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, 2009 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. |
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. 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.
The
Company's executive offices are located at 601 Cien Street, Suite 235, Kemah,
Texas 77565 and its telephone number is (281) 334-9479. As of
December 31, 2009, the Company had 6 employees at the executive
offices.
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.
On
February 3, 2010, Hammonds and Delta completed an agreement, pursuant to
which Delta will be merged into Hammonds in consideration for the issuance
of 63,110,925 post-reverse restricted shares of Common Stock to the
noncontrolling shareholders of Delta and to American. As a result, the
controlling shareholders of Delta will become controlling shareholders of
Hammonds, which will result in Delta’s former shareholders owning 93.6% of
Hammonds' Common Stock. Following
the reverse merger, American will own 32,859,935 shares of Common Stock,
representing 48.2% of the Hammonds' total outstanding shares and the owners of
the noncontrolling interest in Delta will own 30,924,353 shares of Common Stock,
representing 45.4% of the Hammonds' total outstanding shares. All other
stockholders of the Hammonds will own 4,357,962 shares of Common Stock,
representing 6.4% of the Hammonds' total 68,142,250 outstanding
shares. Hammonds'
name will be changed from Hammonds Industries, Inc. to Delta Seaboard
International, Inc. ("DSI"). In
accordance with FIN46(R), American will consolidate DSI although its
ownership is less than 51%, because American has a controlling financial
interest in DSI.
Delta is
managed by Robert W. Derrick, Jr. and Ron Burleigh, who are Delta's executive
officers and owners of the 49% noncontrolling 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.
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 and Five J.A.B., 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, 2009, Delta had 39 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 noncontrolling 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, 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.
SET
currently manufactures products, spare parts, and assemblies for the oil &
gas field services market segment. The U.S. Government’s Energy
Information Agency (EIA) stated in its February 10, 2010 Short Term Energy Outlook
that the world oil market should gradually tighten in 2010 and 2011, as
the global economic recovery continues and world oil demand begins to grow
again. Current 2010 futures market prices for natural gas appear to provide the
necessary economic incentive to expand drilling programs. As a result, EIA
expects monthly natural gas production to begin to slowly increase later this
year and continue on an upward trend through the end of
2011.
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 has a
broad portfolio of industry-recognized quality and proprietary trade
capabilities, including API licensure for specifications 7.1 and 5CT relating to
threading capabilities, API Spec Q1, API ISO/TS 29001, and ISO 9001
certification.
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 25 customers, up 25% over 2008. Two of
these customers represented approximately 78% 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. In 2009
SET quickly capitalized on newly qualified API licensing by launching into the
threaded products arena. This has proven to be another avenue for both new and
established customers to take advantage of additional service
offerings.
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 34 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®, Truck Trend and Automobile magazines.
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 portable
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
newsstand issues of Good Housekeeping magazine and plans are being
negotiated for additional brand advertising. The 2009 expected pass through
readership rate for the upcoming Good Choice® 2010 ads are expected to exceed
21,000,000 potential viewings.
NPI
products are available at stores such as Family Dollar, Dollar
Tree, H.E.B., Dollar General, Freds, Big Lots, Bi-Mart, and
Publix, among others.
Virtually
all of NPI's products are manufactured overseas. NPI's products are manufactured
to meet or exceed NPI, UL, ETL, 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,
Big Lots, Ocean State Jobbers, H.E.B., Freds, Publix, Bi-Mart, and Dollar
General, among others. During our fiscal year ended December 31,
2009, NPI's large accounts accounted for 76% of NPI'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 2010 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, General Electric (via a licensee), 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: The Good Choice®, Jumpower™,
expiring February 2009, and The Bitty Booster Cable™, which was renewed in
August 2008.
Employees
As
of December 31, 2009, NPI employed 10 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
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.
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.
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. 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 to the financial statements).
For the
years ended December 31, 2009 and 2008, American had unrealized trading gains of
$498,396 and losses of $4,054,334, respectively, related to securities held on
those dates. The unrealized losses for the year ended December 31, 2008,
were due primarily to the decline in value of American's 1,000,000 shares of
Rubicon Financial Incorporated's (OTCBB: RBCF.OB) common stock of
$3,394,991. At December 31, 2009 and 2008, our investment in shares
of RBCF common stock, classified as trading securities on the balance sheet, was
valued at $311,670, or $0.30 per share, and $322,170, or $0.30 per share,
respectively, based upon the closing market prices on those dates,
respectively. American recorded realized gains of $19,654 and realized
losses of $539,958 for the years ended December 31, 2009 and 2008,
respectively (see Note 2 to the financial statements).
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 2008, 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.
During
the fourth quarter of 2009, American foreclosed on real property which was
security for a note receivable owed to American, which was in
default. American is carrying this property on the balance
sheet for $4,611,233, which represents the portion of the principal and
accrued interest allocated to the property received at the time of default, see
Note 6, and the assumption of a note payable secured by the property (see Notes
6 and 9 to the financial statements). During
the third quarter of 2009, and in connection with the guarantor’s fee described
below, American pledged $250,000 in certificates of deposit for a
$3,850,000 loan to Southwest Gulf Coast Properties, Inc. at Texas Community
Bank. Additionally, this loan is secured by American's 287 acres on
Dickinson Bayou and the Dawn Condominiums with an appraised value of over
$3,900,000. 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 pledged $1,750,000 in certificates of deposit for a
$4,000,000 loan to Dawn Condominiums L.P. at Texas Community Bank. During the
third quarter of 2009, the principal balance of the loan was repaid and the bank
released the pledged certificates of deposit to American. 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 also owns 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. American has engaged an independent broker on an
exclusive basis to sell the property. 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 is 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 78% of our sales. At
December 31, 2009, four customers accounted for approximately 58% 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, SET has
seen decreased order volume as the world demand for crude products has decreased
during the 2008 – 2009 recession. Reduced
demand for oil field drilling products typically results 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,
GBI - Dollar Tree, Ocean State Jobbers, Big Lots, H.E.B., Publix, Freds,
Bi-Mart, and Dollar General, among others. During our fiscal year ended December
31, 2009, NPI's large accounts accounted for 76% of
NPI'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
2010 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,
General Electric (via a licensee), 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, 2009, we had 9,191,325 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, 2009, the Registrant had 9,191,325 shares of common stock
issued, 3,831,364 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
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 noncontrolling interest, the net impact of this settlement on
American's net income is $739,500. Delta partially recovered this loss 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”). On February 19, 2010,
Delta settled its claims in the Broker Lawsuit and received $700,000, which will
be included in other income for the three months ended March 31,
2010.
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 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.” This case went to trial and
the jury rendered a verdict on September 17, 2009, awarding the plaintiff
$263,410 plus court costs in damages. On February 22, 2010, the trial judge
entered a $269,138 judgment in favor of the plaintiffs. The attorneys plan
a motion for a new trial. Delta has liability insurance policy with applicable
policy limits of $1,000,000. Management believes that Delta has a more than
adequate amount of available liability insurance coverage to fund any judgment
that might be entered. Delta intends to vigorously defend this case. 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 February 2010, the case was mediated and the
parties attempted to settle the case. However, the parties have been
unable to agree on terms. If the parties can not agree, the case will have
to be mediated again or tried. Additional information has been
recently discovered to support American's case. Our attorney believes that
if the case is tried, either side could win. If Botts wins, we believe
that the maximum loss for American would be approximately $1,500,000. If
the case is tried, American intends to vigorously defend this case. 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
November 18, 2009, 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 and voted to ratify our selection of
GBH CPAs, PC as independent auditors for 2009. At the date of the annual
meeting, the Company had a total of 9,105,372 shares of common stock outstanding
and a total of 6,768,769 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 |
6,717,161 |
51,608 |
|
Charles
R. Zeller |
6,741,724 |
27,045 |
|
Robert
W. Derrick, Jr. |
6,741,724 |
27,045 |
|
Thomas
J. Craft, Jr. |
6,741,844 |
26,925 |
|
John
W. Stump III |
6,718,241 |
50,528 |
On
November 30, 2009, the board of directors of American accepted the resignation
of John W. Stump, III as a director and as chairperson of the audit committee
and as a member of the compensation committee and nominating committee,
positions he has held since April 20, 2007. On January 19, 2010,
the board of directors of American appointed Steven M. Plumb as a director,
chairperson of the audit committee and a member of the compensation committee
and nominating committee.
Proposal
2. Ratification of GBH CPAs, PC as Independent Auditors for
2009
|
For |
Against |
Abstain |
BNV |
|
6,756,015 |
11,209 |
1,545 |
- |
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. 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
complementary businesses and by expanding the operations of our existing
businesses, especially in the energy sector. We will evaluate whether additional
and complementary 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, 2009, American issued 200,000 shares of common
stock to the CEO for services valued at $200,000. At December 31, 2009,
Delta had a balance due to the noncontrolling interest owners of $120,000 and
SET had a balance of $180,000 due to International Diversified Corporation,
Ltd., a corporation owned by Elkana Faiwuszewicz, Daniel Dror's
brother.
Critical
Accounting Policies
Our
significant accounting policies are described in Note 1 to our consolidated
financial statements for the years ended December 31, 2009 and
2008.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, 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
Effective
January 1, 2009, American began implementation of SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51”.
SFAS No. 160 (ASC 810 “Consolidation”) required
American to:
|
· |
Recharacterize
minority interests, previously classified within liabilities, as
noncontrolling interests reported as a component of consolidated equity on
the balance sheet, |
|
· |
Include
total income in net income, with separate disclosure on the face of the
consolidated income statement of the attribution of income between
controlling and noncontrolling interests,
and |
|
· |
Account
for increases and decreases in noncontrolling interests as equity
transactions with any difference between proceeds of a purchase or
issuance of noncontrolling interests being accounted for as a change to
the controlling entity’s equity instead of as current period gains/losses
in the consolidated income statement. Only when the controlling entity
loses control and deconsolidates a subsidiary will a gain or loss be
recognized. |
SFAS No.
160 was effective prospectively for fiscal years beginning on or after December
15, 2008 except for its specific transition provisions for retroactive adoption
of the balance sheet and income statement presentation and disclosure
requirements for existing minority interests that are reflected in these
consolidated financial statements for all periods presented. As a result of the
implementation of SFAS No. 160, which required retrospective application of
presentation requirements, total equity at December 31, 2008 increased by
$2,085,573 representing noncontrolling interests, and total liabilities at
December 31, 2008 decreased by $2,085,573 as a result of the elimination of
minority interest. Also as a result of the adoption of SFAS No. 160, for the
year ended December 31, 2008, loss from continuing operations, net of income
taxes increased by $57,726 and net losses attributable to the noncontrolling
interests increased by $57,726.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC
105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source
of authoritative accounting principles recognized by the FASB to be applied by
all nongovernmental entities in the preparation of financial statements in
conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for
financial statements issued for fiscal years ending on or after September 15,
2009, and interim periods within those fiscal years. The adoption of SFAS 168
(ASC 105-10) on July 1, 2009 did not impact American’s results of operations or
financial condition. The Codification did not change GAAP; however, it did
change the way GAAP is organized and presented. As a result, these changes
impact how companies reference GAAP in their financial statements and in their
significant accounting policies. American implemented the Codification in this
Report by providing references to the Codification topics alongside references
to the corresponding standards.
In
addition to the pronouncements noted above, there were various other accounting
standards and interpretations issued recently, none of which are expected to a
have a material impact on our consolidated financial position, operations or
cash flows.
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, 2009 were $25,656,678,
compared to $32,108,660 for the prior year, a decrease of $6,451,982, or
20%. The decrease in revenues was due to lower demand for pipe and rig services,
resulting in a decrease in Delta's revenues of $10,342,022, or 54%,
compared to the prior year. Our new wholly-owned subsidiary, SET,
contributed revenues of $7,193,272 for the full year ended December 31, 2009
compared to $2,584,464 for the three months ended December 31, 2008, an
increase of $4,608,808. Revenues for NPI of $10,392,365 in 2009
compared to $9,673,597 in 2008 decreased by $718,768 due to the decline in the
economy.
Cost of
sales for the year ended December 31, 2009 was $17,593,869, compared to
$20,726,120 for the year ended December 31, 2008. Our gross margins in 2009 were
31.4%, compared to gross margins of 35.5% in 2008. The decline in margins
was primarily
due to the decline in pipe sales at Delta. The margins on pipe sales are
historically greater than the margins on our other revenue
components.
Consolidated
selling, general and administrative expenses for the year ended December 31,
2009 were $11,523,098, compared to $11,951,117 in the prior year, representing a
decrease of $428,019, or 4%. Costs at Delta and NPI decreased by $667,706 and
$122,866 associated with their decreased revenues, and Corporate costs
decreased by $209,445. Costs at SET were higher by $571,998 for the full
year ended December 31, 2009 compared to the three months included in the prior
year.
We had an
operating loss of $3,460,289 for the year ended December 31, 2009, compared
to an operating loss of $568,577 for the year ended December 31,
2008.
We had
other income of $274,217 in 2009, compared to other expense of
$318,844 in 2008. Other income for the year ended December 31, 2009
included $175,000
for providing right-of-way access on the 287 acres in Galveston County.
Interest and dividend income was $420,853, net realized/unrealized gains
on trading securities was $518,050, and interest expense was $873,518
for the year ended December 31, 2009. 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 Note 17 to the financial statements), 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 to the financial
statements). 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 to the financial statements). 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 to the
financial statements). 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 to the financial
statements). Interest and dividend income was $693,431 and interest
expense was $841,212 for the year ended December 31, 2008.
We had a
net loss from continuing operations of $3,237,436, or $0.37 per share,
for the year ended December 31, 2009, compared to a net loss of $834,881, or
$0.11 per share, for the year ended December 31, 2008.
We had a net loss from discontinued operations of $350,000, or $0.04
per share, for the year ended December 31, 2009, compared to net income from
discontinued operations of $9,274,274, or $1.18 per share, for the year ended
December 31, 2008. 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 loss was $2,952,088, or $0.34 per share, for the year ended
December 31, 2009, compared to net income of $8,381,667, or $1.07 per share, for
the year ended December 31, 2008.
Delta
Delta had
revenues of $8,789,809 for the year ended December 31, 2009, compared to
$19,131,831 in the prior year, or a decrease of $10,342,022, or 54%. The
decrease in revenues was due to lower demand for pipe and rig services. For the
year ended December 31, 2009, pipe sales represented 47.9% of Delta's
revenues, compared to 74.5% for the year ended December 31, 2008. Margins
for the year ended December 31, 2009 were $5,206,036, or 59%, compared to
$8,764,069, or 46%, in the prior year reflecting pricing pressure on Delta's
products due to lower demand. Delta's selling general and administrative
expenses for the year ended December 31, 2009 were $6,905,855, compared to
$6,238,149 in the prior year, representing a decrease of $667,706, or 10%.
The decrease is associated with the decline in revenues. Delta
experienced an operating loss of $1,032,113 for the year ended December 31,
2009, compared to operating income of $1,858,214 in the prior year.
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
For the
year ended December 31, 2009, NPI's revenues were $9,673,597, compared to
revenues of $10,392,365 during the prior year, a decrease of $718,768. The
revenue decrease was due primarily
to the decline in the economy. NPI’s gross margin for the year
ended December 31, 2009 improved to 23% compared to 20% for the prior
year. For the year ended December 31, 2009, selling, general and
administrative expenses were $1,934,628, compared to $2,057,495 for the
prior year, representing a decrease of $122,866, or 6%. The decrease
is associated with the decline in revenues. NPI experienced operating
income of $255,256 for the year ended December 31, 2009, compared to an
operating loss of $18,650 during the prior year.
NPI is
highly reliant upon a small customer base, with approximately 58% of its
sales in 2009 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 2010 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
For the year ended December 31, 2009, SET's revenues
were $7,193,272, gross margin was 10%, selling, general and administrative
expenses were $1,072,944, and SET experienced an operating loss of
$366,455. 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%,
selling, general and administrative expenses were $500,946, and net operating
income was $78,681.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had current assets of $22,143,193 at December 31, 2009, compared to
current assets of $26,360,921 at December 31, 2008. Current assets
decreased by $4,217,728 for the year ended December 31, 2009, primarily due to a
decrease in cash and certificates of deposit of $4,503,000, which was used to
make payments of $3,825,454 on debt and line-of-credit agreements and to fund
operating activities. The Company's current liabilities at December 31, 2009,
were $9,001,742, compared to $8,164,894 at December 31, 2008. Working capital
for the year ended December 31, 2009 was $13,141,451, compared to
$18,196,027 at year end 2008. At December 31, 2009, the Company had
total assets of $31,012,169, compared to total assets of $35,977,944 at December
31, 2008. The
Company's total liabilities at December 31, 2009 were $16,351,308, compared
to $17,985,254 at December 31, 2008.
For the
year ended December 31, 2009, we had negative cash flows from operations of
$707,357, compared to negative cash flows from operations of $98,324 during
2008. For the year ended December 31, 2009, the negative cash
flow from operations was the result of our net loss from continuing
operations of $3,237,436. Our net loss for the year ended December
31, 2009 included non-cash income of $498,396 for unrealized gains on trading
securities and non-cash expenses of $1,687,179, including depreciation and
amortization of $1,179,349 and non-cash compensation of $507,830. Accounts
receivable decreased by $1,376,300, inventories decreased by $328,525, and
trading securities increased by $213,980.
For the
year ended December 31, 2008, the negative cash flow from
operations was the result of our net loss from continuing
operations of $834,881 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 to the financial statements), 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 to the financial statements),
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 trading
securities of $4,054,334, a $1,450,000 loss from the Delta lawsuit
settlement (see Note 17 to the financial statements), 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.
Cash
provided by investing activities for the year ended December 31, 2009 was
$3,035,615, compared to net cash used in investing activities of $3,751,040
in 2008. Cash was provided by investing activities in 2009 as a result of
a net decrease in investments in certificates of deposit of $3,115,813 and
proceeds from notes receivable of $295,104, offset by the issuance of a note
receivable of $300,000 and the purchase of property and equipment of
$275,599.
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.
During
the year ended December 31, 2009, our financing activities used cash of
$3,365,445 compared to cash provided of $4,670,144 during 2008.
During the year ended December 31, 2009, we received net proceeds from the
issuance of debt of $783,851. We made payments of $3,825,454 on debt
and line-of-credit agreements and
purchased 257,646 shares of treasury stock at a cost of $252,223.
During 2008, we
received proceeds from borrowings of $9,067,663, made payments of
$3,102,278 on debt and $1,443,423 on margin loans.
On
October 30, 2009, NPI received a notice that it is in technical default of the
fixed charge coverage ratio covenant on its line of credit with
Wachovia. The principal balance of this note is due July 31, 2010.
NPI is not in payment default and has been current with all of its debt and
interest payments since the inception of the line of credit. The
interest rate on NPI’s line of credit will increase from prime to prime plus 3%
and NPI will be required to submit financial statements and a borrowing base
certificate to the bank on a monthly rather than quarterly basis, as was
previously required. Wells Fargo acquired Wachovia and due to the
bank’s new policies, the special assets management lending group requested that
the asset based lending group review NPI for a new loan. This group
declined the loan and the bank has recommended another lender. NPI is
negotiating a new line of credit with another financial institution and
management is confident that new financing in support of NPI’s business will be
obtained. NPI has a consistent and growing base of business with large seasonal
sales received in the third and fourth quarters. Historically, during
this period every year, NPI receives a large order from its primary customer and
briefly exceeds its borrowing base to make the inventory purchases necessary to
fill that order. For the past 10 years, this has not been a problem
and NPI's representative at the bank has always been willing to work with
NPI. At December 31, 2009, NPI’s line of credit balance was
$1,099,000 and as of this filing, the balance has been reduced by $73,000 to
$1,026,000. NPI’s current assets at December 31, 2009 were
$4,457,821, and included $1,208,334 and $2,754,233 in accounts receivable and
inventory, respectively.
Our
subsidiary, Delta has a line of credit for $2,000,000 with Trust Mark Bank,
which has a maturity date in April 2010. Both Delta's line of credit with its
bank has historically been renewed prior to the due date for a period
of 18 to 24 months. Management plans to renew this line of
credit upon expiration. 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. Delta and SET have excellent relationships with their banks and
believe that they will be able to renegotiate their lines of credit at terms and
conditions satisfactory to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK