Systems, Inc., which designs,
manufactures, and sells ergonomically engineered, modular
racking systems, enclosures, and technical furniture for PC's
and Internet related equipment.
. Hertz Computer Corporation, which custom designs and
manufactures PC's under the HERTZ label and provides contract
manufacturing and OEM support.
. Hertz Information Systems, Inc., which provides comprehensive
technical support including outsourcing, networking,
communications and Internet related services.
. Edutec, Inc., which offers advanced, state-of-the-art computer
and Internet training facilities for short and long-term
rentals.
The Company has discussed possible business combinations with Hertz,
but to date no agreements have been reached and there can be no assurance that
any agreement will be reached regarding any business combination in the future.
Effective January 1999, the Company purchased all of the capital stock
of Marald, Inc., doing business as Unlimited Coatings (UC), 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 has agreed to provide chemicals at a discount
to Toro Spray-On Liners, Inc. an entity partially owned by the above related
party. UC, headquartered in Houston, Texas distributes specialty chemicals to
the automotive after-market and is best known for its spray-on bed-liners for
trucks. UC's products, are marketed under the "Toro Liner" name. UC also markets
specialty chemicals, including rustproofing, undercoating, fabric protectants,
fuel additives, and performances enhancement chemicals related to the automotive
after-market. The UC acquisition has been accounted for as a purchase.
In March 1999, the Company acquired 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 was 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 are 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.
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.
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
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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 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
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As of March 15, 1999, Har-Whit employed 30 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 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.
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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.
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 March 15, 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.
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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.
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
8
<PAGE>
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 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
9
<PAGE>
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 March 15, 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 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.
10
<PAGE>
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.
11
<PAGE>
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.
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
12
<PAGE>
As of March 15, 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.
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.
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.
13
<PAGE>
Item 2. Description of Property
The Company operates Brenham and TRE from its office in Kemah, Texas.
This office is owned by a party affiliated with the Company and to date the
Company has not paid rent for the use of the office; however, commencing
April 1999, the Company entered a one-year lease at a monthly rental rate of
$500. 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.," for a description of
properties for Har-Whit, NPI, and CRC. 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
14
<PAGE>
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
<TABLE>
<S> <C>
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
Main St. and Ruth St., Houston, Harris County, 4,410 sq. ft., N.E. Corner of Fannin
County, Texas ($71,000 property tax) and Blodgett, Houston, Harris
Texas ($56,000 property tax)
22,248 sq. ft., N.E. Corner Almeda and
Riverside Dr., Houston, Harris County,
Texas ($37,000 of property tax)
</TABLE>
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
<PAGE>
PART II
Item 5. Market for Common Equity and Related 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.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
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
</TABLE>
On April 11, 1999, the last bid price of the Common Stock as
reported by the OTC Electronic Bulletin Board was $0.25. The Company believes
that as of March 31, 1999, there were approximately 218 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.
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
December 31, 1998, 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.
16
<PAGE>
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 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
17
<PAGE>
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 purchase
2,000,000 shares of Common Stock to the CEO of the Company at an
exercise price of $0.12 per share.
18
<PAGE>
(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.
The Company believes transactions in (6) through (14) 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.
19
<PAGE>
The Company believes transactions in (17) through (20) 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 6. Management's Discussion and Analysis
General
The Company is a holding company, which currently has five 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. The acquisitions of
Har-Whit, Acqueren, and CRC, 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
20
<PAGE>
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.
Restatement of Prior Periods
The Company's financial statements as of and for the years ended
December 31, 1997 and 1998 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 sale and natural gas and mineral interests at
the seller's historical carry-over cost. The effects of the restatement are
described in Note 17 to the Company's consolidated financial statements.
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.
21
<PAGE>
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 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. Deemed dividends of $2,038,038 were recorded for 1998 and $1,875,000
was recorded in 1997. 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.
22
<PAGE>
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. 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
23
<PAGE>
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. 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.
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.
24
<PAGE>
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.
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
25
<PAGE>
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.
Item 7. Consolidated Financial Statements
See Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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 on January 26, 1998.
Prior to the appointment of BDO Seidman, LLP as auditors of the Company, KPMG,
LLP ("KPMG") audited the financial statements of Har-Whit, Inc. ("Har-Whit") and
Pitt's and Spitt's, Inc. ("P&S") as of and 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 consolidated balance sheet of
Pitt's and Spitt's of Texas, Inc. ("PST") as of October 13, 1996. Unqualified
audit opinions were issued for each of those audits. 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 above
should not be relied upon for any period. The board of directors of the Company
did not discuss the misstatement with KPMG. 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 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.
During 1997 and prior to the change in control and BDO Seidman, LLP's
appointment as auditors of the Company as discussed in the preceding paragraph,
KPMG declined to provide further services to the Company.
Upon appointment of current management, accounting records were
updated and reconstructed to enable BDO Seidman, LLP to conduct their audits of
the Company for 1997 and subsequent periods.
26
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information appearing under the heading
"Election of Directors" of the Company's 1999 Proxy Statement, which information
is hereby incorporated by reference.
27
<PAGE>
Item 10. Executive Compensation
Reference is made to the information appearing under the headings
"Executive Compensation" and "Employment Agreements" of the Company's 1999 Proxy
Statement, which information is hereby incorporated by reference.
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information appearing under the heading
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's 1999 Proxy Statement, which information is hereby incorporated by
reference.
29
<PAGE>
Item 12. Certain Relationships and Related Transactions
Reference is made to the information appearing under the heading
"Certain Relationships and Related Transactions" of the Company's 1999 Proxy
Statement, which information is hereby incorporated by reference.
30
<PAGE>
Item 13. Exhibits and Reports on Form 8-k
(a) 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(5) 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 previously on registration statement Form 10-SB/A (second
amendment) File No. 000-25223.
(5) Filed herewith.
(b) There have been no reports filed on Form 8-K.
31
<PAGE>
SIGNATURES
----------
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
American International Industries, Inc.
By /s/ Daniel Dror
---------------------------------------
Daniel Dror, President, Chief Executive
Officer and Director
___________________________
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Daniel Dror Chairman of the Board December 21, 1999
- -------------------------
Daniel Dror and Chief Executive Officer
/s/ William Dartmouth Director December 21, 1999
- --------------------------
William Dartmouth
/s/ Erick Friedman Director December 21, 1999
- ---------------------------
Erick Friedman
32
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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-28
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 17, 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
Note 17 to which date is
October 25, 1999
F-2
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---------- ----------
(Restated- (Restated-
Note 17) Note 17)
Assets
<S> <C> <C>
Current assets:
Cash (Note 8)................................................... $ 62,991 $ 2,149,916
Trading securities (Note 4)..................................... - 418,770
Securities available-for-sale (Note 4).......................... - 115,884
Accounts receivable, net of allowance for doubtful accounts
of $19,000 and $179,000, respectively (Note 8)............... 253,553 1,641,469
Notes receivable (Note 14)...................................... - 116,190
Inventories, net of reserve of $62,682 in 1998 (Notes 5 and 8).. 180,022 1,055,091
Other........................................................... 46,160 141,996
---------- -----------
Total current assets............................................ 542,726 5,639,316
Real estate held for sale (Note 6).................................. 408,700 1,239,584
Property and equipment, net of accumulated
depreciation (Notes 7 and 8)..................................... 1,335,713 5,060,372
Goodwill, net of amortization of $0 and $32,297, respectively
(Note 3)......................................................... - 1,085,616
Non-compete agreements, net of amortization of
$125,000 and $232,500, respectively................................ 375,000 417,500
Other............................................................... 20,942 125,793
---------- -----------
Total assets....................................................... $2,683,081 $13,568,181
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---------- ----------
(Restated- (Restated-
Note 17) Note 17)
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Accounts payable................................................ $ 87,085 $ 1,451,717
Accrued expenses (Note 13)...................................... 29,412 481,227
Margin loan from a financial institution (Note 4)............... - 195,645
Accrued property taxes.......................................... - 386,601
Note payable, current portion (Note 8).......................... 72,962 116,144
Notes payable to related parties, current portion (Note 9)...... - 459,972
Capital lease obligations, current portion (Note 10)............ 9,174 584,552
---------- ----------
Total current liabilities..................................... 198,633 3,675,858
Notes payable, less current portion (Note 8)..................... 571,916 1,599,909
Notes payable to related parties, less current portion (Note 9).. - 320,324
Capital lease obligations, less current portion (Note 10)........ - 776,388
Deferred tax liability (Note 12)................................. 298,804 -
---------- ----------
Total liabilities............................................. 1,069,353 6,372,479
---------- ----------
Commitments and Contingencies (Notes 3 and 13)
Stockholders' Equity:
Preferred stock $.001 par value;
10,000,000 shares authorized,
none issued (Note 11)......................................... - -
Common stock, $.001 par value,
200,000,000 shares authorized (Note 11)....................... 46,117 121,116
Additional paid-in capital...................................... 4,540,482 15,726,799
Deficit......................................................... (2,972,871) (8,045,998)
---------- ----------
1,613,728 7,801,917
Less: Common stock subscriptions receivable..................... - (550,000)
Treasury stock, at cost, 238,000 shares in 1998.................. - (37,251)
Accumulated other comprehensive loss (Note 4).................... - (18,964)
---------- ----------
Total stockholders' equity.................................... 1,613,728 7,195,702
---------- ----------
Total liabilities and stockholders' equity....................... $ 2,683,081 $13,568,181
========== ==========
</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
December 31,
--------------------------
1997 1998
------------ ------------
(Restated -
Note 17)
<S> <C> <C>
Net sales............................................. $ 2,501,860 $10,213,039
Cost of sales......................................... 1,635,855 8,120,515
----------- -----------
Gross profit.......................................... 866,005 2,092,524
Operating expenses.................................... 1,674,172 3,113,504
----------- -----------
Operating loss........................................ (808,167) (1,020,980)
Other income (expense):
Interest expense (Note 9)............................ (63,908) (104,044)
Interest income...................................... - 45,936
Investment income, net (Note 4)...................... - 129,034
Other................................................ 2,048 5,277
----------- -----------
(61,860) 76,203
----------- -----------
Net loss before income tax benefit.................... (870,027) (944,777)
Deferred income tax benefit (Note 12)................. - (298,804)
----------- -----------
Net loss before deemed dividends...................... (870,027) (645,973)
Deemed dividends (Notes 3 and 6)...................... (1,875,000) (2,038,038)
----------- -----------
Net loss applicable to common stockholders............ $(2,745,027) $(2,684,011)
=========== ===========
Net loss per common share - basic and diluted......... $ (.19) $ (.03)
=========== ===========
Weighted average number of common shares outstanding.. 14,121,344 87,985,486
=========== ===========
Consolidated Statements of Comprehensive Loss
Net loss.............................................. $ (870,027) $ (645,973)
Other comprehensive items:
Unrealized gain (loss) on shares available-for-sale.. - (18,964)
----------- -----------
Comprehensive loss.................................... $ (870,027) $ (664,937)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in
For the years ended December 31, 1997 and 1998 Shares Amount Capital
------------ -------- -----------
(as restated - Note 17)
<S> <C> <C> <C>
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 11).................. 1,400,000 1,400 68,600
Other assets (Note 11)......................... 200,000 200 39,800
Sale of shares for cash (Note 11)............... 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 11)................ 1,000,000 1,000 110,700
Sale of shares for cash (Note 11)............... 15,160,000 15,160 2,308,340
Exercise of stock options (Note 11)............. 2,500,000 2,500 51,500
Common stock subscribed (Note 11)............... 4,000,000 4,000 546,000
Treasury stock acquired......................... - - -
Stock Dividend Issued (Note 11)................. 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
=========== ======== ===========
</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
============= ============= ============= ============= =============
</TABLE>
The 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
December 31,
--------------------------
1997 1998
------------ ------------
(Restated -
Note 17)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(870,027) $ (645,973)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 194,107 428,588
Common stock issued for services.................... 70,000 111,700
Inventory reserve................................... - 62,682
Loss on disposal of equipment....................... - 21,994
Deferred tax benefit................................ - (298,804)
Realized gain on sale of securities................. - (91,135)
Increase in market value of equity securities....... - (37,899)
Changes in assets and liabilities:
Accounts receivable................................ 125,109 1,244,635
Inventories........................................ (3,360) 158,777
Other current assets............................... (6,160) 27,595
Purchase of trading securities, net................ - (94,091)
Other assets....................................... - (125,793)
Accounts payable and accruals...................... (187,951) (1,474,453)
Accrued property taxes............................. - 86,601
--------- -----------
Net cash used in operating activities.................. (678,282) (625,576)
--------- -----------
Cash flows from investing activities:
Purchase of available-for-sale investment securities.. - (134,848)
Capital expenditures.................................. (26,262) (170,309)
Purchase of real estate properties.................... - (167,922)
Notes receivable...................................... - (116,190)
Proceeds from disposition of assets................... - 25,000
Cash received in acquisitions......................... - 1,036,242
--------- -----------
Net cash provided by (used in) investing activities.... (26,262) 471,973
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock....................... 403,456 2,377,500
Proceeds from notes payable........................... 644,878 121,467
Repayments of notes payable........................... (333,952) (83,527)
Principal payments on capital lease obligations....... (6,106) (137,661)
Purchase of treasury stock............................ - (37,251)
--------- -----------
Net cash provided by financing activities.............. 708,276 2,240,528
--------- -----------
Net increase in cash................................... 3,732 2,086,925
Cash, beginning of period.............................. 59,259 62,991
--------- -----------
Cash, end of period.................................... $ 62,991 $ 2,149,916
========= ===========
</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
December 31,
-------------------------
1997 1998
----------- ------------
(Restated -
Note 17)
<S> <C> <C>
Supplemental Cash Flow Information:
Interest paid........................................... $ 62,635 $ 72,941
Non-Cash Transactions:
Acquisition of land for common stock.................... $ 225,000 $ 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
Net purchases of securities on margin................... $ - $ 195,645
Issuance of note payable in acquisition................. $ - $ (303,300)
Subscriptions of common stock........................... $ - $ 550,000
Deemed Dividend......................................... $1,875,000 $2,038,038
</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.
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.
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.
Available-for-Sale
Changes in market value of investments in equity securities available-for-
sale are included as a component of stockholders' equity.
F-10
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Real estate held for sale - Real estate held for sale is carried at the
-------------------------
lower of cost, predecessor carryover historical cost basis or fair market value,
net of selling costs.
Management assesses the value of real estate held for sale on a quarterly
and annual basis to determine if any impairment to this net realizable value has
occurred. Management closely monitors any changes in the real estate market
which would indicate that a change in the value of its holdings has occurred and
also obtains independent third party appraisals on its holdings on an as-needed
basis.
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.
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, 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 and
7,720,000 shares of common stock at December 31, 1997 and 1998, respectively,
and subscriptions to purchase 4,000,000 shares of common stock at December 31,
1998.
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
11).
F-11
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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................... $ - $ 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.
F-12
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (See Note 13).
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 December 31, 1998,
7,173,059 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.
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
========== ==========
</TABLE>
F-13
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Acqueren CRC
----------- -----------
<S> <C> <C>
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>
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, the Company recognized a $37,899 net increase in the market value of
such equity securities as a component of net loss. As of December 31, 1998, the
Company had borrowed $195,645 from a margin account with a financial
institution.
As of December 31, 1998, the trading securities and related call options
are summarized below.
<TABLE>
<CAPTION>
Security Options
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>
F-14
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 5 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
-------------------------
<S> <C> <C>
Raw materials.................................................... $ 44,125 $ 8,683
Work-in-process.................................................. 102,489 169,618
Finished goods................................................... 33,408 806,790
------------ -----------
$ 180,022 $ 1,055,091
============ ===========
</TABLE>
NOTE 6 - REAL ESTATE HELD FOR SALE
Real estate held for sale includes the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
-------------------------
<S> <C> <C>
286 undeveloped acres on Galveston Bay, Texas (Note 3)........... $ 225,000 $ 225,000
42.6 undeveloped acres of land in Southeast Houston, Texas and
commercial properties in Harris County, Texas/(1)/.............. - 486,390
736 undeveloped acres of land in Anahuac, Texas/(2)/............. - 176,572
23 acres of undeveloped land in Harris County, Texas............. - 164,800
Other properties................................................. 183,700 186,822
---------- -----------
$ 408,700 $ 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 $400,000 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 1997 and 1998.
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 1997 and 1998.
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,
-------------------------
Years 1997 1998
-------- ---------- -----------
<S> <C> <C> <C>
Land.................................................... $ 328,000 $ 386,812
Building and improvements............................... 20 665,246 876,466
Machinery and equipment................................. 8 404,117 5,144,632
Office equipment........................................ 7 29,735 403,640
Automobiles............................................. 5 25,800 93,900
---------- -----------
1,452,898 6,905,450
Less accumulated depreciation and amortization.......... (117,185) (1,845,078)
---------- -----------
Net property and equipment.............................. $1,335,713 $ 5,060,372
========== ===========
</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 - NOTES PAYABLE TO BANK
Notes payable to banks consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------
1997 1998
---------- ----------
<S> <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
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
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
Other notes payable.............................................. - 81,777
---------- ----------
644,876 1,716,053
Less current portion............................................. (72,962) (116,144)
---------- ----------
$ 571,916 $1,599,909
========== ==========
</TABLE>
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 the note payable totaling $1,000,000 was collateralized by $1,000,000
of restricted cash.
F-16
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Principal repayment provisions of long-term debt are as follows at December
31, 1998:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
1999................................................................. $ 116,144
2000................................................................. 1,061,721
2001................................................................. 63,125
2002................................................................. 90,565
2003................................................................. 384,498
------------
Total................................................................ $ 1,716,053
============
</TABLE>
NOTE 9 - 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, none of
which were outstanding at December 31, 1997:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <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
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
Note payable to officer of CRC, 8% per annum, due upon demand........ 196,225
------------
Total notes payable to related parties............................... 780,296
Less-current portion................................................. (459,972)
------------
Notes payable to related parties, long-term portion.................. $ 320,324
============
</TABLE>
Interest expense for the year ended December 31, 1998 on these related
party notes was approximately $15,000.
F-17
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
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
==========
</TABLE>
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, the Company was in violation of
certain financial ratios and has received a waiver for those violations from the
lessor through January, 2000.
NOTE 11 - 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.
F-18
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-19
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 and 1998
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Dividend yield............................... 0% 0%
Expected volatility.......................... 90% 90%
Risk free interest........................... 6.5% 6.5%
Expected lives............................... 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,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported................................. $(2,745,027) $(2,684,011)
Pro forma................................... $(2,755,027) $(2,828,211)
Loss per share:
As reported................................. $ (.19) $ (.03)
Pro forma................................... $ (.20) $ (.03)
</TABLE>
F-20
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options to employees as of
December 31, 1997, and 1998 and changes during the periods ending on those dates
is presented below:
<TABLE>
<CAPTION>
Weighted- Weighted
Average Average
Exercise Exercise
Price Price
December 31, December 31,
Shares 1997 Shares 1998
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period............... - $ - 1,000,000 $ .02
Granted.......................................... 1,000,000 .02 2,020,000 .12
--------- ------------ --------- ------------
Outstanding and exercisable at
end of period................................... 1,000,000 $ .02 3,020,000 $ .09
--------- ------------ --------- ------------
Weighted-average fair value of
options granted during the
period.......................................... 1,000,000 $ .01 2,020,000 $ .12
========= ============ ========= ============
</TABLE>
The following table summarizes information about fixed stock options to
employees outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Number Out- Remaining
standing and Contractual
Exercisable at Life (Years) at
Exercise December 31, December 31,
Price 1998 1998
--------- -------------- ---------------
<S> <C> <C>
$ .02 1,000,000 3.73
$ .12 2,000,000 4.37
$ .34 20,000 4.59
--------- -------------- ---------------
$ .02-.34 3,020,000 3.83
========= ============== ===============
</TABLE>
NOTE 12 - 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>
F-21
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
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 $ -
=========== ===========
</TABLE>
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 13 - 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.
F-22
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company advanced the Chief Executive Officer $27,190 as of December 31,
1998. 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.
Other related party transactions are discussed in Notes 3, 6, 9, 11 and 13.
F-23
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - 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
December 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net sales:
Industrial/Commercial................... $ 2,501,860 $ 8,907,617
Media/Entertainment..................... - 1,305,422
Oil and gas............................. - -
Real estate............................. - -
Corporate............................... - -
----------- -----------
Consolidated net sales................... $ 2,501,860 $10,213,039
----------- -----------
Income (loss) from operations:
Industrial/Commercial................... $ (161,250) $ 249,409
Media/Entertainment..................... - 192,215)
Oil and gas............................. - 63,763
Real estate............................. - (115,291)
Corporate............................... (646,917) (1,026,646)
----------- -----------
Consolidated operating loss.............. $ (808,167) $(1,020,980)
=========== ===========
</TABLE>
F-24
<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
============ ============ =========
</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 16 - SUBSEQUENT EVENTS (UNAUDITED)
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>
F-25
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 is to 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 are placed in escrow pending the completion of a business valuation of
Signal. The shares are to 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. To date the valuation has not been completed.
Since the restricted shares of common stock of the Company are held in escrow
and have not been issued to consummate this transaction, such shares are not
considered outstanding for purposes of EPS calculations.
F-26
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Line of Credit
In February 1999, CRC arranged a $200,000 working line of credit, with
interest at prime, due in February 2000. The line is secured by certain
investments of a related subsidiary.
NOTE 17 - RESTATEMENT OF PRIOR PERIODS
The Company's financial statements for the years ended December 31, 1997
and 1998, 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 effects of the restatements are as follows:
F-27
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Statement 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>
F-28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT 12-31-98 AND 97 STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS,
STOCKHOLDERS EQUITY AND CASH FLOWS FOR THE YEARS ENDED 12-31-98 AND 97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 2,149,916 62,991
<SECURITIES> 534,654 0
<RECEIVABLES> 1,936,659 272,553
<ALLOWANCES> (179,000) (19,000)
<INVENTORY> 1,055,091 180,022
<CURRENT-ASSETS> 5,639,316 542,726
<PP&E> 8,606,080 1,452,898
<DEPRECIATION> (3,545,126) (117,185)
<TOTAL-ASSETS> 13,568,181 2,683,081
<CURRENT-LIABILITIES> 3,675,858 198,633
<BONDS> 0 0
0 0
0 0
<COMMON> 121,116 46,117
<OTHER-SE> 7,074,586 1,567,611
<TOTAL-LIABILITY-AND-EQUITY> 13,568,181 2,683,081
<SALES> 10,213,039 2,501,860
<TOTAL-REVENUES> 10,213,039 2,501,860
<CGS> 8,120,515 1,635,855
<TOTAL-COSTS> 8,120,515 1,635,855
<OTHER-EXPENSES> 3,113,504 1,674,172
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104,044 63,908
<INCOME-PRETAX> (944,777) (870,027)
<INCOME-TAX> (298,804) 0
<INCOME-CONTINUING> (645,973) (870,027)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (645,973) (870,027)
<EPS-BASIC> (.03) (.19)
<EPS-DILUTED> (.03) (.19)
</TABLE>
