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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1999
[ ] 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
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Nevada 88-0326480
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
601 Cien Street, Suite 235 77565-3065
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(Address of Principal Executive Office) (Zip Code)
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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. [ ]
Issuer's revenues for the 12 months ended December 31, 1999 were $13,396,256.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the price on the pink sheets of the National Quotation
Bureau on August 1, 2000 was $6,737,671. As of June 30, 2000 registrant had
162,256,222 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-KSB 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:
o the success or failure of management's efforts to implement their business
strategy;
o the ability of the Company to raise sufficient capital to meet operating
requirements;
o the ability of the Company to protect its intellectual property rights;
o the ability of the Company to compete with major established companies;
o the effect of changing economic conditions;
o 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, and operates the following
subsidiaries:
o Har-Whit/Pitt's & Spitt's, Inc. (a manufacturer and distributor of barbeque
pits and a custom sheet metal fabricator)
o Brenham Oil & Gas, Inc. (an owner of an oil and gas royalty interest),
o 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.)
o Acqueren, Inc. (whose sole business operating entity is Northeastern
Plastics, Inc. which is a supplier of automotive after-market products and
consumer durables),
o Marald, Inc. d/b/a Unlimited Coatings (a distributor of specialty
chemicals, primarily used for spray-on bed-liners for truck beds, marketed
through a network of independent distributors),
o Tough Trucks & Accessories, Inc. d/b/a Armor Linings, a retail applicator
of spray-on truck bed liners and truck accessories.
o World Wide Net, Inc. (a separately trading public entity, WWNT, currently
inactive, having sold its wholly owned subsidiary, Modern Film Effects,
Inc. at October 1, 1999).
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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.
The Company currently operates from one facility in Kemah, Texas. Its
facility is 1,380 square feet and is leased for $1,335 month, expiring May 2004.
As of July 11, 2000, the Company, excluding its subsidiaries, employed eight
persons, on a full-time basis, none of which are covered by a collective
bargaining agreement.
HAR-WHIT/PITT'S & SPITT'S, INC.
In September 1996, prior to the 1997 Group gaining control of AIII, the
Company purchased all of the capital stock of Pitt's & Spitt's, Inc., a Texas
corporation, incorporated in December 1989, and Har-Whit, Inc., a Texas
corporation, incorporated in January 1975, for 2,527,000 shares of Common Stock
and $500,000 in exchange for non-compete agreements with the previous owners.
Messrs. Hartis and Whitworth, two of the prior owners of the above corporations
who served as directors for fiscal year 1998, each received 631,750 shares of
Common Stock and $250,000 in connection with the acquisitions. In August 1998,
Pitt's & Spitt's, Inc. was merged into Har-Whit, Inc., which subsequently
changed its name to Har-Whit/Pitt's & Spitt's, Inc. ("Har-Whit"). Har-Whit is
located at 14221 Eastex Freeway in Houston, Texas 77032. Its telephone number is
(281) 442-5013.
BRENHAM OIL & GAS, INC.
In December 1997, the Company purchased all of the capital stock of
Brenham Oil and Gas, Inc., a Texas corporation, incorporated in November 1997
("Brenham"), for 6,000,000 shares of Common Stock from Daniel
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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. Mr. Dror is no longer the
trustee of the trust. 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 St., 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 ("TREE"), 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. TREE and GCA are collectively
referred to as TREE. In May 1998, the Company through TREE 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.
Mr. Dror is no longer affiliated with the company. In June 1998, the Company
through TREE 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 TREE, GCA,
Midtowne, 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. TREE is located at 601 Cien St., 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. 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.
MARALD, INC.
Effective January 1999, the Company purchased all of the capital stock
of Marald, Inc., doing business as Unlimited Coatings ("Unlimited"), 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. Unlimited, headquartered in Houston, Texas distributes specialty
chemicals to the automotive after-market and is best known for its spray-on
bed-liners for trucks. Unlimited products are marketed under the "Toro Liner"
name. Unlimited also markets specialty chemicals, including rust proofing,
undercoating, fabric protectants, fuel additives, and performance enhancement
chemicals related to the automotive after-market. The Unlimited acquisition has
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been accounted for as a purchase. The Company knows of no independent sources of
information regarding Unlimited's market. However, based on management's
knowledge of the industry, management believes Unlimited is the fourth largest
wholesaler of systems, training, and chemicals used for sprayed-on truck bed
linings. Management believes the industry leader is Rhino Liners, followed by
Linex and Ultimate Linings. Unlimited markets through participation in trade
shows and advertising in national trade magazines. Unlimited competes on the
basis of price, quality, and service. Unlimited is located at 1107-B Upland
Drive, Houston, Texas 77043. Its phone number is (713) 647-8676.
TOUGH TRUCKS & ACCESSORIES, INC.
In April 1999, the Company acquired 100% of the outstanding shares of
Tough Trucks & Accessories, Inc. d/b/a Armor Linings ("Armor"). Armor operates a
facility in Houston, for the application of spray-on liners for truck beds,
undercoating and rustproofing of vehicles, and wholesale and retail sales of
truck accessories. Customers include many of the Houston area auto and truck
dealerships. Armor has established commercial applications of the coatings,
which are applied for corrosion resistance and noise suppression in diverse
uses. A manufacturing company has Armor apply the lining to the inside of
housings for large turbine engines. Other applications include surfaces exposed
to corrosive materials in chemical and refining plants, lining the interior of
refuse containers (dumpsters), spraying floors and decks, and other applications
where a tough surface, resistant to corrosion, moisture and wear is needed. The
chemicals are supplied by Unlimited. The Company paid cash in the amount of
$143,000 and assumed approximately $85,000 related to certain equipment lease
obligations. The acquisition was accounted for as a purchase. Armor is located
at 1107-B Upland Drive, Houston, Texas 77043. Its phone number is
(713) 932-7667.
ACQUISITION OF WORLD WIDE NET, INC. COMMON STOCK
In May 1999, the Company purchased for investment purposes, 400,000
freely tradable shares (giving effect to a 1 for 5 reverse split) of World Wide
Net, Inc. (WWNT) for a total of $300,000, representing 20% of the total
outstanding common shares of WWNT. WWNT, an inactive public company with nominal
assets, is traded in the over-the-counter-bulletin-board (OTCBB). Of the total
of 400,000 freely tradable shares, approximately 367,000 have been sold, and an
additional 1,200 shares have been purchased, in several transactions. The
remaining 33,000 shares are categorized as trading securities and are accounted
for in accordance with SFAS No. 115. The fair market value of the unsold shares
at December 31, 1999 was $5,226. Unrealized losses amounted to $22,118 for the
three-month period ended December 31, 1999. Management determines the fair
market value of these shares based on quoted market prices as reflected on the
OTCBB. All sales of WWNT shares have been made in the open market to non-related
third parties. WWNT is located at 601 Cien St., Suite 235 in Kemah, Texas 77565.
Its telephone number is (281) 334-9479.
On September 12, 1999, the Company signed an agreement to acquire
3,100,000 newly issued, restricted, common shares of WWNT, constituting
approximately 60.8% of the then outstanding total of 5,100,000 common shares of
WWNT. The shares of WWNT were received by AIII in exchange for 100% of the
shares of Modern Film Effects, Inc. dba Cinema Research Corporation ("CRC").
Prior to the merger with CRC, WWNT had only nominal assets and no operations
during the three preceding years. Accordingly, the investment in WWNT was
recorded at the historical cost basis of CRC at the effective date of the
transaction. Since the purchase of the 3.1 million shares acquired in September
1999 resulted in majority ownership of WWNT, the Company consolidated WWNT as of
September 30, 1999.
RECENT DEVELOPMENTS
On June 28, 1999, the Company entered into a definitive agreement to
acquire 100% of the optical and digital title, special effects and the scan and
record operations of Pacific Title/ Mirage Studios ("Pac Title").
On September 29, 1999 the Company announced that it had discontinued
negotiations regarding the acquisition of the assets and operations of Pac
Title. Due to unforeseen circumstances the Company decided not to proceed with
the acquisition.
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BUSINESS OPERATIONS OF HAR-WHIT/PITT'S & SPITT'S, INC.
Har-Whit is (i) a manufacturer and seller of barbeque pits and
accessories, and (ii) a custom sheet metal and light structural fabrication
company specializing in stainless steel and aluminum. Har-Whit began selling
barbeque pits in 1983, and began its fabrication business in 1973.
PRODUCTS AND SERVICES
Har-Whit manufactures 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.
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.
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EMPLOYEES
As of August 1, 2000, Har-Whit employed 31 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:
o 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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o 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.
o 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.
o 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.
TREE and its wholly owned subsidiary Midtowne own nine tracts of land
in Harris, Chambers, and Galveston counties in Texas. See "Item 2. Description
of Property." TREE is operated from AIII's office in Kemah, Texas.
All the properties owned by TREE 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 TREE
will be able to compete in this market.
EMPLOYEES
As of August 1, 1999, TREE employed one person, its president, on a
full-time basis; all other operating functions are handled by the Company's
personnel.
REGULATION
TREE'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 TREE 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
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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 TREE. Various jurisdictions also require
inspection of properties by appropriate authorities, approval of sales
literature, disclosure to purchasers of specific information, bonding for
property improvements, approval of real estate contract forms and delivery to
purchasers of a report describing the property.
A number of states and localities have adopted laws and regulations
imposing environmental controls, disclosure rules and zoning restrictions which
have impacted the management, development, use, and/or sale of real estate. Such
laws and regulations tend to discourage sales and leasing activities and
mortgage lending with respect to some properties, and may therefore adversely
affect TREE. Failure of TREE 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 TREE 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 TREE. TREE'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 is currently distributed in
the automotive after-market and through well-established food and drug retail
channels.
NPI's consumer durable electrical products include flood light kits,
clamp on lamps, household extension cords, tri-tap extension cords, heavy-duty
extension cords, night-lights, and surge protection devices. All of NPI's
consumer durable electrical products are UL Listed.
Beginning in late 1996, management changed its business strategy, and
began to target what it believed to be the less competitive food and drug and
variety retail industry. By adding more food and drug related items such as
power strips, multiple outlet devices, cord sets, and night lights, NPI has been
able to enter the consumer durables market at such locations as Family Dollar
Stores, Bills Dollar Stores, and Dollar Tree Stores.
Currently, virtually all of NPI's products are manufactured overseas.
NPI's products are manufactured based on NPI's specifications and design. Since
1995, NPI has changed all but one of its overseas suppliers, and as a result
management believes it has been able to reduce purchasing costs and increase
product quality. Currently, NPI has no long-term agreements with any overseas or
domestic manufacturers for its products, but relies on management's personal
contacts with such manufacturers in renewing its present agreements. There is no
assurance that NPI will be able to renew its present agreements with
manufacturers on terms economically favorable to NPI, if at all. The inability
of NPI to renew its agreements on economically favorable terms would have a
material adverse effect on NPI.
NPI orders the materials for its principal products from the following
manufacturers: Apollo Wire and Cable supplies NPI's electrical cord sets;
Longqou Dongli Wire and Cable supplies NPI's booster cables; Rite Tech supplies
NPI's surge strips; and Dashing Electric supplies NPI's night lights. To date,
NPI has typically received
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<PAGE> 10
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 customer's place of business in the
United States. Under a turnkey 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 1999, 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.
COMPETITION
In the safety products category of the automotive after-market, of
which a substantial portion of NPI's products fall, NPI competes against a large
number of suppliers many of which have far greater financial resources than NPI.
In addition, management has seen little movement between suppliers at major
national retailers, and as such, NPI's ability to increase market share will be
limited. Management believes its primary competitors in the safety products
market include General Cable, Coleman Cable, East Penn, Champion, and many other
producers and importers. Based on current sales, management believes its market
share of this safety products category to be approximately 4%. There can be no
assurance that NPI will be able to successfully compete in this marketplace.
In the consumer durables electrical products market, NPI competes
against a large number of suppliers, many of which have far greater financial
resources than NPI. Management believes its primary competitors in the consumer
durables market include Pacific Electricord Company, Woods Wire, General Cable,
Coleman Cable, and various other producers. Based on current sales, management
believes its market share of the consumer durables electrical product market to
be approximately 1.4%. There can be no assurance that NPI will be able to
successfully compete in this marketplace.
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<PAGE> 11
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 July 11, 2000, 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 $3,395 month. 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 UNLIMITED COATINGS AND ARMOR LININGS
Unlimited is a wholesaler of sprayed-on systems, technology and
chemicals throughout the United States. Unlimited began its wholesale business
in November 1995. Armor is a retailer that applies a polyurethane sprayed-on
liners to truck beds and other products.
PRODUCTS AND SERVICES
Armor operates a facility in Houston, Texas for the application of
spray-on liners for truck beds, undercoating and rustproofing of vehicles, and
wholesale and retail sales of truck accessories. Armor has established
commercial applications of the coatings, which are applied for corrosion
resistance and noise suppression in diverse uses. Applications include surfaces
exposed to corrosive materials in chemical and refining plants, lining the
interior of refuse containers (dumpsters), spraying floors and decks, and other
applications where a tough surface, resistant to corrosion, moisture and wear is
needed. The chemicals are supplied by Unlimited.
Unlimited uses a two-component polyurethane formula that within minutes
of being sprayed into a truck bed, bonds directly to the metal thereby forming a
protective cushion between cargo and the truck bed. The bed liner also reduces
noise, prevents rust, mildew, corrosion, and prevents scratches and dings to the
surface of the truck bed. The bed liners are crack and abrasion resistant, yet
are flexible enough to expand and contract in extreme temperature conditions. In
addition, the bed liners are skid resistant and will not break down or corrode
when exposed to fertilizers and other corrosive chemicals. The bed liners come
in various colors, including but not limited to, black, blue, brown, burgundy,
green, and grey.
Unlimited's wholesale operation is in the business of selling the
sprayed-on polyurethane lining systems, technology, and chemicals. After the
initial sale of the system, Unlimited installs the system and trains the
purchaser to safely and properly operate and maintain the lining system. After
selling the system, Unlimited will typically continue to provide chemicals
necessary for operation.
Unlimited purchases the sprayed-on lining systems and chemicals from
Artlux, S.A., and typically receives shipments within 48 hours of request.
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<PAGE> 12
SALES AND MARKETING
Unlimited has recently begun to advertise nationally for its wholesale
operation in various trade publications, such as Body Shop Business, Truck
Accessories News, Sema News, Trucking Times, and Restyling. In addition,
Unlimited has, over the years, attended industry trade shows to market its
wholesale business. Currently, Armor retail operation does not advertise its
services except as in the Houston, Texas yellow pages, and relies primarily on
word of mouth from former customers and truck dealers in and around the Houston
area.
Unlimited currently has no marketing plan. Management believes its
ability to increase sales of its sprayed-on polyurethane lining systems,
technology and chemicals is dependent upon, among other items; its ability to
acquire smaller or equally sized companies in the same industry. In addition,
even if Unlimited is able to acquire competitors, there can be no assurance that
it will be successful in integrating the competitor into its business or that it
will provide added value.
COMPETITION
As the majority of Unlimited revenues are generated from the wholesale
operation, it competes primarily on a national level. Its current competitors
include Rhino Liners, TOFF Liners, Linex, and Ultimate Linings. Armor current
competitors include licensed distributors of products offered by Rhino Liners,
TOFF Liners, Linex and Ultimate Linings.
The Company knows of no independent sources of information regarding
Unlimited market. However, based on management's knowledge of the industry,
management believes Unlimited is the fourth largest wholesaler of systems,
training, and chemicals used for sprayed-on truck bed linings. Management
believes the industry leader is Rhino Liners, followed by Linex and Ultimate
Linings. Unlimited markets through participation in trade shows and advertising
in national trade magazines. Unlimited competes on the basis of price, quality,
and service.
As Armor is a retailer, it competes with other retailers in the
industry. The Company knows of no independent sources of information regarding
Armors' market. In addition, since Armor competes with numerous smaller
operations, management does not know Armors' competitive position in the
industry. Armor competes on the basis of price, quality, and service.
EMPLOYEES
As of August 1, 2000, Unlimited employed five persons, on a full-time
basis, including management, sales, and office employees. As of August 1, 2000,
Armor employed seven persons, on a full-time basis, including management, sales,
and office employees. No employees are covered by a collective bargaining
agreement. Management considers relations with its employees to be satisfactory.
FACILITIES
Unlimited and Armor currently operate from one location in Houston,
Texas, leased for approximately $3,400 per month. The facilities are
approximately 8,750 sq. ft. and the lease expires June 2003. Both companies
believe their present facility is adequate for their current needs.
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates Brenham and TREE from its office in Kemah, Texas.
See Item 1. Description of Business: "Business Operations of Har-Whit/Pitt's &
Spitt's, Inc.," "Business Operations of Acqueren, Inc.," "Business Operations of
Unlimited Coatings," "Business Operations of Armor Linings," and for a
description of properties for Har-Whit and NPI. 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 TREE, including
all properties owned by its wholly owned subsidiary Midtowne. 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. TREE holds undeveloped commercial properties
for sale, although management may pursue, without a
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<PAGE> 13
vote of shareholders, development opportunities it believes to be economically
favorable. At the present time TREE has no plans to develop any of its
properties.
PROPERTY DESCRIPTION AND LOCATION
o 286 acres, State Highway 146, Galveston County, Texas
o 736 acres, Anahuac, Chambers County, Texas
o 23 acres, North U.S. 59, Houston, Harris County, Texas
o 15 acres, North U.S. 59, Houston, Harris County, Texas
o 1 acre, Greens Road, Houston, Harris County, Texas
o 43 acres, Airport Boulevard, Houston, Harris County, Texas
o 17,346 sq. ft., S.E. Corner of South Main Street and Ruth Street, Houston,
Harris County, Texas
o 4,410 sq. ft., N.E. Corner of Fannin and Blodgett, Houston, Harris County,
Texas
o 22,248 sq. ft., N.E. Corner Almeda and Riverside Drive, Houston, Harris
County, Texas
In November 1998, Acqueren deposited $100,000 on behalf of TREE as earnest
money related to 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, TREE sold such option to unrelated third parties for $600,000,
realizing a gain on sale of $500,000.
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. On
August 17, 1999,TDA Industries, Inc. filed an action in the United District
Court in the Southern District of New York, alleging violations of various
securities laws, common law fraud, and breach of contract. In November, 1999 the
parties entered into a settlement agreement calling for the mutual release, with
prejudice, their respective lawsuits, TDA to forfeit its rights to 500,000 AIII
shares it had been entitled to as stock dividends, and for each party to deliver
to InterBank Capital Group 75,000 shares of AIII (total of 150,000 shares) for
its role in negotiating the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades under the symbol "EDII" on the
National Quotations Bureau Pink Sheets. The market for the Common Stock 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 National Quotation Bureau. These prices reflect inter-dealer
prices, without retail mark-ups, markdowns or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL 1998
First Quarter .21 .09
Second Quarter .64 .11
Third Quarter .48 .20
Fourth Quarter .27 .16
FISCAL 1999
First .33 .18
Second Quarter .34 .19
Third Quarter .24 .08
Fourth Quarter .11 .07
</TABLE>
On August 1, 2000, the last bid price of the Common Stock as reported
by the National Quotation Bureau was $0.076. The Company believes that as of
June 30, 2000, there were approximately 229 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 therefore, 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 August
1, 2000, for all securities the Company sold since the Company began current
operations in September 1996, without registration under the Act. There were no
underwriters in any of these transactions, nor were any sales commissions paid
thereon.
SECURITIES ISSUED FOR CASH
1. In September 1997, the Company issued 500,000 shares of Common Stock to a
current director of the Company at a purchase price of $0.10 per share. In
September 1997 and May 1998, the Company issued 5,000,000 shares
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<PAGE> 15
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. In January 2000, the Company issued 2,500,000 shares of
Common Stock to a director at an aggregate purchase price of $40,000. In
May 2000, the Company agreed to convert $250,000 of debt owed to Elk
International Corporation, Ltd. into 15,000,000 shares of Common Stock, and
additionally issued 15,000,000 shares of Common Stock for an aggregate of
$250,000, which has not been paid to date. In June 2000, the Company agreed
to issue Daniel Dror II Trust of 1998 10,000,000 shares of Common Stock for
an aggregate of $200,000.
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 fiscal year-end 1998, 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 fiscal year-end 1998.
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 affixed 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 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.
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<PAGE> 16
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 was 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 was 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 was
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 finder's 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.
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 office of the
Company as part of an employment agreement.
15. In January 1999, Ms. Laird-Ruthstrom was issued an option to purchase
45,000 shares of Common Stock at an exercise price of $0.02 per share for
services rendered, which were exercise in August 1999. In January 1999, the
Company issued Mr. Stump an option to purchase 100,000 shares of Common
Stock at an exercise price of $0.24 per share and in March 1999; the
Company issued an option to purchase 100,000 shares of Common
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<PAGE> 17
Stock at an exercise price of $0.19 per share for services rendered. In
October 1999, the Company canceled the above securities in exchange for the
cancellation of $9,262 in debt. In January 1999, an employee of the Company
was issued an option to purchase 15,000 shares of Common Stock at an
exercise price of $0.24 per share for services rendered. In November 1999,
Mr. Fields and Ms. Laird-Ruthstrom were each issued 200,000 and 50,000
shares of Common Stock, respectively, and three other employees were issued
an aggregate of 175,000 shares of Common Stock for services rendered.
The Company believes transactions in (6) through (15) 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.
16. 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.
17. 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.
18. 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, 1999, the Company had exchanged approximately 25,543,594
shares of Common Stock pursuant to the purchase agreement with the
remaining shares held by the Company until the Acqueren shares are
exchanged.
19. 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.
The Company believes transactions in (16) through (19) 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).
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company is a holding company, which currently has six wholly owned
operating subsidiaries and one majority-owned (consolidating) subsidiary.
Har-Whit is a manufacturer and distributor of barbeque pits and a custom sheet
metal fabricator. TREE owns certain undeveloped real estate in Harris, Galveston
and Chambers counties in Texas, some of which is held by its wholly owned
subsidiary, Midtowne. TREE 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 invests in marketable securities and
its wholly owned subsidiary, NPI. NPI is a supplier of automotive after-market
products and consumer durable goods. Unlimited distributes specialty chemicals
to the automotive after-market. Armor provides corrosion-resistant spray-on
liners for trucks beds and wholesale/retail truck accessories. WWNT is an
inactive public company held for future ventures. The acquisitions of Har-Whit,
Acqueren, and Unlimited and were accounted for using the purchase method of
accounting, whereby the purchase price of the acquisition was allocated based on
the fair market 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. TREE, Brenham and WWNT were
accounted for using the historical cost basis of the predecessor.
The historical financial statements of AIII include the acquisitions of
acquired companies as of the effective dates of the purchases and the results of
these companies subsequent to closing, as these transactions were accounted for
under the purchase method of accounting.
The Company intends to continue to grow through the acquisition of
companies, which can be acquired at reasonable earnings multiples and present
opportunity for growth and profitability through the application of improved
access to financing and management expertise afforded by synergistic
relationships with the holding company and the other companies in the AIII
group. Potential acquisitions are evaluated to determine that they would be
accretive to earnings and equity, that the projected growth in earnings and cash
flows are attainable and consistent with minimum expectations to yield desired
returns to investors, and that management is capable of guiding the growth of
operations, working in concert with others in the group to maximize opportunity.
The Company intends to grow through the acquisition of additional and
complimentary businesses and to expand its holdings in its various businesses.
The Company expects to face competition for acquisition candidates, which may
limit the number of acquisition opportunities and may lead to higher acquisition
prices. There can be no assurance that the Company will be able to identify,
acquire or manage profitably additional businesses or to integrate any acquired
businesses into the Company without substantial costs, delays or other
operational or financial problems. Further, acquisitions involve a number of
risks, including possible adverse effects on the Company's operating results,
diversion of management's attention, failure to retain key personnel of the
acquired business and risks associated with unanticipated events or liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The timing, size and
success of the Company's acquisition efforts and the associated capital
commitments cannot be readily predicted. The Company currently intends to
finance future acquisitions by using shares of its common stock and other forms
of financing as the consideration to be paid. In the event that the common stock
does not maintain a sufficient market value, or potential acquisition candidates
are otherwise unwilling to accept common stock as part of the consideration for
the sale of their businesses, the Company may be required to seek other forms of
financing in order to maintain its acquisition program. If the Company does not
have sufficient cash resources, its growth could be limited unless it is able to
obtain additional equity or debt financing.
As the Company's business strategy has been to acquire various
companies, it has collected excess cash to effect such acquisitions. The Company
has invested, at various times, a portion of its excess cash in investment
securities. The Company chooses stocks that it believes are undervalued, with
the expectation that they will rise in value. There is a risk that the value of
these investments will not rise as high as the Company expects, or will fall.
The Company only invests in liquid securities, in order to have immediate access
to its cash reserves.
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
17
<PAGE> 19
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, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
The net sales for the year ended December 31, 1999 were $13,396,256 as
compared to $8,907,617 for December 31, 1998. The 51% increase is primarily
attributable to inclusion of Unlimited and Armor sales since acquisition as well
as Acqueren's sales for a twelve-month period. Unlimited had sales of $2,008,924
for the twelve-month period since acquisition on January 1, 1999. Armor had
sales of $495,672 for the nine months since acquisition on April 1, 1999. NPI, a
wholly owned subsidiary of Acqueren, had sales of $8,905,001 for the year ended
December 31, 1999 as compared to $6,211,170 for the six-month period (since
acquisition) ended December 31, 1998. Har-Whit's sales for the year ended
December 31, 1999 were $1,986,659, a 26.3% decrease over the $2,696,447 reported
in the prior year. The decrease was due primarily to increased competition for
limited steel fabrication jobs due to slowing of growth in the energy field. No
other subsidiaries had sales during the year.
Cost of sales as a percentage of net sales for the year ended December
31, 1999, was approximately 82.2%, with gross margin of 17.8%, as compared to
approximately 79.5% cost of sales and 20.5% gross margin during the year ended
December 31, 1998. The change is the result of the inclusion of twelve-months of
operations for NPI, which sustained a gross margin of 10.5% in 1999.
Operating expenses for the year ended December 31, 1999 were
$4,358,557, as compared to $2,470,761 for 1998. This increase of 76.4% is
primarily the result of AIII corporate operating expenses of $2,048,787 in 1999
as compared to $918,246 in 1998. Accounting and auditing expenses for 1999
totaled approximately $850,000. Corporate expenses also included compensation of
the CEO of $132,000, employee compensation of $300,028, travel expenses of
$82,695 and other business acquisition expenses of $327,880. NPI operating
expenses were $836,813 in 1999 as compared to $504,775 for the six-month period
after acquisition in 1998. In their first year of operation in 1999, Unlimited
and Armor had operating expenses of $122,937 and $482,653, respectively. WWNT
had nominal expenses of $330.
Other income of $1,795,345 for 1999, included gain on sales of property
right of $500,000, investment income of $1,134,884, royalty income of $46,586
interest income of $82,264 and other income, net of $31,611. This compares to
total other income of $202,411 for 1998 which included investment income of
$91,135, interest income of $45,936, other income of $27,471 and unrealized
gains on sale of trading securities of $37,899. Other expenses of $960,441 for
1999 consisted of interest expense of $201,050 and unrealized loss on sale of
trading securities of $759,391. This compares to total other expenses of
$126,238 for 1998, which consisted of interest expense of $104,044 and loss on
sale of assets of $22,194. The Company's increased market initiatives resulted
in significant increase in realized and unrealized investment income and losses.
LOSS ON DISCONTINUED OPERATIONS
On October 1, 1999, WWNT sold all of its shares of CRC to Cinema
Investment Group, Inc. (Cinema) for $250,000 and assumption of liabilities of
$1,200,000. In accordance with generally accepted accounting principles, the
loss on disposal of CRC of $266,345 and the operating loss for the nine months
prior to the sale of $963,525 are shown as a $1,229,870 loss from discontinued
operations in 1999. Comparable reclassifications have been made for 1998.
NET LOSS AND COMPREHENSIVE LOSS
Consolidated net loss before deemed dividends for the year ended
December 31, 1999 was $2,365,680 as compared to $645,973 for 1998. The loss on
discontinued operations of CRC, as discussed above, accounted for 50.1% of the
loss. Unrealized losses on available-for-sale investments in equity securities
of $18,964 are included in comprehensive loss in 1998. There are no such losses
in 1999.
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES - AIII
Total assets at December 31, 1999, were $10,408,514, as compared
to$13,268,181 ($9,948,750 after a retroactive treatment of CRC net assets to a
single line item in 1998) at December 31, 1998, a decrease of 21.6%. The
decrease is primarily due to the sale of CRC. Acquisitions during 1999
(Unlimited, Armor and WWNT) yielded additional assets totaling $1,840,914;
however, CRC had total assets of $4,391,898 at December 31, 1998 and $3,766,131
at date of sale.
Total liabilities at December 31, 1999 were $4,725,405 as compared to
$6,372,479 ($3,053,048 after a retroactive treatment of CRC net assets to a
single line item in 1998) at December 31, 1998, and the decrease is the net
result of the sale of CRC.
At December 31, 1999, AIII's current working capital was $2,177,505 as
compared to $1,963,488 ($2,794,133, after a retroactive treatment of CRC net
assets to a single line item in 1998) at December 31, 1998. Cash flows during
1999 decreased by $373,599; the beginning cash balance of $1,012,995 at January
1, 1999 decreased to $639,336 at December 31, 1999.
Cash flows used by operating activities were $1,794,739 in 1999
compared to $585,873 in 1998. The increase in cash flows used in operating
activities were primarily the result of the purchase of trading securities in
the amount of $1,402,576 and a $442,239 increase in accounts receivable in 1999.
The increase in accounts receivable is due primarily to increased sales of NPI.
Inventories, prepaid expenses, and other assets decreased by $184,637, net of
amounts acquired, due primarily to increased volume for NPI and acquisition of
Unlimited and Armor. Accounts payable and accrued expenses increased by
$1,092,768 due to the volume of activity for NPI and acquisition of Unlimited
and Armor.
Cash flows provided by investing activities were $1,031,426 in 1999
compared to $817,312 used in 1998. This is primarily due to Acqueren's sale of
its available-for-sale securities in 1999.
Cash flows provided by financing activities were $389,714 in 1999
compared to $2,353,189 in 1998. This decrease is primarily due to a reduction in
the sale of stock for cash in 1998.
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, 1999, the Company was in violation of certain financial ratios
on it capital leases and has received a waiver for those violations from the
lessor.
The real estate portfolio owned by the Company is being marketed by
Real America Corporation, an experienced real estate brokerage firm having over
thirty years experience in the Houston, Texas real estate market. The Company
has been advised by Real America as well as by the independent appraisers of the
properties that in the present Houston real estate market the Company should
maximize the properties value. At the present time a number of offers have been
received on several of the properties with consideration far in excess of the
present book value of the properties and on one occasion, above the appraised
value. All of the properties have "For Sale" signs prominently displayed and are
actively being marketed. The Company, relying on reputable MAI appraisers and
having recently had all of the properties appraised, and fully aware of the
currently strong demand in the local market, is of the opinion that no
impairment of value exists. There is no assurance that the real estate market
will not downturn, and if such an event occurs, there is no assurance that the
Company will be able to realize these values.
As stated above, the Company has not recently sold any of its
properties because it believes that it has not received adequate offers on the
properties. The Company has not gathered information on comparable sales with
respect to all of its current properties, and as such, there is no assurance
that the Company's strategy will result in the Company successfully selling its
current properties for a gain well in excess of their currently carrying value.
This lack of comparable sales creates uncertainty as to the actual value of some
of the Company's properties, and may hinder the Company's ability to sell its
properties at a gain over their current carrying value. However, the
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<PAGE> 21
Company believes that its real estate properties are stated at the lower of cost
or market, and accordingly, there is no impairment adjustment required.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Company's financial statements commence on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This information was "previously reported," as defined in Rule 12b-2 of
the Securities Exchange Act of 1934.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Pursuant to the Company's Certificate of Incorporation and its By-Laws,
the members of the Board of Directors serve for one-year terms. The Company's
directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Daniel Dror, Sr. 60 Chairman of the Board, Chief Executive Officer
Erick Friedman 60 Director
John W. Stump III 56 Chief Financial Officer
Rebekah Laird-Ruthstrom 45 Secretary and Treasurer
</TABLE>
Daniel Dror, Sr. has served as chairman of the board and chief
executive officer of the Company since September 1997. From September 1993 until
April 1999, Mr. Dror has served as chairman of the board and chief executive
officer of Daniel Dror and Company, Inc. an investment and business management
company. From April 1994 to November 1996, Mr. Dror served as chairman of the
board and chief executive officer of Microtel International, Inc., a public
company in the telecommunication business. From 1982 until 1993, Mr. Dror served
as chairman of the board and chief executive officer of Kleer-Vu Industries,
Inc., a public company.
Erick Friedman has served as director of the Company since May 1998.
Since 1989, Mr. Friedman has been employed by Yale University School of Music as
a professor of music. Since 1968, Mr. Friedman has invested in various
companies.
John W. Stump III has served as chief financial officer of the Company
since August 1998. From December 1996 to October 1997, Mr. Stump served as chief
executive officer of Changes International. From April 1996 to December 1996,
Mr. Stump served as chief operating officer and chief financial officer of
Nutrition Resources, Inc. From February 1993 to April 1996, Mr. Stump served as
Acquisitions Analyst for Movie Gallery, Inc. Mr. Stump is a Certified Public
Accountant and has over twenty years of financial and accounting management
experience including public reporting and investor relations.
Rebekah Laird-Ruthstrom has served as secretary, treasurer, and
executive assistant secretary of the Company since February 1998. From 1982
until 1993, Ms. Laird-Ruthstrom served as executive assistant of Kleer-Vu
Industries, Inc. Since September 1993, Ms. Laird-Ruthstrom served as assistant
secretary, treasurer, and executive assistant of Daniel Dror and Company, Inc.,
and since April 1999 she has served as vice president. From July 1994 to April
1997, Ms. Laird-Ruthstrom served as executive assistant of Microtel
International, Inc.
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<PAGE> 22
SECTION 16(a) COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own beneficially
more than ten percent (10%) of the Company's Common Stock, to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
Copies of all filed reports are required to be furnished to the Company pursuant
to Section 16(a). Based solely on the reports received by the Company and on
written representations from reporting persons, the Company believes that the
directors, executive officers, and greater than ten percent (10%) beneficial
owners complied with all applicable filing requirements during the fiscal year
ended December 31, 1999, except as follows: Ms. Laird-Ruthstrom who failed to
timely file a Form 4 in December 1999, which will be filed in August 2000; Elk
International Corporation, Ltd. which failed to timely file Form 4s in October,
November, December 1999, and a Form 5 in February 2000, which will all be filed
August 2000; and Mr. Friedman who failed to timely file a Form 4 in November and
December 1999, which will be filed in August 2000.
ITEM 10. EXECUTIVE COMPENSATION
The following tables contain compensation data for the Chief Executive
Officer and other named executive officers of the Company for the fiscal year
ended December 31, 1999; with respect to this information for Mr. Fields,
compensation is reported for the Company's fiscal year (NPI's fiscal year end is
June 30):
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------------- -------------------------
Securities
Bonus/ Underlying
Fiscal Other Annual Stock Options/
Name and Principal Position Year Salary Compensation Award(1) SARs
<S> <C> <C> <C> <C> <C>
Daniel Dror, Sr.(2), CEO 1999 $132,000 -- -- --
1998 $150,000(6) $5,750(3) $23,640(4) 2,000,000(5)
Marc Fields, President NPI 1999 $124,332 -- $ 8,000(7) --
1998 $124,000 -- -- --
1997 $127,483 -- -- --
</TABLE>
----------
(1) The issuance of Common Stock was awarded for services rendered.
(2) Mr. Dror began serving as CEO of the Company in September 1997.
(3) Represents total payments made by the Company for automobile owned by
the Company which Mr. Dror utilizes for the fiscal year.
(4) Consists of: (a) 100,000 shares of Common Stock granted in January
1998, and (b) 100,000 shares of Common Stock granted in May 1998,
pursuant to an employment agreement.
(5) In May 1998, Mr. Dror was granted an option to purchase 2,000,000
shares of Common Stock at an exercise price of $0.12 per share expiring
in May 2001, which was amended in May 2000 to $.04 per share with an
expiration date of May 2003.
(6) In November 1998, Mr. Dror executed a promissory note payable to the
Company for $91,294, in consideration for advances made to Mr. Dror by
the Company in the same amount, which note was forgiven. As such, the
salary amount includes $91,294.
(7) Consists of 200,000 shares of Common Stock granted in November 1999.
EMPLOYMENT AGREEMENTS
In May 1998, Mr. Dror entered into a three-year employment agreement
with the Company, which provided for compensation of 100,000 shares of Common
Stock and options to purchase 2,000,000 shares of Common Stock at $0.12 per
share expiring in May 2001. In October 1998, Mr. Dror terminated the employment
agreement dated May 1998, and entered into a new three-year employment agreement
with the Company, which provides for a monthly salary of $1,000. The employment
agreement provides for a bonus to be determined by the
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<PAGE> 23
Board of Directors. The employment agreement may be terminated by the Company,
upon death or disability of Mr. Dror, or with cause, which includes, without
limitation, gross negligence, the failure to perform essential duties, and the
willful engaging in misconduct injurious to the Company.
In September 1994, Mr. Fields entered into an employment agreement with
NPI to serve as president and chief operating officer of NPI on an at-will
basis, which provided for an annual salary of $110,000, which was raised to
$124,000 in 1998. The employment agreement provides for a bonus of 10% of the
amount equal to NPI's operating income, less rent and interest expense, which
exceeds $500,000. The employment agreement grants Mr. Fields an option to
purchase NPI common stock equal to 5% of NPI's equity at an exercise price of 5%
of the total shareholder's equity, if NPI conducts an initial public offering of
its common stock during Mr. Field's employment. The employment agreement
provides for a disability insurance policy as well as a life insurance policy in
the name of Mr. Fields' spouse in the amount of approximately three times Mr.
Fields salary. The employment agreement provides that upon termination NPI has
the option to have Mr. Fields sign a one-year non-compete agreement in exchange
for one year's base salary.
In March 1999, Juan Carlos Martinez, president of Marald, entered into
a two-year employment agreement with the Company, which provides for a monthly
salary of $7,500. The employment agreement provides for a bonus to be determined
by the Board of Directors. The employment agreement may be terminated by the
Company, upon death or disability of Mr. Martinez, or with cause, which
includes, without limitation, gross negligence, the failure to perform essential
duties, and the willful engaging in misconduct injurious to the Company.
The Company or its subsidiaries do not maintain life insurance on any
of its directors or employees. The directors serve without cash compensation,
but can be granted stock as discussed in "Certain Relationships and
Transactions."
STOCK OPTIONS AND WARRANTS
The Company did not issue any options during fiscal year 1999 to its
named executive officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
SHARES NUMBER OF SECURITIES UNEXERCISED
ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
NAME EXERCISE REALIZED OPTIONS OPTIONS(1)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Daniel Dror, Sr. -- -- 2,000,000 -- $ 0 --
Marc Fields -- -- -- -- -- --
</TABLE>
----------
(1) Computed based on the differences between the fair market value on
December 31, 1999 of $.04 per share and the exercise price of the
option.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2000, the number and
percentage of outstanding shares of Company Common Stock owned by (i) each
person known to the Company to beneficially own more than 5% of its outstanding
Common Stock, (ii) each director, (iii) each named executive officer, and (iv)
all executive officers and directors as a group.
22
<PAGE> 24
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF COMMON
BENEFICIAL OWNER(1) STOCK BENEFICIALLY OWNED PERCENTAGE OF OWNERSHIP
<S> <C> <C>
Daniel Dror, Sr. 2,000,000(2) 1.2%
Elkana Faiwuszewicz 37,560,000(1) 23.1%
Marc Fields -- --
Erick Friedman 7,200,000 4.4%
John W. Stump III -- --
Rebekah Laird-Ruthstrom 16,131,000(3) 9.9%
Daniel Dror II Trust of 1998(4) 12,715,000 7.8%
All executive officers and directors as a
group (4 persons) 25,331,000 15.6%
</TABLE>
----------
The business address of each principal stockholder is the same as the
address of the Company's principal executive offices except: Mr. Fields
whose business address is 11601 Highway 32 in Nicholls, Georgia 31554;
Mr. Faiwuszewicz whose business address is P.O. Box SS-19084, Nassau,
Bahamas; and Mr. Daniel Dror II whose business address is 1412 N.
Blvd., Houston, Texas 77006.
(1) The Elk International Corporation, Ltd. holds 36,560,000 shares listed
above, and the president of Elk International Corporation, Ltd. is
Elkana Faiwuszewicz, Mr. Dror's brother. Mr. Dror has no interest nor
is he an officer or director of Elk International Corporation, Ltd.
(2) Consists of an option to purchase 2,000,000 shares of Common Stock at
an exercise price of $0.04 per share.
(3) Includes: (a) 7,901,0000 shares of Common Stock held by the Daniel Dror
II 1976 Trust, of which Ms. Laird-Ruthstrom is trustee, and (b)
8,080,000 shares of Common Stock held by Daniel Dror & Company, Inc.,
of which Ms. Laird-Ruthstrom is an officer.
(4) The trustee and sole beneficiary of the Daniel Dror II Trust of 1998 is
Daniel Dror II. Daniel Dror has no affiliation with this trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1998, Mr. Dror was issued 100,000 shares of Common Stock in
exchange for services rendered. In May 1998, Mr. Dror was granted 100,000 shares
of Common Stock, pursuant to an employment agreement. In May 1998, Mr. Dror was
issued an option to purchase 2,000,000 shares of Common Stock at an exercise
price of $0.12 per share, which was amended in May 2000 to $0.04 per share,
which expires in May 2003 (previously May 2001), pursuant to an employment
agreement. During fiscal year 1998, the Company advanced Mr. Dror a total of
$74,404, and in November 1998 Mr. Dror executed a promissory note payable to the
Company in the amount of $74,404 payable on demand at prime interest rate. In
September 1997, Elk International Corporation, Ltd., which is controlled by Mr.
Dror's brother, was issued an option to purchase 2,000,000 shares of Common
Stock at a purchase price of $0.02 per share, which was exercised in June 1998.
In September 1997, Elk International Corporation, Ltd., which is controlled by
Mr. Dror's brother, was issued 5,000,000 shares of Common Stock at a purchase
price of $0.03 per share. In May 1998, Elk International Corporation, Ltd.,
which is controlled by Mr. Dror's brother, was issued 3,500,000 shares of Common
Stock for an aggregate purchase price of $300,000. In December 1998, Daniel Dror
II was employed by the Company at a monthly salary of $750. In November 1998,
Mr. Dror purchased GCA, Inc., a Texas corporation from the Company for $100.
GCA, Inc. was purchased by the Company in December 1997 from an unrelated
individual for 6,000,000 shares of Common Stock. Prior to Mr. Dror's acquisition
of GCA, Inc., and as of November 1998, all assets of GCA, Inc. had been
transferred to TREE and GCA, Inc. was not in good standing with the State of
Texas. See "Item 1. Description of Business-General" for further discussion.
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<PAGE> 25
In May 1998, Ms. Laird-Ruthstrom was issued 50,000 shares of Common
Stock in exchange for services rendered. In January 1999, Ms. Laird-Ruthstrom
was issued an option to purchase 45,000 shares of Common Stock at an exercise
price of $0.02 per share for services rendered.
In May 1998, the Company entered into a one-year renewable lease
agreement with a corporation affiliated with Mr. Dror, for the Company's office
in Kemah, Texas at a monthly rental rate of $750. The Company did not renew the
lease.
In May 1998, the Company entered into a one-year renewable lease
agreement with Elk International Corporation for Mr. Dror's home office in
Houston, Texas at a monthly rental rate of $800. The Company has renewed the
lease.
In January 1999, the Company issued Mr. Stump an option to purchase
100,000 shares of Common Stock at an exercise price of $0.24 per share and in
March 1999, the Company issued an option to purchase 100,000 shares of Common
Stock at an exercise price of $0.19 per share for services rendered. In October
1999, the Company canceled the above securities in exchange for the cancellation
of $9,262 in debt.
Effective January 1999, the Company purchased Marald, Inc. in exchange
for 3,500,000 shares of Common Stock, and a finders fee of $45,000 paid in part
to a party related to Mr. Dror. In addition, under the terms of the acquisition
agreement, the Company has agreed to provide chemicals at a discount to Toro
Spray-On Liners, Inc., an entity partially owned by the above-related party.
In January 2000, the Company agreed to issue Mr. Friedman 2,500,000
shares of Common Stock for an aggregate of $40,000.
In May 2000, the Company agreed to convert $250,000 of debt owed to Elk
International Corporation, Ltd. into 15,000,000 shares of Common Stock, and
additionally issued 15,000,000 shares of Common Stock for an aggregate of
$250,000, which has not been paid to date.
In June 2000, the Company agreed to issue Daniel Dror II Trust of 1998
10,000,000 shares of Common Stock for an aggregate of $200,000.
The Company obtains approval from its entire Board of Directors prior
to any acquisitions. If any transactions are executed or contemplated with a
related party or affiliate of the Company, such relationship is disclosed prior
to a vote of the Board of Directors. Prior to entering into any real estate
transaction with affiliated parties, the Company obtains appraisals from MAI
Appraisers for Board of Director consideration. The Company believes that the
terms of each transaction made with related parties or affiliates are as fair as
those obtainable from independent third parties. As of April 1999, any advances
or loans made by the Company to any related parties or affiliates will be made
at an interest rate no lower than the current prime rate plus 2%.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of the Annual
Report:
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) Marc Fields Employment Agreement
10.4(2) Shabang! Merchant Service Agreement
10.5(3) American International Industries, Inc. Lease
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<PAGE> 26
10.6(2) Brenham Oil and Gas, Inc. Royalty Interest
10.7(2) Brenham Oil and Gas Interest Lease
10.8(2) Northeastern Plastics, Inc. Lease
10.9(4) Juan Carlos Martinez Employment Agreement
10.10(4) Marald, Inc. 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.
25
<PAGE> 27
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
By /s/ John W. Stump, III
---------------------------------------------
John W. Stump, III
Chief Financial Officer
----------
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel Dror Chairman of the Board August 10, 2000
---------------------------- and Chief Executive Officer
Daniel Dror
/s/ Erick Friedman Director August 10, 2000
----------------------------
Erick Friedman
</TABLE>
26
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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) Marc Fields Employment Agreement
10.4(2) Shabang! Merchant Service Agreement
10.5(3) American International Industries, Inc. Lease
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10.6(2) Brenham Oil and Gas, Inc. Royalty Interest
10.7(2) Brenham Oil and Gas Interest Lease
10.8(2) Northeastern Plastics, Inc. Lease
10.9(4) Juan Carlos Martinez Employment Agreement
10.10(4) Marald, Inc. Acquisition Agreement
21.1(2) List of Subsidiaries
27(5) Financial Data Schedule
</TABLE>
----------
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.
<PAGE> 30
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Independent Auditors' Reports
Report on the 1999 consolidated financial statements
Report on the 1998 consolidated financial statements
Consolidated Financial Statements:
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Years ended December 31, 1999 and 1998
Statements of Stockholders' Equity - Years ended December 31, 1999 and
1998
Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
<PAGE> 31
[R. E. BASSIE & CO., P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American International Industries, Inc.:
We have audited the consolidated financial statements of American International
Industries, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
International Industries, Inc. and subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ R. B. Bassie & Co., P.C.
Houston, Texas
July 7, 2000
<PAGE> 32
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.
BDO SEIDMAN, LLP
Houston, Texas
March 26, 1999
<PAGE> 33
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 639,396 $ 1,012,995
Restricted certificates of deposit (notes 3 and 8) 1,150,000 1,150,000
Trading securities (note 4) 1,006,779 418,770
Securities available-for-sale (note 4) -- 115,884
Accounts receivable, less allowance for doubtful accounts of
$135,614 in 1999 and $179,000 in 1998 1,609,561 1,200,754
Notes receivable 431,691 116,190
Inventories (note 5) 1,199,947 988,824
Prepaid expenses and other current assets 45,510 43,855
------------ ------------
Total current assets 6,082,884 5,047,272
------------ ------------
Net assets of discontinued operations (note 3) -- 1,280,467
Real estate held for sale (note 6) 939,584 939,584
Property and equipment, net of accumulated
depreciation and amortization (notes 7 and 8) 1,588,222 1,430,128
Excess of cost over net assets of businesses
acquired, less accumulated amortization of
$132,729 in 1999 and $32,476 in 1998 (notes 2 and 3) 1,604,031 850,506
Non-compete agreements, net of accumulated amortization of
$325,000 in 1999 and $225,000 in 1998 (notes 2 and 3) 175,000 275,000
Other assets 18,793 125,793
------------ ------------
Total assets $ 10,408,514 $ 9,948,750
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 2,377,963 1,841,350
Margin loan from financial institution 523,863 195,645
Current installments of notes payable to related parties (note 9) 471,000 100,000
Current installments of notes payable (note 8) 487,444 116,144
Current installments of capital lease obligations (note 10) 45,109 --
------------ ------------
Total current liabilities 3,905,379 2,253,139
Notes payable to related parties, less current installments (note 9) -- 200,000
Notes payable, less current installments (note 8) 703,596 599,909
Capital lease obligations, less current installments (note 10) 46,132 --
Minority interest 70,298 --
------------ ------------
Total liabilities 4,725,405 3,053,048
------------ ------------
Stockholders' equity (notes 2, 3 and 11):
Preferred stock, $.001 par value. Authorized
10,000,000 shares: none issued -- --
Common stock, $.001 par value. Authorized 200,000,000 shares:
125,972,971 shares issued and 125,720,971 shares outstanding
in 1999, 121,353,971 shares issued and 121,115,971
shares outstanding in 1998 125,721 121,116
Additional paid-in capital 16,393,094 15,726,799
Accumulated deficit (10,801,678) (8,345,998)
------------ ------------
Total stockholders' equity 5,717,137 7,501,917
Less common stock subscriptions -- (550,000)
Less treasury stock, at cost (252,000 and 238,000 shares, respectively) (34,028) (37,251)
Accumulated other comprehensive loss -- (18,964)
------------ ------------
Total stockholders' equity 5,683,109 6,895,702
Commitments and contingent liabilities (notes 10 and 13)
------------ ------------
Total liabilities and stockholders' equity $ 10,408,514 $ 9,948,750
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Revenues $ 13,396,256 $ 8,907,617
Costs and expenses:
Cost of sales 11,008,413 7,265,621
Selling, general and administrative 4,358,557 2,470,761
-------------- --------------
Total operating expenses 15,366,970 9,736,382
-------------- --------------
Operating loss (1,970,714) (828,765)
Other income (expenses):
Interest income 82,264 45,936
Realized gains on investments 1,134,884 91,135
Unrealized gain and (losses) on investments (759,391) 37,899
Gain (loss) on the sale of assets 493,682 (22,194)
Interest expense (201,050) (76,726)
Other income 84,515 27,471
-------------- --------------
Total other income 834,904 103,521
-------------- --------------
Net loss from continuing operations before
income tax benefits (1,135,810) (725,244)
Deferred income tax benefit (note 12) -- 298,804
-------------- --------------
Net loss from continuing operations (1,135,810) (426,440)
Loss from discontinued operations (note 3) (1,229,870) (219,533)
-------------- --------------
Net loss (2,365,680) (645,973)
Deemed dividends (note 2) (90,000) (2,338,038)
-------------- --------------
Net loss applicable to common shareholders $ (2,455,680) $ (2,984,011)
============== ==============
Net loss per common share - basic and diluted:
Net loss from continuing operations $ (0.01) $ (0.03)
============== ==============
Net loss from discontinued operations $ (0.01) $ (0.00)
============== ==============
Net loss applicable to common shareholders $ (0.02) $ (0.03)
============== ==============
Weighted average common shares 123,951,124 87,985,486
============== ==============
Consolidated statements of comprehensive loss
Net loss $ (2,365,680) $ (645,973)
Unrealized gain (loss) on shares available-for-sale 18,964 (18,964)
-------------- --------------
Comprehensive loss $ (2,346,716) $ (664,937)
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 35
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated
shares amount capital deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 46,117,060 $ 46,117 $ 4,540,482 $ (2,972,871)
Issuance of restricted shares for:
Acqueren, Inc. (note 2) 26,750,000 26,750 2,113,250 --
Cinema Research Corporation
and D-Rez Corporation (note 2) 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 (2,389,116)
Unrealized loss on shares available-for-sale -- -- -- --
Deemed dividend (note 6 and 11) -- -- -- (2,338,038)
Net loss -- -- -- (645,973)
------------ ------------ ------------ ------------
Balance, December 31, 1998 121,115,971 121,116 15,726,799 (8,345,998)
Issuance of restricted shares for:
Marald, Inc. (note 2) 3,500,000 3,500 648,500 --
Midtowne Properties (note 11) 1,000,000 1,000 89,000 --
Employee compensation (note 11) 10,000 10 21,990 --
Exercise of stock options (note 11) 345,000 345 6,555 --
Proceeds from stock subscriptions -- -- -- --
Stock subscriptions cancelled (note 11) (250,000) (250) (99,750) --
Treasury stock sales -- -- -- --
Sale of available-for-sale shares -- -- -- --
Deemed dividend (notes 6 and 11) -- -- -- (90,000)
Net loss -- -- -- (2,365,680)
------------ ------------ ------------ ------------
Balance, December 31, 1999 125,720,971 $ 125,721 $ 16,393,094 $(10,801,678)
============ ============ ============ ============
<CAPTION>
Common Accumulated
stock other Total
subscription Treasury comprehensive stockholders'
receivable stock loss equity
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ -- $ -- $ -- $ 1,613,728
Issuance of restricted shares for:
Acqueren, Inc. (note 2) -- -- -- 2,140,000
Cinema Research Corporation
and D-Rez Corporation (note 2) -- -- -- 1,292,000
Investment properties (note 6) -- -- -- 736,000
Midtowne Properties (note 6) -- -- -- 1,665,000
Employee compensation (note 11) -- -- -- 111,700
Sale of shares for cash (note 11) -- -- -- 2,323,500
Exercise of stock options (note 11) -- -- -- 54,000
Common stock subscribed (note 11) (550,000) -- -- --
Treasury stock acquired -- (37,251) -- (37,251)
Stock dividend issued (note 11) -- -- -- --
Unrealized loss on shares available-for-sale -- -- (18,964) (18,964)
Deemed dividend (note 6 and 11) -- -- -- (2,338,038)
Net loss -- -- -- (645,973)
------------ ------------ ------------ ------------
Balance, December 31, 1998 (550,000) (37,251) (18,964) 6,895,702
Issuance of restricted shares for:
Marald, Inc. (note 2) -- -- -- 652,000
Midtowne Properties (note 11) -- -- -- 90,000
Employee compensation (note 11) -- -- -- 22,000
Exercise of stock options (note 11) -- -- -- 6,900
Proceeds from stock subscriptions 450,000 -- -- 450,000
Stock subscriptions cancelled (note 11) 100,000 -- -- --
Treasury stock sales -- 3,223 -- 3,223
Sale of available-for-sale shares -- -- 18,964 18,964
Deemed dividend (notes 6 and 11) -- -- -- (90,000)
Net loss -- -- -- (2,365,680)
------------ ------------ ------------ ------------
Balance, December 31, 1999 $ -- $ (34,028) $ -- $ 5,683,109
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 36
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,365,680) $ (645,973)
Loss from discontinued operations 1,229,870 219,533
------------ ------------
Net loss from continuing operations (1,135,810) (426,440)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 408,048 245,001
Inventory reserve (8,466) 62,682
Common stock issued for services 22,000 111,700
Deferred tax benefits -- (298,804)
Realized gain on sale of securities (1,134,884) (91,135)
(Increase) decrease in market value of trading securities 759,391 (37,899)
Loss on disposal of equipment 6,320 21,994
Gain on sale of subsidiary (143,928) --
Purchase of trading securities, net (1,402,576) (94,091)
Changes in assets and liabilities, net of acquired assets and liabilities:
(Increase) decrease in accounts receivable (442,239) 1,214,877
(Increase) decrease in inventories 1,701 178,516
Increase in prepaid expenses 46,993 27,595
(Increase) decrease in other assets 135,943 (143,744)
Increase (decrease) in accounts payable and accrued expenses 1,092,768 (1,356,125)
------------ ------------
Net cash used in operating activities (1,794,739) (585,873)
------------ ------------
Cash flows from investing activities:
Proceeds (purchase) of available-for-sale securities, net 1,167,605 (134,848)
Capital expenditures for property and equipment (303,096) (170,309)
Purchase of real estate property -- (167,922)
Purchase of certificates of deposit -- (1,150,000)
Notes receivable 178,000 (116,190)
Proceeds from disposition of assets 131,076 25,000
Cash received in acquisitions -- 896,957
Cash paid for acquisitions (142,159) --
------------ ------------
Net cash provided by (used in) investing activities 1,031,426 (817,312)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock 456,900 2,377,500
Proceeds from notes payable 99,261 96,467
Repayments on notes payable (154,144) (83,527)
Principal payments on capital lease obligations (14,965) --
(Purchase) sale of treasury stock 2,662 (37,251)
------------ ------------
Net cash provided by financing activities 389,714 2,353,189
------------ ------------
Net increase (decrease) in cash (373,599) 950,004
Cash at beginning of year 1,012,995 62,991
------------ ------------
Cash at end of year $ 639,396 $ 1,012,995
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 201,051 $ 72,941
============ ============
Non-cash transactions:
Acquisition of land for common stock $ -- $ 305,444
Acquisition of property and equipment for note payable $ -- $ 79,682
Net purchase of securities on margin $ 428,218 $ 195,645
Issuance of note payable in acquisition $ -- $ (303,300)
Subscriptions of common stock $ -- $ 550,000
Deemed dividends $ 90,000 $ 2,338,038
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP AND BUSINESS
American International Industries, Inc. (the "Company" or "AIII"),
formerly Black Tie Affair, Incorporated, operates as a diversified
holding company with a number of wholly-owned subsidiaries and one
majority-owned subsidiary.
As discussed in Note 3, the Company acquired five additional businesses
in 1998 and 1999 as part of its acquisition and expansion plans. Four
of these acquisitions, accounted for as purchases, resulted in the
Company owning 100% of the stock of the acquired companies. Note 4
describes the sale of one of the 1998 acquisitions in 1999.
Additionally, the Company acquired a majority interest in an inactive
public company in 1999. The operations of each business are described
in the above referenced notes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of trade receivables, net of a
valuation allowance for doubtful amounts.
INVENTORIES
Inventories are valued at the lower of cost or market on a first in,
first out basis.
INVESTMENT SECURITIES
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of its investments in marketable securities
at the time of purchase and reevaluates such determination at each
balance sheet date. Securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities. Debt securities for which the Company does not have the
intent or ability to hold to maturity and equity securities not
classified as trading securities are classified as available-for-sale.
The cost of investments sold is determined on the specific
identification or the first-in, first-out method. Trading securities
are reported at fair value with unrealized gains and losses recognized
in earnings, and available-for-sale securities are also reported at
fair value but unrealized gains and losses are shown in the caption
"unrealized gains (losses) on shares available for sale" included in
stockholders' equity. Management determines fair value of its
investments based on quoted market prices at each balance sheet date.
<PAGE> 38
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 noncompete agreements. The
Company amortizes goodwill over a 15-year period and the noncompete
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, 1999 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
<PAGE> 39
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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, 1999 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 7,400,000 and 7,720,000 shares of common
stock at December 31, 1999 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. 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).
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 judgment 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
<PAGE> 40
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1999 presentation of loss on discontinued operations of a subsidiary.
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.
(2) ACQUISITIONS
Effective January 1, 1999, the Company issued 3,500,000 shares of its
common stock for all outstanding shares of Marald, Inc., d.b.a.
Unlimited Coatings, ("UC"), a Texas specialty products corporation. In
addition, a finders fee of $45,000 was payable, in part to a party
related to the CEO. Based upon the estimated fair market value of
AIII's stock ($0.19 per share), and the finder's fee, the total
purchase consideration of the Company was approximately $697,000.
Effective April 1, 1999, the Company paid $143,000 and assumed certain
equipment lease obligations of approximately $85,000 for all
outstanding shares of Tough Trucks and Accessories, Inc., d.b.a. Armor
Linings ("Armor"), a Texas transportation after-market corporation.
Effective September 30, 1999, the Company exchanged 100% of the shares
of Modern Film Effects, Inc., d.b.a. Cinema Research Corporation
(including Digital Research Corporation) ("CRC"), a California
corporation and subsidiary of the Company, for 60.8% of the then
outstanding total of 5,100,000 newly issued, restricted, common shares
of World Wide Net, Inc. (WWN) (OTCBB). Prior to the acquisition of CRC,
WWN had only nominal assets and no operations during the preceding
years. Accordingly, the investment in WWN was recorded at the
historical cost basis of CRC of $106,072 at the effective date of the
transaction. Since this transaction resulted in majority ownership of
WWN, the Company consolidated WWN as of December 31, 1999.
Effective July 1, 1998, the Company issued 26,750,000 shares of
restricted common stock for 100% of the outstanding common stock of
Acqueren, Inc., a Delaware corporation, and its wholly-owned
subsidiary, Northeastern Plastics, Inc., (NPI) (collectively referred
to as "Acqueren"). Based upon the estimated fair market value of the
restricted common stock of AIII, the total
<PAGE> 41
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
purchase consideration of the Company was approximately $2,140,000
($.08 per share). The purchase agreement provided for the two primary
shareholders 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 Acqueren's stock. The purchase agreement further provided for the
remaining stockholders of Acqueren to receive 25.02 shares of AIII's
common stock for each share of Acqueren's stock. As of December 31,
1998 and 1999, 7,173,059 and 1,206,406 shares, respectively, had not
been issued to various former shareholders of Acqueren for their shares
of Acqueren's common stock. Accordingly, those shares of AIII's common
stock are not considered outstanding in loss per share calculations for
1998 and 1999.
Effective September 24, 1998, the Company acquired 100% of the
outstanding stock of CRC. The Company issued 6,300,000 shares of
restricted common stock and options (exercisable in whole or in part)
to purchase 400,000 shares of AIII common stock over a five-year period
at $.20 per share. In addition, the Company issued a $379,500
non-interest bearing note payable to selling shareholders (seller).
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 of the note payable to seller of $303,000, the
total purchase consideration of the Company was $1,595,300. The
president (CEO) and the vice president of marketing (the seller
shareholders) signed five and six-year employment contracts,
respectively, which included noncompete covenants for the duration of
the contracts. These contracts required aggregate compensation payments
of approximately $175,000 annually, plus performance-based incentives.
Except as previously stated for WWN (and explained in Note 4), all of
the above acquisitions have been accounted for using the purchase
method with the purchase price allocated to the acquired assets and
liabilities based on their respective estimated fair values at the
acquisition dates. Such allocations were based on evaluations and
estimations.
The purchase allocation is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current assets $ 374,547 $ 4,877,985
Noncurrent assets 22,429 164,019
Property and equipment 190,737 3,806,265
Goodwill 835,984 1,117,913
Current liabilities (444,123) (4,732,281)
Long-term liabilities (112,028) (1,498,601)
Minority interests (11,462) --
------------ ------------
$ 856,084 $ 3,735,300
============ ============
</TABLE>
<PAGE> 42
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
The following presents the unaudited pro forma results of operations of
AIII for the years ended December 31, 1999 and 1998, as if these
purchase transactions would have been consummated as of January 1, 1999
and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Pro forma sales $ 13,561,480 $ 14,823,668
Pro forma operating loss $ (1,935,366) $ (1,748,519)
Pro forma net loss applicable to common
shareholders $ (2,453,669) $ (4,043,339)
Pro forma basic and diluted net loss per share $ (.02) $ (.04)
Weighted average shares outstanding 124,699,735 94,297,221
</TABLE>
(3) DISCONTINUED OPERATIONS - SALE OF CRC
Effective October 1, 1999, WWN sold all its shares of CRC to Cinema
Investment Group, Inc. ("Cinema"). WWN received a note receivable for
$250.000. Cinema assumed liability for notes payable of $1,200,000;
however, such notes are guaranteed by the pledge of certificates of
deposit of $1,000,000 owned by AIII at December 31, 1999. Since net
assets exceeded proceeds of the sale, the Company recognized a loss of
$266,345 at date of disposal.
<TABLE>
<S> <C>
Net assets at October 1, 1999 $ 516,345
Proceeds from the sale (250,000)
------------
Loss on disposal of CRC $ 266,345
============
</TABLE>
CRC, acquired in the fourth quarter of 1998, comprised the
Media/Entertainment segment of the Company's total operations. Shown
below is a summary of certain elements of CRC's operations, financial
position and cash flows reflected in the Company's consolidated
financial statements from the period of acquisition in 1998 to the date
of disposition in 1999:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Income statement data:
Revenues $ 2,685,251 $ 1,305,422
Cost and expenses (3,648,776) (1,497,637)
Operating loss (963,525) (219,533)
Loss from discontinued operations (1,229,870) (219,533)
</TABLE>
<PAGE> 43
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<TABLE>
<S> <C> <C>
Balance sheet data:
(at September 30, 1999 and December 31, 1998)
Current assets $ 381,860 $ 592,044
Property and equipment, net 3,274,026 3,630,244
Total assets 3,766,131 4,391,898
Current liabilities (2,353,539) (1,915,279)
Other liabilities (896,247) (1,196,152)
Net assets of discontinued operations 516,345 1,280,467
Cash flow data:
Cash flows from operations $ (45,095) $ N/A
Cash flows from investing activities (126,013) N/A
Cash flows from financing activities (80,735) N/A
------------ ------------
Net cash flows from discontinued operations $ (251,843) $ N/A
============ ============
</TABLE>
(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 years ended December 31, 1998 and
1999, the Company recognized net increases (decreases) in the market
value of such equity securities of $37,899 and $(759,391),
respectively, as components of net loss. As of December 31, 1998 and
1999, the Company had borrowings from margin accounts with financial
institutions of $195,645 and $523,863.
<PAGE> 44
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
As of December 31, 1998 and 1999, the trading securities and related
call options are summarized below.
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Security Options
Security Market Option Market
Cost Value Proceeds Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equity Security
Billings Concepts Corp.
50,000 shares of $ 250,000 325,000 14,762 17,500
common stock
20,000 shares of
common stock
Ciena Corporation
2,000 shares of
common stock
Corel Corporation
1,000 shares in 18,003 15,125 -- --
common stock
Intel Corporation
4,000 shares of 330,636 329,248 -- --
common stock
Loral Space and
Communications
10,000 shares of
common stock
Rochester Medical
30,200 shares of 290,540 215,175 -- --
common stock
UBID, Incorporated
7,000 shares of 308,409 185,500 63,992 50,995
common stock
World Wide Net,
Incorporated
33,500 shares of 25,125 5,226 -- --
common stock
------------ ------------ ------------ ------------
$ 1,222,713 1,075,274 78,754 68,495
============ ============ ============ ============
<CAPTION>
1998
---------------------------------------------------------------
Security Options
Security Market Option Market
Cost Value Proceeds Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equity Security
Billings Concepts Corp.
50,000 shares of
common stock
20,000 shares of $ 223,256 220,000 -- --
common stock
Ciena Corporation
2,000 shares of 25,326 29,250 3,462 2,124
common stock
Corel Corporation
1,000 shares in
common stock
Intel Corporation
4,000 shares of
common stock
Loral Space and
Communications
10,000 shares of 132,289 178,120 18,812 28,750
common stock
Rochester Medical
30,200 shares of
common stock
UBID, Incorporated
7,000 shares of
common stock
World Wide Net,
Incorporated
33,500 shares of
common stock
------------ ------------ ------------ ------------
$ 380,871 427,370 22,274 30,874
============ ============ ============ ============
</TABLE>
<PAGE> 45
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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, is
carried at fair value. Unrealized losses of such securities at December
31, 1998 of $18,964 are included as a component of stockholder's
equity, and are comprehensive loss items in the consolidated statement
of operations. The Company's cost in these securities, determined on
the specific identification or the first-in, first-out method, was
$134,848 at December 31, 1998. At December 31, 1999, the Company had no
available-for-sale equity securities.
(5) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 46,351 $ 78,683
Work-in-process 244,315 169,618
Finished goods 909,281 740,523
------------ ------------
$ 1,199,947 $ 988,824
============ ============
</TABLE>
(6) REAL ESTATE HELD FOR SALE
Real estate held for sale is summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
286 undeveloped acres on Galveston Bay, Texas $ 225,000 $ 225,000
42.6 undeveloped acres of land in Southeast Houston, Texas and 186,390 186,390
commercial properties in Harris County, Texas (1)
736 undeveloped acres of land in Anahuac, Texas (2) 176,572 176,572
23 acres of undeveloped land in Harris County, Texas 164,800 164,800
Other properties 186,822 186,822
------------ ------------
$ 939,584 $ 939,584
============ ============
</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
<PAGE> 46
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 assumed property tax liability of $300,000. The difference
between the total cost basis and the fair value of the asset
acquired plus the property tax liability of $300,000 assumed
of $1,965,000 was recognized as a deemed (non-cash) dividend.
Mid-Towne had no material activity in 1998 and 1999.
2. In May 1998, the Company purchased 736 acres of undeveloped
land in Anahuac, Texas ("Anahuac") from a company then owned
by the CEO of the Company who is also a stockholder in the
Company. The consideration paid for the land consisted of
8,000,000 shares of newly issued, restricted common stock of
AIII. Since the Anahuac acquisition was made through an entity
under common control, the Company has accounted for the
acquisition at the predecessor carry-over historical cost
basis of $176,572. The difference between the cost basis and
the fair value of the asset acquired of $736,000 was
recognized as a deemed (non-cash) dividend. This acreage had
no material activity in 1998 and 1999.
(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 1999 1998
----- ------------ ------------
<S> <C> <C> <C>
Land $ 508,487 $ 386,812
Building and improvements 20 688,521 688,521
Machinery and equipment 8 523,313 415,210
Office equipment 7 131,905 28,202
Automobiles 5 126,308 93,900
------------ ------------
1,978,534 1,612,645
Less accumulated depreciation and amortization (390,312) (182,517)
------------ ------------
Net property and equipment $ 1,588,222 $ 1,430,128
============ ============
</TABLE>
<PAGE> 47
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(8) NOTES PAYABLE TO BANKS
Notes payable to banks consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Note payable to a bank, 9.75% per annum, due in monthly $ 531,873 $ 574,276
payments of principal and interest of $7,895 through
February 2003 with remaining amount due in March 2003 for Har-Whit
Line of credit with a bank for $125,000, 9.5% per 125,000 --
annum, interest only due monthly with payment of principal due at
maturity in May 2000 for Marald, Inc.
Line of credit with a bank for $100,000, 9.5% per 99,917 --
annum, interest only due monthly with payment of principal due at
maturity in August 2000 for Marald, Inc.
Line of credit with a bank for $150,000, 8% per 150,000 60,000
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
Other notes payable 284,250 81,777
------------ ------------
1,191,040 716,053
Less current portion (487,444) (116,144)
------------ ------------
$ 703,596 $ 599,909
============ ============
</TABLE>
Each of AIII's subsidiaries that have outstanding notes payable have
secured such notes by that subsidiary's inventory, accounts receivable,
property and equipment and guarantees from AIII. In addition, as of
December 31, 1998, CRC had a note payable totaling $1,000,000, which
was collateralized by a $1,000,000 restricted certificate of deposit.
The Company continued to collateralize this note subsequent to the sale
of CRC.
<PAGE> 48
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
Principal repayment provisions of long-term debt are as follows at
December 31, 1999:
<TABLE>
<S> <C>
2000 $ 487,444
2001 234,638
2002 92,099
2003 60,126
2004 to maturity 316,733
------------
Total $ 1,191,040
============
</TABLE>
(9) NOTES PAYABLE TO RELATED PARTIES
In connection with the acquisitions discussed in Note 2, the Company
had the following notes payable to related parties outstanding at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31
1999 1998
------------ ------------
<S> <C> <C>
Note payable to principal selling stockholder of Acqueren, $ -- $ 300,000
6% per annum, annual payment of $100,000 due in
August 1999 and 2000 with remainder due in August 2001
Note payable to selling stockholder of WWN, 8% per 221,000 --
annum, due on demand
Note payable to former director of interest, imputed at 250,000 --
prime, due on demand
------------ ------------
Total notes payable to related parties 471,000 300,000
Less current portion (471,000) (100,000)
------------ ------------
Notes payable to related parties, long-term portion $ -- $ 200,000
============ ============
</TABLE>
Interest expense for the years ended December 31, 1999 and 1998 on
these related party notes was approximately $148,000 and $15,000,
respectively.
<PAGE> 49
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(10) CAPITAL LEASES
The Company has the following future aggregate minimum annual lease
payments required under capital leases as of December 31, 1999:
<TABLE>
<S> <C>
2000 $ 54,483
2001 35,549
2002 14,403
------------
Total minimum lease payments 104,435
Less amount representing interest (13,194)
------------
Present value of net minimum lease payments 91,241
Less current portion (45,109)
------------
Long-term portion $ 46,132
============
</TABLE>
Interest rates on the capitalized leases range from 6.7% to 15.5%.
Certain of the leases contain restrictive covenants regarding various
financial ratios and capital distributions. At December 31, 1999, the
Company was in violation of certain financial ratios and has received a
waiver for those violations from the lessor through January 2000.
(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 on
particular matters), preferences as to dividends and liquidation,
conversion, redemption rights and sinking fund provisions. The Company
has no present plans for the issuance of Preferred Stock.
The Company is authorized to issue up to 200,000,000 shares of Common
Stock, of which 125,972,971 were issued and 125,720,971 outstanding at
December 31, 1999, and 7,415,000 were reserved for issuance pursuant to
the exercise of outstanding stock options as of December 31, 1999.
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 a 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.
Prior to January 1, 1998, 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
<PAGE> 50
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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.
The Company issued 500,000 options to each of the two former owners 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.
In connection with the 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 total consideration of $300,000.
In May 1998, an employee was issued 50,000 shares of Common Stock in
exchange for services rendered.
In addition in January and May 1998, the Company issued 600,000 shares
of restricted common stock to employees and directors for management
advisory services. These awards were recorded as $32,700 of
compensation expense at the market value (ranging from $.05 to $.08 per
share) of the shares issued at the date of grant.
During 1998, the Company sold 11,660,000 shares 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
<PAGE> 51
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
with expected total proceeds of $550,000. Subsequent to year-end,
subscription rights of $100,000 were canceled with the remainder paid
by an alternate subscriber.
In July 1998, the Company declared a 10% stock dividend that was
payable to stockholders of record as of August 30, 1998. Such dividends
resulted in issuance of 9,188,911 shares to stockholders and was
accounted for at the market value as of August 30, 1998 ($.26 per
share).
In August 1998, the Company issued an option to purchase 20,000 shares
of common stock at an exercise price of $0.34 per share to an officer
of the company as part of an employment agreement.
In November 1998, the Board of Directors authorized management to
purchase from time to time up to 10 million shares of the Company's
common stock, as deemed appropriate by management. To date the company
has purchased a total of 220,000 shares from two former officers of the
Company. The purchases were made in two separate transactions in
November 1998. In one transaction $20,000 was paid for 110,000 of the
Company's shares and in the other transaction $12,500 was paid for
110,000 of the Company's shares. In both instances, the Company either
paid at market or below market value for the treasury shares. Those
transactions were funded from the Company's general operating funds.
The Company does not intend to repurchase significant numbers of its
shares in the future.
In January 1999, the Company issued an option to purchase 45,000 shares
of common stock at an exercise price of $.02 per share to an officer of
the Company as part of an employment agreement. Also in January, the
Company issued an option to purchase 15,000 shares of common stock at
exercise price of $.24 per share in exchange for services rendered.
In February 1999, a former officer of the Company exercised a vested
option to purchase 300,000 shares of common stock at $.02 per share.
In October 1999, the Board of Directors authorized management to issue
an additional 1,000,000 shares of common stock to the former owners of
Midtowne Properties who are related parties, due to significantly
higher appraised values than originally estimated at date of
acquisition. Since the original acquisition was made through entities
under common control, the value of these shares, $90,000, has been
recognized as a deemed dividend.
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 1999 and 1998 as follows:
<PAGE> 52
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31
------------------------------
1999 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
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported $ (2,455,680) $ (2,684,011)
Pro forma $ (2,458,830) $ (2,828,211)
Loss per share:
As reported $ (.02) $ (.03)
Pro forma $ (.02) $ (.03)
</TABLE>
A summary of the status of the Company's stock options to employees as
of December 31, 1999, and 1998 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 1999 Shares 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 3,020,000 12 1,000,000 .02
Granted 60,000 .13 2,020,000 .12
Exercised (45,000) (.02) -- --
Canceled (20,000) .34 -- --
------------ ------------ ------------ ------------
Outstanding and exercisable at end of period 3,015,000 .12 3,020,000 .09
============ ============ ============ ============
Weighted average fair value of options
granted during the period 60,000 .13 2,020,000 .12
============ ============ ============ ============
</TABLE>
<PAGE> 53
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
The following table summarizes information about fixed stock options to
employees outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Number Out- Remaining
standing and Contractual
Exercisable at Life (Years) at
Exercise December 31, December 31,
Price 1999 1999
------------ -------------- ---------------
<S> <C> <C> <C>
$ .02 1,000,000 3.00
$ .12 2,000,000 1.42
$ .24 15,000 2.00
------------ ------------ ------------
$ .02 - 24 3,015,000 1.96
============ ============ ============
</TABLE>
(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,
1999 1998
------------ ------------
<S> <C> <C>
Tax benefit computed at statutory rate
for continuing operations $ (420,000) $ (246,583)
Non-deductible permanent difference -- 42,196
Change in valuation allowance, net of
valuation allowance of acquired subsidiaries 420,000 (94,417)
------------ ------------
Tax benefit for continuing operations $ -- $ (298,804)
============ ============
Tax expense (benefit) of discontinued operations $ -- $ --
============ ============
</TABLE>
Deferred taxes are determined based on the temporary differences
between the financial statement and income tax bases of assets and
liabilities as measured by the enacted tax rates, which will be in
effect when these differences reverse. The components of deferred
income tax assets are as follows:
<PAGE> 54
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 2,137,000 $ 1,734,583
Provision for doubtful accounts -- 21,000
Other 21,000 18,000
------------ ------------
Total deferred tax asset 2,158,000 1,773,583
Valuation allowance (1,571,000) (1,536,642)
------------ ------------
Net deferred asset 587,000 236,941
------------ ------------
Deferred tax liability:
Capital leases 107,000 --
Difference in carry value of property and
equipment 480,000 236,941
------------ ------------
Total deferred tax liability 587,000 236,941
------------ ------------
Net deferred tax liability $ -- $ --
============ ============
</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 in excess of
$2,100,000 as of December 31, 1999, to offset future taxable income,
which expire 2019.
(13) COMMITMENTS AND CONTINGENCIES
Prior to January 1, 1998, Acqueren relocated its operations from
Brooklyn, New York to Nicholls, Georgia. In accordance with the move
the Company executed a lease from an unrelated party for the Company's
new facility. The current lease agreement expires October 9, 2001, and
provides for annual rent of $40,740. Rent expenses of $39,960 and
$31,600, respectively, was recorded at December 31, 1999 and 1998.
In connection with the relocation to Nicholls, Georgia. Acqueren,
through its wholly owned subsidiary, NPI, terminated its union contract
in New York. The union has claimed a deficiency for unfunded pension
liabilities. Management has accrued $160,000 at December 31, 1999
relating to this potential liability. Management estimates that such an
amount will be sufficient to cover any potential obligation to this
union.
NPI sells automotive and electrical products primarily to companies in
the United States and Canada. For the years ended December 31, 1999 and
1998, over seventy percent of its sales were to one customer.
Management of the Company performs ongoing credit evaluations and makes
provision for uncollectible amounts when deemed necessary.
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,
<PAGE> 55
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 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.
On August 17, 1999, the former shareholders of Acqueren filed an action
in New York, alleging misrepresentation by AIII. Management expects the
outcome of such litigation will not have a material adverse effect on
the Company.
(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, 1999.
Other related party transactions are discussed in Notes 2, 6, 9, 11 and
13.
(15) SEGMENT INFORMATION
The Company has three reportable segments and corporate overhead:
industrial/commercial, oil and gas, and real estate. 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 predominately in the
energy industry; (3) distributors of specialty chemicals for the
automotive after-market, including specializing in the application of
spray-on bed liners for truck beds; and (4) a holding company for
future commercial ventures. The oil and gas segment owns an oil, gas
and mineral royalty interest in Washington County, Texas. Prior to
1999, the Company had a media/entertainment segment which they sold in
1999. The comparative segment information reflects media entertainment
data prior to restatement. 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 performances based on profit or loss from
<PAGE> 56
AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
operations before income taxes, not including nonrecurring gains and
losses and foreign exchange 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 subsidiaries and the management at the time
of the acquisition was retained.
Consolidated net revenues, net operating losses, and identifiable
assets were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Revenues:
Industrial/Commercial $ 13,396,256 $ 8,907,617
Oil and gas -- --
Real estate -- --
Corporate -- --
------------ ------------
$ 13,396,256 $ 8,907,617
============ ============
Income (loss) from operations:
Industrial/Commercial $ 159,042 $ 213,072
Oil and gas (6,813) (8,300)
Real estate (74,486) (115,291)
Corporate expenses (2,048,457) (918,246)
------------ ------------
$ (1,970,714) $ (828,765)
============ ============
Identifiable assets:
Industrial/commercial $ 8,507,502 $ 6,183,083
Media/Entertainment -- 1,280,467
Oil and gas 70,006 63,763
Real estate 996,065 576,772
Corporate 834,941 1,844,665
------------ ------------
$ 10,408,514 $ 9,948,750
============ ============
</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.
<PAGE> 57
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
--------- ------------
27 Financial Data Schedule
