UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Quarterly Report Pursuant to Section 13 or 15(D) of The Securities Act of
1934
For the quarterly period ended: March 31, 2005
Commission file number: 000-49950
AMERICAN PETROLEUM GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 98-0232018
(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
1400 N. Gannon Drive, 2nd Floor, Hoffman Estates, IL 60194
(Address of principal executive offices)
(847) 805-0125 (Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.0001 par value 12,036,750
(Class) (Outstanding as of May 17, 2005)
AMERICAN PETROLEUM GROUP, INC.
FORM 10-QSB
March 31, 2005
INDEX
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets..............................................................F-2
Consolidated Statements of
Operations..........................................................F-3
Consolidated Statements of Cash
Flows...............................................................F-4
Consolidated Statements of Stockholders'
Equity..............................................................F-5
Notes to Consolidated Financial
Information.........................................................F-6
Item 2 Management's Discussion and Analysis or Plan of Operation............3
Item 3 Controls and Procedures..............................................9
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 10
Item 2. Unregistered Sales of Equity Securities and use of
Proceeds....................10
Item 3. Defaults Upon Senior Securities.......................................10
Item 4. Submission Of Matters To A Vote Of Security Holders.................. 10
Item 5. Other Information.................................................... 10
Item 6. Exhibits............................................................. 10
Signatures....................................................................10
Certifications................................................................11
2
PART I: FINANCIAL INFORMATION
AMERICAN PETROLEUM GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
TABLE OF CONTENTS
-------------------------------------------------------------------------------
PAGE
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
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Balance Sheets
March 31, 2005 and December 31, 2004
================================================================================
(UNAUDITED) (Audited)
MARCH 31, December 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 139,705 $ 801
Trade accounts receivable, net of allowance of $22,700
for doubtful accounts 241,579 291,846
Advances to others 236,837 100,000
Acquisition deposits 12,500 --
Inventory 230,187 254,944
------------ ------------
TOTAL CURRENT ASSETS 860,808 647,591
EQUIPMENT
Equipment 6,068 6,068
Less accumulated depreciation 2,523 2,023
------------ ------------
3,545 4,045
------------ ------------
TOTAL ASSETS $ 864,353 $ 651,636
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Book overdraft $ -- $ 5,523
Trade accounts payable 490,929 629,825
Accrued interest 11,392 32,000
Accrued professional fees -- 45,000
Accrued expenses 10,497 11,187
Notes payable to stockholders 925,000 500,000
Loans payable to officers/stockholders 647,915 713,269
------------ ------------
TOTAL CURRENT LIABILITIES 2,085,733 1,936,804
COMMITMENTS AND CONTINGENCES (NOTES B, F, G, I AND K)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 5,000,000 shares; 3,677,500 shares
and 2,527,500 issued and outstanding in 2004 and 36,775 25,275
2003, respectively
Common stock, $0.001 par value; 100,000,000 shares
authorized; 8,723,000 and 3,635,000 shares issued and
outstanding in 2004 and 2003, respectively 8,723 3,740
Additional paid-in capital 15,416,783 11,523,435
Retained deficit (16,683,661) (12,837,618)
------------ ------------
(1,221,380) (1,285,168)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,789,353 $ 1,151,636
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Operations
Three Month Periods Ended March 31, 2005 and 2004
================================================================================
(UNAUDITED) (Unaudited)
MARCH 31, March 31,
2005 2004
------------ ------------
NET SALES $ 384,901 $ --
COST OF GOODS SOLD 280,595 --
------------ ------------
GROSS PROFIT 104,306 --
EXPENSES
Acquisition expense -- 10,000
Professional fees 72,647 33,715
Office expenses 37,340 350
Compensation expenses 690,000 --
Payroll and payroll taxes 266,433 --
Licenses and insurance 12,954 --
Outside sales 36,300 --
Rent and taxes 4,000 --
Repairs and maintenance 595 --
Utilities 9,735 --
Vehicles 693 --
Telephone 7,251 --
Plant equipment 2,743 --
Depreciation 500 --
Advertising and promotion 395 --
Travel and entertainment 16,146 3,977
Financing expense 2,782,500
Other 5,106 1,783
------------ ------------
TOTAL EXPENSES 3,945,338 49,825
------------ ------------
LOSS BEFORE OTHER ITEMS (3,841,032) (49,825)
OTHER INCOME (EXPENSE)
Interest expense (10,417) --
Other income 5,406 --
------------ ------------
TOTAL OTHER INCOME ( EXPENSE) (5,011) --
------------ ------------
NET LOSS $ (3,846,043) $ (49,825)
============ ============
Loss per share $ (0.71) $ (0.066)
============ ============
Weighted average number of shares outstanding 5,401,000 750,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Stockholders' Equity (Deficit)
Three Month Periods Ended March 31, 2005 and Year Ended December 31, 2004
================================================================================
Preferred Stock Common Stock Additional
---------------------------------------------------------- Paid-In
(AUDITED) Number Par Value Number Par Value Capital
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2003 -- $ -- 1,415,000 $ 1,415 $ 9,328,585
Net loss -- -- -- -- --
Stock shares issued 2,527,500 25,275 2,598,700 2,599 2,194,576
Retired common shares -- -- (273,700) (274) 274
------------ ------------ ------------ ------------ ------------
(AUDITED)
BALANCE AT DECEMBER 31, 2004 2,527,500 25,275 3,740,000 3,740 11,523,435
Net loss -- -- -- -- --
Stock shares issued 1,150,000 11,500 4,983,000 4,983 3,893,348
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
BALANCE AT MARCH 31, 2005 3,677,500 $ 36,775 8,723,000 $ 8,723 $ 15,416,783
============ ============ ============ ============ ============
Retained
Earnings
(AUDITED) (Deficit) Total
------------ ------------
BALANCE AT DECEMBER 31, 2003 $ (9,662,160) $ (332,160)
Net loss (3,175,458) (3,175,458)
Stock shares issued -- 2,222,450
Retired common shares -- --
------------ ------------
(AUDITED)
BALANCE AT DECEMBER 31, 2004 (12,837,618) (1,285,168)
Net loss (3,846,043) (3,846,043)
Stock shares issued -- 3,909,831
------------ ------------
(UNAUDITED)
BALANCE AT MARCH 31, 2005 $(16,683,661) $ (1,221,380)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
Interim Statements of Cash Flows
Three Month Periods Ended March 31, 2005 and 2004
================================================================================
(UNAUDITED) (Unaudited)
MARCH 31, March 31,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,846,043) $ (49,825)
Compensation, consulting, financing and termination
expenses in exchange for shares 3,472,500 --
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 500 --
(Increase) decrease in operating assets:
Trade accounts receivable 50,267 --
Advances to others (136,837) --
Inventory 24,757 --
Acquisition deposits (12,500) (26,000)
Book overdraft (5,523) --
Increase (decrease) in operating liabilities:
Trade accounts payable (138,896) 23,347
Accrued expenses (66,298) --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (658,073) (52,478)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,008 --
Increase in additional paid-in capital 424,823 18,000
Issuance of preferred stock 11,500 --
Proceeds from loans payable 359,646 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 796,977 18,000
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 138,904 (34,478)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 801 35,432
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 139,705 $ 954
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE A - COMPANY
The Board of Directors (the "Board") by unanimous written consent
dated as of November 18, 2003, and certain stockholders (the
"Majority Stockholders") owning a majority of issued and outstanding
capital stock of the Company entitled to vote, by written consent
dated as of November 18, 2003, approved and adopted resolutions to
amend the Company's Certificate of Incorporation. The Certificate of
Amendment to the Company's Certificate of Incorporation, already
filed with the Secretary of State of Nevada, changed the Company's
name to "American Capital Alliance, Inc." from Prelude Ventures, Inc.
The name of the Company was changed again on November 1, 2004 to
American Petroleum Group, Inc. ("APG") by a vote of the security
holders.
APG is a Chicago based holding company with an agenda to acquire,
merge, and manage various business opportunities. APG's current
direction is in the manufacturing and distribution of petroleum and
related products for the automotive industry. On July 1, 2004, APG
acquired 100% of the outstanding stock of American Petroleum
Products Company ("APPC"). The accompanying consolidated financial
statements include the results of operations of APPC beginning on
July 1, 2004. After the above acquisition, the Company is no longer
considered a "development stage entity".
NOTE B - CONTINUANCE OF OPERATIONS
The financial statements have been prepared using accounting
principles generally accepted in the United States of America
applicable for a going concern which assumes that the Company will
realize its assets and discharge its liabilities in the ordinary
course of business. At March 31, 2005, the Company had accumulated
losses of $16,683,661 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
$264,000 was raised during the quarter ended March 31, 2005 from
loans payable to officers/stockholders (see Note I) whose proceeds
were used for working capital needs, as well as a down payment
toward the purchase of an option on one of the proposed
acquisitions.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Petroleum Group, Inc. and its wholly owned subsidiary,
American Petroleum Products Company (the "Company") after
elimination of significant intercompany transactions and accounts.
F-6
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
Revenue is recognized when the title to inventory is transferred.
TRADE RECEIVABLES
Concentration of credit risk with respect to receivables, which are
unsecured are generally limited due to the wide variety of customers
and markets using the Company's products, as well as their
dispersion across many geographic areas. The Company maintains
allowances for potential credit losses, and such losses have been
minimal and within management's expectations. The allowance for
doubtful accounts is estimated based on various factors including
revenue, historical credit losses and current trends.
INVENTORY
Inventory consisted of primarily raw materials (oil, additives and
packaging material) and is valued at the lower of cost or market
applied on a first-in, first-out basis.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could vary from the estimates
that were used.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
DEPRECIATION
Depreciation of equipment is computed using the straight-line method
for financial statements and income tax reporting purposes.
ADVERTISING COSTS
Advertising costs are expenses as incurred.
F-7
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards, No. 109,
"Accounting for Income Taxes". Under this method, deferred taxes are
determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. Valuation
allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized (see
Note D).
BASIC LOSS PER SHARE
The Company reports basic loss per share in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". Basic loss per share is computed using the weighted average
number of shares outstanding during the period. Diluted earnings per
share is not presented (see Note I). On August 25, 2004, the Company
approved a one-for-twenty reverse stock split; all per share amounts
have been retroactively adjusted.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses approximate fair
value because of the short maturity of those instruments. At March
31, 2005 and December 31, 2004, the Company estimates that the fair
value of its notes payable are not materially different from its
financial statement carrying value, except for the liability for
stock borrowings (see Note G).
NEW ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet
effective, accounting standards if currently adopted could have a
material effect on the accompanying financial statements.
IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long lived
assets may warrant revision or that the remaining balance of an
asset may not be recoverable. The measurement of possible impairment
is based on the ability to recover the balance of assets from
expected future operating cash flows on an undiscounted basis. In
the opinion of management, no such impairment existed at March 31,
2005. See Note F concerning impairment of goodwill.
F-8
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
the current year presentation.
NOTE D - INCOME TAXES
DEFERRED TAX ASSETS
The Financial Accounting Standards Board issued Statement No. 109 in
Accounting for Income Taxes ("FAS 109") which is effective for
fiscal years beginning after March 15, 1992. FAS 109 requires the
use of the asset and liability method of accounting for income
taxes. Under the assets and liability method of FAS 109, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial statements carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
The following table summarizes the significant components of the
Company's deferred tax assets:
2005 2004
----------- -----------
Gross deferred tax assets (non-capital loss carryforward) $ 5,673,000 4,365,000
Valuation allowance for deferred tax asset (5,673,000) (4,365,000)
----------- -----------
$ -- $ --
=========== ===========
INCOME TAXES
No provision for income taxes has been provided in these
consolidated financial statements due to the net loss. At March 31,
2005 and December 31, 2004, the Company has net operating loss
carryforwards, which expire commencing in 2022, totaling
approximately $16,650,000 and $12,800,000, respectively, the benefit
of which has not been recorded in the financial statements due to
the future uncertainty of the generations of earnings by the
Company.
NOTE E - NON-CASH TRANSACTIONS
Investing and financing activities that do not have a direct impact
on current cash flows are excluded from the cash flow statement.
F-9
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE E - NON-CASH TRANSACTIONS (CONTINUED)
The Company has recorded a termination expense in respect to the
termination of its former President and has issued 200,000 common
shares at $2.35 per share to satisfy the total liability which
includes the termination expense, unpaid management fees and unpaid
advances to the Company (see Note I).
During 2004, the Company entered into a business combination and
acquired certain operating assets of APPC in exchange for Company
stock (see Note F).
NOTE F - BUSINESS COMBINATIONS
BUSINESS ACQUISITION CANCELLED
On April 1, 2003, the Company entered into an agreement to acquire
100% of the issued and outstanding shares of Pascal Energy, Inc., a
Canadian corporation, by the issuance of 5,000,000 common shares,
restricted under Rule 144 of the Securities and Exchange Act and at
a later date, issue an additional 5,000,000 common shares,
restricted under Rule 144 of Securities and Exchange Act, subject to
the Company paying not less than $1,000,000 in accumulated dividends
to its shareholders of record. Pascal Energy, Inc.'s business is to
provide servicing for the oil and gas industry.
The Company has determined that the transaction cannot be completed
due to the inability to complete a comprehensive due diligence.
Therefore, the shares previously outstanding were returned to the
treasury of the Company on February 25, 2004.
"TSG" ACQUISITION
On October 9, 2003, the Company acquired an option for $500,000 to
purchase the assets and certain liabilities of Tri-State Stores,
Inc., an Illinois Corporation ("Tri-State"), GMG Partners LLC, an
Illinois Limited Liability Company ("GMG"), and SASCO Springfield
Auto Supply Company, a Delaware Corporation ("SASCO"). Tri-State,
GMG and SASCO are collectively referred to herein as "TSG." Upon
exercise of the option, the Company was to pay $3,000,000 and assume
certain liabilities, not exceeding $700,000. TSG is involved in the
automotive after market. During the first quarter of 2004, the
Company elected not to continue to pursue this acquisition. The
contractual amount of the option was never fully paid, however,
amounts advanced for the option purchase and associated acquisition
expenses resulted in an $185,000 charge to operations for the year
ended December 31, 2003 and $10,000 for the year ended December 31,
2004.
F-10
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE F - BUSINESS COMBINATIONS (CONTINUED)
MOTOR PARTS WATERHOUSE, INC.
The Company issued 5,000,000 shares of common stock for an option to
acquire all the outstanding stock of Motor Parts Warehouse, Inc.
("MPW"), of St. Louis, Missouri. In order to exercise the option,
the Company must issue an additional 5,000,000 shares of common
stock to the shareholders of MPW and pay $2,200,000. This MPW option
cannot be exercised until after the refinancing of the TSG debt of
approximately $3,000,000. MPW is also an auto parts distributor. As
a result of the financing not being completed, the Company elected
not to continue to pursue this acquisition.
ALLIANCE PETROLEUM PRODUCTS COMPANY
On October 9, 2003, the Company also entered into a Stock Purchase
Agreement ("Alliance Agreement") with Alliance Petroleum Products
Company ("Alliance"), an Illinois Corporation, and a Rider to the
Alliance Agreement ("Rider"). Alliance is in the business of
blending and bottling motor oil and anti-freeze. Under the Alliance
Agreement, the Company issued 5,000,000 shares of common stock for
100% of the issued and outstanding shares of the common stock of
Alliance (757,864 common shares). An additional 5,000,000 shares of
common stock of the Company is to be issued to Worldlink
International Network, Inc. upon 24 months from the above date.
Under the terms of the Rider, the Company is required to provide
funding of at least $3,500,000 to pay Harris Bank, a secured
creditor of Alliance. The shareholders of Alliance have the option
to have the 757,864 issued and outstanding shares of common stock of
Alliance returned and the Alliance Agreement rescinded if they
choose, if the Company did not arrange the funding within 150 days
from the date of the execution of the Alliance Agreement. Since the
option period has expired, the principals of the transactions have
verbally agreed to extend the option period pending completion of
the financing. This was a material contingency to the transactions
and as a result had to be resolved prior to recognition of a
business combination. On June 24, 2004 (effective date July 1, 2004)
the Company ("Prelude") then known as American Capital Alliance,
Inc., ("AMAI") and Alliance Petroleum Products Company ("Alliance"),
entered into an Amendment to the original Alliance Agreement, dated
October 9. 2003 whereby all previous conditions and contingencies
were deemed to have been completed or waived and the agreement
amended as follows:
F-11
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE F - BUSINESS COMBINATIONS (CONTINUED)
ALLIANCE PETROLEUM PRODUCTS COMPANY (CONTINUED)
o 5,000,000 shares of AMAI voting capital stock are to be issued to
the shareholders of Alliance in the same proportions as the first
5,000,000 shares were issued to them pursuant to the exchange of
securities contemplated in the Agreement and Plan of Reorganization
upon the execution of this Amendment. The exchange of securities
also includes, 1,000,000 shares of preferred shares, with the
necessary Certificate of Designation, to allow conversion at the
rate of 1 share of preferred to ten (10) shares of common, and to
permit the preferred shareholders to vote their shares, at any time
after issuance, and after they have been converted, the shares be
issued to the shareholders of American in the same proportions as
the first 5,000,000 shares were issued to them pursuant to the
Agreement and Plan of Reorganization.
o All the shares to the Alliance shareholders are no longer subject to
a two year restriction prior to sale or transfer, but are now only
subject to those transfer restrictions under Rule 144 of the
Securities Laws.
o AMAI assumes all payment obligations and all other agreements of
Alliance as set forth in the including four "Promissory Notes"; and
AMAI assumes all payment obligations and all other agreements of
Alliance to the Harris Bank. (See Note K)
The operations of Alliance have been consolidated with the results of AMAI
since July 1, 2004.
The aggregate acquisition price was $856,200, which consisted of 1,107,500
of the Company's common stock valued at $0.54 and cash advances
outstanding to Company at the time of consummation of the transactions.
The value of the stock was determined based on the approximate average
market price of the shares on August 11, 2004 (change in control date) and
discounted for factors such a limited market for the stock.
F-12
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE F - BUSINESS COMBINATIONS (CONTINUED)
ALLIANCE PETROLEUM PRODUCTS COMPANY (CONTINUED)
Following is a condensed balance sheet showing the fair values of the
assets acquired and the liabilities assumed as of the date of
acquisition:
Current assets $ 498,087
Property and equipment 3,068
Goodwill arising in the acquisition 822,262
------------
$ 1,323,417
Current liabilities $ 341,642
Current maturities of long-term debt 125,575
Net assets acquired 856,200
------------
$ 1,323,417
The Company acquired only minimal property, plant and equipment in
the transaction; Alliance does not have title to these production
assets. Additionally, no expense has been recognized during the
quarter ended March 31, 2005 for compensation for the use of the
machinery and equipment to a corporation representing the predecessor
operation to Alliance and to an entity that owned the real estate.
The predecessor company was owned by the former officers of APPC who
are also stockholders and directors of the Company; the real estate
company is owed by the former president and a major stockholder of
the Company; The assets of these entities secure obligations to
Harris Bank as a result of certain transactions entered into by the
predecessor company, the real estate company or their owners. A
security interest had been entered into to as a result of these prior
lending activities with appropriate 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.
F-13
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE F - BUSINESS COMBINATIONS (CONTINUED)
PRO FORMA INFORMATION
On July 1, 2004, the company purchased 100% of the voting stock of
APPC. Results of operations for APPC are included in the consolidated
financial statements since that date. The acquisition was made for
the purpose of the reasons as stated above. Following are pro forma
amounts assuming that the acquisition was made on January 1, 2004:
Net sales $ 1,487,007
Cost of good sold 1,217,846
-----------
Gross profit 269,161
Expenses 3,836,886
-----------
Net income (loss) $(3,567,725)
===========
Loss per share:
Basic $ 1.82
===========
NOTE G - NOTES PAYABLE
The Company entered into a stock borrowing arrangement whereby
several stockholder/officers of the Company transferred
approximately 1,000,000 shares pre-split or 50,000 shares on a post
split basis of common stock into an escrow account. The shares were
subsequently sold with the proceeds of $500,000 being transferred to
the Company. The Company is obligated to return the shares to the
original holders by April 2005. If the Company had to repurchase its
stock at March 31, 2005, it would be required to pay $38,000 to
acquire the aggregate shares using a $0.76 approximate share price
in order to replace such shares for the original contributors of the
stock. The balance sheet as of December 31, 2003 was restated to
record the $500,000 liability and reduce additional paid-in capital.
F-14
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE G - NOTES PAYABLE (CONTINUED)
HIGHGATE HOUSE FUNDS, LTD. TRANSACTION
In order to raise capital for operations of the parent Company and to
complete the Oilmatic transaction, the Company entered into a
transaction with Cornell Capital Partners LP and Highgate House
Funds, Ltd., dated March 8, 2005, whereby the Company entered into a
Convertible Debenture for a total amount of $500,000 at 7% interest.
The Note is convertible into shares of common stock at a conversion
price of $0.85 per share, at the option of the Lender. At the same
time the Company entered into with Cornell Capital Partners LP a
total Standby Equity. Distribution Agreement for up to $10,000,000
equity line. As part of this transaction, the Company paid fees to
Cornell Capital of 750,000 shares (of which 15,000 was given to
Newbridge Securities as Placement Agent for the SEDA Agreement), plus
a commitment fee and Structuring fee to Yorkville Advisors
Management, LLC of a total of $75,000. In addition, as part of the
Secured Debenture, Highgate House Funds, Ltd. was issued 3,100,000
shares of common stock as collateral by the Company. Upon payment, or
conversion of the Convertible Debenture, these shares are to be
returned to the Company and returned to treasury. An additional
50,000 shares of common stock were issued as additional compensation
for the Convertible Debenture. As of March 31, 2005, the Company had
received $425,000 in advances against the Convertible debenture. A
financing expense of $2,782,500 was charged to operations for this
transaction.
NOTE H - RELATED PARTY TRANSACTIONS
PAYROLL SERVICES
The Company had its payroll processed though a "professional employer
organization" owned by a publicly traded corporation that has common
shareholders, directors and officers. For the quarter ended March 31,
2005, this company processed $261,829 of payroll, taxes and benefits,
along with an administration fee of $15,700.
EXPENSE REIMBURSEMENTS
The Company reimburses Company officer/directors for travel, office
and other expenses. In addition, certain officers make temporary
advances.
F-15
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE H - RELATED PARTY TRANSACTIONS (CONTINUED)
DUE ALPHA ADVISORS
A professional services agreement dated October 9, 2003 was entered
into with Alpha Advisors, LLC for a term of one year and renewable
for an additional year. Alpha Advisors LLC is an entity owned by
stockholders/directors/officers of the Company. The fee for these
services was the issuance of 1,000,000 shares of common stock of the
Company upon execution of the agreements, $25,000 due at signing of
the Tri-State Stores and Alliance Petroleum Group, Inc. agreements
and $6,000 payable on the first of each month thereafter. In
addition, a finder's fee of 10% of any new financing was to be paid
on funds being committed. Accounts Payable includes $31,000 of such
amounts due as of September 30, 2004. The Company and Alpha are
currently in the process of converting the debt into equity based
upon a discount of 80% from the market price.
OPERATING ASSETS
The operations of APPC are performed in a plant owned by the former
President and current shareholder of the Company. The Company does
not have a lease and is presently not paying rent for this property
due to a dispute with the former President (see Notes F and K).
NOTE I - RELATED PARTY LOANS PAYABLE TO OFFICERS/STOCKHOLDERS
3/31/05 12/31/04
AMOUNT Amount
------------ ------------
Rick Carter $ 150,000 $ 6,000
Ron Shapps -- 200,000
Michael Cahr 100,000 100,000
Warren Field 50,000 50,000
New Century Capital Consultants, Inc. 50,000 50,000
Keystone Nittany Ventures -- 113,353
Former President 142,915 142,916
Malibu Management Company -- 16,000
Alliance Finance Network 85,000 35,000
Jeff Neimen 50,000 --
John Niestrom 20,000 --
------------ ------------
Total $ 647,915 $ 713,269
============ ============
F-16
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE I - RELATED PARTY LOANS PAYABLE TO OFFICERS/STOCKHOLDERS (CONTINUED)
NEW CENTURY CAPITAL CONSULTANTS, INC.-NOTE PAYABLE
The Company on March 16, 2004 entered into a convertible unsecured
revolving promissory note agreement with New Century Capital
Consultants, Inc. The lender is a stockholder in the Company via
compensation it received (see Note H). The agreement allows for
borrowings up to $500,000 of which $50,000 has been advanced
currently. Interest accrues at the rate of 9% per annum payable along
with the any outstanding principle balance on March 16, 2005, unless
the note is in default. The lender may convert the principal amount
and any accrued interest into common stock of the Company based upon
a formula equal to 40% below the closing bid price of the stock
starting after six months from execution of this agreement.
Additionally, on a one time basis the lender upon written demand
after the six months can require the Company to prepare and file a
registration statement under the Securities and Exchange Act of 1933
for an offering of up to 1,000,000 shares. Also, the agreement allows
for "piggyback registration" rights in that the Company must notify
the lender and allow the lender to register its shares if the
companies file such a registration statement. The agreement contains
events of default such as bankruptcy, insolvency, defaults or
rendering of judgments on indebtedness in excess of $75,000 on from
any other lender. Additionally, the agreement contains certain
covenants as prohibition of payment of dividends, retirements or
redemptions of capital stock, or the transfer of material assets of
the Company. Upon these acts of defaults, the entire amount of
principal and interest is immediately due, and interest accrues at a
rate of 15% per annum.
On October 18, 2004, the Company received notice from the lender
that, in its opinion, the Company was in default on the arrangement
as a result of distributions 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.
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. During the quarter ended March 31, 2005, the outstanding loans
were converted to equity in the Company.
F-17
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE I - RELATED PARTY LOANS PAYABLE TO OFFICERS/STOCKHOLDERS (CONTINUED)
FORMER PRESIDENT
The amount recorded by the Company represents the estimated fair
value of the liability of the amount assumed at the time of purchase
of APPC. It appears that the liability represents funds advanced for
working capital. The obligation is unsecured, as no terms for
repayment, and non-interest bearing. As a result of other
contingencies that of the purchase of AAPC the final settled amount
of this liability could be significantly different from the present
recorded amount.
OTHER STOCKHOLDERS
Warren Field, Rick Carter, Michael Cahr and Ron Shapps are related to
the Company by virtue of being stockholders. The loans payable are
unsecured, due on demand, and accrue interest of 7% per annum.
Certain notes have provisions including options to purchase
additional common shares at $.01 per share. During the quarter ended
March 31, 2005, the outstanding loans to Ron Shapps were converted to
equity in the Company.
NOTE J - STOCKHOLDERS' EQUITY
A consulting services agreement was entered into on October 9, 2003,
with National Securities Corporation, Inc. for a term of six months
renewable on a monthly basis. The fee for this service is the
issuance of 12,500 shares post split of common stock of the Company.
A consulting services agreement was entered into on October 9, 2003,
with New Century Consultants, Inc. for a term of six months renewable
on a monthly basis. The fee for this service is the issuance of
50,000 shares post split of common stock of the Company.
A consulting agreement was entered into on October 10, 2003, with
Commonwealth Partners NY, LLC for a term of three years. The fee for
this service is the issuance of 10,000 free trading shares post split
and 15,000 restricted shares post split of common stock of the
Company.
On January 27, 2004, the Company entered into a manufacturing
agreement with the shareholders of International Pit Crew Express,
Inc. ("IPC"), a Texas corporation, to acquire the exclusive right to
manufacture petroleum products for IPC's customers within the United
States, including the United States convenience store industry. As
consideration for these rights, the Company issued 75,000 shares post
split of common stock on April 2, 2004 to the shareholders of IPC.
Additionally, the Company is to provide one half of the funds
necessary for the purchase of machinery, and all related parts,
supplies, and installation costs.
F-18
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
In conjunction with the change of control of the Company on August
11, 2004, 649,375 shares post split of common and 2,527,500 shares of
preferred stock were issued to newly elected officers of the Company.
The Company recognized the issuance as compensation expense of
$1,516,500 for the year ended December 31, 2004. The value was based
upon the closing price of the stock as quoted on the "electronic
bulletin board market" on August 11, 2004. Series A Preferred Stock
is convertible at a ratio of one share of Series A Preferred Stock to
.5 shares of common stock. In addition, the Company entered into
certain compensation agreements with these newly elected officers
(see Note K).
NOTE K - COMMITMENTS AND CONTINGENCIES
COMPENSATION AGREEMENTS
In August 2004, the Company entered into a compensation agreement
with Mr. William Bossung for the position of Vice President of
Corporate Finance and a Director of the Company through December 2005
with a one year renewal. Compensation includes fees of $100,000 per
annum and issuance of common and preferred stock.
In August 2004, the Company entered into a compensation agreement
with Mr. Rick Carter for the position of Vice President through
December 2005 with a one year renewal. Compensation includes fees of
$80,000 per annum and issuance of common and preferred stock.
In August 2004, the Company entered into a compensation agreement
with Mr. James W. Zimbler for the position of President and a
Director of the Company through December 2005 with a one year
renewal. Compensation includes fees of $144,000 per annum and
issuance of common and preferred stock.
Effective January 1, 2005, the Company entered into a compensation
agreement with Ronald Shapps for the position of Chairman of the
Board of Directors through December 2005 with a one year renewal.
Compensation includes fees of $144,000 and the issuance of common and
preferred stock.
F-19
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
HARRIS BANK
In conjunction with the Harris Bank attempting to collect their debt
against certain parties as indicated above in Note F, the bank is
requesting that the Company become a party to any forbearance as to
collection of the debt, such as becoming a guarantor or buying life
insurance for the original makers of the debt. The basis of their
claims is that the Company is using facilities that secure the
original borrowings. It is the opinion of management and counsel of
the Company that there is no basis and claims or commitments since
APPC or APG was not a borrower or a guarantor on the debt (management
of Alliance are guarantors of the original debt based on their role
as former shareholders/officers of Alliance before its acquisition by
the Company). The Company entered into negotiations with the bank and
is attempting to secure financing to purchase the operating assets
being utilized in the operations at fair value. It is anticipated
that an agreement will be signed by the end of the second fiscal
quarter of 2005.
COMPENSATION FOR UTILIZING OPERATING ASSETS
As indicated in Note H, no rent or compensation of any type has been
paid to the entities that claim to have legal title to the operating
assets of APPC. Management has taken the position that since there
was no contract or agreement to purchase or for the payment of
rentals for these assets, therefore nothing is owed. The consolidated
operations for the period since APPC was acquired do not contain any
provision for compensation for use of the facilities. The owner (and
former President of the Company and major shareholder) of the entity
that owns the real estate is claiming a monthly rental amount of
$15,000. This is a contingency relating to the business combination
that could potentially result in an adjustment of the purchase price
of APPC and additional charges to the Company's operations. The
Company is in negotiations with the owner and anticipates that the
dispute will be resolved and an agreement will be signed by the end
of the second fiscal quarter of 2005.
AMENDMENT OF ALLIANCE PETROLEUM PRODUCTS COMPANY AGREEMENT
On June 24, 2004 the Company amended the original agreement removing
the contingencies contained in the original document, the most
significant being of refinancing certain debt owed Harris Bank (see
Note F and above). As part of this amendment the original agreement
stated APPC assumed all payment obligations and all other agreements
of Alliance to the Harris Bank,; and all payment obligations and all
other agreements of Alliance as set forth in the following four
"Promissory Notes":
F-20
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
AMENDMENT OF ALLIANCE PETROLEUM PRODUCTS COMPANY AGREEMENT (CONTINUED)
o Alliance is to pay $200,000 to Richard Stiefel after all
amounts have been paid to Jesse Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been
received from Cornell Capital Corporation. The note is
non-interest bearing. Jesse Fuller was the former president
and a director of the Company and a major shareholder. Richard
Stiefel is an officer in Alliance and former shareholder, and
currently is an officer/director/ shareholder of the Company.
It is the opinion of current management that the terms of the
amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management
that the former control person(s) of the Company attempted to
bind the Company for debts due and owing from a transaction
the Company was not a party to, did not hold any assets from
or any obligation to repay and monies lent against assets.
o Alliance promises to pay American Group Financial, Inc. and/or
Jesse Fuller $407,368 and any additional sums that AGF or
Jesse Fuller owes to Harris Bank. Jesse Fuller is the owner of
AGF, the former president of the Company, former director and
still a major shareholder. The note accrues interest at 5% per
annum. The note was due December 1, 2004. It is the opinion of
current management that the terms of the amendment as
contained above, are unenforceable against the Company. It is
the belief and opinion of current management that the former
control person(s) of the Company attempted to bind the Company
for debts due and owing from a transaction the Company was not
a party to, did not hold any assets from or any obligation to
repay and monies lent against assets.
o Alliance is to pay $200,000 to Virginia Gefvert after all
amounts have been paid to Jesse Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been
received from Cornell Capital Corporation. The note is
non-interest bearing. Jesse Fuller was the former president
and a director of the Company, and a major shareholder.
Virginia Gefvert was a former shareholder of Alliance. It is
the opinion of current management that the terms of the
amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management
that the former control person(s) of the Company attempted to
bind the Company for debts due and owing from a transaction
the Company was not a party to, did not hold any assets from
or any obligation to repay and monies lent against assets.
F-21
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
AMENDMENT OF ALLIANCE PETROLEUM PRODUCTS COMPANY AGREEMENT (CONTINUED)
o Alliance is to pay $200,000 to American Group Financial, Inc. after
all amounts have been paid to Jesse Fuller and American Group
Financial (owned by Jesse Fuller) and funding has been received from
Cornell Capital Corporation. The note is non-interest bearing. Jesse
Fuller was the former president and a director of the Company, and a
major shareholder. Virginia Gefvert was a former shareholder of
Alliance. It is the opinion of current management that the terms of
the amendment as contained above, are unenforceable against the
Company. It is the belief and opinion of current management that the
former control person(s) of the Company attempted to bind the
Company for debts due and owing from a transaction the Company was
not a party to, did not hold any assets from or any obligation to
repay and monies lent against assets.
MINING LEASE
By a lease letter agreement effective March 9, 2001, and amended March 4,
2002 and September 4, 2002, the Company was granted the exclusive right to
explore, develop and mine the Medicine Project property located in Elko
County of the State of Nevada. The term of the lease was for 20 years,
with automatic extensions so long as the conditions of the lease are met.
During the year ended December 31, 2003, management of the Company
terminated the mining lease. As the Company terminated the lease, it is
required to pay all federal and state mining claim maintenance fees for
the current year. The Company is required to perform reclamation work on
the property as required by federal state and local law for disturbances
resulting from the Company's activities on the property. In the opinion of
management, there will be no continuing liability.
TERMINATION
During 2003, the Company agreed to issue 10,000 common shares post split
to its former President for the settlement of management fees payable
($105,000), advances to the Company ($10,000) and termination expense
($355,000). The shares were valued at $2.35 per share, by prior
consultants. These shares were issued to the former President and were
accounted for as an addition to paid-in capital.
F-22
AMERICAN PETROLEUM GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
================================================================================
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OILMATIC STATUS - SUBSEQUENT EVENT
On December 3, 2004, the Registrant entered into a Letter of Intent,
dated December 1, 2004, with Oilmatic Systems LLC of East Orange, New
Jersey, whereby the Registrant would purchase Oilmatic Systems LLC
and/Oilmatic International, Inc., for shares of common stock of the
Registrant. Originally, it was anticipated that the transaction will
close after the end of the first fiscal quarter of 2005. Subsequent
to March 31, 2005, however, management no longer felt that the mutual
goals of both parties were attainable and the transaction with
Oilmatic was cancelled.
F-23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our audited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward-looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or 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. 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.
3
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.
Completed Transactions
Alliance Petroleum Products Company
On October 9, 2003, the Company also entered into a Stock Purchase
Agreement ("Alliance Agreement") with Alliance Petroleum Products Company
("Alliance"), an Illinois Corporation, and a Rider to the Alliance Agreement
("Rider"). Alliance is in the business of blending and bottling motor oil and
anti-freeze. Under the Alliance Agreement, the Company issued 5,000,000 shares
of common stock for 100% of the issued and outstanding shares of the common
stock of Alliance (757,864 common shares). An additional 5,000,000 shares of
common stock of the Company is to be issued to Worldlink International Network,
Inc. upon 24 months from the date hereof. Under the terms of the Rider, the
Company is required to provide funding of at least $3,500,000 to pay Harris
Bank, a secured creditor of Alliance. The shareholders of Alliance have the
option to have the 757,864 issued and outstanding shares of common stock of
Alliance returned and the Alliance Agreement rescinded if they choose if the
Company did not 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 (the number of shares indicates the amount prior to the
reverse split of November 2004);
4
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 operations of Alliance have been consolidated with the results of
AMAI since July 1, 2004. American Petroleum Group, Inc. which was formerly
American Capital Alliance, Inc. (the "Company") is a Chicago based holding
company with an agenda to acquire, merge, and manage various business
opportunities. The Company's current direction is in the manufacturing and
distribution of petroleum and related products for the automotive industry.
After the above acquisition, the Company is no longer considered a "development
state entity"
Subsequent Transactions
Oilmatic Systems, LLC
On December 3, 2004, the Registrant entered into a Letter of Intent,
dated December 1, 2004, with Oilmatic Systems LLC of East Orange, New Jersey,
whereby the Registrant would purchase Oilmatic Systems LLC and/or Oilmatic
International, Inc., for shares of common stock of the Registrant.
As part of the transaction, Michael Allora, President of Oilmatic 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.
5
Oilmatic is a food service distribution company that supplies a closed
loop Bulk Cooking Oil Supply and Management system. Its patented state of the
art handheld Dipstick(R) design dispenses and removes cooking oil with the
simple push of a button at the deep fryers. The system also consists of separate
fresh oil and waste oil tanks. A key switch allows management to control
unnecessary oil fills and disposals. This system completely eliminates the
practice of employees manually removing hot used oil which significantly reduces
slips, falls and burns, as well as the hard labor of unloading and retrieving
heavy boxes of oil. Additionally, the system eliminates hazardous grease spills
both inside and outside of the store that cause grease fires and grease trap
build-ups that pollute our environment.
Effective May 20, 2005, Management no longer felt that the mutual goals
of both parties were attainable and therefore the transaction with Oilmatic was
cancelled between the Parties.
PLAN OF OPERATIONS
We were a startup, development stage Company prior to the acquisition
of American Petroleum Products Company ("APPC") and did not realize any revenues
from our business operations until that time. However at time of acquiring APPC
its sales volume was at a point below its break even point and therefore was
losing money. Management of the Company feels that APPC is operating at a small
percentage of its capacity with its major constraint on increasing volume being
that of financing raw materials for manufacturing and some other limited
variable manufacturing costs. In addition, it is currently not generating
profits of sufficient amount to support the other operations of the parent
Company. Accordingly, we must raise money from sources other than the operations
of this business. Our only other source of cash at this time is investments by
others in our Company. We must continue to raise cash to complete future
acquisitions and stay in business, including funding current operations.
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 and a Standby Equity Distribution Agreement for up to
$10,000,000. The Note is convertible into shares of common stock at a conversion
price of $0.85 per share, at the option of the Lender. At the same time the
Company entered into with Cornell Capital Partners LP a total Standby Equity
Distribution Agreement for up to $10,000,000 equity line. As part of this
transaction, we paid fees to Cornell Capital of 750,000 shares (of which 15,000
was given to Newbridge Securities as Placement Agent for the SEDA Agreement),
plus a commitment fee and Structuring fee to Yorkville Advisors Management, LLC
of a total of $75,000. In addition, as part of the Secured Debenture, Highgate
House Funds, Ltd. was issued 3,100,000 shares of common stock as collateral by
the Company. Upon payment, or conversion of the Convertible Debenture, these
shares are to be returned to the Company and returned to treasury. An additional
50,000 shares of commons tock was issued as part of its compensation for the
Convertible Debenture.
To meet our need for cash, we were investigating and attempting to
raise debt and equity financing to complete the acquisition of Oilmatic (which
is no longer active) as 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.
6
For its current operations, the Company has sufficient cash and revenue
to support only near term operations.
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 Quarter Ending March 31, 2005 vs. March 31, 2004 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. For the period ended March 31,
2005, the Company had $384,901 in sales, with the cost of revenues of $280,595
and other expenses, including financing expenses related to Cornell capital and
Highgate House of $2,782,500 for a total expense of $3,945,338.
Liquidity and Financial Resources
During the three months ended March 31, 2005, net cash used by operating
activities was $658,073. The Company incurred a net loss of $3,846,043 for the
three months ended March 31, 2005; the company still has a net operating loss
even if the stock compensation expense of $690,000 and financing expense of
$2,782,500 did not occur. Additionally at March 31, 2005, current liabilities
and long-term liabilities exceed current assets by approximately $1,221,380;
these factors raise substantial doubt about the Company's ability to continue as
7
a going concern. The Company anticipates that in order to fulfill its plan of
operation including payment of certain past liabilities of the company, it will
need to seek financing from outside sources. The company is currently pursuing
private debt and equity sources. It is the intention of the Company's management
to also improve profitability by significantly reducing operating expenses and
to increase revenues significantly, through growth and acquisitions. The Company
is actively in discussion with one or more potential acquisition or merger
candidates. There is no assurance that the company will be successful in raising
the necessary funds nor there a guarantee that the Company can successfully
execute any acquisition or merger transaction with any company or individual or
if such transaction is effected, that the Company will be able to operate such
company profitably or successfully.
Administrative expenses for the three months ended March 31, 2005,
including stock compensation expenses and financing expenses were $3,945,338,
resulting in losses from operations of $3,846,043. Included in these amounts are
expenses for stock compensation and financing expense of $3,472,500. 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.
8
ITEM 3. 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-QSB 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 II: OTHER INFORMATION
ITEM 1. 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.
9
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. Recently, the Company has reached an oral
agreement for the resolution of all claims between Harris Bank, the former
control person of the Company and the Company, whereby the Company will be
acquiring the real property and fixed assets involved in the dispute. This oral
agreement is being reduced to a written agreement and if executed and completed,
will resolve any issues outstanding. It is anticipated that the Agreements will
be signed by all parties, and the transaction completed, by the end of the third
fiscal quarter.
The Company received a letter, dated February 28, 2005, from the
Attorney for Concentric Consumer Marketing, Inc., in connection with certain
sums owed by American Petroleum Products Corporation ("APPC"), a wholly owned
subsidiary of the Company, in the amount of $13,000 per month for the past four
(4) months, for services. There is no way to determine at this time the validity
of the claim, or any possible outcome or if the claim is material to the
Company, or even if litigation will be commenced against the Company and/or
APPC. The Company has reached a settlement with Concentric Consumer Marketing,
Inc., and expects to execute a Settlement Agreement shortly.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We issued 75,000 shares of common stock, and 150,000 shares of Series A
preferred stock, to Eliot Cole, Esq. as part of his compensation for accepting
the position of a Director on 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 in relation to the Highgate House Funds, Ltd. Convertible
Debenture and the Standby Equity Distribution Agreement with Cornell Capital
Partners LP, as follows:
Highgate House Funds, Ltd. 3,100,000 for collateral
Highgate House Funds, Ltd. 50,000 for compensation
Cornell Partners, LP 735,000 as compensation
Newbridge Securities Corporation 15,000 for compensation as
Placement Agent for the SEDA Agreement
We issued 683,000 shares from the exercise of the options granted to Holders of
certain promissory Notes issued by the Company. These creditors were entitled to
purchase one shares (1) at a purchase price of one cent ($0.01) for each dollar
lent to the company.
The use of the proceeds from the Highgate House Funds, Ltd., transaction was for
general working capital, and to fund the Oilmatic Acquisition.
The use of proceeds from the exercise of the option shares is for general
working capital of the Company.
10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 By-laws of the Registrant*
31.1 Rule 13A-14(A)/15D-14(A) Certification for President/Chief Executive
Officer
31.2 Rule 13A-14(A)/15D-14(A) Certification for Chief Financial Officers
32.1 Section 1350 Certification for President/Chief Executive Officer
32.2 Section 1350 Certification for President/Chief Financial Officer
------------
* These documents are hereby incorporated by reference to Form SB-2, as amended,
June 26, 2001, and subsequent filings.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 27, 2005
American Petroleum Group, Inc.
/s/ James W. Zimbler
-----------------------------------
James W. Zimbler,
Interim President/Chief Executive Officer
/s/ James Carroll
-----------------------------------
James Carroll,
Chief Financial Officer
11