UNITED STATES
SECURITIES AND EXCHANGE COMMISSSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934: For the fiscal year ending December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the transition period from _________ to _________
Commission file number: 000-49950
AMERICAN PETROLEUM GROUP, INC.
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(Name of small business issuer in its charter)
Nevada 98-0232018
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1400 N. Gannon Drive, 2nd Floor, Hoffman Estates, IL 60194
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(Address of Principal executive offices) (Zip Code)
Issuer's telephone number: (847) 805-0125
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Securities registered under Section 12(b) of the "Exchange Act"
Common Share, Par Value, $.0001
-------------------------------
(Title of each Class)
Securities registered under Section 12(g) of the Exchange Act: None
----
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such a 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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part II of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year: $857,172
-------
The aggregate market value of the voting and non-voting common equity held by
non-affiliates based on the average bid and asked price of such common equity,
as of March 29, 2005, was approximately $1,217,937.50.
The number of shares of Common Stock outstanding, as of November 14, 2005 was:
17,145,500
Transitional Small Business Disclosure Format (check one): Yes [_]; No [X]
AMERICAN PETROLEUM GROUP, INC.
ANNUAL REPORT ON FORM 10-KSB
For Fiscal Year Ended December 31, 2004
INDEX
Page No:
PART I ......................................................... 3
ITEM 1. DESCRIPTION OF BUSINESS............................. 3
ITEM 2. DESCRIPTION OF PROPERTY............................. 11
ITEM 3. LEGAL PROCEEDINGS................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDEDRS............................................ 13
PART II ........................................................ 13
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................. 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION........................................... 16
ITEM 7. FINANCIAL STATEMENTS................................ 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE.......................................... 18
ITEM 8A. CONTROLS AND PROCEDURES ............................ 19
PART III ....................................................... 20
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF
THE EXCHANGE ACT.................................... 20
ITEM 10 EXECUTIVE COMPENSATION.............................. 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWERNS
AND MANGAEMENT...................................... 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................... 26
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ............. 27
American Petroleum Group, Inc.
Part I
Item 1. Description of Business
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.
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 American (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 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 Item 3. Litigation
THE COMPANY
The operations of Alliance (now known as American Petroleum Products Company)
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, via its subsidiary (American Petroleum Products Company, or APPC),
is in the manufacturing and distribution of petroleum and related products for
the automotive industry. Specifically, APPC is in the business of blending,
bottling, and distributing private label motor oil, transmission fluid, and
related products for the automotive aftermarket. These products are sold, both
direct and through distributors, to retail outlets that include oil change
shops, automotive aftermarket chains, gas stations, department stores, and
convenience stores. Although most products are sold in 12-quart cases, some
products are sold in bulk. APPC sells to a wide variety of customers with a low
dependence on any one customer (the largest customer makes up less than 10% of
sales year to date).
In order to make finished motor oil, blenders and bottlers like APPC purchase
base oils and blend them with V.I. Improver and/or Additive Packages to create
motor oil, which is then sold either Bulk or Bottled. While there are several
major companies with huge markets, this is a highly fragmented market, with many
smaller players, especially in the private label market. Other major costs
include bottles, caps, labels, corrugated, labor, and transportation costs.
The U.S. market for aftermarket motor oil is approximately $11.3B annually,
making APPC a very small, regional player. Most retail outlets for motor oil
carry a major brand and a lesser-known, lower-priced brand. APPC primarily
competes with those other, lesser-known brands, which consist of other
regional/national motor oil blenders and bottlers.
Given that the product is somewhat of a commodity, APPC competes largely by
managing a competitive cost structure so that it can pass through competitive
pricing and by carefully managing customer relationships. By giving our
customers fair prices and providing excellent quality and service, APPC has
maintained relatively long term relations with its customer base and has had
success winning new customers.
Motor oil with for late model year automobiles normally utilize the latest
formulae established by the American Petroleum Institute and the Society of
Automotive Engineers. The "standard" for current model year automobiles is
referred to as "SM," which recently replaced "SL." Only SM and SL motor oil can
currently receive the API "starburst" certification seal, and APPC must annually
renew its API license in order to use the "starburst" seal on its labels. Motor
oil can also be made without the API starburst and sold as oil with technology
prior to SM or SL. This API-certified oil must include what is referred to as
"Group 2 Base Oils" as the foundation for the oil, as well as an additive
package that includes the most recently approved chemical blend. APPC, like
other motor oil blenders, must purchase Group 2 base oils from select,
API-approved suppliers in order to make API-certified premium motor oil. APPC
primarily purchases Group 2 base oils from Motiva (Port Arthur, Texas) and from
Evergreen Oil (Irvine, California). Shortages of Group 2 base oils have caused
price increases in recent months, but APPC has been able to pass these increases
on to the customer.
Subsequent Transactions
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 will assume,
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.
It is anticipated that the transaction will close after the end of the first
fiscal quarter of 2005. While there can be no assurance the transaction will
close, the Company is confident that the parties will execute definitive
agreements as scheduled.
PLAN OF OPERATIONS
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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.
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 six 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
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:
For the Year Ending December 31, 2004 vs. December 31, 2003
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Until July 1, 2004, the commencement of the third fiscal quarter of the
Company's fiscal year, the Company did not have an operating unit. Therefore, a
comparison of sales to the previous year is not an accurate representation of
the increase or decrease of the revenues, costs and sales of the Company.
Subsequent to July 1, 2004, the Company had $857,172 in sales, with the cost of
revenues of $732,722 and other expenses, including
interest expense of $25,475 and impairment of Goodwill of $822,262 for a total
expense of $3,299,908.
Liquidity and Financial Resources
---------------------------------
During the twelve months ended December 31, 2004, net cash used by operating
activities was $(614,767). The Company incurred a net loss of $3,175,458 for the
twelve months ended December 31, 2004; the company still has a net operating
loss even if the stock compensation expense of $1,523,200 and Goodwill
Impairment expense of $822,262 did not occur. Additionally at December 31, 2004,
current liabilities exceed current assets by approximately $1,289,200; 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. As shown in the financial statements, the
Company incurred a net loss of $3,175,458 during the year ended December 31,
2004 and has incurred substantial net losses for each of the past two years. At
December 31, 2004, current liabilities exceed current assets by $1,289,200.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. It is the intention of the Company's management to improve
profitability by significantly reducing operating expenses and to increase
revenues significantly, through growth and acquisitions. The ultimate success of
these measures is not reasonably determinable at this time.
Administrative expenses for the fiscal year ended December 31, 2004,
including impairment losses and stock compensation expenses was $3,299,908
resulting in losses from operations of $3,175,458. Included in these amounts are
expenses for stock compensation expense of $1,523,200. 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.
Employees:
As of December 31, 2004, we employed approximately 29 persons. None of our
employees are covered by collective bargaining agreements. We believe that our
relations with or employees are good.
Item 2. Description of Property
The Company currently occupies a sub-lease, for the administrative offices,
located at 1400 North Gannon Drive, Hoffman Estates, Illinois (847-805-0125. We
occupy approximately 700 square feet comprising three offices. Our rent is
$1,000 per month. We have no lease and have an oral month-to-month agreement
with the leaseholder of the office space, which is the former President of the
Company. The space is adequate for the currently needs of the Company. If the
month-to-month tenancy was to end, we would be able to move our operations
without a significant disruption of operations.
The Company's wholly-owned subsidiary, American Petroleum Products, Inc.,
operates from a manufacturing and distribution facility located at 5841 W.
66th Street, Bedford Park, Il. The facility is comprised of approximately 36,000
sq. ft. The facility is sufficient for the needs of the wholly-owned subsidiary
for the foreseeable future. The Company does not have a formal lease and is
presently not paying rent for this property due to a dispute with the former
President of the Company, who is also the owner of this property. We are
attempting to reach a resolution with the former President and landlord of the
property. If we are not able to successfully resolve the dispute, and are forced
to vacate the facility, it will have a substantial material effect on the
ability to operate the subsidiary. We have reached an agreement with respect to
all claims related to the ;property wit the owner, which when executed, will
result in the Company purchasing the property.
Item 3. Legal Proceedings
Other than described below, there are no past, pending or, to our knowledge,
threatened litigation or administrative action which has or is expected by our
management to have a material effect upon our business, financial condition or
operations, including any litigation or action involving our officer, director
or other key personnel. There have been no changes in the company's accountants,
or disagreements with its accountants since its inception.
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
contact with Harris Bank and is attempting to resolve the matter. In the event
that a resolution is not resolved in a manner satisfactory to the Registrant, it
could result in the seizure of the equipment and have a material adverse effect
on the operations of the Registrant. We have reached an agreement resolving all
claims of Harris Bank, which when executed will result in the Company receiving
clear title to all equipment in its plant.
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.
Indemnification of Officers and Directors
-----------------------------------------
At present we have not entered into individual indemnity agreements with
our Officer or Director. However, our By-Laws and Certificate of Incorporation
provide a blanket indemnification that we shall indemnify, to the fullest extent
under Nevada law, our directors and officers against certain liabilities
incurred with respect to their service in such capabilities. In addition, the
Certificate of Incorporation provides that the personal liability of our
directors and officers and our stockholders for monetary damages will be
limited.
Item 4. Submission of Matters to a Vote of Security Holders
On February 15, 2005, the majority of shares entitled to vote approved
certain actions as set forth in the Schedule 14C filed with the SEC on February
24, 2005, consisting of:
1. Electing and appointing the Board of Directors and Officers of
American Petroleum Group, Inc.;
2. Ratified the appointment of Brown Smith Wallace LLC as our
independent public accountants for the fiscal year ending December
31, 2003 and 2004;
3. Adoption of a Code of Ethics for the Executive Officers of American
Petroleum Group, Inc., and
4. Approving the purchase of all interest in, all assets and stock of
Oilmatic Systems, LLC ("Oilmatic Transaction" or "Transaction").
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
General:
--------
We are authorized to issue 100,000,000 shares of Common Stock, at a par value
$.0001 per share. As of March 29, 2005, the latest practicable date, there are
4,315,000 shares of common stock outstanding. The number of record holders of
Common Stock as of December 31, 2004 is approximately 50.
Common Stock:
-------------
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock are
entitled to receive ratably such dividends when, as and if declared by the Board
of Directors out of funds legally available therefore. In the event we have a
liquidation, dissolution or winding up, the holders of Common Stock are entitled
to share ratably in all assets remaining which are available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock
Price Ranges of American Petroleum Group, Inc. Common Stock:
-------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the NASD OTC Bulletin Board under the
symbol "AMPE." It was previously traded under the symbol "AMAI" until October
29, 2004, "PLUD" until February 23, 2004, and "PLUV from September 12, 2002
until December 31, 2002.
There is currently a limited trading market for the Company's Common Stock with
the price being very volatile. The following chart lists the high and low
closing bid prices for shares of the Company's Common Stock for each month
within the last fiscal year. These prices are between dealers and do not include
retail markups, markdowns or other fee and commissions, and may not represent
actual transactions.
Fiscal Year 2004: High Bid Low Bid High Ask Low Ask
----------------- -------------------------------------------
January 2004 1.05 0.71 1.07 0.75
February 2004 0.81 0.37 0.85 0.41
March 2004 0.43 .022 .048 .025
April 2004 0.32 0.11 0.35 0.13
May 2004 0.17 0.05 0.18 0.06
June 2004 0.12 0.045 .015 0.032
July 2004 0.1 0.03 0.12 0.05
August 2004 0.13 0.025 0.15 0.032
September 2004 0.05 0.021 0.055 0.025
October 2004 0.06 0.025 0.07 0.029
November 2004 (1) 1.4 .01 5 .07
December 2004 1.1 0.56 2 0.9
1 Taking into effect a reverse split of 20 to 1, effective November 2004
Fiscal Year 2005: High Bid Low Bid High Ask Low Ask
----------------- --------------------------------------------
January 2005 0.92 0.65 1.12 0.75
February 2005 1.03 0.65 1.1 0.8
Liquidation:
------------
In the event of a liquidation of the Company, all stockholders are entitled to a
pro rata distribution after payment of any claims.
Dividend Policy:
The Company has never declared or paid cash dividends on its common stock and
anticipates that all future earnings will be retained for development of its
business. The payment of any future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, the financial condition of the Company and general
business conditions.
Stock Transfer Agent:
---------------------
Effective March 1, 2005, our transfer agent and registrar of the Common Stock
is Manhattan Transfer Registrar Co., P.O. Box 756. Miller Place, NY 11764,
(631) 585-7341; fax (631) 580-7766.
Recent Sales of Unregistered Securities
---------------------------------------
The information concerning the recent sales of unregistered securities required
by Item 5 is incorporated by reference to the information set forth in Item 12
"Certain Relationships and Related Transactions" set forth hereafter
Item 6. Management's Discussion and Analysis or Plan of Operation.
Forward-looking Information
---------------------------
Certain statements in this document are forward-looking in nature and
relate to trends and events that may affect the Company's future financial
position and operating results. The words "expect" "anticipate" and similar
words or expressions are to identify forward-looking statements. These
statements speak only as of the date of the document; those statements are based
on current expectations, are inherently uncertain and should be viewed with
caution. Actual results may differ materially from the forward-looking
statements as a result of many factors, including changes in economic conditions
and other unanticipated events and conditions. It is not possible to foresee or
to identify all such factors. The Company makes no commitment to update any
forward-looking statement or to disclose any facts, events or circumstances
after the date of this document that may affect the accuracy of any
forward-looking statement.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 7. Financial Statements
American Petroleum Group, Inc. and Subsidiaries
Index to Financial Statements
CONTENTS
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On November 16, 2004, the current Interim President of the Registrant in
discussions with Amisano Hanson, became aware that the Registrant had not
properly informed Amisano Hanson of its dismissal, and the Registrant had failed
to comply with the notification provisions of Form 8-K for dismissal of the
previous auditor and appointment of the new auditor. Accordingly, the current
management, on November 16, 2004 notified its previous independent auditor,
Amisano Hanson, Chartered Accountants, 750 West Pender Street, Suite 604,
Vancouver Canada, V6C 2T7, 604-689-0188, that it was replaced as the Independent
Auditor of the Registrant, by Brown Smith Wallace LLC. This action was
previously approved by the Board of Directors on or about February 19, 2004.
Members of The Board of Directors and Officers of the Registrant have discussed
these facts with Amisano Hanson, and have discussed the actions necessary to
correct the problem.
The audit reports of, Amisano Hanson, Chartered Accountants, 750 West Pender
Street, Suite 604, Vancouver Canada, V6C 2T7, 604-689-0188 on the Company's
consolidated financial statements as of and for the fiscal years ended December
31, 2002 and 2001 did not contain an adverse opinion or a disclaimer of opinion,
or modified as to audit scope or accounting principles, however the auditors
qualified their report as to the uncertainty that the Company would continue as
a going concern. During the period of their engagement, there were no
disagreements between Amisano Hanson, and the Registrant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Amisano Hanson, would have caused them to make reference to the subject matter
of the disagreement in connection with its reports on the Registrant's financial
statements, other than the fee dispute that has arisen between the parties.
The Registrant has furnished Amisano Hanson with a copy of this report and has
requested them to furnish a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements. A copy of the
resignation letter is to be attached as Exhibit 16 to this Form 8-K.
On February 19, 2004, the management of the Registrant engaged Brown Smith
Wallace LLC, located at 1050 N. Lindbergh Blvd. St. Louis, MO 63132, Telephone
314.983.1200, as its independent auditors to audit its financial statements for
the fiscal year ended December 31, 2003. The decision to retain Brown Smith
Wallace LLC was approved by the Registrant's board of directors at that time.
Prior to the engagement, Registrant did not consult with Brown Smith Wallace LLC
regarding the application of accounting principles to a specified transaction,
or the type of audit opinion that may be rendered with respect to the
Registrant's financial statements, as well did not consult with Brown Smith
Wallace LLC, as to the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the small business issuer's financial statements and either
written or oral advice was provided that was an important factor considered by
the small business issuer in reaching a decision as to the accounting, auditing
or financial reporting issue.
Item 8a. Controls and Procedures
We recently acquired American Petroleum Products Corp., our main operating
entity, after taking control of the parent Company in September 2004. As such,
the company is just developing and implementing systems of internal and
disclosure controls. Within the ninety-day period preceding the filing of this
report, our management evaluated the effectiveness of the design and operation
of its disclosure controls and procedures (the "Disclosure Controls") as of the
end of the period covered by this Form 10-KSB and (ii) any changes in internal
controls over financial reporting that occurred during the last quarter of our
fiscal year. This evaluation ("Controls Evaluation") was done under the
supervision and with the participation of management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), who became CFO in
September 2004, and the Controller, who became CFO in March 2005.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. Because
of the inherent limitations in a cost effective control system, misstatements
due to error or fraud may occur and not be detected. We will conduct periodic
evaluations of our internal controls to enhance, where necessary, our procedures
and controls.
Conclusions
Based upon the Controls Evaluation, the CEO and CFO have concluded that the
Disclosure Controls are effective in reaching a reasonable level of assurance
that management is timely alerted to material information relating to the
Company during the period when its periodic reports are being prepared. In
accord with the U.S. Securities and Exchange Commission's requirements, the CEO
and CFO conducted an evaluation of the Company's internal control over financial
reporting (the "Internal Controls") to determine whether there have been any
changes in Internal Controls that occurred during the quarter which have
materially affected or which are reasonable likely to materially affect Internal
Controls. Based on this evaluation, there have been no such changes in Internal
Controls during the last quarter of the period covered by this report.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The following were elected to the Board of Directors, effective February 15,
2005:
Ron Shapss 58 Chairman of the Board
James W. Zimbler 39 Director and President
Richard Carter 36 Director and Vice-President
William Bossung 47 Director and VP of Corporate Finance
Michael S. Krome 43 Director and General Counsel
George L. Riggs, III 53 Director
Elliot Cole Esq. 71 Director
James Carroll 54 Chief Financial Officer
Ron Shapss, 58, Chairman of the Board
Mr. Shapss is the founder of Ronald Shapss Corporate Services, Inc., ("SCS") a
company engaged in consolidating fragmented industries since 1992. RSCS was
instrumental in facilitating the roll-up of several companies into such entities
as U.S. Delivery, Inc., Consolidated Delivery & Logistics, Inc. Mr. Shapss was
also the founder of Coach USA, Inc. A 1970 graduate of Brooklyn Law School, Mr.
Shapss is a member of the New York bar.
James W. Zimbler, 39, Director and Interim President
Mr., Zimbler has been a principal of Alpha Advisors, LLC, since its inception in
May 2002. Alpha is involved as a consultant in the mergers and acquisitions of
public companies, and consulting for private companies that wish to access the
public markets. Prior to becoming a founding member of Alpha, he was involved in
consulting for capital raising, re-capitalization and mergers and acquisitions
for various clients. Mr. Zimbler is one of the initial shareholders in Humana
Trans Services Holding Corp. (OTCBB "HTSC"). Mr. Zimbler has recently focused
his energies in the field of turnarounds of small emerging private and public
companies.
Richard Carter, 36, Director and Vice-President
1998 - 2002 GunnAllen Financial, Senior Vice President
2002 - 2004 National Securities, Senior Vice President
Richard D. Carter joined American Petroleum Group, Inc. from the
investment-banking field. Mr. Carter has been responsible for raising investment
capital for 14 years. Mr. Carter's main focus will be spent on implementing
financial systems and continued funding related to growth and acquisitions.
William Bossung, 47, Director and Vice President of Corporate Finance
Mr. Bossung has over 18 years of diversified financial experience. For
approximately the last ten years Mr. Bossung has been President of Alliance
Financial Network, Inc., which provides financial consulting for public and
private companies. From early 1995 until mid 1997, Mr. Bossung was the Director
of Corporate Finance for Chadmoore Wireless Group, Inc., which was subsequently
acquired by Nextel.
Michael S. Krome, Esq., 43, Director and General Counsel
Michael S. Krome was admitted to practice Law in the State of New York in
February 1991, and in the United States District Court for the Eastern District
of New York in June 1991 and Southern District of New York in November 1994. He
has been a Director of Human Trans Services Holding Corp ("HTSC") since January
2004. Since 1991 he has practiced law as a sole practitioner with a General
Practice. Since 2001 he has concentrated his practice in representing Public
Corporations. He is a graduate of the State University of New York at Albany and
graduated from the Benjamin N. Cardozo School of Law in June 1990. From February
1999 to November 1999, he was Vice President of Legal Affairs of Fortune Media,
Inc., (now known as Wayne's Famous Phillies, Inc.). From April 2000 until
January 2001, he was a Director and Counsel to Universal Media Holdings, Inc.,
know known as Genio Group, Inc.
George L. Riggs, III, C.P.A., 53, Director
George L. Riggs, III, C.P.A., was the founder and Managing partner of Riggs &
Associates, LLP prior to joining the firm of Centerprise/Scillia Dowling &
Natarelli (formerly Simione Scillia Larrow & Dowling LLC) as an audit and
accounting principal. He left the firm in October 2002 to return to a solo
practice. He has been a Director of Human Trans Services Holding Corp ("HTSC")
since July 2003. He specializes in public and privately held corporations, with
significant experience in mergers and acquisitions, litigation support, and
bankruptcy and reorganizations matters. He has over twenty-five years experience
in public accounting, including 13 years as a partner at Deliotte & Touche, LLP.
He spent ten years as the Professional Practice Director for the Hartford, New
Haven and Waterbury offices. In this position, he was responsible for the review
of all engagements to ascertain compliance with professional guidelines and
technical consultations on all clients in the areas of accounting, auditing and
securities. He is a graduate of the University of Hartford where he received the
Regents Honor award for graduating first from the school of business
administration. He also holds an MBA degree from the University of Connecticut
with a specialization in finance. He received a certificate of merit from the
Massachusetts Society of CPAs for passing the CPA exam at the first sitting.
George has conducted many continuing education seminars for his prior firms and
the Connecticut Society of CPAs as well as spoken to many professional groups on
certain industry, technical and financing subjects. He holds CPA certificates in
Connecticut and Vermont. He is a member of the American Institute of Certified
Public Accountants, the Connecticut Society of Certified Public Accountants, and
Institute of Management Accountants. Mr. Riggs resigned as CFO on March 17,
2005.
Elliot Cole, Esq., 71, Director
Partner, Patton Boggs LLP. Elliot Cole has practiced corporate law for 40-plus
years, more than 30 of which he has been a partner at Patton Boggs LLP. He has
been a Director of Human Trans Services Holding Corp (OTC BB "HTSC") since May
2004. His expertise is rooted in the representation of early-stage companies. As
a counselor of startups through mezzanine and later-stage financing, Mr. Cole
assists with bringing companies in a wide range of businesses along to maturity.
His broad-based contacts with financiers and investors have provided capital and
management assistance to a number of the firm's clients over the years. Mr. Cole
has served on the boards of several business, community and social
organizations. He has been a trustee of Boston University, his alma mater, for
over 20 years, having served on its Investment Committee and Community
Technology Fund.
James J. Carroll, 54, Chief Financial Officer
James J. Carroll was 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 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 10. Executive Compensation
For the fiscal year ended December 31, 2004, no Officer/Director has been
compensated with salaries or other form of remuneration except as set forth
below:
Capacities in Aggregate
Which Remuneration Cash Restricted Share
Name was Received Period Ended Payment Remuneration
---------------------------------------------------------------------------------------------
Ronald Shapss (1) Chairman of the Board December 31, 2004 - 0 - - 0 -
James W. Zimbler Interim President December 31, 2004 $ 52,250 $600,000 (2)
Richard Carter Vice-President December 31, 2004 $ 51,100 $600,000 (2)
George L. Riggs, III (3) Chief Financial Officer December 31, 2004 $ 20,193 $ 90,000 (2)
Michael S. Krome, Esq. General Counsel December 31, 2004 $ 13,846 $ 90,000 (2)
(1) Mr. Shapss was elected Chairman of the Board on February 15, 2005
(2) Based upon shares of restricted common stock of the Company, discounted
(3) Mr. Riggs resigned as CFO on March 17, 2005
Director Compensation:
----------------------
Our directors receive no compensation for their services as director, at this
time, other than what has already been paid by the issuance of shares of common
stock.
Director and Officer Insurance:
-------------------------------
The Company does not have directors and officers ("D & O") liability insurance
at this time.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table describes, as of the date of this offering, the beneficial
ownership of our Common Stock by persons known to us to own more than 5% of such
stock and the ownership of Common Stock by our directors, and by all officers
and directors as a group.
Effective August 25, 2004, the control of the Registrant changed. This was due
to appointment of the new Directors. In addition, the Registrant issued a
controlling block of shares to the persons identified. These shares consisted of
shares of common stock and shares of preferred stock Series A, that was
convertible to common stock at a ratio of one share of preferred to 10 shares of
common (subsequent to the reverse split the amount is .5 per share), with
immediate voting rights as if they were converted to common stock. The shares
were issued as part of compensation packages for the services to be rendered to
the registrant. The series A preferred stock conversion ration is subject to
adjustment of the same reverse split of the common stock of 20 to 1 that
occurred in the fourth fiscal quarter.
Accordingly, the shares of the series A preferred stock is convertible into a
total of 1,838,750 shares of common stock, and continues to have immediate
voting rights equal to that conversion. A total of 4,315,000 are issued and
outstanding as of March 29, 2005.
No. of Common No. of Preferred(1) % ownership(1)
--------------------------------------------------
Ronald Shapps(2) 500,000 1,000,000 11.5
James W. Zimbler (2) 500,000 1,000,000 11.5
Richard Carter (2) 535,000 1,000,000 12.3
George L. Riggs, III (2) 75,000 150,000 *
Michael S. Krome, Esq. (2) 75,000 150,000 *
Elliot Cole, Esq. (2) 75,000 150,000 *
Alpha Advisors, LLC (3) 113,750 227,500 *
Richard Steifel 290,000 -- 6.7
Chris Hansen 222,500 -- 5.1
Jesse Fuller 887,893 -- 20.6
Officers and Directors
(6 persons) 1,873,750 3,677,500 43.4% (4)
(1) Percentage of ownership includes conversion ration of preferred stock at a
rate of one share of preferred stock to.5 shares of common stock. All
holders of the preferred shares have elected to convert the Series A
preferred shares to common stock. The additional shares of common stock
have not yet been issued and are not reflected in the table
(2) Officer and/or Director of the Company.
(3) Alpha Advisors, LLC is controlled by James W. Zimbler,, George L. Riggs,
and Michael S. Krome. When all of the ownership percentages are added, the
control percentage for Alpha Advisors LLC is 17.6%, including the
conversion of the preferred stock, if voted as a block.
(4) Officers and Directors own 41.7% of the issued common stock of the
Company. Certain Officers and Directors also own an additional 3,677,500
shares of preferred stock, convertible into .5 shares of common stock each
share of preferred, equaling 1,873,750 additional shares of common stock
and having immediate voting rights. This give effective voting control
over the Company.
Item 12. Certain Relationships and Related Transactions
Issuance of Stock:
-----------------
We issued 75,000 shares of common stock, and 150,000 shares of Series A
preferred stock, to Ronald Shapss as part of his compensation for accepting the
position of Chairman of the Board of Directors, January 2005. We issued 500,000
shares of common stock, and 1,000,000 shares of Series A preferred stock, to
Ronald Shapss as part of his compensation for accepting the position of Chairman
of the Board of Directors, on February 15, 2005. We issued shares of the Company
as set forth on the Form 8-K filed September 20, 2004, and incorporated by
reference, in connection with the change of control of the Company
Item 13. Exhibits
Index to Exhibits
SEC REFERENCE
NUMBER TITLE OF DOCUMENT
------ -----------------
3.1 Articles of Incorporation of the Registrant, as amended (1)
3.2 By-laws of the Registrant, as amended (1)
99.1 Certification of President Officer pursuant to 18 U.S.C.
Section 1350, as adopted, Pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (2)
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted, Pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (2)
------------
(1) Previously filed as an exhibit to the Company's Form 10-SB filed on June
26, 2001, and subsequent filings
(2) Filed herewith
Reports on Form 8-K
A Current Report on Form 8-K, for Item 2, Changes in Control of Registrant
was filed on July 9, 2004 regarding changes to the Board of Directors.
A Current Report on Form 8-K, for Item 5.01, Changes in Control of
Registrant was filed on September 20, 2004 regarding changes to the Board of
Directors.
A Current Report on Form 8-K, for Item 8.01, Other Events was filed on
November 3, 2004, regarding the completion for a reverse split of the common
stock and change of name of the Registrant.
A Current Report on Form 8-K, for Item 4.01, Changes in Registrant's
Certifying Accountant, 4.02., Non-Reliance on Previously Issued Financial
Statements or a Related Audit Report or Completed Interim Review and 9.01.,
Financial Statements and Exhibits was filed on February 16, 2005
Item 14. Principal Accounting Fees and Services
During the fiscal year ended December 31, 2004, we paid a total of
$_________ in audit, audit-related, tax or other fees paid for professional
services rendered by the independent certified public accountant who audited the
financial statements of the Nevada corporation that are filed herewith as those
of the Company. See Item 7, "Financial Statements", above.
During the fiscal year ended December 31, 2004, the Registrant did not have an
audit committee.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, American Petroleum Group, Inc. has duly caused this Report to be
signed on behalf of the undersigned thereunto duly authorized on November 14,
2005.
AMERICAN PETROLEUM GROUP, INC.
By /s/ George Campbell
---------------------
George Campbell, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities indicated and on
March 31, 2005.
Signature Title Date
--------------------------------------------------------------------------------
/s/ Ronald Shapss Chairman November 14, 2005
-----------------
Ronald Shapss
/s/ George Campbell CEO, President November 14, 2005
--------------------
George Campbell
/s/ James J. Carroll Chief Financial/Accounting November 14, 2005
-------------------- Officer
James J. Carroll
/s/ Michael S. Krome Director November 14, 2005
---------------------
Michael S. Krome
/s/ Elliot Cole Director November 14, 2005
---------------------
Elliot Cole
AMERICAN PETROLEUM GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
WITH
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2004
TABLE OF CONTENTS
-------------------------------------------------------------------------------
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM........................................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Operations.................................. 3
Consolidated Statements of Stockholders' Equity (Deficit).............. 4
Consolidated Statements of Cash Flows.................................. 5
Notes to Consolidated Financial Statements............................. 6
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
American Petroleum Group, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of American
Petroleum Group, Inc. and subsidiary (FKA American Capital Alliance, Inc.) as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Petroleum
Group, Inc. and subsidiary as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, the Company is dependent on its ability to
obtain the necessary financing to meet its obligations and pay its liabilities
arising from normal business operations when they come due. These factors, along
with other matters set forth in Note B, raise substantial doubt that the Company
will be able to continue as a going concern. Management's plan regarding those
matters is also described in Note B. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
In connection with a business combination the Company entered into as of July 1,
2004 as discussed in Note F, certain contingencies remain to be resolved as
discussed in Note K in order to finalize this transaction.
March 23, 2005
St. Louis, Missouri
-1-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
2004 2003
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 801 $ 35,432
Trade accounts receivable,
net of allowance of $22,700
for doubtful accounts 291,846 --
Advances to others 100,000 --
Acquisition deposits -- 200,200
Inventory 254,944 --
------------ ------------
Total Current Assets 647,591 235,632
Equipment
Equipment 6,068 --
Less accumulated depreciation 2,023
------------ ------------
4,045 --
------------ ------------
TOTAL ASSETS $ 651,636 $ 235,632
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities
Book overdraft $ 5,523 $ --
Trade accounts payable 629,825 67,792
Accrued interest 32,000 --
Accrued professional fees 45,000 --
Accrued expenses 11,187 --
Notes payable to stockholders 500,000 --
Loans payable to officers/stockholders 713,269 --
------------ ------------
Total Current Liabilities 1,936,804 67,792
Notes Payable to Stockholders -- 500,000
Commitments and Contingences
(Notes B, F, G, I, K and L)
Stockholders' Equity (Deficit)
Preferred stock; 5,000,000 shares;
2,527,500 shares issued and outstanding 25,275 --
Common stock, $0.001 par value;
100,000,000 shares authorized; 3,740,000
and 1,415,000 shares issued and
outstanding in 2004 and 2003, respectively 3,740 1,415
Additional paid-in capital 11,523,435 9,328,585
Retained (deficit) (12,837,618) (9,662,160)
------------ ------------
(1,285,168) (332,160)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 651,636 $ 235,632
============ ============
The accompanying notes are an integral part of these
consolidated financialstatements.
-2-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2004 and 2003
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
2004 2003
----------- -----------
NET SALES $ 857,172 $ --
----------- -----------
COST OF GOODS SOLD 732,722 --
----------- -----------
GROSS PROFIT 124,450 --
EXPENSES
Acquisition expense 10,000 196,200
Professional fees 145,293 133,067
Management fees -- 136,890
Office expenses 140,218 2,979
Compensation expenses 1,523,200 8,778,000
Termination expenses -- 355,000
Payroll and payroll taxes 390,152 --
Bad debts 22,700 --
Outside sales 83,707 --
Repairs and maintenance 14,293 --
Depreciation 2,023 --
Advertising and promotion 60,640 --
Other 69,099 --
----------- -----------
TOTAL EXPENSES 2,461,325 9,602,136
----------- -----------
INCOME (LOSS) BEFORE OTHER ITEMS (2,336,875) (9,602,136)
OTHER INCOME (EXPENSE)
Forgiveness of debt -- 32,442
Interest expense (32,000) --
Other expense (806,583) --
----------- -----------
TOTAL OTHER INCOME ( EXPENSE) (838,583) 32,442
----------- -----------
NET INCOME (LOSS) $(3,175,458) $(9,569,694)
=========== ===========
Loss per share $ 1.62 $ 11.31
=========== ===========
Diluted loss per share $ 1.62 $ --
=========== ===========
Weighted average number of shares outstanding 1,965,414 845,795
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2004 and 2003
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Retained
--------------- ------------ Paid-In Earnings
Number Par Value Number Par Value Capital (Deficit) Total
------ --------- ------ --------- ------- --------- -----
Balance at December 31, 2002 -- -- 750,000 $ 750 $ 99,250 $ (92,466) $ 7,534
Net loss -- -- -- -- -- (9,569,694)
(9,569,694)
Stock shares issued -- -- 665,000 665 9,229,335 -- 9,230,000
---------- --------- ---------- -------- ----------- ------------ -----------
Balance at December 31, 2003 -- -- 1,415,000 1,415 9,328,585 (9,662,160)
(332,160)
Net loss -- -- -- -- -- (3,175,458)
(3,175,458)
Stock shares issued 2,527,500 25,275 2,598,700 2,599 2,194,576 -- 2,222,450
Retired common shares -- -- (273,700) (274) 274 -- --
---------- --------- ---------- -------- ----------- ------------ ------------
Balance at December 31, 2004 2,527,500 $ 25,275 3,740,000 $ 3,740 $11,523,435 $(12,837,618) $ (1,285,168)
========== ========= ========== ======== =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2004 and 2003
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,175,458) $(9,569,694)
Compensation, consulting and termination expenses in
exchange for shares 1,523,200 9,248,000
Impairment of goodwill 803,615 --
Adjustments to reconcile net loss to net cash used in
operating activities:
Bad debts 22,700 --
Depreciation 2,023 --
(Increase) decrease in operating assets:
Trade accounts receivable (291,846) --
Advances to others (100,000) --
Inventory (254,944) --
Acquisition deposits 200,200 (200,200)
Book overdraft 5,523 --
Prepaid expenses -- 400
Increase (decrease) in operating liabilities:
Trade accounts payable 639,033 60,529
Accrued expenses 11,187 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (614,767) (460,965)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of new subsidiary (856,200) --
Purchases of equipment (3,068) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (859,268) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,325 --
Increase in additional paid-in capital 698,535 482,000
Issuance of preferred stock 25,275 --
Proceeds from loans payable 713,269 --
Loans payable -- (10,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,439,404 472,000
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (34,631) 11,035
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35,432 24,397
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 801 $ 35,432
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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 December
31, 2004, the Company had accumulated losses of $12,837,618 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 $713,000 was raised during the year ended
December 31, 2004 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.
-6-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
Revenue is earned and recognized when the product title passes from the
Company to the buyer. Depending on the terms of the shipping contract (FOB
shipping point/FOB destination), revenue is recognized and earned when
product is delivered and accepted by the buyer.
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. Total advertising costs
charged to expense were $60,640 in 2004.
-7-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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 December 31, 2004 and 2003,
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 December 31, 2004. See Note F concerning impairment
of goodwill.
-8-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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:
2004 2003
---- ----
Gross deferred tax assets (non-capital loss carryforward) $ 4,365,000 $ 3,284,000
Valuation allowance for deferred tax asset (4,365,000) (3,284,000)
----------- -----------
$ $
=========== ===========
INCOME TAXES
No provision for income taxes has been provided in these consolidated
financial statements due to the net loss. At December 31, 2004, the
Company has net operating loss carryforwards, which expire commencing in
2022, totaling approximately $12,800,000, 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.
-9-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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.
-10-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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:
-11-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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.
-12-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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 six months ended
December 31, 2004 for compensation for the use of the machinery and
equipment to a corporation representing the processor operation to
Alliance and to an entity that owned the real estate. The processor
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 lien filed and
personal guarantee 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.
-13-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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 TO STOCKHOLDERS
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 December 31, 2004, it would be
required to pay $51,500 to acquire the aggregate shares using a $1.03
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.
-14-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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. This company processed $351,513 of
payroll, taxes and benefits, along with an administration fee of $18,155.
Included in accounts payable at December 31, 2004 is a balance due for
these services of $113,858.
EXPENSE REIMBURSEMENTS
The Company reimburses Company officer/directors for travel, office and
other expenses. In addition, certain officers make temporary advances.
Accounts Payable includes $14,987 of advances of these types.
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 Note L).
-15-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE I - RELATED PARTY LOANS PAYABLE TO OFFICERS/STOCKHOLDERS
2004
Amount
Rick Carter $ 6,000
Ron Shapps 200,000
Michael Cahr 100,000
Warren Field 50,000
New Century Capital Consultants, Inc. 50,000
Keystone Nittany Ventures 113,353
Former President 142,916
Malibu Management Company 16,000
Alliance Finance Network 35,000
--------
Total $713,269
========
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 of 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.
-16-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE I - RELATED PARTY LOANS PAYABLE TO OFFICERS/STOCKHOLDERS (CONTINUED)
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 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.
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.
-17-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
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 700,000 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.
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.
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.
-18-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMPENSATION AGREEMENTS (CONTINUED)
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.
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.
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.
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":
-19-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE K - COMMITMENTS AND CONTINGENCIES (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 $407,368.09 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.
-20-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
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.
-21-
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004
(See Independent Auditors' Report)
--------------------------------------------------------------------------------
NOTE L - SUBSEQUENT EVENTS
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. It is
anticipated that the transaction will close after the end of the first
fiscal quarter of 2005. While there can be no assurance the transaction
will close, the Company is confident that the parties will execute
definitive agreements as scheduled. A total of $300,000 was advanced in
anticipation of the transaction with Oilmatic Systems, LLC. The
transaction was an arms-length transaction and was accounted for in the
financial statements.
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.