Some of the statements contained in this Form 10-K of American International
Industries, Inc. (hereinafter the "Company" or the "Registrant") for its
year ended December 31, 2008 discuss future expectations, contain
projections of results of operations or financial condition or state other
forward-looking information. 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:
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the success or failure of management's efforts to implement their
business strategies for each subsidiary;
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the ability of the Company to raise sufficient capital to meet
operating requirements of our subsidiaries;
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the ability of the Company to hire and retain quality management for
our subsidiaries;
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the ability of the Company to compete with other established companies
that operate in the same markets and segments;
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the effect of changing economic conditions impacting operations of our
subsidiaries;
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the ability of the Company to successfully manage its subsidiaries and
from time to time sell certain assets and subsidiaries to maximize
value; and
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the ability of the Company to meet the other risks as may be described
in future filings with the SEC.
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American International Industries, Inc. - General
American International Industries, Inc., organized under the laws of the
State of Nevada in September 1994, is a diversified corporation with
interests in industrial companies, oil and gas interests, oilfield supply
and service companies, and interests in undeveloped real estate in the
Galveston Bay, TX area. The Company’s business strategy is to acquire
controlling equity interests in undervalued companies and take an active
role in its new subsidiaries to improve their growth, by providing its
subsidiaries with access to capital, leveraging synergies and providing its
subsidiaries with the Company's management expertise. The Company is
sometimes referred to as "we", "us", "our", and other such phrases as
provided in Regulation F-D (Fair Disclosure).
American International Industries, Inc. is a holding company and has three
reporting segments and corporate overhead:
· Northeastern
Plastics (NPI) - a wholly-owned subsidiary, is a supplier of
automotive after-market products and consumer durable goods products to
retailers and wholesalers in the automotive after-market and in the consumer
durable electrical products markets;
· Shumate Energy
Technologies, Inc. (SET) - a wholly-owned subsidiary,
manufactures highly specialized equipment for energy industry customers,
including expandable tubing technology products that are used in field
service operations for oil and gas exploration under extreme environmental
conditions. SET manufactures large-diameter products and close tolerance
machined parts that range up to thirty-four feet in length using state of
the art, large part CNC equipment.
· Delta
Seaboard Well Services (Delta) - a 51% owned subsidiary, is an
onshore rig-based well-servicing contracting company providing services to
the oil and gas industry;
· Corporate
overhead - 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.
Corporate overhead also includes Brenham Oil & Gas, a division that owns an
oil, gas and mineral royalty interest in Washington County, Texas, which is
carried on the Company's balance sheet at $0. The Company received
income from the royalty interest of $4,396 in 2008, $4,859 in 2007, $5,147
in 2006 . Through Brenham Oil & Gas, the Company is engaged in
negotiations with financial institutions for the purpose of financing
potential acquisitions of existing oil and gas properties and reserves.
The Company is seeking to enter into arrangements with third-party owners
and potential partners with proven oil and gas reserves, but who lack the
financial resources and/or the technical expertise possessed by the Company,
to assist them with the resources required to develop their reserves.
The historical financial statements of the Company include the acquisitions
of acquired companies as of the effective dates of the acquisitions, and the
results of those companies subsequent to closing, as these transactions were
accounted for under the purchase method of accounting.
Our long-term strategy is to expand the operations of each of our
subsidiaries in their respective fields by providing managerial and
financial support to our subsidiaries. As part of our business model, we
explore mergers, acquisitions and dispositions of businesses and assets from
time to time, based upon the reasonable discretion of management and the
value added of each potential transaction.
We encounter substantial competition in each of our subsidiaries product and
service areas. Such competition is expected to continue. Depending on the
particular market involved, our subsidiaries 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.
Corporate overhead includes our investment activities for financing current
operations and expansion of our current holdings, as well as evaluating the
feasibility of acquiring additional businesses.
On December 31, 2008, the board of directors of the Company approved the
deconsolidation of Hammonds Industries, Inc. (“Hammonds”) from the
Company. To effect the deconsolidation of Hammonds, the Company was
required to reduce its ownership percentage, board membership, and
guarantee of Hammonds’ debt. After the distribution of the special
dividend of approximately 17.4 million shares of Hammonds’ common stock
to the Company’s shareholders of record on December 31, 2008, the
Company’s ownership is proximately 13% of Hammonds' issued and
outstanding common stock. Effective December 31, 2008, Carl Hammonds was
appointed Chairman and CEO and John Stump, III was appointed CFO.
Hammonds accepted the resignations of Daniel Dror, as Chairman of the
Board and CEO, Sherry L. Couturier, as Director, CFO and Vice President,
and Charles R. Zeller, as Director, and appointed Richard C. Richardson
as a new board member unrelated to the Company. As a result, the
majority of Hammonds’ board of directors is no longer controlled by the
Company. Additionally, a reduction of the Company’s guarantee of
Hammonds’ debt was obtained from Texas Community Bank. As a result
of the deconsolidation, the 2007 financial statements have been revised
to present the previously consolidated operations as discontinued
operations.
The Company's executive offices are located at 601 Cien Street, Suite 235,
Kemah, Texas 77565 and its telephone number is (281) 334-9479.
Delta Seaboard Well Service, Inc.
Effective September 30, 2003, the Company acquired a 51% interest in Delta
Seaboard Well Service, Inc. and a related entity, Seaboard Well Service
(collectively "Delta"), both Texas corporations, for cash consideration of
$1,000,000 pursuant to a stock purchase agreement. We also issued 400,000
shares of series A 5% cumulative redeemable convertible preferred stock
("Series A Preferred Stock") to a creditor of Delta in consideration for the
release of the creditor’s interest in certain of Delta's coastal rigs and in
satisfaction of certain Delta indebtedness. The Series A Preferred Stock
issued to the former creditor is convertible into shares of the Company's
restricted common stock at $10.00 per share. In 2004 the holder of the
Series A Preferred Stock converted 10,000 shares of Series A Preferred Stock
into 10,000 shares of common stock and in 2005 the holder of the Series A
Preferred Stock agreed to convert the remaining 390,000 Series A Preferred
Stock into 390,000 shares of common stock issuable at a rate of 10,000
shares per month.
Delta is managed by Robert W. Derrick, Jr. and Ron Burleigh, who are Delta's
executive officers and owners of the 49% minority interest of Delta. Mr.
Derrick was elected as a director of the Company in February 2004. Delta was
founded in 1958 in Houston, Texas.
Delta's Business
Delta's well site services provide a broad range of products and services
that are used by oil companies and independent oil and natural gas companies
operating in South and East Texas, and the Gulf Coast market. Delta's
services include workover services, plugging and abandonment, and well
completion and recompletion services. During 2004, Delta consolidated its
Louisiana operations into its Houston operation and facilities and sold
three rigs in Louisiana to third parties. Delta continues to own one
land-based rig in Louisiana and five land-based rigs in the Gulf Coast
region of Texas.
Well Service Market
Demand for Delta's workover and related services are correlated to the level
of expenditures by oil and gas producers, which is a function of oil and gas
prices. In general, we expect demand for Delta's services to increase
significantly due to expanding activities of oil and gas producers in the
United States as a result of the significant increase in energy prices in
the U.S. and worldwide. Delta is dependent to a significant degree on the
level of development and workover activities in the U.S. Gulf Coast area.
Delta faces competition from many larger companies in the U.S. Gulf of
Mexico market.
Products and Services
Workover Services. Delta provides workover products and services primarily
to customers in the U.S. Gulf Coast market. Workover products and services
are used to restore or increase production on a producing well. Workover
services are typically used during the well development, production and
abandonment stages. Delta's hydraulic workover units are typically
contracted on a short-term dayrate basis. As a result, utilization of our
workover units varies from period to period and the time to complete a
particular service contract depends on several factors, including the number
of wells and the type of workover or pressure control situations involved.
Usage of our workover units is also affected by the availability of trained
personnel. With our current level of trained personnel, we estimate that we
have the capability to crew and operate multiple jobs simultaneously.
During 2008, Delta had the opportunity to purchase and import new Chinese
Seamless Pipe (OCTG) and make it available to our customers who were
drilling and completing new wells in the United States. These pipe sales
generated considerable revenues and profit for Delta for the year ended
December 31, 2008, and management expects this part of Delta’s business to
continue during 2009.
Delta's Competition
Delta believes that it has certain competitive advantages related to cost
efficiencies, material coordination, reduced engineering time resulting from
its highly experienced staff of toolpushers, field supervisors and
operations managers, and its fully integrated operations with cementing and
electric wireline operations that include cutting casing and tubing as part
of Delta's services. Delta also believes that with the financial resources
of the Company and its access to the public capital markets, Delta will be
able to pursue strategic acquisitions and enter into ventures that should
result in long-term growth and market expansion.
Delta's services are sold in highly competitive markets. The competition in
the oil and gas industry could result in reduced profitability or inability
to increase market share. In its markets, principally in South and East
Texas, and the Gulf Coast, Delta competes principally with the following
entities: Tetra Applied Technologies, Key Energy Services, Basic Energy as
well as a number of smaller companies. The land drilling service business is
highly fragmented and consists of a small number of large companies and many
smaller companies. Many of Delta's competitors have greater financial
resources than Delta. Delta relies upon the Company's ability to provide
working capital and secure debt and/or equity financing in order for Delta
to continue to expand its oil and gas well services business and pursue its
growth plan in land-based exploration and drilling operations.
Government Regulation
The business of Delta is significantly affected by federal, state and local
laws and regulations relating to the oil and natural gas industry. Changes
in these laws and regulations, including more restrictive administrative
regulations and enforcement of these laws and regulations, could
significantly affect Delta's business and results of operations. Delta
cannot predict future changes in existing laws and regulations or how these
changes in laws and regulations may be interpreted or the effect changes in
these laws and regulations may have on Delta or its future operations or
earnings. Delta cannot predict whether additional laws and regulations will
be adopted. Delta depends on the demand for its products and services from
oil and natural gas companies. This demand is affected by economic cycles,
changing taxes and price and other laws and regulations relating to the oil
and gas industry, including those specifically directed to oilfield and
offshore operations. The adoption of new laws and regulations curtailing
exploration and development drilling for oil and natural gas in our areas of
operation could also adversely affect Delta's operations by limiting demand
for its products and services. Delta cannot determine the extent to which
its future operations and earnings may be affected by new legislation, new
regulations or changes in existing regulations or enforcement.
Although Delta believes that it is in compliance with existing laws and
regulations, there can be no assurance that substantial costs for compliance
will not be incurred in the future. Moreover, it is possible that other
developments, such as the adoption of more restrictive environmental laws,
regulations and enforcement policies, could result in additional costs or
liabilities that Delta cannot currently quantify.
Employees
As of December 31 2008, Delta had 40 employees, including its two executive
officers. No employees are covered by a collective bargaining agreement and
Delta considers relations with its employees satisfactory.
Facilities
Delta's facilities consist of 2,500 square feet of office space and 10,000
square feet of warehouse located in Houston, TX. These facilities were
formerly leased by Delta and were acquired by Delta in 2005 from a third
party for $850,000. In 2006, these facilities were acquired by American
International Industries, Inc. (51%) and Delta's executive officers and
owners of the minority interest of Delta (49%). During 2004, Delta
consolidated its Louisiana operations and offices into its Houston
facilities to create operating efficiencies. Delta has retained a 5,000
square foot office and warehouse facility in Louisiana which is leased from
a third party at an annual rental of $18,000.
Shumate Energy Technologies, Inc.
Effective October 8, 2008, Shumate Energy Technologies, Inc. (SET), our
wholly-owned subsidiary, purchased the assets of Shumate Machine Works
Corporations from Shumate Industries, Inc. for a purchase price of
$5,000,000 (see note 3). SET is managed by Larry C. Shumate, President,
and is located at 12060 FM 3083, Conroe, Texas 77301.
SET’s Business
SET, our contract machining and manufacturing subsidiary, focuses in the
energy field services market. SET manufactures products, parts,
components, and assemblies for its customers designed to their
specifications. SET provides state of the art 3-D modeling software,
computer numeric-controlled, or CNC, machinery and manufacturing expertise
to our customers’ research and development, engineering, and manufacturing
departments for desired results with their products. SET’s
customers include, without limitation, Baker Hughes, Canrig Drilling
Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith
International, and Weatherford International.
Energy Field Services Markets
The energy field services market is comprised of several market segments
including oil & gas field services, pipeline and transportation, process
controls, fluid management and controls, sub-sea, refining, and
maintenance services for these areas. SET currently manufactures
products, spare parts, and assemblies for the oil & gas field services
market segment. Although the impact of the global recession is
creating some uncertainty in these markets, the U.S. Government’s Energy
Information Agency (EIA) stated in its January 13, 2009
Short Term Energy
Outlook that in 2009 domestic crude oil production is projected to
increase by over 300,000 bbl/d to an average of 5.25 million bbl/d, the
first increase since 1991. Output is further expected to increase by
another 50,000 bbl/d in 2010. The Agency also projects that in 2009
lower-48 natural gas production outside of the Gulf of Mexico region is
expected to increase by 1%. Natural gas drilling activity is expected to
begin recovery in 2010.
Products and Services
The diverse line of products SET manufactures includes the following:
- Expandable tubular products including liner hangers, launchers and sand
screens for energy field service applications;
- Top drive assemblies, sub-assemblies and spare service parts;
- Measurement while drilling (MWD) products;
- Directional drilling products;
- Completion tools;
- Exploration products for research and development;
- Natural gas measurement equipment, including fittings and valves;
- Power frames for centrifugal pumps and mud motors; and
- Sub-sea control equipment.
SET’s investment in capital equipment and software provides capabilities
to perform close tolerance, highly specialized work for oil field
equipment and tools, process controls, formation evaluation tools, and
exploration and production products. SET’s capabilities include producing
large-diameter products and close tolerance machined parts that range up
to thirty-four feet in length using a myriad of materials of construction
including high grade carbon steel, high grade stainless steel, nickel, and
chrome based alloys. SET uses state of the art, large part CNC equipment
in the production of these parts and has developed in-house trade secrets
and processes with respect to the manufacture of certain products. SET
produces complex assemblies, including expandable tubing technology
products that are used in field service operations under extreme
environmental conditions for oil and gas exploration.
Sales and Marketing
SET has developed and maintained long-term relationships with its
customers. Management uses a variety of methods to identify target
customers, including the utilization of databases, direct mail, and
participation in manufacturers’ trade shows. The energy field service
target market usually consists of larger, well capitalized companies as
well as smaller firms. These efforts supplement SET’s traditional sales
and marketing efforts of customer referrals and territory canvassing.
Nearly all of SET’s sales are on a negotiated price basis. In some cases,
sales are the result of a competitive bid process where a customer sends
to SET and other competitors a list of products required, and SET submits
a bid on each job. Frequently, the ability to meet customer delivery
schedules as well as plant capacities and capabilities are a significant
aspect of winning any bid or purchase order.
SET has a customer base of more than 20 customers. Two of these customers
represented approximately 88% percent of its revenues for fiscal year
2008. SET continually focuses on developing more volume from secondary
and tertiary customers and with new customers to reduce customer
concentration risk. Management believes that long-term relationships with
many of its customers will contribute to SET’s success.
SET’s customers include, without limitation, Baker Hughes, Canrig Drilling
Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith
International, and Weatherford International.
SET’s Competition
The machining and manufacturing business is engaged in fragmented and
highly competitive industry segments. Management estimates that there are
more than 100 machine shops in the metro-Houston area alone. SET
estimates that its share of the market, based on 2007 revenues, is less
than one percent (1%). Competition is based primarily on quality,
service, price, performance timeliness and geographic proximity. SET
competes with a large number of other machining and manufacturing
operators on a national, regional and local basis, most of which have
greater financial resources than SET does, and several of which are public
companies. SET also competes with overseas competitors whose labor costs
may be significantly lower than our costs.
SET believes that it is able to compete by defining and understanding
customer needs and by using its equipment and machinery base to
manufacture products with difficult specifications and tolerances.
Business Strategy
Strategies to achieve growth include the following:
Generating more revenues
and increasing profit margins by expanding contract machining and
manufacturing business and through investing in additional state-of-the
art CNC equipment which offers the ability to make increasingly complex
tools as required by customers. As a result of higher commodity
prices, activity levels and pricing for SET’s customers, SET will continue
to expand its operations and invest in additional computer-numeric
controlled machinery that allows it to manufacture higher precision
critical components for its customers growing demand of energy equipment.
Acquiring other
technology-oriented products to leverage asset base, manufacturing
infrastructure, market presence and experienced personnel. SET has
extensive experience in manufacturing and machining products, and has a
reputation for providing quality products and services in the energy field
services market. SET has an existing base of customers and existing
distribution channels in this market. SET intends to combine its
experience, reputation, customer base, and distribution channels with its
expertise and knowledge of the industry to market and distribute other
technology-oriented product lines for this customer base and through these
distribution channels.
Raw Materials
The principal raw materials that SET uses are carbon steel, aluminum,
stainless steel, nickel, brass, titanium and various special alloys and
other metals. The metals industry as a whole is cyclical, and at times
pricing and availability of raw materials in the metals industry can be
volatile due to numerous factors beyond SET’s control, including general,
domestic and international economic conditions, labor costs, production
levels, competition, import duties and tariffs and currency exchange
rates. This volatility can significantly affect the availability and cost
of raw materials, and may, therefore, adversely affect SET’s net sales,
operating margin, and profitability. On average, pricing for raw
materials has fluctuated about thirty percent annually on a historical
basis. During periods of rising raw materials pricing, SET has been able
to pass through the increase in cost to its customers approximately ninety
percent of the time. The remaining ten percent reflects down-time between
reviewing costs on standardized repetitive work that is not quoted on a
monthly basis. Accordingly, the increase in the cost of raw materials has
had an immaterial effect on SET’s operations; however, it is possible that
SET may not be able to pass any portion of such increases on to its
customers in the future.
Intellectual Property
SET relies on trade secret protection for our confidential and proprietary
information. SET seeks to enter into confidentiality agreements with its
employees, partners, and suppliers. It is possible, however, that others
will independently obtain similar information or otherwise gain access to
SET’s trade secrets.
Government Regulation and Environmental Matters
SET’s operations are subject to a number of federal, state and local
regulations relating to the protection of the environment and to workplace
health and safety. In particular, its operations are subject to extensive
federal, state and local laws and regulations governing waste disposal,
air and water emissions, the handling of hazardous substances, painting
product on premises, environmental protection, remediation and workplace
exposure. Hazardous materials used in SET’s operations include lubricants
and cleaning solvents. SET believes that it is in substantial
compliance with all such laws and does not currently anticipate that it
will be required to expend any substantial amounts in the foreseeable
future in order to meet current environmental or workplace health and
safety requirements.
Although no environmental claims have been made against SET and SET has
not been named as a potentially responsible party by the Environmental
Protection Agency or any other entity, it is possible that SET could be
identified by the EPA, a state agency or one or more third parties as a
potentially responsible party under CERCLA or under analogous state laws.
If so, SET could incur substantial litigation costs to prove that SET was
not responsible for the environmental damage.
Safety
SET is committed to emphasizing and focusing on safety in the
workplace. SET has a variety of safety programs in place, which include
periodic safety meetings and training sessions to teach proper safety work
procedures. SET has established “best practices” processes throughout
most of its operations to ensure that employees comply with safety
standards that SET establishes and to ensure full compliance with federal,
state and local laws and regulations. In addition, SET intends to
continue to emphasize the need for an accident-free workplace.
Employees
SET employs 47 people in Conroe, Texas. No employees are represented by a
labor union, and SET has not entered into a collective bargaining
agreement with any union. SET has not experienced any work stoppages and
considers the relations with its employees to be good.
Facilities
SET leases 30,000 square feet of manufacturing and office space located in
Conroe, TX.
Northeastern Plastics, Inc.
Northeastern Plastics, Inc. (NPI), a Texas corporation, is a wholly-owned
subsidiary of the Company. NPI is a supplier of products to retailers
and wholesalers in the automotive after-market and in the consumer durable
electrical products markets. In June 1998, the Company acquired all
the capital stock of Acqueren, Inc., a Delaware corporation, that owned 100%
of Northeastern Plastics, Inc. The total purchase consideration for
Acqueren was approximately $2,140,000. Northeastern Plastics was originally
founded in 1986 as a New York Corporation. NPI is located at 14221
Eastex Freeway, Houston, TX 77032.
Products and Services
NPI's diversified products are sold in the automotive and consumer retail
and after market channels. NPI currently markets its diversified product
assortment under the Good Choice® and MOTOR TREND® brand names.
The NPI MOTOR TREND® branded products include a variety of booster cables,
portable and rechargeable hand lamps, lighting products, cord sets, and
miscellaneous battery and other consumer automotive accessories. The NPI
MOTOR TREND® program is supported through a national advertising campaign in
MOTOR TREND® magazine.
The NPI Good Choice® branded product assortment not only matches in depth
but exceeds the NPI MOTOR TREND® branded product assortment. In addition,
the vast majority of the Good Choice® product line has been tested at the
Good Housekeeping Institute and prominently carries the Good Housekeeping
"Seal" on many of its products. The NPI Good Choice® product assortment
includes a variety of booster cables, portable hand lamps, lighting
products, cord sets, residential household light bulbs, night lights,
multiple outlet devices and other consumer products.
The NPI Good Choice® program is supported through a national advertising
campaign in the subscription and newsstand issues of Good Housekeeping
magazine and plans are being negotiated for additional brand advertising.
The 2008 expected pass through readership rate for the upcoming Good Choice®
2008 ads are expected to exceed 21,000,000 potential viewings.
NPI products are available at stores such as Family Dollar, Dollar Tree,
Ocean State Jobbers, Auto Zone, Bi-Mart, and Straus Auto among others.
Virtually all of NPI's products are manufactured overseas. NPI's products
are manufactured to meet or exceed NPI, UL and CSA specifications and
designs. NPI has no long-term agreements with any manufacturers for its
products, but relies on its management's business contacts with
manufacturers in renewing its short-term agreements. There is no assurance
that NPI will be able to continue to renew its present agreements with
manufacturers on terms economically favorable to NPI, if at all. Any
inability or delay in NPI's renewal of its agreements at economically
favorable terms could have a material adverse effect on NPI unless
alternative supplies are available. NPI's management believes that if they
are unable to utilize any of their present suppliers, it would be able to
secure alternative manufacturers / suppliers at comparable terms.
Sales and Marketing
NPI has working vendor agreements with its major customers. NPI sells
its products through the use of its in-house personnel and independent sales
agents covered under sales and marketing agreements. NPI contracts with
agents, who are responsible for contacting potential customers 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 on a commission basis only, calculated on the net sales price of
products invoiced to customers. No commissions are paid until NPI receives
payment from customers.
NPI also sells a substantial percentage of its products under a direct
import program that offers NPI customers the additional services of
arranging for overseas manufacturing and delivery to overseas freight
forwarders and, for additional cost, on-site factory product inspections
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 can also arrange for the complete turn-key deliveries of its
products to its customer’s place of business. Currently, NPI estimates
approximately slightly more than 30% of its sales are made through the use
of its direct import program and the remainder from warehouse sales.
NPI markets its products through such major chains as Family Dollar, Dollar
Tree, Ocean State Jobbers, Auto Zone, Bi-Mart, and Straus Auto, among
others. During our fiscal year ended December 31, 2008, NPI's large accounts
accounted for 76% of NPI's revenues. One of these customers accounted for
53% of NPI's revenues and 17% of the Company's revenues. The loss of
any of these major customers could have a material adverse effect on NPI
operating results. NPI's strategic plan for 2009 includes targeting
three or more additional large accounts and reducing its dependence upon
major customers by adding more mid-size accounts.
Competition
In the safety product category of the automotive after-market, which
accounts for a significant portion NPI's products and sales, NPI competes
against a large number of suppliers many of which have far greater financial
resources than NPI and therefore NPI's ability to increase market share may
be limited. NPI's management believes its primary competitors in the safety
products market include Coleman Cable Company and East Penn among other
large manufacturers and importers.
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. NPI's management believes its primary competitors in the
consumer durables market include Coleman Cable and American Tac and various
other producers.
Price is the primarily 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 substitutable with those of competitors. However, NPI believes
that opportunities exist to differentiate all of its products on the basis
of brand name, quality, reliability and customer service.
Intellectual Property
NPI has been issued the following trademarks: Jumpower™, expiring
February 2009, and The Bitty Booster Cable™, which was renewed in August
2008.
Employees
As of December 31, 2008, NPI employed 11 persons, including its executive
officer, as well as customer service and warehouse employees. No employees
are covered by a collective bargaining agreement. NPI's management considers
relations with its employees to be satisfactory.
Facilities
NPI operates from a Company-owned 38,500 square feet of warehouse and office
facility located in Houston, TX.
Corporate Transactions
In June 2002, the Company's real estate subsidiary, T.R.E. Enterprises,
Inc., sold approximately 63% of its real estate portfolio to Orion
HealthCorp., Inc. (AMEX: ONH), f/k/a SurgiCare, Inc. for $6,000,000,
evidenced by 1,200,000 shares of Series AA Convertible Preferred Stock,
redeemable by ONH at face value of $5.00 per share, which valuation was
based on independent appraisals. In December 2002, the Company agreed to
convert 300,000 Series AA Convertible Preferred Shares into 3,658,537 shares
of ONH common stock, which were subsequently sold in open market
transactions during 2003. During the third quarter of 2004, the
Company converted the remaining 900,000 shares of Series AA Convertible
Preferred Stock into 875,000 shares of ONH's common stock which shares had a
market value of $3,150,000 at the date of conversion. The Company sold
180,500 ONH shares for proceeds of $103,954 in February 2007. Through
December 31, 2006, the Company had an unrealized loss on these shares of
$633,227. The realized loss from the sale of the shares in 2007 was
$585,228. The net income effect of the sale of these shares is $47,999 in
2007. The Company owns 644,500 shares of ONH's common stock at
December 31, 2008 (see note 2).
On September 12, 2007, American acquired 170,345 shares, or approximately
7%, of OI Corporation's (NasdaqGM: OICO) common stock for a $1,000,000
cash payment and the issuance of 240,000 restricted shares of American's
common stock, valued at $5.05 per common share based upon the closing
market price on that date, for a total purchase price of $2,212,000. The
OICO shares were purchased from OI Corporation's former President and CEO,
William W. Botts. The closing market price on the date of this transaction
for OICO was $13.23 per common share. At December 31, 2007, our investment
in the 170,345 shares of OICO common stock is classified as trading
securities on the balance sheet and was valued at $2,201,198, or $12.92
per share, using the closing market price on that date. During 2008,
American purchased an additional 7,000 shares at an average purchase price
of $11.67 per share. In October 2008, OICO purchased 176,945 shares
of American's OICO holdings for $1,882,923, or $10.64 per share.
The realized loss from the sale of the shares in 2008 was $406,456 (see
note 2).
On November 27, 2007, American acquired 1,000,000 restricted shares, or
approximately 9% of Rubicon Financial Incorporated’s (OTCBB: RBCF.OB)
common stock for a $1,000,000 cash payment and the issuance of 200,000
restricted shares of American's common stock, valued at $4.90 per common
share based upon the closing market price on that date, for a total
purchase price of $1,980,000. The closing market price on the date of this
transaction for RBCF was $2.87 per common share. During 2008, American
purchased an additional 38,900 shares at an average purchase price of
$0.17 per share. At December 31, 2008, our investment in the 1,038,900
shares of RBCF common stock is classified as trading securities on the
balance sheet and was valued at $311,670, or $0.30 per share, based upon
the closing market price on that date. At December 31, 2007, our
investment in the 1,000,000 shares of RBCF common stock is classified as
trading securities on the balance sheet and was valued at $3,700,000, or
$3.70 per share, based upon the closing market price on that date. Rubicon
Financial Incorporated is a development stage company, operating as a full
service insurance agency offering personal and commercial lines, health,
and life insurance products to individuals and companies in California (see
note 2).
At December 31, 2008 and 2007, the Company has unrealized trading losses of
$4,054,334 and gains of $2,401,333, respectively, related to securities held
on those dates. These unrealized gains / losses are included in the
consolidated statements of operations for the respective years. The Company
recorded realized losses of $539,958 for the year ended December 31, 2008
and realized losses of $519,809 on the sales of trading securities and for
the year ended December 31, 2007. For the year ended December 31, 2006, the
Company had unrealized trading losses of $49,578 and recorded realized gains
on the sales of trading securities of $4,911 (see note 2).
On October 19, 2007, Nestle Products Corporation (incorporated on October
18, 2007 in the State of Nevada), a wholly-owned subsidiary of the
Company, acquired 9.9% of Las Vegas Premium Gold Products, Inc., a private
Nevada corporation, in exchange for 50,000 restricted shares of the
Company's common stock valued at $250,000, or $5.00 per common share based
upon the closing market price on that date. On October 3, 2008, NPC
entered into an agreement with LVPG, whereby the parties have agreed to
rescind the October 2007 stock purchase agreement. LVPG returned 60,000
shares (50,000 original shares plus 10,000 stock dividend shares) of AMIN
common stock and NPC returned 470,237 shares of LVPG common stock. In
October, the Investment in Las Vegas Premium Gold Products of $250,000 was
reversed and the return of AMIN's 60,000 shares were recorded as treasury
stock.
On October 25, 2005, the Company and Yuma Production Company (Yuma) entered
into a partnership agreement to purchase a refinery in Nixon, Texas owned by
Notre Dame Investors, Inc. (Notre Dame). Notre Dame refused to honor the
contract to sell the refinery and filed Chapter 11 Bankruptcy in Federal
Court in San Antonio, Texas. Yuma filed a claim against Notre Dame in the
bankruptcy case and the judge ordered Notre Dame to auction off the refinery
to settle the claim. Lazarus Energy LLC was the successful bidder in the
auction for the refinery. A settlement agreement between Yuma and
Notre Dame was approved by the bankruptcy judge, whereby Yuma was awarded a
$4,000,000 claim against the payments on the promissory note used to
purchase the refinery. Based on the October 25, 2005 partnership
agreement with Yuma, the Company's 50% share of the award is $2,000,000,
consisting of cash of $1,000,000 and a note receivable of $1,000,000. The
cash was received in August 2006 and the balance of the note receivable was
paid in full during 2008. This settlement is included in other income
for 2006.
During the fourth quarter of 2008, American received a 1.705 acre tract of
land in Galveston County appraised at $540,000 as a guarantor's fee.
In connection with this fee, American has pledged $1,750,000 in certificates
of deposit for a $4,000,000 loan to Dawn Condominiums L.P. at Texas
Community Bank. As the principal of the loan is reduced, the bank will
release portions of the pledged certificates of deposit until the loan is
paid in full. During 2007, American purchased for investment a 174
acre tract of land in Waller County, Texas for $1,684,066. This property is
listed for sale with a real estate broker. American continues to own
287 undeveloped acres of waterfront property on Dickinson Bayou and
Galveston Bay in Galveston County, Texas. American is carrying this property
on the balance sheet at its historical book value of $225,000. In November
2005, American signed a contract for sale of the property for $16,000,000
with Lakeland Partners III. In January 2007, Lakeland assigned all of its
interest in the contract to Westfield Forest, L.P. Westfield deposited
$95,000 in earnest money with the title company upon assignment of the
contract, which had an initial feasibility period of one year. In July
2008, the contract was amended to extend the feasibility period to October
31, 2008. American advised Westfield that it would not extend the
contract any further. In October 2008, American was advised by
Westfield that due to unforeseen serious health reasons of its main
principal, Westfield could not finalize all of the permits and financing for
the development of the 287 acres, timely. Westfield delivered to
American all of their studies and project development documents.
American believes that this property and its development plans will sell for
substantially more than the price for which the property was being sold to
Westfield, due to the fact that the property is in a rapidly growing
Galveston / Houston, Texas metropolitan area and real estate in the
surrounding areas have increased substantially in value in the past 24
months. American has engaged CBRE on an exclusive basis to sell the
property for an increased listing price of $25,000,000. These
properties are not going to be developed by nor are they being held as
inventory by American.
ITEM 1A. RISK FACTORS RELATED TO OUR BUSINESSES
General
We may experience adverse impacts on our results of operations as a result
of adopting new accounting standards or interpretations
Our implementation of and compliance with changes in accounting rules,
including new accounting rules and interpretations, could adversely affect
our operating results or cause unanticipated fluctuations in our operating
results in future periods. For example, we are required by the
Sarbanes-Oxley Act of 2002 to file annual reports and quarterly reports
disclosing the effectiveness of our internal controls and procedures.
Although we believe our internal controls are operating effectively, and we
have committed internal resources to ensure compliance, we cannot guarantee
that we will not have any material weaknesses as reported by our auditors,
or that such deficiencies will not be discovered through our internal
reviews, and such determination could materially adversely affect our
business or significantly increase our costs in order to establish effective
controls and procedures.
Actual results could differ from the estimates and assumptions that we use
to prepare our financial statements
To prepare financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions, as of the date of the financial statements, which affects the
reported values of assets, liabilities, revenues and expenses and
disclosures of contingent assets and liabilities. Areas requiring
significant estimates by our management include:
- contract costs and profits and revenue recognition;
- provisions for uncollectible receivables and recoveries of costs from
subcontractors, vendors and others;
- provisions for income taxes and related valuation allowances;
- recoverability of other intangibles and related estimated lives;
- accruals for estimated liabilities;
- timing of the introduction of new products and services and market
acceptance of the same
Risks related to our Delta subsidiary
Delta’s operations are materially dependent on levels of oil and gas
workover and abandonment activities in the United States
Delta's services include workover services, plugging and abandonment, and
well completion and recompletion services. Activity levels for Delta’s oil
and gas related services business are affected both by short-term and
long-term trends in oil and gas prices and supply and demand balance, among
other factors. Oil and gas prices and, therefore, the levels of workover and
abandonment activities, tend to fluctuate. Demand for Delta's services can
vary significantly due to levels of activities of oil and gas producers in
the United States which are directly effected by the significant increase in
energy prices in the U.S. and worldwide. Delta is dependent to a significant
degree on the level of development and workover activities in the U.S. Gulf
Coast area.
Any prolonged slowdown of the U.S. economy may contribute to an eventual
downward trend in the demand for Delta’s services
Other factors affecting Delta’s oil and gas services business include any
decline in production of oil and gas wells in the Texas and Gulf Coast area
in which it operates. Delta’s revenues and profitability are particularly
dependent upon oil and gas industry activity and spending levels in the
Texas and Gulf Coast region. Delta’s operations may also be affected by
interest rates and cost of capital, tax policies and overall economic
activity. Adverse changes in any of these other factors may depress the
levels of well workover and abandonment and result in a corresponding
decline in the demand for Delta’s products and services and, therefore, have
a material adverse effect on Delta’s revenues and profitability.
Profitability of Delta’s operations is dependent on numerous factors beyond
Delta’s control
Delta’s operating results in general, and gross margin in particular, are
functions of market conditions and the product and service mix sold in any
period. Other factors impact the cost of sales, such as the price of steel,
because approximately 60% of Delta’s oil and gas related revenues is from
the sale of new drilling pipe and used pipe extracted during Delta’s well
plugging business. Competition for pipe which is impacted by the US and
worldwide cost of and demand for steel, availability of skilled labor and
contract services, shortages in raw materials due to untimely supplies or
ability to obtain items at reasonable prices may also continue to affect the
cost of sales and the fluctuation of gross margin in future periods.
Delta encounters and expect to continue to encounter intense competition in
the sale of Delta’s products and services
Delta competes with numerous companies and its services are sold in highly
competitive markets. The competition in the oil and gas industry could
result in reduced profitability or inability to increase market share. In
its markets, principally in South and East Texas, and the Gulf Coast, Delta
competes principally with the following entities: Tetra Applied
Technologies, Key Energy Services, Basic Energy, which are far larger than
Delta, as well as a number of smaller companies. The land drilling service
business is highly fragmented and consists of a small number of large
companies and many smaller companies. Many of Delta's competitors have
greater financial resources than Delta. Many of Delta’s competitors have
substantially greater financial and other related resources than us.
Dependence upon major customers for Delta’s workover products and services
Delta provides workover products and services primarily to customers in the
U.S. Gulf Coast market. Workover products and services are used to restore
or increase production on a producing well. Workover services are typically
used during the well development, production and abandonment stages. Delta's
hydraulic workover units are typically contracted on a short-term dayrate
basis. As a result, utilization of Delta’s workover units varies from period
to period and the time to complete a particular service contract depends on
several factors, including the number of wells and the type of workover or
pressure control situations involved. In 2007, Delta’s largest customers for
workover services were El Paso Production Company, The Houston Exploration
Company, The Railroad Commission of Texas, Legend Natural Gas and Dominion
Exploration and Production, Inc.
Delta’s revenues and cash flows from pipe sales are subject to commodity
price risk
Approximately 60% of Delta’s oil and gas related revenues is from the sale
of pipe; therefore, Delta has increased market risk exposure in the pricing
applicable to the costs of steel. Realized pricing is primarily driven by
the prevailing worldwide price and demand for steel. The cost of steel has
been increasing significantly due to increased world demand generally and
from China and India specifically.
Delta’s business involves certain operating risks, and its insurance may not
be adequate to cover all losses or liabilities Delta might incur in its
operations
Delta’s operations are subject to many hazards and risks, including the
following:
- fires and explosions;
- accidents resulting in serious bodily injury and the loss of life or
property;
- pollution and other damage to the environment; and
- liabilities from accidents or damage by our fleet of trucks, rigs and
other equipment.
If these hazards occur, they could result in suspension of operations,
damage to or destruction of our equipment and the property of others, or
injury or death to our or a third party's personnel.
Risks related to government regulation
Delta’s business is significantly affected by federal, state and local laws
and regulations relating to the oil and natural gas industry. Changes in
these laws and regulations, including more restrictive administrative
regulations and stricter enforcement of these laws and regulations, could
significantly affect Delta's business and results of operations. Delta
cannot predict future changes in existing laws and regulations or how these
laws and regulations may be interpreted or the effect changes in these laws
and regulations may have on Delta or its future operations and
profitability. Delta cannot predict whether additional laws and regulations
will be adopted. The adoption of new laws and regulations curtailing
exploration and development drilling for oil and natural gas in Delta’s
areas of operation could also materially adversely affect Delta's operations
by limiting demand for its products and services.
Delta’s workover products and services are subject to and affected by
various types of government regulation, including numerous federal and state
environmental protection laws and regulations. These laws and regulations
are becoming increasingly complex and stringent. Governmental authorities
have the power to enforce compliance with these regulations, and violators
are subject to civil and criminal penalties, including civil fines,
injunctions, or both. Third parties may also have the right to pursue legal
actions to enforce compliance. It is possible that increasingly strict
environmental laws, regulations and enforcement policies could result in
substantial costs and liabilities to Delta and could subject its operations
to increased scrutiny.
Risks related to our SET subsidiary
The majority of our revenues are generated from a small number of
customers, and our results of operations and cash flows will be adversely
affected if any of our major customers either fail to pay on a timely
basis or cease to purchase our products.
Two of our customers accounted for approximately 88% of our sales. At
December 31, 2008, two customers accounted for approximately 73% of our
trade accounts receivable balance. These customers do not have any
ongoing commitment to purchase our products and services. We generally do
not require collateral from our customers, although we do perform ongoing
credit evaluations of our customers and maintain allowances for potential
credit losses which, when realized, have been within the range of our
expectations. If one or more of our major customers stops purchasing our
products or defaults in its obligation to pay us, our results of
operations as well as our cash flows will be adversely affected.
We face significant competition in our markets. Our inability to compete
successfully could have a material adverse effect on our business and
results of operations.
The energy field services industry is highly competitive. Competition in
the sale of our products is primarily based on process capability,
quality, cost, delivery and responsiveness. Many of our competitors are
entities that are larger and have greater financial and personnel
resources than we do. We may not be able to compete successfully. If we
do not compete successfully, our business and results of operations will
be materially adversely affected.
We purchase metals in the open market, and our profitability may vary if
prices of metals fluctuate.
The principal raw materials that we use are carbon steel, aluminum,
stainless steel, nickel, brass, titanium and various special alloys and
other metals. The metals industry as a whole is cyclical, and at times
pricing and availability of raw materials in the metals industry can be
volatile due to numerous factors beyond our control, including general,
domestic and international economic conditions, labor costs, production
levels, competition, import duties and tariffs and currency exchange
rates. This volatility can significantly affect the availability and cost
of raw materials, and may, therefore, adversely affect our net sales,
operating margin and net income. During periods of rising raw materials
pricing, there can be no assurance that we will be able to pass any
portion of such increases on to our customers. When raw material prices
decline, customer demands for lower prices could result in lower sale
prices and, as we use existing inventory, result in lower
margins. Changing metal prices could adversely affect our ability to
attain profitably.
The oil & gas industry is subject to fluctuations in demand, which results
in fluctuations in our results of operations.
Most of our products are sold to oil and gas field services companies that
experience significant fluctuations in demand based on economic
conditions, energy prices, domestic and international drilling rig counts,
consumer demand, and other factors beyond our control. In 2008 and 2007,
we experienced increased activity levels driven by increases in energy
commodity prices and increased demand for oil field drilling
products. However, the increase in demand could be temporary as commodity
prices fluctuate daily. Reduced demand for oil field drilling products
would result in lower activity levels for our company. These changes can
happen very quickly and without forecast or notice, and may have a
material adverse effect on our results of operations.
Our operations are subject to a number of federal, state and local
regulations relating to the protection of the environment and to workplace
health and safety. If we were found to be responsible for significant
damages related to such regulation, it could have a material adverse
effect on our business and results of operation.
Our operations are subject to extensive federal, state and local laws and
regulations governing waste disposal, air and water emissions, the
handling of hazardous substances, environmental protection, remediation,
workplace exposure, and other matters. Hazardous materials that we use in
our operations primarily include lubricants and cleaning solvents. Our
leased facility is located in an industrial area close to properties with
histories of heavy industrial use. Although no environmental claims have
been made against us and we have not been named as a potentially
responsible party by the EPA or any other party, it is possible that we
could be identified by the EPA, a state agency or one or more third
parties as a potentially responsible party under CERCLA or under analogous
state laws. If so, we could incur substantial litigation costs to prove
we are not responsible for the environmental damage, or, if we were found
to be a responsible party, we could be liable for significant
damages. This could have a material adverse effect on our business and
results of operations.
Risks related to our NPI subsidiary
Dependence upon third-party manufacturers for its products
Virtually all of NPI's products, which include products sold in the
automotive and consumer retail and after market channels, are manufactured
overseas. NPI has no long-term agreements with any manufacturers for its
products, but relies on management's business contacts with manufacturers in
renewing its short-term 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. Any inability or delay in NPI's
renewal of its agreements at economically favorable terms could have a
material adverse effect on NPI unless alternative supplies are available.
Dependence upon third-party licenses
NPI markets its diversified product assortment under the Good Choice® and
MOTOR TREND® brand names. Nearly all of the NPI Good Choice® product line
has been tested at the Good Housekeeping Institute and prominently carries
the Good Housekeeping "Seal" on the vast majority of its products. The NPI
Good Choice® product assortment includes a variety of booster cables,
portable hand lamps, lighting products, cord sets, residential household
light bulbs, night lights, multiple outlet devices and other consumer
products. The Good Choice® program is dependent upon a national advertising
campaign in the subscription and newsstand issues of Good Housekeeping
magazine, pursuant to an agreement with Good Housekeeping.
The NPI MOTOR TREND® branded products include a variety of booster cables,
portable and rechargeable hand lamps, lighting products, cord sets,
emergency road side kits and miscellaneous battery and other consumer
automotive accessories. The NPI MOTOR TREND® program is a standard licensing
program with Source Inter Link and MOTOR TREND® magazine. NPI’s business
would be materially adversely affected if either the Good Housekeeping or
MOTOR TREND® relationship was terminated.
Dependence upon major customers
NPI markets its products through such major chains as Family Dollar, Dollar
Tree, Ocean State Jobbers, Auto Zone, Bi-Mart, and Straus Auto, among
others. During our fiscal year ended December 31, 2008, NPI's large accounts
accounted for 76% of NPI's revenues. One of these customers accounted for
53% of NPI's revenues and 17% of the Company's revenues. The loss of
any of these major customers could have a material adverse effect on NPI
operating results. NPI's strategic plan for 2009 includes targeting
three or more additional large accounts and reducing its dependence upon
major customers by adding more mid-size accounts.
Dependence upon independent sales agents and internal personnel for sales
and marketing
NPI has working vendor agreements with its major customers. NPI sells
its products through the use of its in-house personnel and independent sales
agents covered under sales and marketing agreements. NPI contracts with
agents, who are responsible for contacting potential customers 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 on a commission basis only, calculated on the net sales price of
products invoiced to customers. No commissions are paid until NPI receives
payment from customers. NPI is not dependent upon its sales agents and would
not be adversely affected if one or more sales agents having established
relationships with NPI’s major customers terminated the relationship with
NPI.
NPI faces competition from larger companies
In the safety product category of the automotive after-market, which
accounts for a significant portion NPI's products and sales, NPI competes
against a large number of suppliers, many of which have far greater
financial resources than NPI. This competition may adversely affect NPI's
ability to continue to increase revenues and market share. NPI's management
believes its primary competitors in the safety products market include
Coleman Cable Company and East Penn among other large manufacturers and
importers. 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. NPI's management believes its primary
competitors in the consumer durables market include Coleman Cable and
American Tac, among others.
Price is the primarily 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 substitutable with those of competitors.
RISK FACTORS RELATED TO MARKET OF OUR COMMON STOCK
Market prices of our equity securities can fluctuate significantly
The market prices of our common stock may change significantly in response
to various factors and events beyond our control, including the following:
- the other risk factors described in this Form 10-K;
- changing demand for our products and services and ability to develop and
generate sufficient revenues;
- any delay in our ability to generate operating revenue or net income from
new products and services;
- general conditions in markets we operate in;
- general conditions in the securities markets;
- issuance of a significant number of shares, whether for compensation under
employee stock options, conversion of debt, potential acquisitions, stock
dividends and additional financing using equity securities or otherwise.
Possible issuance of additional securities
Our Articles of Incorporation authorize the issuance of 50,000,000 shares of
common stock, par value $0.001 and 1,000,000 shares of preferred stock, par
value $0.001. At December 31, 2008, we had 8,676,461 shares of common stock
issued and 0 preferred shares issued. To the extent that additional shares
of common stock are issued, our shareholders would experience dilution of
their respective ownership interests in the Company. The issuance of
additional shares of common stock may adversely affect the market price of
our common stock and could impair our ability to raise capital through the
sale of our equity securities.
Compliance with Penny Stock Rules
As the result of the fact that the market price for our common stock has
been below $5 per share, our common stock is considered a "penny stock" as
defined in the Exchange Act and the rules thereunder. Unless our common
stock is otherwise excluded from the definition of "penny stock," the penny
stock rules apply with respect to that particular security. The penny stock
rules require a broker-dealer prior to a transaction in penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks
and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and
its sales person in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that the broker-dealer, not
otherwise exempt from such rules, must make a special written determination
that the penny stock is suitable for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure rules
have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. So long as
the common stock is subject to the penny stock rules, it may become more
difficult to sell such securities. Such requirements, if applicable, could
additionally limit the level of trading activity for our common stock and
could make it more difficult for investors to sell our common stock.
Shares eligible for future sale
As of December 31, 2008, the Registrant had 8,676,461 shares of common stock
issued, 4,674,306 shares are "restricted" as that term is defined under the
Securities Act, and in the future may be sold in compliance with Rule 144
under the Securities Act. Rule 144 generally provides that a person holding
restricted securities for a period of one year may sell every three months
in brokerage transactions and/or market-maker transactions an amount equal
to the greater of one (1%) percent of (a) the Company's issued and
outstanding common stock or (b) the average weekly trading volume of the
common stock during the four calendar weeks prior to such sale. Rule 144
also permits, under certain circumstances, the sale of shares without any
quantity limitation by a person who has not been an affiliate of the Company
during the three months preceding the sale and who has satisfied a two-year
holding period. However, all of the current shareholders of the Company
owning 5% or more of the issued and outstanding common stock are subject to
Rule 144 limitations on selling.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. DESCRIPTION OF PROPERTY
During 2004, the Company's majority owned subsidiary, Delta consolidated its
Houston and Louisiana facilities into a combined 12,500 square foot leased
executive office, sales and warehouse facility in Houston, TX, which
facility was acquired by Delta in 2005 from a third party for $850,000. In
2006, these facilities were acquired at the same amount from Delta by
American International Industries, Inc., which has a 51% interest, and by
Delta's executive officers who acquired the remaining 49% interest. Delta
continues to maintain a 5,000 square foot office and warehouse facility in
Louisiana which is leased from an unaffiliated third party at an annual
rental of $18,000. The Company leases a 30,000 square foot
manufacturing and office facility utilized by SET for $22,100 per month. The
Company owns the 38,500 square foot warehouse and office facility utilized
by NPI. The Company's executive offices which consist of 1,892 square feet
are leased from an unaffiliated third party for $3,476 per month. The
Company believes its various facilities are adequate to meet current
business needs, and that its properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
In 2007, our Delta subsidiary received $100,000 to settle a claim against
Gemini Insurance Company, Houstoun, Woodard, Easton, Gentle Tomforde and
Anderson, Inc., D/B/A Insurance Alliance and Robert Holman,
specifically for a rig damaged in Hurricane Katrina.
On July 23, 2008, Delta Seaboard Well Service, Inc., our 51% owned
subsidiary negotiated a settlement in the
Fort Apache Energy, Inc.
v. Delta Seaboard Well Service, Inc. lawsuit for $1,450,000. After
minority interest, the net impact of this settlement on American's net
income is $739,500. Management believes that the settlement amount will be
recoverable through insurance as described below.
Delta Seaboard Well
Service, Inc. v. Houstoun, Woodard, Eason, Gentle Tomforde and Anderson,
Inc., D/B/A Insurance Alliance and Robert Holman (“Broker Lawsuit”).
Delta is in negotiations to settle its claims in the Broker Lawsuit for
approximately $2,400,000, including $1,600,000 of actual damages plus
interest, attorney’s fees, and statutory damages. Delta had a CGL
insurance policy with Gemini Insurance Company ("Gemini") for 2003, naming
Delta as an insured, which policy was in effect at such time as Delta
began the plugging operation referenced in the Fort Apache Lawsuit. Delta
made a claim under the policy for a defense in the Fort Apache case. In
October 2008, in the
Gemini Insurance Company v. Delta Seaboard Well Service, Inc. case,
the court granted Gemini's motion for summary judgment and declared
that the insurance policy provides no coverage for the claims made against
Delta in the Fort Apache case. Delta’s position is that its broker failed
to obtain appropriate insurance coverage and misrepresented the coverage
it did obtain. Delta is aggressively pursuing its claims in the Broker
Lawsuit.
As part of the attorney’s work on the Broker Lawsuit, Delta filed a claim
for coverage with American Specialty Lines Insurance Company (AISLIC).
Delta is suing AISLIC for denying coverage for the Fort Apache Lawsuit,
seeking $445,000 plus interest and attorney’s fees. Delta is vigorously
pursuing the AISLIC Lawsuit.
Delta is a co-defendant in a personal injury lawsuit,
Karen Duke and as next
friend of her minor son, George Duke v. Delta Seaboard Well Service, Inc.
and Jimmy Newcomb. This lawsuit arises out of a motor vehicle
accident that occurred on July 31, 2006. The plaintiffs claim to have
incurred $54,533 in medical expenses to date and Ms. Duke claims lost
wages of approximately $6,820. The plaintiffs are claiming an unspecified
amount of claimed actual and consequential economic damages (for medical
expenses and lost wages / diminished earnings capacity), plus an
unspecified amount of claimed damages for their alleged “pain &
suffering.” The company has liability insurance policy with applicable
policy limits of $1,000,000.00. This case has not yet been scheduled for
trial and discovery remains pending. Delta’s attorneys anticipate that the
matter will be referred to an agreed mediation during the summer of 2009.
Management believes that Delta has a more than adequate amount of
available liability insurance coverage to fund any settlement that might
be reached in this case, or to respond to any judgment that might be
entered after a jury trial. Delta intends to vigorously defend this case
though trial, unless some reasonable settlement can be reached before
then. An evaluation of the outcome of this case cannot be made at this
time. Delta expects to prevail in these matters and has not recorded any
liabilities in connection with this lawsuit.
American International
Industries, Inc. v. William W. Botts. American filed this lawsuit
against William W. Botts (“Botts”) seeking damages as a result of a Stock
Purchase Agreement and Consulting Agreement that American entered into
with Botts on September 12, 2007. Under the Stock Purchase Agreement,
American gave Botts $1,000,000 in cash and 288,000 shares of restricted
AMIN stock (240,000 original shares plus a 20% stock dividend) for 170,345
shares of OI Corporation. As part of the original agreement, Botts had
the right to sell the 288,000 shares back to American for $4.17 per
share. Under the Consulting Agreement, American agreed to pay Botts
$14,000 per month, plus expenses for performing consulting services. On
or about November 5, 2008, American paid Botts $100,000 to terminate the
Consulting Agreement to stop the accrual of monthly consulting payments to
Botts. In this suit, American has sued Botts for $2,500,000 in damages,
alleging fraud-misrepresentation, fraud-failure to disclose material
information, violation of Section 27.01 of the Texas Business and Commerce
Code – fraud in a stock transaction, and breach of fiduciary duty. Botts
has filed a breach of contract counter-claim against American, alleging
damages of $78,000 for consulting fee payments and expenses, $1,200,000
for stock purchase guarantee option payments, and an unspecified amount of
attorneys fees. The parties attempted to settle this matter during
December 2008, but were unable to do so. If the outcome of this case is
unfavorable, then the value of the 288,000 shares of AMIN stock and of the
576,000 shares of Hammonds Industries, Inc. stock that Botts is entitled
to receive as a stock dividend will be credited against any loss incurred
by American, and American's common shares outstanding will be reduced by
288,000 shares, or approximately 3%. Because the case is very new, an
evaluation of the outcome of this case cannot be made at this
time. American expects to prevail in these matters and has not recorded
any liabilities in connection with this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On September 24, 2008, the Company's annual meeting of shareholders was
held. At the meeting the shareholders voted for the election of Daniel
Dror, Charles R. Zeller, Robert W. Derrick, Jr., and Thomas J. Craft, Jr.,
and John W. Stump III to serve on our board until the next annual meeting
of shareholders or until their successors are elected and qualified, voted
to ratify our selection of GBH CPAs, PC as independent auditors for 2008,
and voted to increase the number of authorized shares of common stock from
10,000,000 to 50,000,000 shares. At the date of the annual meeting, the
Company had a total of 8,586,486 shares of common stock outstanding and a
total of 7,314,276 were present and voted. The following tables set forth
the vote of shareholders with respect to the two proposals:
Proposal 1. Election of Directors
|
Nominees
|
For
|
Withheld
|
|
Daniel Dror
|
7,059,965
|
254,311
|
|
Charles R. Zeller
|
7,113,313
|
200,963
|
|
Robert W. Derrick, Jr.
|
7,113,313
|
200,963
|
|
Thomas J. Craft, Jr.
|
7,113,433
|
200,843
|
|
John W. Stump III
|
7,109,339
|
204,937
|
Proposal 2. Ratification of GBH CPAs, PC as Independent Auditors for 2008
|
For
|
Against
|
Abstain
|
BNV
|
|
7,185,046
|
69,632
|
59,598
|
-
|
Proposal 3. Increase authorized shares of common stock from 10,000,000
shares to 50,000,000 shares
|
For
|
Against
|
Abstain
|
BNV
|
|
6,781,864
|
521,782
|
10,629
|
-
|
Not applicable.
American International Industries, Inc. is a holding company and has three
reporting segments and corporate overhead:
· Northeastern
Plastics (NPI) - a wholly-owned subsidiary, is a supplier of
automotive after-market products and consumer durable goods products to
retailers and wholesalers in the automotive after-market and in the
consumer durable electrical products markets;
· Shumate Energy
Technologies, Inc. (SET) - a wholly-owned subsidiary,
manufactures highly specialized equipment for energy industry customers,
including expandable tubing technology products that are used in field
service operations for oil and gas exploration under extreme environmental
conditions. SET manufactures large-diameter products and close tolerance
machined parts that range up to thirty-four feet in length using state of
the art, large part CNC equipment.
· Delta
Seaboard Well Services (Delta) - a 51% owned subsidiary, is an
onshore rig-based well-servicing contracting company providing services to
the oil and gas industry;
· Corporate
overhead - 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.
Corporate overhead also includes Brenham Oil & Gas, a division that owns
an oil, gas and mineral royalty interest in Washington County, Texas,
which is carried on the Company's balance sheet at $0. The Company
received income from the royalty interest of $4,396 in 2008 and $4,859 in
2007. Through Brenham Oil & Gas, the Company is engaged in
negotiations with financial institutions for the purpose of financing
potential acquisitions of existing oil and gas properties and reserves.
The Company is seeking to enter into arrangements with third-party owners
and potential partners with proven oil and gas reserves, but who lack the
financial resources and/or the technical expertise possessed by the
Company, to assist them with the resources required to develop
their reserves.
The historical financial statements of the Company include the acquisitions
of acquired companies as of the effective dates of the purchases, and the
results of those companies subsequent to closing, as these transactions were
accounted for under the purchase method of accounting.
We intend to continue our efforts to grow through the acquisition of
additional and complimentary businesses and by expanding the operations of
our existing businesses, especially in the energy sector. We will evaluate
whether additional and complimentary businesses can be acquired at
reasonable terms and conditions, at attractive earnings multiples and which
present opportunity for growth and profitability. These efforts will include
the application of improved access to financing and management expertise
afforded by synergistic relationships between the Company and its
subsidiaries. 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 our 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. Periodically as opportunities present
themselves, we may sell or merge the subsidiaries in order to bring value to
the holding company and our shareholders and to enable the Company to
acquire larger companies.
The Company’s real estate investment policy historically has been to acquire
real estate for resale based upon our view of market conditions. Such
properties are listed on the balance sheet as real estate acquired for
resale. Real estate is not a segment of the Company's business.
We expect 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 we will be able to identify, acquire
or manage profitably of 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 our 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
our business, financial condition and results of operations. The timing,
size and success of our acquisition efforts and the associated capital
commitments cannot be readily predicted. It is our current intention to
finance future acquisitions by using shares of our common stock and other
forms of financing as the consideration to be paid. In the event that the
common stock does not have and 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, we may
be required to seek other forms of financing in order to proceed with our
acquisition program. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain additional equity or debt
financing at terms acceptable to the Company.
On December 31, 2008, the board of directors of the Company approved the
deconsolidation of Hammonds Industries, Inc. (“Hammonds”) from the
Company. To effect the deconsolidation of Hammonds, the Company was
required to reduce its ownership percentage, board membership, and
guarantee of Hammonds’ debt. After the distribution of the special
dividend of approximately 17.4 million shares of Hammonds’ common stock to
the Company’s shareholders of record on December 31, 2008, the Company’s
ownership is proximately 13% of Hammonds' issued and outstanding common
stock. Effective December 31, 2008, Carl Hammonds was appointed Chairman
and CEO and John Stump, III was appointed CFO. Hammonds accepted the
resignations of Daniel Dror, as Chairman of the Board and CEO, Sherry L.
Couturier, as Director, CFO and Vice President, and Charles R. Zeller, as
Director, and appointed Richard C. Richardson as a new board member
unrelated to the Company. As a result, the majority of Hammonds’ board of
directors is no longer controlled by the Company. Additionally, a
reduction of the Company’s guarantee of Hammonds’ debt was obtained from
Texas Community Bank.
Related Party Transactions
During the year ended December 31, 2008, American issued 138,550 shares of
common stock to the CEO for services representing $401,166 of cost to
American.
Critical Accounting Policies
Our significant accounting policies are described in the note 1 to our
consolidated financial statements for the years ended December 31, 2008 and
December 31, 2007.
Off-Balance Sheet Arrangements
As of December 31, 2008, we did not have any off-balance sheet arrangements
as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the
Securities Act of 1934.
New Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133."
This Statement requires enhanced disclosures about an entity’s derivative
and hedging activities, including (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
Management has reviewed this new standard and believes that it has no impact
on the financial statements of the Company at this time; however, it may
apply in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008 VERSUS YEAR ENDED DECEMBER 31, 2007
We have three reporting segments and corporate overhead: Northeastern
Plastics ("NPI"), Shumate Energy Technologies ("SET"), Delta Seaboard Well
Service ("Delta"), and corporate overhead.
Our consolidated net revenues for the year ended December 31, 2008 were
$32,108,660, compared to $24,841,988 for the prior year, an increase of
$7,266,672, or 29%. The increase in revenues was due to higher demand for
pipe and rig services, resulting in an increase in Delta's revenues of
$7,656,644, or 66.7%, compared to the prior year. Additionally, our
new wholly-owned subsidiary, SET, contributed revenues of $2,584,464 for the
three months ended December 31, 2008. Revenues for NPI decreased by
$2,974,436 for the year ended December 31, 2008 compared to the prior year.
Cost of sales for the year ended December 31, 2008 was $20,726,120, compared
to $15,939,002 for the year ended December 31, 2007. Our gross margins in
2008 were 35.5%, compared to gross margins of 35.8% in 2007.
Consolidated selling, general and administrative expenses for the year ended
December 31, 2008 were $11,951,117, compared to $10,882,620 in the prior
year, representing an increase of $1,068,497, or 10%. The primary reasons
for the higher expenses are the inclusion of SET's costs for the three
months ended December 31, 2008 and increased costs at Delta associated with
its increase in revenues.
We had an operating loss of $568,577 for the year ended December 31, 2008,
compared to an operating loss of $1,979,634 for the year ended December 31,
2007.
We had other expense of $318,844 in 2008, compared to other income
of $2,935,503 in 2007. The primary reason for the other expense in 2008 was
due to net realized/unrealized losses on trading securities of $4,594,292
and the recognition of $1,450,000 for the Delta lawsuit settlement (see
notes 9 and 17), offset by $4,922,591 for recognition of the property
dividend distribution gain associated with the declaration of the Hammonds’
stock dividend (see note 14). The unrealized losses on trading
securities of $4,054,334 for the year ended December 31, 2008 were due
primarily to a decline in the market value of our investment in Rubicon
Financial Incorporated of $3,394,991 (see note 2). The realized losses
on trading securities of $539,958 for the year ended December 31, 2008
resulted primarily from the loss on the sale of our investment in OI
Corporation of $406,456. American recognized as a guarantor's fee the
receipt of a 1.705 acre tract of land in Galveston County appraised at
$540,000 (see note 5). Delta recognized other income from a Texas
Emissions Reduction Plan (TERP) grant in the amount of $277,606 for the year
ended December 31, 2008. For further disclosure regarding the TERP grant,
see note 13. Interest and dividend income was $693,431 and interest
expense was $841,212 for the year ended December 31, 2008. The primary
reason for the other income in 2007 was due to net realized and unrealized
gains on trading securities of $1,881,524, income from a Texas Emissions
Reduction Plan (TERP) grant in the amount of $504,122, guarantor fee income
of $250,000, interest and dividend income of $900,343, offset by interest
expense of $584,357.
We had a net loss from continuing operations of $892,607, or $0.11 per
share, for the year ended December 31, 2008, compared to net income of
$865,953, or $0.14 per share, for the year ended December 31, 2007.
We had net income from discontinued operations of $9,274,274, or $1.18 per
share, for the year ended December 31, 2008, compared to net loss from
discontinued operations of $4,682,641, or $0.79 per share, for the year
ended December 31, 2007. Net income from discontinued operations for
the year ended December 31, 2008
includes the gain on deconsolidation of $15,421,569, offset by Hammonds' net
loss of $6,147,295 for the year ended December 31, 2008.
Our net income was $8,381,667, or $1.07 per share, for the year ended
December 31, 2008, compared to a net loss of $3,816,688, or $0.65 per share,
for the year ended December 31, 2007.
Delta
Delta had revenues of $19,131,831 in 2008, compared to $11,475,187 in 2007,
or an increase of $7,656,644, or 66.7%. The increase in revenues at Delta is
due primarily to increased pipe sales of $7,421,675, or 108.5%, and an
increase in rig service revenues of $234,969, or 3.4%. Increased
drilling activity during 2008 created a greater demand for pipe and rig
services. For the year ended December 31, 2008, pipe sales
represented 74.5% of Delta's revenues, compared to 59.6% for the year ended
December 31, 2007. Margins for 2008 were $8,764,069, compared to
$6,174,344 in 2007. Delta experienced operating income of $1,858,214 in
2008, compared to an operating loss of $298,881 in 2007.
Delta, as part of its business, sells salvaged and new pipe to operators of
oil and gas fields. Delta receives purchase orders for all of its service
work and related pipe sales. All sales are recorded when the work is
completed or when the pipe is sold.
NPI
During 2008, NPI's revenues were $10,392,365, compared to revenues of
$13,366,801 during the prior year, a decrease of $2,974,436. The revenue
decrease was due to an overstock position from the 2007 holiday season from
one large customer and a decrease in orders for the 2008 holiday season, due
to the decline in the economy. NPI’s gross margin for 2008 and 2007
was 20%. NPI experienced an operating loss of $18,650 for the 2008 fiscal
year, compared to operating income of $730,199 during the prior fiscal year.
During fiscal 2008, operating expenses were $2,057,495, compared to
$1,998,442 for the fiscal year 2007.
NPI is highly reliant upon a small customer base, with approximately 53% of
its sales being generated through one principal customer. There is
significant risk in having such a large portion of revenues concentrated to
this extent and the loss of one or more principal customers could result in
a reduction in NPI’s revenues. The sales of NPI have historically been
subject to sharp seasonal variations. NPI's strategic plan for 2009
includes targeting three or more additional large accounts and reducing its
dependence upon major customers by adding more mid-size accounts.
Our subsidiary, NPI has purchase orders from all customers for all of its
sales of which many of the items are requested to be container shipped and
shipped directly to the end users. All sales are recorded when the items are
shipped.
SET
The results of SET for the
period of October 8, 2008 to December 31, 2008 are included in our results
of operations. For the period ended December 31, 2008, SET's revenues
were $2,584,464, gross margin was 22%, and net operating income was $78,681.
LIQUIDITY AND CAPITAL RESOURCES
The Company had current assets of $26,360,921 at December 31, 2008, compared
to current assets of $32,636,832 at December 31, 2007. The Company's
current liabilities at December 31, 2008, were $8,164,894, compared to
$4,846,460 at December 31, 2007. Working capital for the year ended December
31, 2008 was $18,196,027, compared to $27,790,372 at year end 2007. At
December 31, 2008, the Company had total assets of $35,977,944, compared to
total assets of $44,356,910 at December 31, 2007. The Company's total
liabilities at December 31, 2008 were $20,070,827, compared to $17,263,242
at December 31, 2007. The changes in the Company's assets and
liabilities primarily resulted from the discontinued operations of Hammonds
Industries, Inc. and the inclusion of the assets and liabilities of our new
wholly-owned subsidiary, Shumate Energy Technologies, Inc., as shown in the
table below:
| |
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Increase / (Decrease) |
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
From continuing operations, excluding SET
|
|
$ |
24,680,771
|
|
|
$ |
28,473,746
|
|
|
$ |
(3,792,975
|
) |
|
From continuing operations - SET |
|
|
1,680,150 |
|
|
|
- |
|
|
|
1,680,150
|
|
|
From discontinued operations - Hammonds Industries, Inc. |
|
|
- |
|
|
|
4,163,086 |
|
|
|
(4,163,086
|
) |
|
Total current assets
|
|
|
26,360,921
|
|
|
|
32,636,832
|
|
|
|
(6,275,911
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations, excluding SET
|
|
|
4,425,869
|
|
|
|
5,067,926
|
|
|
|
(642,057
|
) |
|
From continuing operations - SET |
|
|
5,191,154 |
|
|
|
- |
|
|
|
5,191,154
|
|
|
From discontinued operations - Hammonds Industries, Inc. |
|
|
- |
|
|
|
6,652,152 |
|
|
|
(6,652,152
|
) |
|
Total assets
|
|
$
|
35,977,944
|
|
|
$
|
44,356,910
|
|
|
$ |
(8,378,966
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations, excluding SET
|
|
$ |
6,901,918
|
|
|
$ |
3,343,628
|
|
|
$ |
3,558,290
|
|
|
From continuing operations - SET |
|
|
1,262,976 |
|
|
|
- |
|
|
|
1,262,976
|
|
|
From discontinued operations - Hammonds Industries, Inc. |
|
|
- |
|
|
|
1,502,832 |
|
|
|
(1,502,832
|
) |
|
Total current liabilities
|
|
|
8,164,894
|
|
|
|
4,846,460
|
|
|
|
3,318,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations, excluding SET
|
|
|
5,829,999
|
|
|
|
9,471,562
|
|
|
|
(3,641,563
|
) |
|
From continuing operations - SET
|
|
|
6,075,934 |
|
|
|
- |
|
|
|
6,075,934
|
|
|
From discontinued operations - Hammonds Industries, Inc. |
|
|
- |
|
|
|
2,945,220 |
|
|
|
(2,945,220
|
) |
|
Total liabilities
|
|
$ |
20,070,827
|
|
|
$ |
17,263,242
|
|
|
$ |
2,807,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations, excluding SET |
|
$ |
17,778,853 |
|
|
$ |
25,130,118 |
|
|
$ |
(7,351,265
|
) |
|
From continuing operations - SET |
|
|
417,174 |
|
|
|
- |
|
|
|
417,174
|
|
|
From discontinued operations - Hammonds Industries, Inc.
|
|
|
- |
|
|
|
2,660,254 |
|
|
|
(2,660,254
|
) |
|
Total working capital |
|
$ |
18,196,027 |
|
|
$ |
27,790,372 |
|
|
$ |
(9,594,345
|
) |
Current assets from continuing operations, excluding SET, decreased by
$3,792,975 for the year ended December 31, 2008, primarily due to a decrease
in trading securities as a result of the decline in market value of our
investment in Rubicon Financial Incorporated and the sale of our investment
in OI Corporation, offset by deposits for pipe inventory. Current
liabilities from continuing operations, excluding SET, increased by
$3,558,290, primarily due to the issuance of short-term debt, an increase in
current installments of long-term debt, offset by payments on margin loans.
Long-term liabilities from continuing operations, excluding SET, decreased
by $3,641,563, primarily due to the reclassification of long-term debt to
current installments of long-term debt.
For the year ended December 31, 2008, we had negative cash flows from
operations of $98,324, compared to negative cash flow from operations of
$3,473,127 during 2007. The negative cash flow from operations was
the result of our net loss from continuing operations of $892,607 for the
year ended December 31, 2008. Our net loss for the year ended
December 31, 2008 included non-cash income of $5,740,197, including
$4,922,591 for recognition of the property dividend distribution gain
associated with the declaration of the Hammonds’ stock dividend (see note
14), the recognition of guarantor's fee income from the receipt of a 1.705
acre tract of land in Galveston County appraised at $540,000 (see note 5),
and income from a Texas Emissions Reduction Plan (TERP) grant in the
amount of $277,606. Our net loss for the year ended December 31, 2008
included non-cash expenses of $6,880,562, including unrealized losses on
the sale of trading securities of $4,054,334, a $1,450,000 loss from the
Delta lawsuit settlement (see notes 9 and 17), depreciation and
amortization of $647,851, and non-cash compensation of $728,377.
Excluding the acquired assets and liabilities of SET, our
inventories decreased by $876,516, trading securities decreased by
$1,872,157, deposits for pipe purchases increased by $2,221,932, accounts
receivable increased by $697,618, and accounts payable decreased by
$734,635 for the year ended December 31, 2008.
Net cash used in operating activities in 2007 was attributable primarily to
an increase in trading securities of $1,984,289 (see note 2). Inventories
increased by $11,389, accounts receivable increased by $71,578, and accounts
payable and accrued expenses decreased by $692,315. Significant non-cash
adjustments to reconcile net income from continuing operations of $865,953
to net cash used in operating activities include the following:
|
-
|
unrealized gains on trading securities of $(2,401,333);
|
|
-
|
income from a Texas Emissions Reduction Plan (TERP) grant in the
amount of $(504,122);
|
|
-
|
realized losses on trading securities of $519,809;
|
|
-
|
common shares and stock warrants issued for services of $561,885;
|
|
-
|
depreciation and amortization expense of $380,605; and
|
Net cash used by investing activities in 2008 was $3,751,040, compared to
net cash provided by investing activities of $423,693 in 2007. Cash used by
investing activities in 2008 resulted from the assumption of a $5,000,000
note for the purchase of the Shumate Machine Works assets, a net decrease in
investments in certificates of deposit of $880,000, proceeds from notes
receivable of $1,098,866, and proceeds from the sale of drilling rig
equipment of $200,000, offset by purchases of property and equipment of
$373,911, and the issuance of notes receivable of $475,000. Cash provided by
investing activities in 2007 resulted from a net redemption of certificates
of deposits of $944,000, receipts of principal payments on notes receivable
of $553,571, offset by capital expenditures for property and equipment of
$1,005,677.
Net cash provided by financing activities was $4,670,144 in 2008, compared
to $2,463,931 in 2007. In 2008, we received proceeds from borrowings
of $9,067,663, made payments of $3,102,278 on debt and $1,443,424 on margin
loans. In 2007, we received $2,223,424 from the issuance of debt and
borrowings under lines of credit agreements and $1,102,365 from an increase
margin loans. We made payments of $754,092 on debt and purchased 23,162
shares of treasury stock at a cost of $107,766.
Our subsidiary, NPI, has a $5,000,000 line of credit with Wachovia Bank,
which has a maturity date in April 2009. Our subsidiary, Delta has a line of
credit for $2,000,000 with Trust Mark Bank, which has a maturity date in
June 2009. Both Wachovia Bank and Trust Mark Bank have informed the Company
that the respective maturity dates on the lines of credit will be extended
prior to the due dates by at least eighteen months. Our Subsidiary, SET, has
a $1,000,000 line of credit with Stillwater National Bank and Trust, which
has a maturity date in September 2010. The Company has excellent
relationships with its banks and believes that it will be able to
renegotiate its lines of credit at terms and conditions satisfactory to the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK