UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10Q-SB
--------------------------
Quarterly Report Pursuant to Section 13 or 15 (D) of the Securities Act
of 1934
for the quarterly period ended: June 30, 2005
COMMISSION FILE NUMBER: 000-49950
---------------------------
AMERICAN PETROLEUM GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA
(State or other jurisdiction of Incorporation or organization)
98-0232018
(IRS Employee Identification No.)
1400 N. GANNON DRIVE
2ND FLOOR
HOFFMAN ESTATES, IL 60194
(847) 805-0125 (Address of principal executive
offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.001 par value 14,536,750
(Class) (Outstanding as of August 19, 2005)
Part I - FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited) 3
Condensed Balance Sheets 3
Condensed Statements of Operation 4
Condensed Statements of Cash Flows 5
Condensed Statements of Stockholder's Equity 6
Notes on Condensed Financial Information 7
Item 2 Management's Discussion and Analysis or Plan of Operation 18
Item 3 Control and Procedures 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission Of Matters To A Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8 -K 29
Signatures 30
Certifications 31
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Balance Sheets
June 30, 2005 and December 31, 2004
(Unaudited) (Audited)
June 30, December 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents -- $ 801
Trade accounts receivable, net of allowance of $22,700
for doubtful accounts 275,783 291,846
Prepaid assets 15,750 --
Advances to others 366,042 100,000
Inventory 259,020 254,944
------------ ------------
TOTAL CURRENT ASSETS 916,595 647,591
EQUIPMENT
Equipment 6,068 6,068
Less accumulated depreciation 3,023 2,023
------------ ------------
3,045 4,045
------------ ------------
TOTAL ASSETS $ 919,640 $ 651,636
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Book overdraft $ 47,502 $ 5,523
Trade accounts payable 605,914 629,825
Accrued interest 36,804 32,000
Accrued professional fees -- 45,000
Accrued expenses 36,814 11,187
Loans payable to officers/stockholders 1,320,750 713,269
------------ ------------
TOTAL CURRENT LIABILITIES 2,047,784 1,436,804
NOTES PAYABLE TO STOCKHOLDERS 927,500 500,000
COMMITMENTS AND CONTINGENCES (NOTES B, F, G, I, K AND L)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 5,000,000 shares; 0 shares
and 2,527,500 issued and outstanding in 2005 and -- 25,275
2004, respectively
Common stock, $0.001 par value; 100,000,000 shares
authorized; 12,162,000 and 3,635,000 shares issued and
outstanding in 2005 and 2004, respectively 12,162 3,635
Additional paid-in capital 15,755,869 11,523,540
Retained deficit (17,823,675) (12,837,618)
------------ ------------
(2,055,644) (1,285,168)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 919,640 $ 651,636
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Operations
Three and Six Month Periods Ended June 30, 2005 and 2004
Three months ended Six months ended
----------------------------- -----------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 380,147 $ -- $ 765,048 $ --
Cost of goods sold 264,518 -- 545,113 --
------------ ------------ ------------ ------------
Gross Profit 115,629 -- 219,935 --
Expenses
Acquisition expense -- -- -- 10,000
Professional fees 20,600 31,000 93,247 63,215
Management fees -- -- -- --
Office expenses 11,239 5,233 48,579 5,583
Compensation expenses 735,000 6,700 1,425,000 6,700
Payroll and payroll taxes 324,177 -- 590,610 --
Licenses and insurance 16,444 -- 29,398 --
Bad debts -- --
Outside sales 40,039 -- 76,339 --
Rent and taxes 3,000 -- 7,000 --
Repairs and maintenance 23,808 -- 24,403 --
Utilities 10,152 -- 19,887 --
Vehicles 693 -- 1,386 --
Telephone 7,694 -- 14,945 --
Plant equipment 3,227 -- 5,970 --
Depreciation 500 -- 1,000 --
Advertising and promotion 8,495 50,250 8,890 50,250
Travel and entertainment 19,258 2,329 35,404 6,306
Financing Expense -- -- 2,782,500 --
Other 6,655 5,860 11,761 9,143
------------ ------------ ------------ ------------
Total Expenses 1,230,981 101,372 5,176,319 151,197
------------ ------------ ------------ ------------
Loss Before Other Items (1,115,352) (101,372) (4,956,384) (151,197)
Other Income (Expense)
Interest expense (25,412) (975) (35,829) (975)
Other income 750 -- 6,156 --
------------ ------------ ------------ ------------
Total Other Income ( Expense) (24,662) (975) (29,673) (975)
------------ ------------ ------------ ------------
NET LOSS $ (1,140,014) $ (102,347) $ (4,986,057) $ (152,172)
============ ============ ============ ============
Loss per share 0.109 0.004 0.477 0.006
============ ============ ============ ============
Weighted average number
of shares outstanding 10,442,500 1,221,028 10,442,500 1,273,333
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Cash Flows
Six Month Periods Ended June 30, 2005 and 2004
(Unaudited) (Audited)
June 30, December 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (4,986,057) $ (152,172)
Compensation, consulting, financing and termination
expenses in exchange for shares 1,425,000 --
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts -- --
Depreciation 500 --
(Increase) decrease in operating assets:
Trade accounts receivable 16,063 --
Advances to others (266,042) --
Inventory (4,076) --
Acquisition deposits -- (56,000)
Prepaid assets (15,750)
Increase (decrease) in operating liabilities:
Book overdraft 41,979 --
Trade accounts payable (23,799) 9,007
Proceeds for additional paid-in-capital
and stock shares issued -- 74,950
Accrued expenses 30,431 --
------------ ------------
Net cash used in operating activities (3,781,751) (124,215)
------------ ------------
Cash flows from investing activities:
Acquisition of new subsidiary -- --
Purchases of equipment -- --
------------ ------------
Net cash provided by (used in) investing activities -- --
------------ ------------
Cash flows from financing activities:
Issuance of common stock 8,527 --
Increase in additional paid-in capital 2,762,717 --
Retirement of preferred stock (25,275) --
Proceeds from loans payable 1,034,981 91,000
------------ ------------
Net cash provided by financing activities 3,780,950 91,000
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (801) (33,215)
Cash and cash equivalents, beginning of year 801 35,432
------------ ------------
Cash and cash equivalents, end of year $ -- $ 2,217
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Stockholders' Equity (Deficit)
Three Month and Six Month Periods Ended June 30, 2005 and Year
Ended December 31, 2004
Preferred Stock Common Stock
-------------------------- -------------------------
(Audited) Number Par Value Number Par Value
---------- ------------ --------- ------------
Balance at December 31, 2003 -- $ -- 1,415,000 $ 1,415
---------- ------------ --------- ------------
Net loss -- -- -- --
Stock shares issued 2,527,500 25,275 2,598,700 2,599
Retired common shares -- -- (273,700) (274
---------- ------------ --------- ------------
(Audited)
Balance at December 31, 2004 2,527,500 25,275 3,740,000 3,740
Net loss -- -- -- --
Stock shares issued 1,150,000 11,500 4,983,000 4,983
Retired common shares -- -- -- --
---------- ------------ --------- ------------
(Unaudited)
Balance at March 31, 2005 3,677,500 36,775 8,723,000 $ 8,723
Net loss -- -- -- --
Stock shares issued -- -- 3,438,750 3,439
Retired preferred shares (3,677,500) (36,775) -- --
(Unaudited)
---------- ------------ --------- ------------
Balance at June 30, 2005 -- -- 12,161,750 12,162
========== ============ ========= ============
Additional Retained
Paid-In Earnings
(Audited) Capital (Deficit) Total
------------ ------------ ------------
Balance at December 31, 2003 $ 9,328,585 $ (9,662,160) $ (332,160)
------------ ------------ ------------
Net loss -- (3,175,458) (3,175,458)
Stock shares issued 2,194,576 -- 2,222,450
Retired common shares 274 -- --
------------ ------------ ------------
(Audited)
Balance at December 31, 2004 11,523,435 (12,837,618) (1,285,168)
Net loss -- (3,846,043) (3,846,043)
Stock shares issued 3,893,348 -- 3,909,831
Retired common shares -- -- --
------------ ------------ ------------
(Unaudited)
Balance at March 31, 2005 $ 15,416,783 $(16,683,661) $ (1,221,380)
Net loss -- (1,140,014) (1,140,014)
Stock shares issued 339,086 -- 342,525
Retired preferred shares -- (36,775)
(Unaudited)
------------ ------------ ------------
Balance at June 30, 2005 15,755,869 (17,823,675) (2,055,644)
============ ============ ============
6
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note A - Company
The Board of Directors (the "Board") by unanimous written consent
dated as of November 18, 2003, and certain stockholders (the "Majority
Stockholders") owning a majority of issued and outstanding capital
stock of the Company entitled to vote, by written consent dated as of
November 18, 2003, approved and adopted resolutions to amend the
Company's Certificate of Incorporation. The Certificate of Amendment
to the Company's Certificate of Incorporation, already filed with the
Secretary of State of Nevada, changed the Company's name to "American
Capital Alliance, Inc." from Prelude Ventures, Inc. The name of the
Company was changed again on November 1, 2004 to American Petroleum
Group, Inc. ("APG") by a vote of the security holders.
APG is a Chicago based holding company with an agenda to acquire,
merge, and manage various business opportunities. APG's current
direction is in the manufacturing and distribution of petroleum and
related products for the automotive industry. On July 1, 2004, APG
acquired 100% of the outstanding stock of American Petroleum Products
Company ("APPC"). The accompanying consolidated financial statements
include the results of operations of APPC beginning on July 1, 2004.
After the above acquisition, the Company is no longer considered a
"development stage entity".
Note B - Continuance of Operations
The financial statements have been prepared using accounting
principles generally accepted in the United States of America
applicable for a going concern which assumes that the Company will
realize its assets and discharge its liabilities in the ordinary
course of business. At June 30, 2005, the Company had accumulated
losses of $17,823,675 since its inception. Its ability to continue as
a going concern is dependent upon the ability of the Company to obtain
the necessary financing to meet its obligations and pay its
liabilities arising from normal business operations when they come
due. The Company is currently pursuing new debt and equity financing
in conjunction with future acquisitions. Additionally, approximately
$672,835 was raised during the quarter ended June 30, 2005 from loans
payable to officers/stockholders (see Note I) whose proceeds were used
for working capital needs, as well as a down payment toward the
purchase of an option on one of the proposed acquisitions.
Note C - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American
Petroleum Group, Inc. and its wholly owned subsidiary, American
Petroleum Products Company (the "Company") after elimination of
significant intercompany transactions and accounts.
7
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note C - Summary of Significant Accounting Policies (Continued)
Revenue
Revenue is recognized when the title to inventory is transferred.
Trade Receivables
Concentration of credit risk with respect to receivables, which are
unsecured are generally limited due to the wide variety of customers
and markets using the Company's products, as well as their dispersion
across many geographic areas. The Company maintains allowances for
potential credit losses, and such losses have been minimal and within
management's expectations. The allowance for doubtful accounts is
estimated based on various factors including revenue, historical
credit losses and current trends.
Inventory
Inventory consisted of primarily raw materials (oil, additives and
packaging material) and is valued at the lower of cost or market
applied on a first-in, first-out basis.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could vary from the estimates
that were used.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Depreciation
Depreciation of equipment is computed using the
straight-line method for financial statements and income tax reporting
purposes.
Advertising Costs
Advertising costs are expenses as incurred.
8
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note C - Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards, No. 109,
"Accounting for Income Taxes". Under this method, deferred taxes are
determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. Valuation
allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized (see
Note D).
Basic Loss Per Share
The Company reports basic loss per share in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". Basic loss per share is computed using the weighted average
number of shares outstanding during the period. Diluted earnings per
share is not presented (see Note I). On August 25, 2004, the Company
approved a one-for-twenty reverse stock split; all per share amounts
have been retroactively adjusted.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses approximate fair
value because of the short maturity of those instruments. At June
30, 2005 and December 31, 2004, the Company estimates that the fair
value of its notes payable are not materially different from its
financial statement carrying value, except for the liability for
stock borrowings (see Note G).
New Accounting Pronouncements
Management does not believe that any recently issued, but not yet
effective, accounting standards if currently adopted could have a
material effect on the accompanying financial statements.
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long lived
assets may warrant revision or that the remaining balance of an
asset may not be recoverable. The measurement of possible impairment
is based on the ability to recover the balance of assets from
expected future operating cash flows on an undiscounted basis. In
the opinion of management, no such impairment existed at June 30,
2005. See Note F concerning impairment of goodwill.
9
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note C - Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year presentation.
Note D - Income Taxes
Deferred Tax Assets
The Financial Accounting Standards Board issued Statement No. 109 in
Accounting for Income Taxes ("FAS 109") which is effective for fiscal
years beginning after March 15, 1992. FAS 109 requires the use of the
asset and liability method of accounting for income taxes. Under the
assets and liability method of FAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to temporary differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The following table summarizes the significant components of the
Company's deferred tax assets:
2005 2004
----------- -----------
Gross deferred tax assets (non-capital loss carryforward) 6,052,000 4,365,000
Valuation allowance for deferred tax asset (6,052,000) (4,365,000)
----------- -----------
$ -- $ --
=========== ===========
Income Taxes
No provision for income taxes has been provided in these
consolidated financial statements due to the net loss. At June 30, 2005
and December 31, 2004, the Company has net operating loss
carryforwards, which expire commencing in 2022, totaling approximately
$17,800,000 and $12,800,000, respectively, the benefit of which has not
been recorded in the financial statements due to the future uncertainty
of the generations of earnings by the Company.
Note E - Non-Cash Transactions
Investing and financing activities that do not have a direct impact on
current cash flows are excluded from the cash flow statement.
10
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note E - Non-Cash Transactions (Continued)
The Company has recorded a termination expense in respect to the
termination of its former President and has issued 200,000 common
shares at $2.35 per share to satisfy the total liability which includes
the termination expense, unpaid management fees and unpaid advances to
the Company (see Note I).
During 2004, the Company entered into a business combination and
acquired certain operating assets of APPC in exchange for Company stock
(see Note F).
Note F - Business Combinations
Business Acquisition Cancelled
On April 1, 2003, the Company entered into an agreement to acquire 100%
of the issued and outstanding shares of Pascal Energy, Inc., a Canadian
corporation, by the issuance of 5,000,000 common shares, restricted
under Rule 144 of the Securities and Exchange Act and at a later date,
issue an additional 5,000,000 common shares, restricted under Rule 144
of Securities and Exchange Act, subject to the Company paying not less
than $1,000,000 in accumulated dividends to its shareholders of record.
Pascal Energy, Inc.'s business is to provide servicing for the oil and
gas industry.
The Company has determined that the transaction cannot be completed due
to the inability to complete a comprehensive due diligence. Therefore,
the shares previously outstanding were returned to the treasury of the
Company on February 25, 2004.
"TSG" Acquisition
On October 9, 2003, the Company acquired an option for $500,000 to
purchase the assets and certain liabilities of Tri-State Stores, Inc.,
an Illinois Corporation ("Tri-State"), GMG Partners LLC, an Illinois
Limited Liability Company ("GMG"), and SASCO Springfield Auto Supply
Company, a Delaware Corporation ("SASCO"). Tri-State, GMG and SASCO are
collectively referred to herein as "TSG." Upon exercise of the option,
the Company was to pay $3,000,000 and assume certain liabilities, not
exceeding $700,000. TSG is involved in the automotive after market.
During the first quarter of 2004, the Company elected not to continue
to pursue this acquisition. The contractual amount of the option was
never fully paid, however, amounts advanced for the option purchase and
associated acquisition expenses resulted in an $185,000 charge to
operations for the year ended December 31, 2003 and $10,000 for the
year ended December 31, 2004.
11
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note F - Business Combinations (Continued)
Motor Parts Waterhouse, Inc.
The Company issued 5,000,000 shares of common stock for an option to
acquire all the outstanding stock of Motor Parts Warehouse, Inc.
("MPW"), of St. Louis, Missouri. In order to exercise the option, the
Company must issue an additional 5,000,000 shares of common stock to
the shareholders of MPW and pay $2,200,000. This MPW option cannot be
exercised until after the refinancing of the TSG debt of approximately
$3,000,000. MPW is also an auto parts distributor. As a result of the
financing not being completed, the Company elected not to continue to
pursue this acquisition.
Alliance Petroleum Products Company
On October 9, 2003, the Company also entered into a Stock Purchase
Agreement ("Alliance Agreement") with Alliance Petroleum Products
Company ("Alliance"), an Illinois Corporation, and a Rider to the
Alliance Agreement ("Rider"). Alliance is in the business of blending
and bottling motor oil and anti-freeze. Under the Alliance Agreement,
the Company issued 5,000,000 shares of common stock for 100% of the
issued and outstanding shares of the common stock of Alliance (757,864
common shares). An additional 5,000,000 shares of common stock of the
Company is to be issued to Worldlink International Network, Inc. upon
24 months from the above date. Under the terms of the Rider, the
Company is required to provide funding of at least $3,500,000 to pay
Harris Bank, a secured creditor of Alliance. The shareholders of
Alliance have the option to have the 757,864 issued and outstanding
shares of common stock of Alliance returned and the Alliance Agreement
rescinded if they choose, if the Company did not arrange the funding
within 150 days from the date of the execution of the Alliance
Agreement. Since the option period has expired, the principals of the
transactions have verbally agreed to extend the option period pending
completion of the financing. This was a material contingency to the
transactions and as a result had to be resolved prior to recognition of
a business combination. On June 24, 2004 (effective date July 1, 2004)
the Company ("Prelude") then known as American Capital Alliance, Inc.,
("AMAI") and Alliance Petroleum Products Company ("Alliance"), entered
into an Amendment to the original Alliance Agreement, dated October 9.
2003 whereby all previous conditions and contingencies were deemed to
have been completed or waived and the agreement amended as follows:
12
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note F - Business Combinations (Continued)
Alliance Petroleum Products Company (Continued)
o 5,000,000 shares of AMAI voting capital stock are to be issued
to the shareholders of Alliance in the same proportions as the
first 5,000,000 shares were issued to them pursuant to the
exchange of securities contemplated in the Agreement and Plan
of Reorganization upon the execution of this Amendment. The
exchange of securities also includes, 1,000,000 shares of
preferred shares, with the necessary Certificate of
Designation, to allow conversion at the rate of 1 share of
preferred to ten (10) shares of common, and to permit the
preferred shareholders to vote their shares, at any time after
issuance, and after they have been converted, the shares be
issued to the shareholders of American in the same proportions
as the first 5,000,000 shares were issued to them pursuant to
the Agreement and Plan of Reorganization.
o All the shares to the Alliance shareholders are no longer
subject to a two year restriction prior to sale or transfer,
but are now only subject to those transfer restrictions under
Rule 144 of the Securities Laws.
o AMAI assumes all payment obligations and all other agreements
of Alliance as set forth in the including four "Promissory
Notes"; and AMAI assumes all payment obligations and all other
agreements of Alliance to the Harris Bank. (See Note K)
The operations of Alliance have been consolidated with the results of
AMAI since July 1, 2004.
The aggregate acquisition price was $856,200, which consisted of
1,107,500 of the Company's common stock valued at $0.54 and cash
advances outstanding to Company at the time of consummation of the
transactions. The value of the stock was determined based on the
approximate average market price of the shares on August 11, 2004
(change in control date) and discounted for factors such a limited
market for the stock.
13
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note F - Business Combinations (Continued)
Alliance Petroleum Products Company (Continued) Following is a
condensed balance sheet showing the fair values of the assets acquired
and the liabilities assumed as of the date of acquisition:
Current assets $ 498,087
Property and equipment 3,068
Goodwill arising in the acquisition 822,262
----------
$1,323,417
Current liabilities $ 341,642
Current maturities of long-term debt 125,575
Net assets acquired 856,200
----------
$1,323,417
The Company acquired only minimal property, plant and equipment in the
transaction; Alliance does not have title to these production assets.
Additionally, no expense has been recognized during the quarter ended
June 30, 2005 for compensation for the use of the machinery and
equipment to a corporation representing the predecessor operation to
Alliance and to an entity that owned the real estate. The predecessor
company was owned by the former officers of APPC who are also
stockholders and directors of the Company; the real estate company is
owed by the former president and a major stockholder of the Company;
The assets of these entities secure obligations to Harris Bank as a
result of certain transactions entered into by the predecessor company,
the real estate company or their owners. A security interest had been
entered into to as a result of these prior lending activities with
appropriate liens filed and personal guarantees of the principals, some
who are currently officers of the Company or Alliance. Harris Bank has
threatened foreclosure if the prior borrowers can not reach terms
allowing the bank to forebear the defaults. (See Note K)
Goodwill (excess of purchase price over net assets acquired) of
$822,262 arising in the above described acquisition had been recognized
at the time of purchase. Subsequently, management determined that the
goodwill value was totally impaired as APPC is operating on a negative
cash flow basis and, therefore, the recoverability of the asset is
uncertain and was fully written off in December 31, 2004.
14
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note F - Business Combinations (Continued)
Pro Forma Information
On July 1, 2004, the company purchased 100% of the voting stock of
APPC. Results of operations for APPC are included in the consolidated
financial statements since that date. The acquisition was made for the
purpose of the reasons as stated above. Following are pro forma amounts
assuming that the acquisition was made on January 1, 2004:
Net sales $ 1,487,007
Cost of good sold 1,217,846
-----------
Gross profit 269,161
Expenses 3,836,886
-----------
Net income (loss) $(3,567,725)
===========
Loss per share:
Basic $1.82
====
Note G - Notes Payable
The Company entered into a stock borrowing arrangement whereby several
stockholder/officers of the Company transferred approximately 1,000,000
shares pre-split or 50,000 shares on a post split basis of common stock
into an escrow account. The shares were subsequently sold with the
proceeds of $500,000 being transferred to the Company. The Company is
obligated to return the shares to the original holders by April 2005.
If the Company had to repurchase its stock at June 30, 2005, it would
be required to pay $38,000 to acquire the aggregate shares using a
$0.76 approximate share price in order to replace such shares for the
original contributors of the stock. The balance sheet as of December
31, 2003 was restated to record the $500,000 liability and reduce
additional paid-in capital.
15
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note G- Notes Payable (Continued)
Highgate House Funds, Ltd. Transaction In order to raise capital for
operations of the parent Company and to complete the Oilmatic
transaction, the Company entered into a transaction with Cornell
Capital Partners LP and Highgate House Funds, Ltd., dated March 8,
2005, whereby the Company entered into a Convertible Debenture for a
total amount of $500,000 at 7% interest. The Note is convertible into
shares of common stock at a conversion price of $0.85 per share, at the
option of the Lender. At the same time, the Company entered into with
Cornell Capital Partners LP a total Standby Equity Distribution
Agreement for up to $10,000,000 equity line. As part of this
transaction, the Company paid fees to Cornell Capital of 750,000 shares
(of which 15,000 was given to Newbridge Securities as Placement Agent
for the SEDA Agreement), plus a commitment fee and Structuring fee to
Yorkville Advisors Management, LLC of a total of $75,000. In addition,
as part of the Secured Debenture, Highgate House Funds, Ltd. was issued
3,100,000 shares of common stock as collateral by the Company. Upon
payment, or conversion of the Convertible Debenture, these shares are
to be returned to the Company and returned to treasury. An additional
50,000 shares of common stock were issued as additional compensation
for the Convertible Debenture. As of June 30, 2005, the Company had
received $425,000 in advances against the Convertible debenture. A
financing expense of $2,782,500 was charged to operations for this
transaction.
Note H - Related Party Transactions
Payroll Services
The Company had its payroll processed though a "professional employer
organization" owned by a publicly traded corporation that has common
shareholders, directors and officers. For the quarter ended June 30,
2005, the company processed $xxxxx of payroll, taxes and benefits,
along with an administration fee of $xxxx. For the six months ended
June 30, 2005, the company processed $xxxx pf payroll taxes and
benefits along with an administrative fee of $xxxx.
Expense Reimbursements
The Company reimburses Company officer/directors for travel, office and
other expenses. In addition, certain officers make temporary advances.
16
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note H - Related Party Transactions (Continued)
Due Alpha Advisors
A professional services agreement dated October 9, 2003 was entered
into with Alpha Advisors, LLC for a term of one year and renewable for
an additional year. Alpha Advisors LLC is an entity owned by
stockholders/directors/officers of the Company. The fee for these
services was the issuance of 1,000,000 shares of common stock of the
Company upon execution of the agreements, $25,000 due at signing of the
Tri-State Stores and Alliance Petroleum Group, Inc. agreements and
$6,000 payable on the first of each month thereafter. In addition, a
finder's fee of 10% of any new financing was to be paid on funds being
committed. Accounts Payable includes $31,000 of such amounts due as of
September 30, 2004. The Company and Alpha are currently in the process
of converting the debt into equity based upon a discount of 80% from
the market price.
Operating Assets
The operations of APPC are performed in a plant owned by the former
President and current shareholder of the Company. The Company does not
have a lease and is presently not paying rent for this property due to
a dispute with the former President (see Notes F and K).
Note I - Related Party Loans Payable to Officers/Stockholders
6/30/05 12/31/04
Amount Amount
---------- ----------
Rick Carter $ 170,000 $ 6,000
Ron Shapps 350,000 200,000
Michael Cahr 100,000 100,000
Warren Field 50,000 50,000
New Century Capital Consultants, Inc. 50,000 50,000
Keystone Nittany Ventures 137,835 113,353
Former President 142,915 142,916
Malibu Management Company 16,000 16,000
Alliance Finance Network 85,000 35,000
Jeff Neimen 50,000 --
John Niestrom 20,000 --
James Zimber 49,000 --
William Bossung 100,000 --
---------- ----------
Total $1,320,750 $ 713,269
========== ==========
17
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note I - Related Party Loans Payable to Officers/Stockholders (Continued)
New Century Capital Consultants, Inc.-Note Payable The Company on March
16, 2004 entered into a convertible unsecured revolving promissory note
agreement with New Century Capital Consultants, Inc. The lender is a
stockholder in the Company via compensation it received (see Note H).
The agreement allows for borrowings up to $500,000 of which $50,000 has
been advanced currently. Interest accrues at the rate of 9% per annum
payable along with the any outstanding principle balance on March 16,
2005, unless the note is in default. The lender may convert the
principal amount and any accrued interest into common stock of the
Company based upon a formula equal to 40% below the closing bid price
of the stock starting after six months from execution of this
agreement. Additionally, on a one time basis the lender upon written
demand after the six months can require the Company to prepare and file
a registration statement under the Securities and Exchange Act of 1933
for an offering of up to 1,000,000 shares. Also, the agreement allows
for "piggyback registration" rights in that the Company must notify the
lender and allow the lender to register its shares if the companies
file such a registration statement. The agreement contains events of
default such as bankruptcy, insolvency, defaults or rendering of
judgments on indebtedness in excess of $75,000 on from any other
lender. Additionally, the agreement contains certain covenants as
prohibition of payment of dividends, retirements or redemptions of
capital stock, or the transfer of material assets of the Company. Upon
these acts of defaults, the entire amount of principal and interest is
immediately due, and interest accrues at a rate of 15% per annum.
On October 18, 2004, the Company received notice from the lender that,
in its opinion, the Company was in default on the arrangement as a
result of distributions to classes of equity holders and possibly
transfer of material assets. The lender has made assertions about
misappropriation of corporate funds. Management of the Company finds
these assertions as unfounded and feel the Company is in compliance
with the terms of the agreement.
Keystone Nittany Ventures, Malibu Management Company and Alliance
Financial Network
Keystone Nittany Ventures, Inc. (Keystone) and Malibu Management
Company (Malibu) are corporations owned by the President of the
Company, James Zimbler who is also a director and a major shareholder.
Alliance Financial Network ("AFN") is a corporation owned by a Vice
President of the Company who is also a director and shareholder.
Keystone, Malibu and AFN have from time-to-time made advances to the
Company. The loans are unsecured due on demand and call for interest of
8% per annum.
18
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note I - Related Party Loans Payable to Officers/Stockholders (Continued)
Former President
The amount recorded by the Company represents the estimated fair value
of the liability of the amount assumed at the time of purchase of APPC.
It appears that the liability represents funds advanced for working
capital. The obligation is unsecured, as no terms for repayment, and
non-interest bearing. As a result of other contingencies that of the
purchase of AAPC the final settled amount of this liability could be
significantly different from the present recorded amount.
Other Stockholders
Warren Field, Rick Carter, Michael Cahr and Ron Shapps are related to
the Company by virtue of being stockholders. The loans payable are
unsecured, due on demand, and accrue interest of 7% per annum. Certain
notes have provisions including options to purchase additional common
shares at $.01 per share.
Note J - Stockholders' Equity
A consulting services agreement was entered into on October 9, 2003,
with National Securities Corporation, Inc. for a term of six months
renewable on a monthly basis. The fee for this service is the issuance
of 12,500 shares post split of common stock of the Company.
A consulting services agreement was entered into on October 9, 2003,
with New Century Consultants, Inc. for a term of six months renewable
on a monthly basis. The fee for this service is the issuance of 50,000
shares post split of common stock of the Company.
A consulting agreement was entered into on October 10, 2003, with
Commonwealth Partners NY, LLC for a term of three years. The fee for
this service is the issuance of 10,000 free trading shares post split
and 15,000 restricted shares post split of common stock of the Company.
On January 27, 2004, the Company entered into a manufacturing agreement
with the shareholders of International Pit Crew Express, Inc. ("IPC"),
a Texas corporation, to acquire the exclusive right to manufacture
petroleum products for IPC's customers within the United States,
including the United States convenience store industry. As
consideration for these rights, the Company issued 75,000 shares post
split of common stock on April 2, 2004 to the shareholders of IPC.
Additionally, the Company is to provide one half of the funds necessary
for the purchase of machinery, and all related parts, supplies, and
installation costs.
19
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
-------------------------------------------------------------------------------
Note J - Stockholders' Equity (Continued)
In conjunction with the change of control of the Company on August 11,
2004, 649,375 shares post split of common and 2,527,500 shares of
preferred stock were issued to newly elected officers of the Company.
The Company recognized the issuance as compensation expense of
$1,516,500 for the year ended December 31, 2004. The value was based
upon the closing price of the stock as quoted on the "electronic
bulletin board market" on August 11, 2004. Series A Preferred Stock is
convertible at a ratio of one share of Series A Preferred Stock to .5
shares of common stock. In addition, the Company entered into certain
compensation agreements with these newly elected officers (see Note K).
Note K - Commitments and Contingencies
Compensation Agreements
In August 2004, the Company entered into a compensation agreement with
Mr. William Bossung for the position of Vice President of Corporate
Finance and a Director of the Company through December 2005 with a one
year renewal. Compensation includes fees of $100,000 per annum and
issuance of common and preferred stock.
In August 2004, the Company entered into a compensation agreement with
Mr. Rick Carter for the position of Vice President through December
2005 with a one year renewal. Compensation includes fees of $80,000 per
annum and issuance of common and preferred stock. This agreement was
terminated effective
In August 2004, the Company entered into a compensation agreement with
Mr. James W. Zimbler for the position of President and a Director of
the Company through December 2005 with a one year renewal. Compensation
includes fees of $144,000 per annum and issuance of common and
preferred stock.
Effective January 1, 2005, the Company entered into a compensation
agreement with Ronald Shapps for the position of Chairman of the Board
of Directors through December 2005 with a one year renewal.
Compensation includes fees of $144,000 and the issuance of common and
preferred stock.
20
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note K - Commitments and Contingencies (Continued)
Harris Bank
In conjunction with the Harris Bank attempting to collect their debt
against certain parties as indicated above in Note F, the bank is
requesting that the Company become a party to any forbearance as to
collection of the debt, such as becoming a guarantor or buying life
insurance for the original makers of the debt. The basis of their
claims is that the Company is using facilities that secure the original
borrowings. It is the opinion of management and counsel of the Company
that there is no basis and claims or commitments since APPC or APG was
not a borrower or a guarantor on the debt (management of Alliance are
guarantors of the original debt based on their role as former
shareholders/officers of Alliance before its acquisition by the
Company). The Company entered into negotiations with the bank and is
attempting to secure financing to purchase the operating assets being
utilized in the operations at fair value. It is anticipated that an
agreement will be signed by the end of the second fiscal quarter of
2005.
Compensation for Utilizing Operating Assets
As indicated in Note H, no rent or compensation of any type has been
paid to the entities that claim to have legal title to the operating
assets of APPC. Management has taken the position that since there was
no contract or agreement to purchase or for the payment of rentals for
these assets, therefore nothing is owed. The consolidated operations
for the period since APPC was acquired do not contain any provision for
compensation for use of the facilities. The owner (and former President
of the Company and major shareholder) of the entity that owns the real
estate is claiming a monthly rental amount of $15,000. This is a
contingency relating to the business combination that could potentially
result in an adjustment of the purchase price of APPC and additional
charges to the Company's operations. The Company is in negotiations
with the owner and anticipates that the dispute will be resolved and an
agreement will be signed by the end of the second fiscal quarter of
2005.
Amendment of Alliance Petroleum Products Company Agreement
On June 24, 2004 the Company amended the original agreement removing
the contingencies contained in the original document, the most
significant being of refinancing certain debt owed Harris Bank (see
Note F and above). As part of this amendment the original agreement
stated APPC assumed all payment obligations and all other agreements of
Alliance to the Harris Bank,; and all payment obligations and all other
agreements of Alliance as set forth in the following four "Promissory
Notes":
21
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note K - Commitments and Contingencies (Continued)
Amendment of Alliance Petroleum Products Company Agreement (Continued)
o Alliance is to pay $200,000 to Richard Stiefel after all
amounts have been paid to Jesse Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been
received from Cornell Capital Corporation. The note is
non-interest bearing. Jesse Fuller was the former president
and a director of the Company and a major shareholder. Richard
Stiefel is an officer in Alliance and former shareholder, and
currently is an officer/director/ shareholder of the Company.
It is the opinion of current management that the terms of the
amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management
that the former control person(s) of the Company attempted to
bind the Company for debts due and owing from a transaction
the Company was not a party to, did not hold any assets from
or any obligation to repay and monies lent against assets.
o Alliance promises to pay American Group Financial, Inc. and/or
Jesse Fuller $407,368 and any additional sums that AGF or
Jesse Fuller owes to Harris Bank. Jesse Fuller is the owner of
AGF, the former president of the Company, former director and
still a major shareholder. The note accrues interest at 5% per
annum. The note was due December 1, 2004. It is the opinion of
current management that the terms of the amendment as
contained above, are unenforceable against the Company. It is
the belief and opinion of current management that the former
control person(s) of the Company attempted to bind the Company
for debts due and owing from a transaction the Company was not
a party to, did not hold any assets from or any obligation to
repay and monies lent against assets.
o Alliance is to pay $200,000 to Virginia Gefvert after all
amounts have been paid to Jesse Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been
received from Cornell Capital Corporation. The note is
non-interest bearing. Jesse Fuller was the former president
and a director of the Company, and a major shareholder.
Virginia Gefvert was a former shareholder of Alliance. It is
the opinion of current management that the terms of the
amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management
that the former control person(s) of the Company attempted to
bind the Company for debts due and owing from a transaction
the Company was not a party to, did not hold any assets from
or any obligation to repay and monies lent against assets.
22
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note K - Commitments and Contingencies (Continued)
Amendment of Alliance Petroleum Products Company Agreement (Continued)
o Alliance is to pay $200,000 to American Group Financial, Inc.
after all amounts have been paid to Jesse Fuller and American
Group Financial (owned by Jesse Fuller) and funding has been
received from Cornell Capital Corporation. The note is
non-interest bearing. Jesse Fuller was the former president
and a director of the Company, and a major shareholder.
Virginia Gefvert was a former shareholder of Alliance. It is
the opinion of current management that the terms of the
amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management
that the former control person(s) of the Company attempted to
bind the Company for debts due and owing from a transaction
the Company was not a party to, did not hold any assets from
or any obligation to repay and monies lent against assets.
Mining Lease
By a lease letter agreement effective March 9, 2001, and amended March
4, 2002 and September 4, 2002, the Company was granted the exclusive
right to explore, develop and mine the Medicine Project property
located in Elko County of the State of Nevada. The term of the lease
was for 20 years, with automatic extensions so long as the conditions
of the lease are met. During the year ended December 31, 2003,
management of the Company terminated the mining lease. As the Company
terminated the lease, it is required to pay all federal and state
mining claim maintenance fees for the current year. The Company is
required to perform reclamation work on the property as required by
federal state and local law for disturbances resulting from the
Company's activities on the property. In the opinion of management,
there will be no continuing liability.
Termination
During 2003, the Company agreed to issue 10,000 common shares post
split to its former President for the settlement of management fees
payable ($105,000), advances to the Company ($10,000) and termination
expense ($355,000). The shares were valued at $2.35 per share, by prior
consultants. These shares were issued to the former President and were
accounted for as an addition to paid-in capital.
23
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Note K - Commitments and Contingencies (Continued)
Oilmatic Status - Subsequent Event
On December 3, 2004, the Registrant entered into a Letter of Intent,
dated December 1, 2004, with Oilmatic Systems LLC of East Orange, New
Jersey, whereby the Registrant would purchase Oilmatic Systems LLC
and/Oilmatic International, Inc., for shares of common stock of the
Registrant. Originally, it was anticipated that the transaction will
close after the end of the first fiscal quarter of 2005. During the
quarter ended June 30, 2005, management no longer felt that the mutual
goals of both parties were attainable and the transaction with Oilmatic
was cancelled
The Company had advanced Oilmatic Systems LLC $300,000 under the Letter
of Intent. Pursuant to the Letter of Intent, if the transaction did not
close, the amount would be a loan to Oilmatic Systems LLC, to be
repayable on the ninth month anniversary of the date of the loan,
together with interest at the floating prime rate.
Triton Petroleum, LLC- Subsequent Event
On July 1, 2005, American Petroleum Group, Inc., the Registrant and
Company, entered into an Asset Purchase Agreement with Triton
Petroleum, LLC, an Illinois Limited Liability Corporation ("Triton")
whereby the Registrant purchased all the assets and operations of
Triton, as follows:
On the Payment Date, which shall be the one year anniversary of the
effectiveness of the Agreement, that being July 1, 2006, the Registrant
shall pay to the Sellers the Purchase Price equal to three and one half
(3.5) the net earnings of the assets and operations formerly owned by
Triton.
The Purchase Price is to be paid as:
(a) Twenty-five (25%) in cash on the payment date, and
(b) with the balance of seventy-five percent (75%), payable over the
following two years, in cash and stock, as agreed to by the parties.
In addition, current loans to Triton, totaling approximately three
hundred thousand ($300,000), due and owing to the members of Triton,
shall be paid over the twelve months from the Closing Date to the
Payment Date.
24
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
June 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
Some of the members of Triton, which sold the Assets to the Company are
Officers/Directors, employees or former Directors of the Company. The
sellers are as follows:
Keystone Capital Resources LLC
Controlled by our Interim President, James W. Zimbler
Rick Carter
Former Director
Christopher Hanson
Employee of our subsidiary, American Petroleum
Products Corp.
Richard Steifel
President of our subsidiary, American Petroleum
Products Corp.
George L. Riggs, III
Former Director and Chief
Financial Officer
Michael S. Krome
Currently a Director and General Counsel
Robert Nelson - no relation to Registrant prior to transaction
Rule 504 - Regulating D Offering - Subsequent Event
On July 25, 2005, the Company conducted a Rule 504, Regulating D
offering of $1,000,000 worth of Convertible Debentures of our
subsidiary American Petroleum Products Company ("APPC"), to accredited
investors in the State of Texas. Pursuant to the Offering, APPC issued
the convertible debentures, which were convertible into shares of
common stock. As part of the Offering, APPC is to be merged into the
Company. Upon conversion into shares and merger of APPC into the
Company the offering shares are issuable as shares of American
Petroleum Group, Inc. A total of 2,500,000 shares of common stock were
issued under the offering.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS.
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with our audited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward-looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
OVERVIEW
History and Organization
American Petroleum Group, Inc., formerly American Capital Alliance, Inc.,
formerly Prelude Ventures, Inc. (the "Company") was incorporated under the laws
of the State of Nevada on May 24, 2000. Prior to its acquisition of American
Petroleum Products, Inc., formally Alliance Petroleum Products, Inc., the
Company had limited business operations and was considered a development stage
enterprise. The activities during that period principally have been limited to
organizational matters, and examining business and financing opportunities for
the Company.
Prior Business Matters and Failed Business Acquisitions. On March 9, 2001, we
acquired a 20-year mining lease from Steve Sutherland, the owner of 24
unpatented lode-mining claims, sometimes referred to as the Medicine Project,
located in Elko County, Nevada. The lease was terminated at some point.
During the nine months ended December 31, 2003, management of the Company
terminated the mining lease. As the Company terminated the lease, it is required
to pay all federal and state mining claim maintenance fees for the current year.
The Company is required to perform reclamation work on the property as required
by federal state and local law for disturbances resulting from the Company's
activities on the property. In the opinion of management, there will be no
continuing liability. Please see the Company's Schedule 14C Information
Statement as filed with the Securities and Exchange Commission on February 13,
2004 and mailed or furnished to Shareholders on February 17, 2004, and
incorporated herein by reference, for additional details on this matter.
4
On April 1, 2003, the Company entered into an agreement to acquire 100% of the
issued and outstanding shares of Pascal Energy, Inc., a Canadian corporation, by
the issuance of 5,000,000 common shares, restricted under Rule 144 of the
Securities Act of 1933 and at a later date, issue 5,000,000 common shares,
restricted under Rule 144 subject to the Company paying not less than $1,000,000
accumulated dividends to its shareholders of record. Pascal Energy, Inc.'s
business has to provide servicing for the oil and gas industry.
The Company determined that the transaction could not be completed due to the
inability to complete a comprehensive due diligence. The shares of common stock
previously transferred in anticipation of the completion of the transaction were
returned to the treasury of the Company and canceled.
"TSG" Acquisition
On October 9, 2003, the Company acquired an option for $500,000 to purchase the
assets and certain liabilities of Tri-State Stores, Inc., an Illinois
Corporation ("Tri-State"), GMG Partners LLC, an Illinois Limited Liability
Company ("GMG"), and SASCO Springfield Auto Supply Company, a Delaware
Corporation ("SASCO"). Tri-State, GMG and SASCO are collectively referred to
herein as "TSG." Upon exercise of the option, the Company was to pay $3,000,000
and assume certain liabilities, not exceeding $700,000. TSG is involved in the
automotive after market. During the first quarter of 2004, the Company elected
not to continue to pursue this acquisition and let the option lapse.
Motor Parts Waterhouse, Inc.
The Company issued 5,000,000 shares of common stock for an option to acquire all
the outstanding stock of Motor Parts Warehouse, Inc. ("MPW"), of St. Louis,
Missouri. In order to exercise the option, the Company must issue an additional
5,000,000 shares of common stock to the shareholders of MPW and pay $2,200,000.
This MPW option cannot be exercised until after the refinancing of the TSG debt
of approximately $3,000,000. MPW is also an auto parts distributor. As a result
of the financing not being completed, the Company elected not to continue to
pursue this acquisition and let the option lapse.
Alliance Petroleum Products Company
On October 9, 2003, the Company also entered into a Stock Purchase Agreement
("Alliance Agreement") with Alliance Petroleum Products Company ("Alliance"), an
Illinois Corporation, and a Rider to the Alliance Agreement ("Rider"). Alliance
is in the business of blending and bottling motor oil and anti-freeze. Under the
Alliance Agreement, the Company issued 5,000,000 shares of common stock for 100%
of the issued and outstanding shares of the common stock of Alliance (757,864
common shares). An additional 5,000,000 shares of common stock of the Company is
to be issued to Worldlink International Network, Inc. upon 24 months from the
date hereof. Under the terms of the Rider, the Company is required to provide
funding of at least $3,500,000 to pay Harris Bank, a secured creditor of
Alliance. The shareholders of Alliance have the option to have the 757,864
issued and outstanding shares of common stock of Alliance returned and the
Alliance Agreement rescinded if they choose if the Company did not
5
arrange the funding within 150 days from the date of the execution of the
Alliance Agreement. Since the expiration of the option period has expired, the
principals of the transactions have verbally agreed to extend the option period
pending completion of the financing. This was a material contingency to the
transactions and as a result has to be resolved prior to recognition of a
business combination. On June 24, 2004 (effective date July 1, 2004) the Company
("Prelude") now known as American Petroleum Group, Inc., ("AMPE") and Alliance
Petroleum Products Company ("Alliance"), entered into an Amendment to the
original Alliance Agreement, dated October 9, 2003 whereby all previous
conditions and contingencies were deemed to have been completed or waived and
the agreement amended as follows;
o 5,000,000 shares of AMAI voting capital stock are to be issued to the
shareholders of Alliance in the same proportions as the first 5,000,000
shares were issued to them pursuant to the exchange of securities
contemplated in the Agreement and Plan of Reorganization upon the
execution of this Amendment. The exchange of securities also includes,
1,000,000 shares of preferred shares, with the necessary Certificate of
Designation, to allow conversion at the rate of 1 share of preferred to
ten (10) shares of common, and to permit the preferred shareholders to
vote their shares, at any time after issuance, and after they have been
converted, the shares be issued to the shareholders of American in the
same proportions as the first 5,000,000 shares were issued to them
pursuant to the Agreement and Plan of Reorganization.
o All the shares to the Alliance shareholders are no longer subject to a
two-year restriction prior to sale or transfer, but are now only subject
to those transfer restrictions under Rule 144 of the Securities Laws.
o AMAI assumes all payment obligations and all other agreements of Alliance
as set forth in the including four "Promissory Notes"; and AMAI assumes
all payment obligations and all other agreements of Alliance to the Harris
Bank.
It is the opinion of current management that the terms of the amendment as
contained above, are unenforceable against the Company. It is the belief and
opinion of current management that the former control person(s) of the Company
attempted to bind the Company for debts due and owing from a transaction the
Company was not a party to, did not hold any assets from or any obligation to
repay and monies lent against assets. This is better described as the
"threatened Litigation from Harris Bank" as set forth in Part II, Item 1.
Litigation
The operations of Alliance have been consolidated with the results of AMAI since
July 1, 2004. American Petroleum Group, Inc. which was formerly American Capital
Alliance, Inc. (the "Company") is a Chicago based holding company with an agenda
to acquire, merge, and manage various business opportunities. The Company's
current direction is in the manufacturing and distribution of petroleum and
related products for the automotive industry. After the above acquisition, the
Company is no longer considered a "development state entity"
6
Oilmatic Systems LLC
On December 3, 2004, the Registrant entered into a Letter of Intent, dated
December 1, 2004, with Oilmatic Systems LLC of East Orange, New Jersey, whereby
the Registrant would purchase Oilmatic Systems LLC and/or Oilmatic
International, Inc., for shares of common stock of the Registrant.
As part of the transaction, Michael Allora, President of Oilmatic would have
assumed, after the closing of the transaction, the position of President and
Chief Operating Officer of American Petroleum as well as Oilmatic. Mr. Allora
has extensive experience in the delivery of bulk liquids and related products to
businesses, retail and wholesale, in the restaurant field.
Oilmatic is a food service distribution company that supplies a closed loop Bulk
Cooking Oil Supply and Management system. Its patented state of the art handheld
Dipstick(R) design dispenses and removes cooking oil with the simple push of a
button at the deep fryers. The system also consists of separate fresh oil and
waste oil tanks. A key switch allows management to control unnecessary oil fills
and disposals. This system completely eliminates the practice of employees
manually removing hot used oil which significantly reduces slips, falls and
burns, as well as the hard labor of unloading and retrieving heavy boxes of oil.
Additionally, the system eliminates hazardous grease spills both inside and
outside of the store that cause grease fires and grease trap build-ups that
pollute our environment.
Effective May 20, 2005, Management no longer felt that the mutual goals of both
parties were attainable and therefore the transaction with Oilmatic was
cancelled between the Parties.
The Registrant had advanced Oilmatic Systems LLC $300,000 under the Letter of
Intent. Pursuant to the Letter of Intent, if the transaction did not close, the
amount would be a loan to Oilmatic Systems LLC, to be repayable on the ninth
month anniversary of the date of the loan, together with interest at the
floating prime rate.
SUBSEQUENT TRANSACTIONS
Triton Petroleum, LLC
On July 1, 2005, American Petroleum Group, Inc., the Registrant, entered into an
Asset Purchase Agreement with TRITON PETROLEUM, LLC, an Illinois Limited
Liability Corporation ("Triton") whereby the Registrant purchased all the assets
and operations of Triton, as follows:
On the Payment Date, which shall be the one year anniversary of the
effectiveness of the Agreement, that being July 1, 2006, the Registrant shall
pay to the Sellers the Purchase Price equal to THREE AND ONE HALF (3.5) times
the net earnings of the assets and operations formerly owned by Triton.
7
The Purchase Price is to be paid as:
(a) TWENTY-FIVE PERCENT (25%) in cash on the payment date, and
(b) with the balance of SEVENTY-FIVE PERCENT, payable over the following two
years, in cash and stock, as agreed to by the parties.
In addition, current loans to Triton, totaling approximately THREE HUNDRED
THOUSAND DOLLARS ($300,000), due and owing to the members of Triton, shall be
paid over the twelve months from the Closing date to the Payment Date.
Some of the members of Triton, which sold the Assets to the Registrant, are
Officers/Directors, employees or former Directors of the Registrant. The sellers
are as follows:
Keystone Capital Resources LLC
Controlled by our former Interim President, James W. Zimbler
Rick Carter
Former Director
Christopher Hanson
Employee of our subsidiary, American Petroleum Products Corp.
Richard Steifel
President of our subsidiary, American Petroleum Products Corp.
George L. Riggs, III
Former Director and Chief Financial Officer
Michael S. Krome
Currently a Director and General Counsel
Robert Nelson - no relation to Registrant prior to transaction.
The assets purchased include the right to the name, Triton Petroleum, all
operations and assets, including any leases, or sub-leases.
Triton purchases used oil from various consolidators of used petroleum such as
gear oil, machine oils, etc. that have never been burnt before. It then
transports the un-combusted, but unrefined oils back to its reclamation facility
for refining. After a very detailed reclamation process, all impurities and
contaminants are extrapolated out of the oil, through Triton's centrifuge
operation, thus leaving it with a valuable renewable petroleum base oil. This
base oil can be blended with new crude and other chemical components and bottled
in our Bedford Park, Illinois facility. Using the renewable oils from Triton
Petroleum will drastically reduce American Petroleum Products Company's (APPC)
cost of base oil by 35%, and management feels that the acquisition of the assets
of Triton petroleum, making APPC its only customer, will be an advantage with
respect to earnings.
APPC has purchased this kind of oil in the past from various supplies, including
Triton Petroleum, but owning the supplier creates a vertical integrated supply
chain and giving AMPE a price advantage over its competitors in this highly
competitive commodity market.
8
PLAN OF OPERATIONS
------------------
We were a startup, development stage Company prior to the acquisition of
American Petroleum Products Company ("APPC") and did not realize any revenues
from our business operations until that time. However at time of acquiring APPC
its sales volume was at a point below its break even point and therefore was
losing money. Management of the Company feels that APPC is operating at a small
percentage of its capacity with its major constraint on increasing volume being
that of financing raw materials for manufacturing and some other limited
variable manufacturing costs. In addition, it is currently not generating
profits of sufficient amount to support the other operations of the parent
Company. Accordingly, we must raise money from sources other than the operations
of this business. Our only other source of cash at this time is investments by
others in our Company. We must raise cash to complete the acquisitions and stay
in business.
In order to raise capital for operations of the parent Company and to complete
the Oilmatic transaction, the Company entered into a transaction with Cornell
Capital Partners LP and Highgate House Funds, Ltd., dated March 8, 2005, whereby
the Company entered into a Convertible debenture for a total amount of $500,000
at 7% interest. The Note is convertible into shares of common stock at a
conversion price of $0.85 per share, at the option of the Lender. At the same
time the Company entered into with Cornell Capital Partners LP a total Standby
Equity Distribution Agreement for up to $10,000,000 equity line. Pursuant to the
Standby Equity Distribution Agreement we are to file a registration statement
180 days after execution.
We must also obtain additional financing to either purchase our operating assets
or obtain working capital for leasing arrangements
To meet our need for cash, we are attempting to raise debt and equity financing
to complete the acquisitions described in this document and fund the Company's
on-going operations. There is no assurance that we will be able to raise these
funds and stay in business. If we do not raise the funds required to complete
any of the acquisitions, we will have to find alternate sources such as a
secondary public offering, private placement of securities, or loans from
officers or others. If we need additional cash and can not raise it, we will
either have to suspend operations until we do raise the cash or cease operations
entirely
Limited Operating History.
The only historical financial information about our Company on which to base an
evaluation of our performance is the last nine months after the acquisition of
APPC which was generating losses at the time of acquisition. We cannot guarantee
we will be successful in our business operations. Our business is subject to the
risks inherent in the establishment of a new business enterprise, including
limited capital resources and the ability to find and finance suitable
acquisition candidates. We are seeking equity and debt financing to provide the
9
capital required to fund additional proposed acquisitions and our on-going
operations.
We have no assurance that future financing will be available to the Company on
acceptable terms. If financing is not available on satisfactory terms, we may be
unable to continue, develop or expand our operations. Equity financing could
result in additional dilution to shareholders.
Liquidity, Capital Resources and Operations
Since the Company's inception, the Company has raised funds from
officer/stockholder advances, from private sales of its common shares and
approximately $500,000 from sale of borrowed stock contributed by the Company's
promoters. This money has been utilized for start-up costs and operating
capital.
In this regard, the Company's plan of operations for the next 12 months is to
pursue profitable business acquisitions, and obtain financing to increase the
sale volume of APPC. Product research and development is expected to be minimal
during the period. Additionally, the Company does not expect any change in
number of employees other than through acquisitions.
Results of Operations:
Three Months Ended June 30, 2005 v. Three Months Ended June 30, 2004
For the Quarter Ending June 30, 2005 v. June 30, 2004, the Company had $380,147
in sales, and cost of revenues and other expenses of $1,255,643, including
$735,000 in compensation expense related to the issuance of stock for services
rendered. This is in comparison to $-0- in sales and cost of revenues and
expenses of $102,347.
Six Months Ended June 30, 2005 v. Six Months Ended June 30, 2004
For the Six months ending June 30, 2005 v. June 30, 2004, the Company had
$765,048 in sales, and cost of revenues and other expenses of $5,205,992,
including $1,425,000 in compensation expense related to the issuance of stock
for services rendered and $2,782,500 in financing expense related to the
issuance of stock in relation to financing activities. This is in comparison to
$-0- in sales and cost of revenues and expenses of $152,172.
Liquidity and Financial Resources:
During the six months ended June 30, 2005, net cash used by operating activities
was $3,781,751. The Company incurred a net loss of $1,140,013 for the three
months ended June30, 2005; the company still has a net operating loss even if
the stock compensation expense of $735,000 had not been incurred. Additionally
10
at June 30, 2005, current liabilities and long-term liabilities exceed current
assets by approximately $2,058,689; these factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company anticipates
that in order to fulfill its plan of operation including payment of certain past
liabilities of the company, it will need to seek financing from outside sources.
The company is currently pursuing private debt and equity sources. It is the
intention of the Company's management to also improve profitability by
significantly reducing operating expenses and to increase revenues
significantly, through growth and acquisitions. The Company is actively in
discussion with one or more potential acquisition or merger candidates. There is
no assurance that the company will be successful in raising the necessary funds
nor there a guarantee that the Company can successfully execute any acquisition
or merger transaction with any company or individual or if such transaction is
effected, that the Company will be able to operate such company profitably or
successfully.
Administrative expenses for the three months ended June 30, 2005, including
stock compensation expense were $1,230,980, resulting in losses from operations
of $1,115,352. Included in these amounts are expenses for stock compensation of
$735,000. The increases in the remainder of Administrative expensed are due to
the start up of the operations due to increases in personnel, professional,
professional fees, and a generally higher level of fixed administrative
expenses. It is anticipated by the Registrant that General and Administrative
costs will remain relatively the same, while Revenues and Gross profit will
increase as a result of the business derived from APPC.
Inflation
The amounts presented in the financial statements do not provide for the effect
of inflation on the Company's operations or its financial position. Amounts
shown for machinery, equipment and leasehold improvements and for costs and
expenses reflect historical cost and do not necessarily represent replacement
cost. The net operating losses shown would be greater than reported if the
effects of inflation were reflected either by charging operations with amounts
that represent replacement costs or by using other inflation adjustments.
Provision for Income Taxes
The company has determined that it will more likely than not use any tax net
operating loss carry forward in the current tax year and has taken and therefore
has a valuation amount equal to 100% of any asset.
Contingencies
Harris Bank
In conjunction with the Bank attempting to collect their debt against
certain parties, the bank is requesting that the Company become a party to any
forbearance as to collection of the debt, such as becoming a guarantor or buying
life insurance for the original makers of the debt. The basis of their claims is
that the company is using facilities that secure the original borrowings. It is
the opinion of management and counsel of the company that there is no basis and
11
claims or commitments since Alliance or the Company was not a borrower or a
guarantor on the debt (management of Alliance are guarantors of the original
debt). The Company has a tentative agreement to resolve al potential claims with
the bank and is attempting to secure financing to purchase the operating assets
being utilized in the operations at fair value.
Compensation for Utilizing Operation Assets
-------------------------------------------
No rent or compensation of any type has been paid to the entities that
claim to have legal title to the operating assets of Alliance. Management has
taken the position that since there was no contract or agreement to purchase or
for the payment of rentals for these assets, therefore nothing is owed. The
consolidated operations for the period since Alliance was acquired do not
contain any provision for compensation for use of the facilities; The owner (and
former president of the Company and major shareholder) of the entity that owns
the real estate had previously had Alliance recorded $15,000 in rent a month
with a corresponding increase to an amount payable to this entity; This is a
contingency relating to the business combination that could potentially result
in an adjustment of the purchase price of Alliance or additional charges to
operations.
Amendment of Alliance Petroleum Products Company Agreement
----------------------------------------------------------
On June 24, 2004 the Company amended the original agreement removing the
contingencies contained in the original document, the most significant being of
refinancing certain debt owed Harris Bank. As part of this amendment the
document stated Alliance assumed assumes all payment obligations and all other
agreements of Alliance to the Harris Bank, and all payment obligations and all
other agreements of Alliance as set forth in the following four "Promissory
Notes".:
o Alliance is to pay $200,000 to Richard Stiefel after all amounts have been
paid to Jesse Fuller and American Group Financial (owned by Jesse Fuller)
and funding has been received from Cornell Capital Corporation. The note
is non-interest bearing. Jesse Fuller was the former president and a
director of the Company and a major shareholder. Richard Stiefel is an
officer in Alliance and former shareholder, and currently is an
officer/director/ shareholder of the Company. It is the position of the
Company that since the funding from Cornell Capital Corporation was not
completed and it is unlikely to be completed that there is no basis for
this liability.
o Alliance promises to pay American Group Financial, Inc. and/or Jesse
Fuller $407,368.09 and any additional sums that AGF or Jessee Fuller owes
to Harris Bank. Jessee Fuller is the owner of AGF, the former president of
the Company, former director and still a major shareholder. The note
accrues interest at 5% per annum. The note due December 1, 2004.
Management of the Company's position is that there was not consideration
for the note and that Alliance was never a party on any debt obligations
to Harris Bank.
o Alliance is to pay $200,000 to Virginia Gefvert after all amounts have
been paid to Jesse Fuller and American Group Financial (owned by Jesse
Fuller) and funding has been received from Cornell Capital Corporation.
The note is non-interest bearing. Jesse Fuller was the former president
and a director of the Company, and a major shareholder. Virginia Gefvert
was a former shareholder of Alliance. It is the position of the Company
that since the funding from Cornell Capital Corporation was not completed
and it is unlikely to be completed that there is no basis for this
liability.
o Alliance is to pay $200,000 to American Group Financial, Inc. after all
amounts have been paid to Jesse Fuller and American Group Financial (owned
by Jesse Fuller) and funding has been received from Cornell Capital
Corporation. The note is non-interest bearing. Jesse Fuller was the former
president and a director of the Company, and a major shareholder. Virginia
Gefvert was a former shareholder of Alliance. It is the position of the
Company that since the funding from Cornell Capital Corporation was not
completed and it is unlikely to be completed that there is no basis for
this liability.
12
Much of the information included in filing includes or is based upon estimates,
projections or other "forward looking statements". Such forward-looking
statements include any projections or estimates made by us and our management in
connection with our business operations. While these forward-looking statements,
and any assumptions upon which they are based, are made in good faith and
reflect our current judgment regarding the direction of our business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions or other future performance suggested
herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined above. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative during our search for a new
business opportunity. Prospective investors should consider carefully the risk
factors set out below.
Government Regulation
To the best of our knowledge, we are not currently subject to direct
federal, state or local regulation in the United States, other than regulations
applicable to businesses generally.
Key personnel
All of our present officers or directors are key to our continuing
operations, we rely upon the continued service and performance of these officers
and directors, and our future success depends on the retention of these people,
whose knowledge of our business and whose technical expertise would be difficult
to replace. At this time, none of the officers or directors is bound by
employment agreements, and as a result, any of them could leave with little or
no prior notice.
13
If we are unable to hire and retain technical, sales and marketing and
operations personnel, any business we acquire could be materially adversely
affected. It is likely that we will have to hire a significant number of
additional personnel in the future if we identify and complete the acquisition
of a business opportunity, or if we enter into a business combination.
Competition for qualified individuals is likely to be intense, and we may not be
able to attract, assimilate, or retain additional highly qualified personnel in
the future. The failure to attract, integrate, motivate and retain these
employees could harm our business.
Limited Operating History. Need for Additional Capital
There is limited financial information about our Company on which to base
an evaluation of our performance. We were a development stage Company prior to
the acquisition of APPC and have not generated any substantial revenues from
operations. We cannot guarantee we will be successful in our business
operations. Our business is subject to the risks inherent in the establishment
of a new business enterprise, including limited capital resources and the
ability to find and finance suitable acquisition candidates. We are seeking
equity and debt financing to provide the capital required to fund the proposed
acquisitions and our on-going operations.
We have no assurance that future financing will be available to the Company
on acceptable terms. If financing is not available on satisfactory terms, we may
be unable to continue, develop or expand our operations. Equity financing could
result in additional dilution to shareholders.
We have not conducted or received results of market research indicating
that there is a demand for the acquisition of a business opportunity or business
combination as contemplated by our company. Even if there is demand for the
acquisition of a business opportunity or combination as contemplated, there is
no assurance we will successfully complete such an acquisition or combination.
Regulation
Although we will be subject to regulation under the Securities Exchange Act
of 1934, management believes that we will not be subject to regulation under the
Investment Company Act of 1940, insofar as we will not be engaged in the
business of investing or trading in securities. In the event that we engage in
business combinations which result in us holding passive investment interests in
a number of entities, we could be subject to regulation under the Investment
Company Act of 1940, meaning that we would be required to register as an
Investment company and could be expected to incur significant registration and
compliance costs. We have obtained no formal determination from the Securities
and Exchange Commission as to the status of our company under the Investment
Company Act of 1940 and, consequently, any violation of such act would subject
us to material adverse consequences.
Uncertain Ability to Manage Growth
Our ability to achieve any planned growth upon the acquisition of a
suitable business opportunity or business combination will be dependent upon a
number of factors including, but not limited to, our ability to hire, train and
14
assimilate management and other employees and the adequacy of our financial
resources. In addition, there can be no assurance that we will be able to manage
successfully any business opportunity or business combination. Failure to manage
anticipated growth effectively and efficiently could have a materially adverse
effect on our business.
"Penny Stock" Rules May Restrict the Market for the Company's Shares
Our common shares are subject to rules promulgated by the Securities and
Exchange Commission relating to "penny stocks," which apply to companies whose
shares are not traded on a national stock exchange or on the NASDAQ system,
trade at less than $5.00 per share, or who do not meet certain other financial
requirements specified by the Securities and Exchange Commission. These rules
require brokers who sell "penny stocks" to persons other than established
customers and "accredited investors" to complete certain documentation, make
suitable inquiries of investors, and provide investors with certain information
concerning the risks of trading in the such penny stocks. These rules may
discourage or restrict the ability of brokers to sell our common shares and may
affect the secondary market for our common shares. These rules could also hamper
our ability to raise funds in the primary market for our common shares.
Possible Volatility of Share Prices
Our common shares are currently publicly traded on the Over-the-Counter
Bulletin Board service of the National Association of Securities Dealers, Inc.
The trading price of our common shares has been subject to wide fluctuations.
Trading prices of our common shares may fluctuate in response to a number of
factors, many of which will be beyond our control. The stock market has
generally experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of companies with no
current business operation. There can be no assurance that trading prices and
price earnings ratios previously experienced by our common shares will be
matched or maintained. These broad market and industry factors may adversely
affect the market price of our common shares, regardless of our operating
performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted. Such litigation, if instituted, could result in substantial costs
for us and a diversion of management's attention and resources.
Indemnification of Directors, Officers and Others
Our by-laws contain provisions with respect to the indemnification of our
officers and directors against all expenses (including, without limitation,
attorneys' fees, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that the person is one of our officers or directors) incurred by an officer
or director in defending any such proceeding to the maximum extent permitted by
Nevada law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of our
company under Nevada law or otherwise, we have been advised the opinion of the
15
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
Anti-Takeover Provisions
We do not currently have a shareholder rights plan or any anti-takeover
provisions in our By-laws. Without any anti-takeover provisions, there is no
deterrent for a take-over of our company, which may result in a change in our
management and directors.
Reports to Security Holders
Under the securities laws of Nevada, we are not required to deliver an
annual report to our shareholders but we intend to send an annual report to our
shareholders.
ITEM 3. CONTROLS AND PROCEDURES
The registrant's new Principal executive financial officer, based on his
evaluation of the registrant's disclosure controls and procedures (as defined in
Rules 13a-14 (c) of the Securities Exchange Act of 1934) as of June 30, 2005 has
concluded that the registrants' disclosure controls and procedures are adequate
and effective to ensure that material information relating to the registrants
and their consolidated subsidiaries is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms,
particularly during the period in which this quarterly report has been prepared.
The registrant's principal executive officers and principal financial
officer have concluded that there were no significant changes in the
registrant's internal controls or in other factors that could significantly
affect these controls subsequent to June 30, 2005 the date of their most recent
evaluation of such controls, and that there was no significant deficiencies or
material weaknesses in the registrant's internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We know of no material, active or pending legal proceedings against us, nor are
we involved as a plaintiff in any material proceedings or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholders are an adverse party or have a
material interest adverse to us.
There is a threatened action by the Harris Bank of Chicago, Illinois with
respect to a defaulted loan agreement. Harris Bank claims to have a lien on the
equipment used by the Registrant in its operations. The Registrant has had
16
contact with Harris Bank and is attempting to resolve the matter. The debt was
reduced from an original indebtedness of $2.35 million to a final reduced amount
of $1.4 million. Terms of the debt with Harris Bank of Chicago, Illinois include
a four-year term of repayment, with interest at 6% on a 20 year amortization
schedule, and a balloon payment at the end of the term. Upon the Company making
a down payment, the terms of the transaction will be finalized. In addition, we
have reached a tentative settlement with American Financial, the owner of the
real property where our subsidiary conducts operations.
The Company received a letter, dated February 28, 2005, from the Attorney for
Concentric Consumer Marketing, Inc., in connection with certain sums owed by
American Petroleum Products Corporation ("APPC"), a wholly owned subsidiary of
the Company, in the amount of $13,000 per month for the past four (4) months,
for services. There is no way to determine at this time the validity of the
claim, or any possible outcome or if the claim is material to the Company, or
even if litigation will be commenced against the Company and/or APPC. The
Company has reached a settlement with Concentric Consumer Marketing, Inc., and
expects to execute a Settlement Agreement shortly.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 25, 2005, we conducted a Rule 504, Regulating D offering of $1,000,000
worth of Convertible Debentures of our subsidiary American Petroleum Products
Company ("APPC"), to accredited investors in the State of Texas. Pursuant to the
Offering, APPC issued the convertible debentures, which were convertible into
shares of common stock. As part of the Offering, APPC is to be merged into the
Registrant. Upon conversion into shares and merger of APPC into the Registration
the offering shares are issuable as shares of American Petroleum Group, Inc. A
total of 2,500,000 shares of common stock were issued under the offering.
17
Effective August 1, 2005, the following individuals resigned as members of the
Board of Directors and/or as Principal Officers of the registrant.
James W. Zimbler Director and Interim President
William Bossung Director
The Directors resigning have stated in their resignation letters that their
resignation does not in any way imply or infer that there is any dispute or
disagreement relating to the Company's operations, policies or practices.
Each resigning Director has been provided a copy of his disclosure, no less that
the day the Registrant is filing the disclosure with the Commission. Each
Director will be given an opportunity to furnish the Registrant a letter or
response, that he agrees with the statements made by the Registrant in this
Section 5.02, and if not, stating the respects in which he does not agree.
The following individuals have been appointed by the Board of Directors to the
positions indicated, effective August 1, 2005:
Name Age Position
-----------------------------------------------------------------
George Campbell 39 President and Chief Executive Officer
James J.Carroll 54 Director and Chief Accounting/Financial
Officer
George Campbell, President and Chief Executive Officer
From 2001 until 2005 , Mr. Campbell was President of George Campbell Consulting,
where he was responsible for the entire operation. From 2000 until 2001, Mr.
Campbell was a Business Strategy Consultant for Scient Corp., where he was
responsible for providing clients with business advice as it related to internet
activities. From 1997 until 2000, Mr. Campbell was with Navistar International
Transportation Corp., where he had a variety of positions, most recently
Director of Strategic Planning for the Truck Group. He was responsible for
leading the leadership of the Truck Group through processes of reorganization
and strategy development.
Mr. Campbell comes to American Petroleum with a distinguished track record that
includes over 13 years of management experience in both start-up and large
company manufacturing. He spent 8 years with AlliedSignal and Navistar
International as a finance and strategy leader, where he led multiple
restructuring, cost, business development, and quality improvement efforts. Most
recently, Mr. Campbell's background includes extensive experience as a
consultant to both emerging growth and well established businesses the areas of
cost competitiveness and quality improvement. Mr. Campbell has been a business
consultant to both start ups and Fortune 1000 clients since 2000, with a focus
on strategic restructurings and quality improvements. Prior to that, Mr.
Campbell worked for both Navistar International and AlliedSignal in various
finance and strategy positions. He has an MBA from the University of Michigan
and a BA from the University of Wisconsin.
18
James J. Carroll, 54, Director and Chief Accounting/Financial Officer
James J. Carroll was appointed our Chief Financial Officer in March, 2005. He is
the founder of Kevney Consulting Group, Ltd (Kevney), and has been active in
Kevney since 2001. Kevney provides diversified financial and management services
to its clients, including merger and acquisition, reorganization and debt
financing consulting and interim chief financial officer services. Mr. Carroll
has over 30 years of diversified financial experience, including 13 years in
public accounting with 5 years as a partner with a regional public accounting
firm. He also has over 15 years of experience in private industry, including
positions as COO and CFO for various manufacturing and distribution companies.
ITEM 6. EXHIBITS
a. Exhibits:
3.1 Articles of Incorporation of the Registrant, as amended*
3.2 By-laws of the Registrant, as amended* 31.1 Section 302 Certification
of Chief Executive Officer (1)
31.2 Section 302 Certification of Chief Accounting/Financial Officer (1)
32.1 Section 906 Certification of Chief Executive Officer (1)
32.2 Section 906 Certification Chief Accounting/Financial Officer (1)
------------
* Previously filed as an exhibit to the Company's Form 10-SB filed on June 26,
2001
(1) Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 19, 2005 American Petroleum Group, Inc.
/s/ George Campbell
--------------------------------------
George Campbell, President and Chief
Executive Officer
/s/ James Carroll
--------------------------------------
James Carroll, Chief Financial Officer
19