As filed with the Securities and Exchange Commission on April 10, 2002
Registration Statement No. 333-70070
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment 2
to
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERICAN GROUP, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 5190 88-0326984
- ------------------------ ----------------- ----------------
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification I.D. Number)
Number)
5295 Town Center Road, Boca Raton, FL 33486 (561-394-2443)
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(Address and telephone number of principal executive offices)
10570 Hagen Ranch Road, BOYNTON BEACH, FL 33437
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(Address of principal place of business)
Robert Claire, President
American Group, Inc.
5295 Town Center Road
Boca Raton, FL 33486
561-391-5555
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(Name, address and telephone number of agent for service)
Copies to:
Robert D. Axelrod, Esquire
Axelrod, Smith & Kirshbaum
5300 Memorial Drive #700
Houston, Texas 77007
Tel.: (713) 861-1996
Fax:(713) 552-2020
Approximate date of proposed commencement of sale to the public: From time to
time after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
=============================================================================================================
Proposed
Amount of Proposed Maximum
Shares Maximum Aggregate Amount of
Title of Each Class of To be Offering Price Offering Registration
Securities to be Registered Registered Per Unit(1) Price Fee
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Common Stock 9,060,198 .18 $1,630,836 $435
Common Stock underlying the warrants 2,000,000 .18 $ 360,000 $ 90
=============================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to rule 457 (g).
The Registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Acts of 1933 as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8 (a), may determine.
AMERICAN GROUP, INC.
PROSPECTUS
_______, 2002
10,455,206 shares of common stock
Our common stock is currently traded on the over-the-counter bulletin board
("OTCBB") under the symbol "AMCG."
The shares for this offering are being sold by the selling security holders. We
will not receive any proceeds from of the sale of the shares. If all of the
warrants in this offering are exercised, the net proceeds to us from the
exercise of the warrants, after the deduction for offering expenses, will be
approximately $166,499. We intend to use these net proceeds for accounts
payable, inventory and general corporate purposes.
Investors should not buy these shares unless they can afford to lose their
entire investment.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 1.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
SUMMARY
American Group, Inc. (the "Company"), a Nevada Corporation, was
incorporated in 1994. Since May 1998 our principal business has been the custom
blending of soil mixes for the commercial nursery industry. Through our wholly
owned subsidiary LPS Acquisition Corp. we do business under the name Lantana
Peat and Soil. Lantana is a processor and distributor of custom blended soil
mixes to several hundred wholesale nursery customers located primarily in
Florida. Prior to August, 1997 Lantana was owned by Kedac, Inc. See "History".
On August 15, 1999 we, through our wholly-owned Canadian subsidiary
9075-7774 Quebec, Inc. acquired Torland 9006-1974 Quebec, Inc., a Canadian
sphagnum peat moss bog and processing facility. Torland sells spagnum peat moss
to Lantana and other customers. Our Canadian subsidiary 9075-7774 Quebec, Inc.
was formed for the sole purpose of acquiring Torland.
We are a custom blender of soil mixes for the commercial nursery
industry. Our current annual revenue is $3,070,376, which is approximately 100%
of our current capacity.
In February, 1999, we began construction of a new $1,700,000 soil
blending facility located near Homestead, Florida, the heart of the Florida
nursery industry. It will have the capacity to produce upwards of approximately
$15,000,000 in revenues from the sale of blended soil products annually (based
on current market prices). In addition to the increased capacity, the new
facility is located within fifteen minutes of the Homestead commercial nursery
markets. We believe that, with our increased capacity and the proximity of the
new facility to the Homestead commercial nursery market, we will be able to
increase our revenues and generate operating profits. The plant is anticipated
to be completed in April, 2002 and is virtually completed as of the date of this
Prospectus. We have received our certificate of occupancy and are in the process
of completing the final installation of the equipment. We are presently trying
to raise the capital needed to finance the completion of the new plant and/or
payoff the existing debt obtained to complete the new plant. There can be no
assurance that we will be successful with this or any other activity to raise
additional capital.
We have suffered recurring losses from operations that raise
substantial doubt about our ability to continue as a going concern. During the
year ended May 31, 2001 we incurred net losses available to common stockholders
of $4,670,647, and during the year ended May 31, 2000, we incurred net losses
available to common stockholders of $1,975,968. During the six months ended
November 30, 2001 and 2000 we incurred net losses available to common
stockholders of $1,341,927 and $2,269,409, respectively. Also, at November 30,
2001, we had negative working capital of $4,391,954. These factors along with an
accumulated deficit of $8,832,627 at November 30, 2001 raise substantial doubt
about our ability to continue as a going concern. We will need approximately
$1,100,000 in order to remain viable as a going concern for the current fiscal
year. If we are unable to obtain these funds, we will not be able to continue as
a going concern and you will lose your entire investment in our stock."
References in this prospectus to we, our and us includes our
wholly-owned subsidiaries.
RISK FACTORS
We have summarized all of the risks that we believe are material at
this time. Our shares are speculative and involve a high degree of risk,
including, but not necessarily limited to, the several material risk factors
described and summarized below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting our proposed
business before purchasing shares. If any of the following risks actually occur,
our business would likely suffer. In these circumstances, the market price of
our common stock could decline, and you may lose all or part of the money you
paid to buy our common stock.
Inability to finance plant completion will effect our ability to continue as a
going concern
If we cannot obtain adequate financing to complete the new plant
facility, it is likely that we will not be able to continue as a going concern.
A total of approximately $300,000 will be needed to complete our
planned new plant facility by April 2002. The total cost of the plant and
improvement is estimated at $1,700,000 of which we have already funded
$1,400,000. In addition, $921,000 is due in payments relating to the Torland
acquisition over the next five years of which $200,000 is past due. We are
currently operating in a deficit cash position and do not generate positive cash
flow from our current operations.
1
An abandonment of the plant facility or non-payment on the plant
facility would be catastrophic to our soil blending operation. We cannot operate
in our current location beyond the anticipated new plant completion date and our
current equipment would need substantial repair to operate beyond the
anticipated completion date April 2002. Non-payment of the Torland
obligation may result in our forfeiting back to its previous owners Torland and
the Canadian peat moss bog facility. We are not able to produce income from
operations in our existing facility. We have continued to operate in order to
maintain existing market share until relocation into our new facility. We
project positive income from operations within two months of moving into our new
facility. The facilities lease contains provisions which would require us to pay
liquidated damages to Lessor in the event we should default thereunder, the
amounts of which are unknown at this time. Any such default could have a
material adverse effect on us. We have no material financial exposure from the
termination of our existing month-to-month lease relating to our Boynton Beach,
Florida facility.
We have had and could have losses, deficits and deficiencies in liquidity which
could impair our ability to continue as a going concern
In Note 2 to the audited financial statements, our independent auditors
have reported that we have suffered recurring losses from operations that raise
substantial doubt about our ability to continue as a going concern. During the
year ended May 31, 2001 we incurred net losses available to common stockholders
of $4,670,647, and during the year ended May 31, 2000, we incurred a net loss of
$1,975,968. During the six months ended November 30, 2001 and 2000 we incurred a
net loss available to common stockholders of $1,341,927 and $2,269,409,
respectively. Also, at November 30, 2001, we had negative working capital of
$4,391,954. These factors along with an accumulated deficit of $8,832,627 at
November 30, 2001 raise substantial doubt about our ability to continue as a
going concern. We will need approximately $1,100,000 in order to remain viable
as a going concern for the current fiscal year. If we are unable to obtain these
funds we will not be able to continue as a going concern and you will lose your
entire investment in our stock.
If we are unable to obtain adequate financing to fund the Torland obligation we
will forfeit ownership
If we cannot obtain adequate financing to properly fund the Torland
obligation or restructure the obligation at terms agreeable to both parties we
will forfeit ownership of the Torland operation. In connection with our
acquisition of Torland we are obligated to pay, as renegotiated on January 18,
2001 (in addition to the $400,000 we paid at the time of closing) an additional
$921,000 as follows: $50,000 on February 28, 2001, $50,000 on July 31, 2001,
$100,000 on December 31, 2001 and the balance of $721,000 in sixty equal
installments of principal and interest beginning February 1, 2002. This
obligation is payable with interest at 8% per annum. We have not made our
February, July and December payments or any of our monthly installment payments.
We have not been provided with notice of default under this obligation. A
declaration of default would be catastrophic and more than likely we would
forfeit our investment in Torland to the note holders. No assurance, however,
can be given that we will be able to raise the additional capital necessary to
make the required payments. We are presently trying to raise the capital needed
to fund the balance of the transaction. If we are unable to restructure the
Torland obligation then Torland will become a vendor. The quality and quantity
of peat moss received from Torland, which is necessary for our operations, is
presently available from Torland, but there can be no assurances that it will be
available in the future. There are other vendors available, but there can be no
assurance as to price, quality and quantity of peat moss that will be available
in the future.
If we do not obtain financing we will not grow and will not be able to meet our
capital obligations
We must obtain outside financing to fund the expansion of the business
and to meet our obligations as they become due. Any additional debt or equity
financing may be dilutive to the interests of our stockholders. Such outside
financing must be provided from the sale of equity securities, borrowing, or
other sources of third party financing. Further, the sale of equity securities
would substantially dilute our existing stockholders' interests, and borrowings
from third parties could result in our assets being pledged as collateral. Loan
terms which would increase our debt service requirements could restrict our
operations. We are unable to obtain financing at commercially reasonsable terms,
if at all, because of our poor financial health and the lack of adequate
collateral to secure additional financing. We are currently experiencing
negative gross margins on sales of our products. The credit facility we entered
into with our President is presently secured by a blanket lien on our assets,
including the new plant. The amount advanced under the line is approximately
$2,000,000, of which all or part is convertible into our Series C Preferred
Stock. Any balance not converted into Series C Preferred Stock will be a bridge
loan which will be repaid from future financing.
We are dependent on our present managers and our ability to grow could be
impaired if we lost their services
Our success is substantially dependent upon the time, talent, and
experience of Robert I. Claire, our President. We do not have an employment
agreement with Mr. Claire. The loss of the services of Mr. Claire would have a
material adverse impact on us. No assurance can be given that a replacement for
Mr. Claire could be located in the event of his unavailability. In order for us
to expand, we must continue to improve and expand the level of expertise of our
personnel and we must attract, train and manage qualified managers and employees
to oversee and manage the expanded operations. You should not invest unless you
are willing to entrust all aspects of our management to our directors and
officers.
2
We may not be able to compete for business and this would substantially impair
our growth
There are a number of companies which provide soil mixes to commercial
nurseries. Other companies emphasize service, price, or distribution as
competitive strategies. Many of our competitors are well established companies
with substantially greater capital resources, research and development staffs
and facilities, and substantially greater marketing capabilities than ours.
There is limited market liquidity for our securities and there are penny stock
securities law considerations that could limit your ability to sell your shares
Our stock is considered penny stock and subject to the penny stock
rules promulgated under the Securities Exchange Act of 1934, Rules 15g-1 to
15g-9. The penny stock rules require broker-dealers to take steps under certain
circumstances prior to executing any penny stock transactions in customer
accounts. Among other things, Rule 15g-3 requires a broker or dealer to advise
potential purchasers of a penny stock of the lowest offer and highest bid
quotations for such stock, and Rule 15g-4 requires a broker or dealer to
disclose to the potential purchaser its compensation in connection with such
transaction. Under Rule 15g-9, a broker or dealer who recommends such securities
to persons other than established customers must make a special written
suitability determination for the purchaser and receive the purchaser's prior
agreement to such a transaction. A broker/dealer must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker/dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customers
account. The effect of these regulations may be to delay transactions in stocks
that are deemed to be penny stocks, and therefore sales of our common stock by
brokers or dealer and resales by investors could be adversely affected.
The sale of outstanding shares could result in a low market price for your
common stock. There is a limited public float for our common stock and you may
not be able to sell your shares at the price or in the volume you desire
Of the outstanding shares of our common stock as of April 8, 2002,
we had outstanding 9,440,956 shares of common of which approximately 863,310 are
free trading shares, and approximately 8,577,646 shares are restricted
securities as that term is defined in Rule 144 adopted under the Act. Rule 144
governs resales of restricted securities. No prediction can be made as to the
effect, if any, that sales of shares of common stock or the availability of such
shares for sale will have on the market prices prevailing from time to time.
Nevertheless, the possibility that substantial amounts of restricted common
stock may be sold in the public market would likely have a material adverse
effect on prevailing market prices for the common stock and could impair our
ability to raise capital through the sale of our equity securities.
Dilution due to outstanding warrants and convertible preferred stock may have a
material negative impact on your investment
In addition to the 67,644,720 shares of common stock issuable upon
conversion of the Series C convertible preferred stock we have 2,000,000 shares
of common stock issuable upon the exercise of the warrants. The exercise of the
outstanding warrants and convertible preferred stock by the holders thereof will
result in the dilution in the interests of our other stockholders.
"The computation of the 67,644,720 shares of the common stock issuable
upon conversion of the 5912.50 shares of Series C preferred stock (which is
currently 65.69% of the total 9,000 shares of Series C preferred stock that can
be issued) is computed by assuming the entire 9,000 shares of Series C preferred
stock was converted into common stock, which would result in 102,968,707 shares
of common stock. The current outstanding Series C preferred stock represents
65.69% of the total available, thus 65.69% of 102,968,707 shares is 67,644,720
shares." The following is a computation showing how the Series C preferred stock
that is currently outstanding is convertible into 67,644,720 million shares of
common stock.
Shares of Shares of
Preferred Stock Common Stock Percentage
--------------- ------------ ----------
Common stock outstanding prior to conversion 9,440,956
Common stock warrants outstanding prior to conversion 2,000,000
---------
Total common stock and shares issuable upon conversion
of common stock warrants 11,440,956 10%
Total preferred stock issuable whereby after conversion
will equal 90% of the then total outstanding common stock 9,000.00 102,968,707 90%
======== -----------
Then total outstanding common stock 114,409,663
===========
Total preferred stock outstanding 5,912.50 67,644,720
======== ===========
We only have 50,000,000 shares of common stock currently authorized. We
intend to have a stockholders meeting in order to increase the number of
authorized shares to allow for the full conversion of the Series C convertible
preferred stock.
The market price of your shares will be volatile
The market price of our common stock may be highly volatile, as has
been the case with the securities of many other small capitalization companies.
Additionally, in recent years, the securities markets have experienced a high
level of price and volume volatility and the market prices of securities for
many companies, particularly small capitalization companies, have experienced
wide fluctuations which have not necessarily been related to the operating
performances or underlying asset values of such companies. Securities of issuers
having relatively limited capitalization or securities recently issued in a
public offering are particularly susceptible to change based on short-term
trading strategies of certain investors. Further, the resale of common stock in
this offering by selling stockholders could affect the market price of the
common stock. This volatility could deprive our shareholdes of opportunities to
sell or otherwise dispose of their stock.
3
We have never paid a cash dividend and it is likely that the only way you will
realize a return on your investment is by selling your shares
We have never paid cash dividends on our common stock and the board of
directors does not anticipate paying cash dividends in the foreseeable future.
It currently intends to retain future earnings, if any, to finance the growth of
its business. As a result, your return on an investment in our stock will likely
depend on your ability to sell our stock at a profit.
USE OF PROCEEDS
The shares for this offering are being sold by the selling security holders. We
will not receive any proceeds from the sale of the shares being sold by this
Prospectus. If all of the warrants in this offering are exercised, after the
deduction for offering expenses, we will receive approximately $166,499. We
intend to use the net proceeds for accounts payable, inventory and general
corporate purposes.
MARKET FOR THE SHARES
Our common stock is currently traded on the over-the-counter bulletin board
under the symbol "AMCG." The following table sets forth, for the periods
indicated, the reported high and low closing bid quotations for our common stock
as reported on the OTCBB . The bid prices reflect inter-dealer quotations, do
not include retail markups, markdowns or commissions and do not necessarily
reflect actual transactions.
HIGH LOW
QUARTER ENDED BID (*) BID (*)
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February 29 (*) 2000 $ 7/8 $ 1/8
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May 31 (*) 2000 $ .52 $ .09
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August 31 (*) 2000 $3 3/8 $2.00
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November 30 2000 $3.60 $ 3/8
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February 28 2001 $1.0 $ .25
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May 31 2001 $ .25 $ .06
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August 31 2001 $ .50 $ .18
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November 30 2001 $ .20 $ .11
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(*) Pre-reverse split. On October 3, 2000 we executed a 20 to 1 reverse split of
our Common Stock and all the share amounts in this Form SB-2 are reverse split
amounts.
The bid price of our common stock was $.11 per share on April 8, 2002. As
of April 8, 2002, there were approximately 929 holders of record of our
common stock.
Our transfer agent is Florida Atlantic Stock Transfer., 7130 Nob Hill Road,
Tamarac, Florida 33321.
Dividend Policy
While there are no restricitons which limit our ability to pay dividends, we
have not paid, and do not currently intend to pay cash dividends on our common
stock in the foreseeable future. Our policy is to retain all earnings, if any,
to provide funds for operation and expansion of our business. The declaration of
dividends, if any, will be subject to the discretion of the Board of Directors,
which may consider such factors as our results of operations, financial
condition, capital needs and acquisition strategy, among others.
4
BUSINESS
Introduction
American Group, Inc. (the "Company"), a Nevada Corporation, was
incorporated in 1994. Since May 1998 our principal business has been the custom
blending of soil mixes for the commercial nursery industry. Through our wholly
owned subsidiary, LPS Acquisition Corp., we do business under the name Lantana
Peat and Soil. Lantana is a distributor of custom blended soil mixes to several
hundred wholesale nursery customers located primarily in Florida. The Company
owns 9006-1974 Quebec, Inc., which controls leases for a peat bog and operates a
facility which harvests, packages and ships sphagnum peat moss.
History
In December, 1994 Kedac, Inc. entered into an agreement to acquire the
assets and liabilities of Can-Flo International, Inc., which consisted of the
operations of Lantana. Kedac and Can-Flo were unaffiliated. Can-Flo was a
holding company for Lantana, a distributor of custom blended soil mixes. Kedac
was formed for the purpose of acquiring Can-Flo. Can-Flo received cash and notes
from Kedac. Mr. Eric Deckinger (currently one of our directors) was the owner
and executive officer of Kedac. Mr. Deckinger had no affiliation with Can-Flo.
Kedac acquired Lantana in order to gain a foothold in the custom blended soil
mix business.
In July, 1997 Lator International, Inc., obtained an option to purchase
Torland from the stockholders of Torland in exchange for a loan to Torland,
collateralized by inventory. This option served as the basis of our August, 1999
acquisition of Torland. Lator and Torland were unaffiliated. Mr. Deckinger had
no affiliation with either Lator or Torland.
As a result of litigation filed against Kedac in May, 1995 (by a
creditor of Can-Flo), Kedac filed under Chapter 11 of the Bankruptcy Code in
January, 1997. In August, 1997, the Bankruptcy court (i) approved a liquidating
Chapter 11 plan for Kedac, whereby LPS purchased the assets and assumed the
liabilities of Kedac for cash and (ii) discharged the lawsuit against Kedac. One
of the assets acquired by LPS was the name Lantana Peat and Soil and LPS has
continued to operate under that name.
LPS was formed for the sole purpose of purchasing the assets and
assuming the liabilities of Kedac in order to pursue a business opportunity. At
the time of the purchase of the assets by LPS, Mr. Deckinger was engaged as
general manager of LPS.
In September, 1997 the stockholders of LPS sold 100% of the outstanding
stock to Coventry Industries Corp. for shares of stock in Coventry. At the time
of the acquisition of LPS, Coventry was a Florida holding company with
diversified business interests including a machine welding plant in Tennessee, a
fire sprinkler fabricator in Florida and a job placement firm in Tennessee. Our
management believed that the business purpose of this transaction was to provide
Coventry with an operating company with management in place. In addition, LPS
had an option to acquire a Canadian peat bog and processing facility. In
exchange for his assumption of existing indebtedness of LPS Mr. Deckinger
remained general manager of LPS and became a preferred stockholder of Coventry.
Prior to the transaction, neither Mr. Deckinger nor LPS were affiliated with
Coventry. Two family members of affiliates of Coventry, however, each owned 7.4%
of LPS common stock. Neither family member was an officer or director of LPS.
On May 31, 1998 we acquired all the common stock of LPS from Coventry
for 6,000 shares (22.4%) of our common stock. As part of this transaction, Mr.
Deckinger agreed to convey back to Coventry his preferred stock, and we agreed
to assume his indebtedness. Prior to this transaction, the American Group, Inc.
had no operations or assets.
5
On May 31, 1998 we purchased all the common stock of Lator (which had a
$350,000 note receivable from Torland, a note receivable from LPS for $315,000
and owned the option to purchase Torland) for 1,500 shares of our common stock,
(6%) and the assumption of Lator's accrued expenses and notes payable.
We were not affiliated with Coventry, LPS, Lator or Mr. Deckinger at
the time of the Lator acquisition. Mr. Deckinger continued to function as
general manager of LPS and became our president. The business reason for the
acquisition was (1) for us to acquire an operating business with an option to
acquire a Canadian peat bog and processing facility and (2) for Coventry to
divest itself of a subsidiary that did not fit its business profile. We believed
the Canadian peat bog and processing facility had tremendous upside potential.
In January, 1999 Mr. Deckinger assumed $750,000 of our debt in exchange for
375,000 shares of our common stock.
On August 15, 1999 we, through our wholly-owned Canadian subsidiary
9075-7774 Quebec, Inc., exercised our option to acquire Torland, a Canadian
sphagnum peat moss bog and processing facility. Our Canadian subsidiary
9075-7774 Quebec, Inc. was formed for the sole purpose of acquiring Torland. The
purchase required us to issue 35,000 shares of our common stock to the
stockholders of Torland, pay $400,000 at the time of closing and requires
payment, as renegotiated on January 18, 2001, of an additional $50,000 on
February 28, 2001, $50,000 on July 31, 2001, $100,000 on December 31, 2001 and
the balance of $721,000 in sixty equal installments of principal and interest
beginning February 1, 2002. This obligation is payable with interest at 8% per
annum. We have not made our February, July and December 2001 payments totaling
$200,000.
We are presently negotiating a written extension on the payment of this
obligation with representatives of the former stockholders of Torland and have
not been provided with any notice of default. We believe that we will be able to
negotiate a written extension for the payment with the former stockholders of
Torland. No assurance, however, can be given that we will be successful in
negotiating an extension of our payment obligations or, that if successful, we
will be able to raise the additional capital necessary to make our payment. We
are also attempting to raise the capital needed to fund the balance of the
transaction. There can be no assurance that we will be successful with this or
any other activity to raise additional capital.
The overarching goal of all of the above transactions was to have a
custom soil blending business in Homestead, Florida with a state of the art soil
blending plant, together with a controlling interest in a premium producer of
Canadian sphagnum peat moss.
Business Activities
We are a custom blender of soil mixes for the commercial nursery
industry. Our current annual revenue is $3,070,376, which is approximately 100%
of our current capacity.
In February, 1999, we began construction of a new $1,700,000 soil
blending facility located near Homestead, Florida, the heart of the Florida
nursery industry. It will have the capacity to produce upwards of approximately
$15,000,000 in revenues from the sale of blended soil products annually (based
on current market prices). In addition to the increased capacity, the new
facility is located within fifteen minutes of the Homestead commercial nursery
markets. We believe that, with our increased capacity and the proximity of the
new facility to the Homestead commercial nursery market, we will be able to
increase our revenues and generate operating profits. The plant is anticipated
to be completed in April, 2002 and is virtually completed as of the date of this
Prospectus. We have received our certificate of occupancy and are in the process
of completing the final installation of the equipment. We are presently trying
to raise the capital needed to finance the completion of the new plant and/or
payoff the existing debt obtained to complete the new plant. There can be no
assurance that we will be successful with this or any other activity to raise
additional capital.
Soil Blending
Our ingredients for custom soil blending are Canadian and Florida peat
moss, sawdust, sand, wood chips, pine bark and wood mulch. The soil blends are
made for a specific purpose such as the germination of seeds, the propagation of
cuttings, or growing plants and flowers in pots.
6
We obtain raw materials for the blending processes from Torland and
other vendors located in Florida and Southern Georgia.
Differentiation From Competition
Currently we are one out of five major soil mixing companies serving the
South Florida area. These companies include Atlas Peat & Soil, Florida Potting,
Tuco Peat and Reliable Peat & Soil. These companies have significantly greater
financial resources than we do. The disparity in financial resources tend to
keep us at a significant competitive disadvantage. We do aggressively compete on
the basis of price, service and quality of soil mix. As to our Canadian
subsidiary, Torland, there are numerous peat bogs with far greater financial and
production resources than Torland. Torland does not attempt to compete with
these bogs, but rather acts as an independent supplier to the LPS operation.
Excess product is sold to third parties at prevailing market rates. This does
not account for a significant amount of our sales volume.
We differentiate ourselves from competitors by our relationship with
Torland, which allows us to purchase high quality sphagnum peat moss at
approximately 66% of the cost of other suppliers. Current market pricing for a
55 cubic foot bale of Canadian sphagnum peat moss is between $82 - $93 per bale.
We purchase the same size bale from Torland at $60 per bale. Our new mixing
plant will significantly increase our capacity to produce our custom blended
soil products with efficiencies that are expected to reduce our current unit
costs, and enhance our commitment to customer service.
Canadian sphagnum peat moss currently represents approximately 29% of
the total product cost of our various soil blends. Even with the savings we have
in the purchase of Canadian sphagnum peat moss, to this point we have been
unable to generate positive income from operations due to the inefficiencies
associated with our Boynton Beach, Florida location. The present plant requires
two times the labor cost of the new plant, and is over three times slower in
producing an average load of blended soil mix. It now takes approximately 2.5
hours to deliver an average load of soil mix as compared to approximately 15
minutes at the new location.
Seasonality
Our customers are primarily commercial nurseries that require soil
mixes on a twelve month basis. Our strongest months for delivery to customers
occur during April through June and mid-August through November.
Marketing
We market our products by direct sales. LPS's current customer base is
composed of approximately 350 commercial nurseries throughout Florida.
Government Regulation
We are subject to federal, state and local regulations including
environmental protection regulations. Such regulations deal with the handling,
transport and disposal of materials we utilize. We believe that we are in
compliance with these regulations.
Trademarks
None
Employees
As of April, 2002, we had 12 employees of which four are in management.
We do not expect to have to hire any additional employees to operate the new
soil blending facility. We believe that our labor relations are good. No
employee is represented by a labor union.
Subsidiaries
We have three wholly-owned subsidiaries, LPS Acquisition Corp., a
Florida corporation, dba Lantana Peat and Soil, Lator International, Inc., a
Florida corporation and 9075-7774 Quebec, Inc. d/b/a/ Torland. LPS operates our
soil mixing business. Lator was acquired in order to obtain its right to acquire
Torland. 9075-7774 Quebec, Inc. acquired Torland on August 15, 1999.
7
Properties
Our principal executive offices are located at 5295 Town Center Road
#301, Boca Raton, Florida 33486, tel. (561) 394-2443. Our principal executive
offices are leased through a sub lease arrangement with our president, Robert I.
Claire. The lease is on a month to month basis beginning November 2001 for a
monthly payment of $1,000. In December 1998, LPS entered into a lease for its
new facility in Homestead, Florida. The lease is for a term of ten years with
five consecutive three year options, exercisable at LPS's option (twenty-five
years including options). The terms of the lease call for monthly lease payments
of $7,500 in year one, $9,000 in year two and $15,000 for years thereafter. LPS
will commence monthly rental payments when it occupies the facility.
The peat moss bog at Torland is comprised of 4,700 acres. The bog is
leased from the Canadian government under five separate leases and the leases
are for a 15 year term at a total rent of $1,100 each. The current lease term
expires in 2008. The leases self-renew for another 15 year term.
Overall Cash Flow Situation
A total of approximately $300,000 will be needed to complete our
planned new plant facility by February, 2002. The total cost of the plant and
improvement is estimated at $1,700,000 of which we have already funded
$1,400,000. In addition, $921,000 is due in payments relating to the Torland
acquisition over the next five years of which $200,000 is past due. We are
currently operating in a deficit cash position and do not generate positive cash
flow from our current operations. There can be no assurance that we will be
successful in finding an investor or group of investors.
In connection with our acquisition of Torland we are obligated to pay,
as renegotiated on January 18, 2001 (in addition to the $400,000 we paid at the
time of closing) an additional $921,000 as follows: $50,000 on February 28,
2001, $50,000 on July 31, 2001, $100,000 on December 31, 2001 and the balance of
$721,000 in sixty equal installments of principal and interest beginning
February 1, 2002. This obligation is payable with interest at 8% per annum. We
have not made our February, July and December payments or any of our monthly
installment payments. We have not been provided with notice of default under
this obligation. No assurance, however, can be given that we will be able to
raise the additional capital necessary to make the required payments. We are
presently trying to raise the capital needed to fund the balance of the
transaction. There can be no assurance that we will be successful with this or
any other activity to raise additional capital.
On October 24, 2000 we entered into a total of $643,283 of convertible
promissory notes, with interest at 10%, interest and principal due in full on
March 31,2001. The notes were issued in exchange for notes outstanding in
similar amounts. The entire unpaid principal balance and all unpaid accrued
interest owing, together with all other charges, if any, on these notes, were
payable by either (i) cash or (ii) conversion into out common stock at a
conversion price of $.25 per share.
On March 31, 2001, in consideration for delays experienced in the
opening of the Homestead plant, $407,283 of the above convertible notes were
modified as follows:
1. The notes shall be converted at any time prior to April 30, 2001, at
such date as the note holder shall determine by written notice to
the Company,
2. The price of conversion shall be the market price
3. The convertible notes shall include a detachable warrant to purchase
2,000,000 shares of common stock at $.10 per share for a period of
one year
4. The Company shall file a registration statement with regard to the
underlying shares.
8
On April 30, 2001 $407,283 of notes together with $21,029 of accrued
interest were converted into 5,366,405 shares of common stock.
On the same date, in consideration for delays experienced in the
opening of the Homestead plant, $235,000 of the convertible notes were modified
as follows: 1. The notes shall be converted at any time prior to April 30, 2001,
at such date as the note holder shall determine by written notice to the
Company, 2. The price of conversion shall be the market price 3. The Company
shall file a registration statement with regard to the underlying.
On April 30, 2001 $235,000 of notes together with $12,104 accrued
interest were converted into 3,088,801 shares of common stock.
On September 26, 2000, we entered into a credit facility with our new
President to provide for an investment of up to $1,500,000 to finance our
operations and growth. All amounts advanced are to be added to an existing
promissory note to the President dated May 28, 1998, which note bears interest
at 10% per annum. All amounts advanced under the credit facility and the note
shall be secured by a first lien on our new plant to be installed in Homestead,
Florida. The holder of the note has the option to convert all or part of the
principal and accrued interest due there under the note into our Series C
preferred stock. As of April 8, 2002 the holder had not made any election to
convert any of the outstanding balance due. The approximate outstanding balance
including amounts advanced under the future provisions of the note, of the loan
at March 31, 2002 is $2,000,000.
Legal proceedings
On March 26, 2002, the Company and its President were served with a
lawsuit filed in the Circuit Court of Palm Beach County Florida styled
Gittelstob vs American Group, Inc. and Robert I. Claire seeking the enforcement
of a guaranty of an obligation owed to a third party by Eric W. Deckinger the
president of LPS Acquisition Corp. and a member of its Board of Directors in the
amount of $352,500. The Company believes the filing to be premature and will
defend the lawsuit vigorously. The Company gives no assurance that it can be
victorious. A judgment against the Company could have a material adverse effect
on the Company.
In March 2002, the Company received notice of acceleration and default
of payment of four (4) operating equipment leases for equipment utilized at its
Boynton Beach, Florida plant. The equipment utilized is essential to the
production of soil-mixes distributed by the Company. The loss of any such
equipment would impair the Company's ability to meet its customers demands which
could have a material adverse effect on the Company.
On March 4, 2002, the Company received written notice that the bank
with which it has an operating line of credit was closed by the Federal Deposit
Insurance Corporation as Receiver. Under powers afforded Receivers under Federal
banking laws, the Receiver disaffirmed its contractual obligations under the
line of credit. While the Company is in the process of determining whether it
has a claim against the Receiver, the Company's inability to open a line of
credit with another financial institution could have a material adverse effect
on the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statement and Information
We are including the following cautionary statement for any
forward-looking statements made by, or on our behalf. Forward-looking statements
include statements concerning plans, objectives, goals, strategies,
expectations, future events or performance and underlying assumptions and other
statements, which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and, accordingly,
involve risks and uncertainties, which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. Our
expectations, beliefs and projections are expressed in good faith and are
believed by us to have a reasonable basis, including without limitations,
management's examination of historical operating trends, data contained in our
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in our view, could
cause actual results to differ materially from those discussed in the
forward-looking statements: our ability to effectuate and successfully operate
acquisitions and our ability to obtain acceptable forms and amounts of financing
to fund planned acquisitions and the new facility in Homestead.
Introduction
In Note 2 to the audited financial statements, our independent auditors
have reported that we have suffered recurring losses from operations that raise
substantial doubt about our ability to continue as a going concern. Our
continued existence is dependent upon our ability to resolve our liquidity
problems, principally by obtaining equity capital and commencing profitable
operations. While pursuing equity capital, we must continue to operate on cash
flow generated from financing activity. We experienced a loss available to
common stockholders of $4,670,647 for the year ended May 31, 2001 and have a
negative working capital of $2,786,556. We experiencd a loss available to common
stockholders of $1,341,927 for the six months ended November 30, 2001 and have a
negative working capital of $4,391,954 at November 30, 2001. These factors raise
substantial doubt about our ability to continue as a going concern. The opinion
expressed by our auditors clearly highlights our negative financial condition,
which condition evidences the high degree of risk associated with making an
investment in our Company. Our financial condition also makes finding suitable
investors difficult due to the risk involved.
We will need approximately $1,100,000 in order to remain viable as a
going concern for the current fiscal year. If we are unable to obtain these
funds we will not be able to continue as a going concern and you will lose your
entire investment in our stock.
Our plans in regard to this matter are to raise capital, become
profitable by integrating operations with Torland and increase efficiency by
relocating our operations into a new state of the art soil blending facility in
Homestead, Florida, close to the major portion of our customer base.
Additionally, we plan, along with the integration with Torland, to begin
utilizing this blending plant which we believe will substantially decrease our
operating costs. We believe these efforts will generate positive cash flow.
9
Year Ended May 31, 2001 compared to May 31, 2000
Revenues for the year ended May 31, 2001 were $3,070,376 compared to
$2,497,330 for the year ended May 31, 2000. The increase in sales can be
attributed to the inclusion of three full months of sales for Torland which was
acquired on August 15, 1999, and an increase in sales at LPS. Gross profit
margins as a percentage of revenues for the year ended May 31, 2001 and 2000
were (3.3)% and (0.5)%, respectively. The decrease in the gross profit margin
can be attributed to increased labor and material costs as a percentage of
sales. Our current facility is not adequate to handle the volume of business
currently in place. Due to our poor cash flow during the years ended May 31,
2001 and 2000, we were unable to avail ourselves of any purchase discounts that
would have otherwise been available had we been able to make commitments to
purchase products in greater quantities. We estimate that the price of material
is 20% higher than the price that could be obtained if we were able to take
advantage of volume price discounts.
Operating expenses for the year ended May 31, 2001 and 2000 were
$1,817,943 and $1,679,040, respectively. For the year ended May 31, 2001 and
2000, operating expenses included a $87,320 and $319,617, respectively,
provision against certain officer loans. For the year ended May 31, 2001
expenses included a provision to settle a potential claim for $320,000.
The net loss available to common stockholder of $4,670,647 for the year
ended May 31, 2001 consisted of non-cash charges of $2,916,705 (which included
depreciation and amortization costs of $305,638, an impairment charge to
goodwill of $1,051,562, preferred stock dividends and other charges of $783,343
and stock issued for debt conversion and release of an unasserted claim of
$776,162) and other operating losses of $1,753,942. The net loss of $1,975,968
for the year ended May 31, 2000 consisted of non-cash losses of $606,720 (which
included depreciation and amortization costs of $287,049 and a provision of
approximately $319,671 charged to compensation for certain officer loans) and
operating losses of $1,369,248.
At May 31, 2001, we had cash and cash equivalents of $1,471 which was a
decrease of $8,261 compared to the cash held at May 31, 2000. During the year
ended May 31, 2001, we used net cash for operations of $1,236,713, which was
primarily due to our operating loss. This was funded by additional borrowings.
In addition, we had a working capital deficit of $2,786,556 at May 31, 2001.
Six months Ended November 30, 2001 compared to for the six months ended November
30, 2000
Revenues for the six months ended November 30, 2001 were $1,479,591
compared to $1,842,537 for the six months ended November 30, 2000. The decrease
in sales can be attributed to a decrease of sales at LPS. Gross loss margins as
a percentage of revenues for the six months ended November 30, 2001 and 2000
were (4.8%) and (6.4%), respectively. The Company's current facility is not
adequate to handle the volume of business currently in place. Due to the
Company's poor cash flow during the six months ended November 30, 2001, the
Company was unable to avail itself of any purchasing discounts that would have
otherwise been available had the Company been able to make commitments to
purchase products at greater amounts. The Company estimates that the price of
material is 20% higher than the price that could be obtained if the Company were
able to take advantage of volume price concessions. The Company will relocate to
Homestead, FL where it is expected to reverse the negative gross profit trend.
Operating expenses for the six months ended November 30, 2001 and 2000 were
$1,016,299 and $914,127, respectively, consisting of selling, general and
administrative expenses. The net losses available to common stockholders for the
six months ended November 30, 2001 and 2000 were $1,341,927 and $2,269,409,
respectively. The decrease is due to the payment-in-kind of preferred stock
valued at the stated value of $800 per share which amounted to approximately
$1,218,472 and the issuance of 300,000 share of the Company's common stock,
valued at $56,550 (market value), in exchange for the retirement of certain
warrants issued in connection with convertible debt and the extension for
payment of this debt during the six months ended November 30, 2000.
Three months Ended November 30, 2001 compared to for the three months ended
November 30, 2000
Revenues for the three months ended November 30, 2001 were $663,153
compared to $979,686 for the three months ended November 30, 2000. The decrease
in sales can be attributed to a decrease of sales at LPS. Gross loss margins as
a percentage of revenues for the three months ended November 30, 2001 and 2000
were (3.1%) and (7.4%), respectively. The Company's current facility is not
adequate to handle the volume of business currently in place. Due to the
Company's poor cash flow during the three months ended November 30, 2001, the
Company was unable to avail itself of any purchasing discounts that would have
otherwise been available had the Company been able to make commitments to
purchase products at greater amounts. The Company estimates that the price of
material is 20% higher than the price that could be obtained if the Company were
able to take advantage of volume price concessions. The Company will relocate to
Homestead, FL where it is expected to reverse the negative gross profit trend.
Operating expenses for the three months ended November 30, 2001 and 2000 were
$495,688 and $524,724, respectively, consisting of selling, general and
administrative expenses. The net losses available to common stockholders for the
three months ended November 30, 2001 and 2000 were $647,379 and $1,087,028,
respectively. The decrease is due to the payment-in-kind of preferred stock
valued at the stated value of $800 per share which amounted to approximately
$618,128 and the issuance of 300,000 share of the Company's common stock, valued
at $56,550 (market value), in exchange for the retirement of certain warrants
issued in connection with convertible debt and the extension for payment of this
debt during the three months ended November 30, 2000.
At November 30, 2001, the Company had cash and cash equivalents of
$119,097, which was an increase of $117,626 compared to the cash held at May 31,
2001. During the six months ended November 30, 2001, the Company used net cash
for operations of $525,087, which was primarily due to the Company's operating
loss. This was funded by additional borrowings. In addition, the Company had a
working capital deficit of $4,391,954 at November 30, 2001.
Qualitative Discussion
We believe that our present operations will require us to obtain
additional capital during the next twelve months. One of our objectives for the
next twelve months is to increase our capital base so that we can increase the
scope of our operations with the completion of our new soil blending facility,
and to acquire additional soil blending capacity. It is unknown at this time
whether we will be successful in raising capital at reasonable terms. We have
been unable to meet our cash requirements for our current operations through
internal cash flow in the prior twelve months. These requirements were only met
by the additional sale of stock or borrowings. We believe that the cash
requirements for our current operations during the next twelve months, excluding
capital requirements for the construction of our new soil blending facility, can
be met through LPS's internal cash flow from operations. We believe that the
operations from the new facility will dramatically change our cash flow so as to
have our cash flow needs provided by operations. Until such time we will need to
generate loans and raise capital in order to continue to operate. Our other cash
requirements would be in connection with additional capital for our growth, if
any, in an amount not yet determined. In addition, Torland will continue to sell
its spagum peat moss product to other customers. We must pay $921,283 in
connection with the acquisition of Torland.
Until such time as our operating results improve sufficiently, we must
obtain outside financing to fund the expansion of our business and to meet our
obligations. Any additional debt or equity financing may be dilutive to the
interests of our stockholders. Such outside financing must be provided from the
sale of equity securities, borrowing, or other sources of third party financing
in order for us to expand our operations. Further, the sale of equity securities
could dilute our existing stockholders' interest, and borrowings from third
parties could result in our assets being pledged as collateral and loan terms
which would increase our debt service requirements and could restrict our
operations. There is no assurance that capital will be available from any of
these sources, or, if available, at terms and conditions acceptable to us.
10
MANAGEMENT
The following table sets forth our directors and executive officers.
Name and Address Age Position
---------------- --- --------
Robert I Claire 42 Director, President
John Stewart 57 Director, Treasurer
and Vice-president
Eric W. Deckinger 54 Director, President
LPS Acquisition Corp.
Louis Zannette 41 Director, President
Torland
Timothy S. Hart 43 Director
Jerry Jennings 61 Director
Directors are elected annually and hold office until the next annual
meeting of our stockholders or until their successors are elected and qualified.
Officers serve at the discretion of the Board of Directors. There is no family
relationship between or among any of our directors and executive officers. We do
not pay any cash compensation for attendance at directors meetings or
participation in directors functions.
Biographies
Robert I. Claire,J.D., C.P.A. has been employed by us since October 3,
2000 when he assumed the role of our president. Mr. Claire also became our
director at that time. Mr. Claire, 42, is a sole practitioner and former partner
at the law firm of Kind, Selman & Claire of Boca Raton, Florida. He previously
served as counsel to American Group, Inc. and its subsidiaries. Specializing in
real estate, corporate and business law, Mr. Claire moved into a position
previously held by Mr. Eric Deckinger. Mr. Claire has been an attorney since
1984.
Eric W. Deckinger is the president of LPS and a director of the
Company, positions he has held since May 1998. Mr. Deckinger was the general
manager of LPS and President of Kedac from 1994 until 1997.
Mr. Deckinger was the principal stockholder, director and executive
officer of Kedac. In December 1994, Kedac, purchased the assets of Can-Flo,
which at that time owned Lantana Peat & Soil. Shortly thereafter, a creditor of
Can-Flo filed suit against Kedac claiming a fraudulent transfer of the assets
from Can-Flo to Kedac. In January 1997, Kedac filed under Chapter 11 of the
Bankruptcy Code in order to stop the litigation. In August, 1997, the court
approved a liquidating Chapter 11 plan for Kedac, whereby LPS purchased the
assets of Kedac and assumed certain liabilities of Kedac. One of the assets
acquired by LPS was the name Lantana Peat and Soil and LPS has continued to
operate the Company under that name. The lawsuit was discharged in Bankruptcy in
August 1997. We subsequently acquired LPS in May, 1998.
John Stewart was the general manager of Kedac, the predecessor of LPS,
from 1994 (which was acquired by LPS in 1997) until LPS was acquired by the
Company in 1998. He has been a director of the Company since May, 1998. Prior to
1994, Mr. Stewart was employed on other capacities by Kedac, Inc., the
predecessor of LPS.
On October 6, 2000 Timothy S. Hart, C.P.A. became director of the
Company. Mr. Hart, 43, is the sole practitioner of TSH Accounting LC of
Plantation, Florida, a position he has held since 1997. He previously served as
principal financial officer of Weitzer Homebuilders, a real estate developer
located in Miami Lakes, Florida from 1994 to 1997.
11
On November 7, 2000 Gerard M. Jennings became director of the Company.
Mr. Jennings, 61, is a president and CEO of Emerson Gerard, an investor
relations/public relations firm located in Boynton Beach, Florida. Mr. Jennings
has held this position since 1994.
On October 6, 2000 Louis Zanette became director of the Company. Mr.
Zanette, 42, is President of Torland, a wholly-owned subsidiary of the Company.
Mr. Zanette has held this position since 1994.
Item 6. Executive Compensation.
The following table reflects compensation for services to the Company
for the fiscal years ended May 31, 2001 and 2000 of the chief executive officer.
No other executive officer of the Company received compensation, which exceeded
$100,000 during 2001 and 2000.
- ----------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ----------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
- ----------------------------------------------------------------------------------------------------------------
OTHER ALL
NAME AND ANNUAL RESTRICTED SECURITIES OTHER
PRINCIPAL COMPEN- STOCK UNDERLYING LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARDS OPTIONS/SARS PAYOUTS SATION
- ----------------------------------------------------------------------------------------------------------------
Eric W. Deckinger 2001 $93,600 -- 10,050 (1) -- -- -- --
President, LPS
- ----------------------------------------------------------------------------------------------------------------
2000 $93,600 -- 10,050 (1) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
1999 $93,600 -- 10,050 (1) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
(1) Car Allowance
The Company does not pay its directors any compensation for serving in
such capacity.
Employment Agreements
We do not have an employment contract with any of our employees. We
anticipate entering into employment agreement with Mr. Claire and Mr. Deckinger
and a chief financial officer in the near future. The material terms of the
anticipated agreements have not been determined.
Employee Stock Option Plan
We believe that equity ownership is an important factor in our ability
to attract and retain skilled personnel, and our board of directors may adopt an
employee stock option program. The purpose of the stock option program will be
to further our interest, our subsidiaries and our stockholders by providing
incentives in the form of stock options to key employees and directors who
contribute materially to the success and profitability of the Company. The
grants will recognize and reward outstanding individual performances and
contributions and will give such persons a proprietary interest in us, thus
enhancing their personal interest in our continued success and progress. This
program will also assist us and our subsidiaries in attracting and retaining key
employees and directors.
12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 3,
2002, with respect to the beneficial ownership of shares of common stock by (i)
each person who is known to us to beneficially own more than 5% of the
outstanding shares of common stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown.
Shares Beneficially
Name and address of Beneficial Owner owned Number Percent
Robert Kohn
5295 Town Center Road #301
Boca Raton, FL 33486 22,881,935 (1) 70.79%
Jessica Kohn
5295 Town Center Road #301
Boca Raton, FL 33486 1,853,281 19.63%
Jeffrey Kohn
5295 Town Center Road #301
Boca Raton, FL 33486 926,640 9.82%
Evergreen Investment Group LP
4050 NE 25th Avenue
Lighthouse Point, FL 33064 12,765,576 (2) 57.58%
MJ Shulman, Inc.
7777 Glades Road #213
Boca Raton, FL 33434 7,377,405 (3) 64.48%
Craig Isrow
7777 Glades Road #213
Boca Raton, FL 33434 13,729,161 (4) 59.25%
Franklyn Weichselbaum
7777 Glades Road #213
Boca Raton, FL 33434 13,729,161 (4) 59.25%
Herb Gimelstob
5295 Town Center Road #301
Boca Raton, FL 33486 4,576,387 (5) 32.65%
Louis Zanette
5295 Town Center Road #301
Boca Raton, FL 33486 35,000 0.37%
TSH Accounting LC
5295 Town Center Road #301
Boca Raton, FL 33486 1,500 (6) 0.02%
Eric Deckinger
5295 Town Center Road #301
Boca Raton, FL 33486 332,550 3.52%
Robert I Claire
5295 Town Center Road #301
Boca Raton, FL 33486 19,700 0.21%
All officers and directors as a group 388,750 4.12%
78,228,296 (7) 68.38%
- ----------
(1) Includes 22,881,935 shares which would be issuable upon the conversion of
preferred stock.
(2) Includes 12,728,076 shares which would be issuable upon the conversion of
preferred stock. The shares of Evergreen Investment Group LP are voted by
Roy Bresky
(3) Includes 2,000,000 shares which would be issuable upon the exercise of
warrants. The shares of MJ Shulman, Inc. are voted by Manny Shulman
(4) Includes 13,729,161 shares which would be issuable upon the conversion of
preferred stock.
(5) Includes 4,576,387 shares which would be issuable upon the conversion of
preferred stock.
(6) TSH Accounting LC is owned and operated by Timothy S. Hart a director of
the Company
(7) Includes (i) 2,000,000 shares which would be issueable upon the exercise of
warrants and (ii) 102,968,707 shares which would be issuable upon the
conversion of preferred stock.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The following summary description of material provisions of our
Articles of Incorporation and Bylaws is qualified in its entirety by reference
to the Articles of Incorporation ("Articles") and the Bylaws of the Company,
copies of which are included as exhibits to the Form SB-2 which we have filed
with respect to the Securities being offered. See, "Additional Information".
13
The Company's Articles of Incorporation, Article 10, provides that no
Director or Officer of the Company shall be personally liable to the corporation
of any of its stockholders for damages for breach of fiduciary duty as a
director or officer involving any act or omission of any such director or
officer provided, however, that the foregoing provision shall not eliminate or
limit the liability of a director of officer for acts or omission which involve
intentional misconduct, fraud or a knowing violation of law, or the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any
repeal or modification of this Article of the Stockholders of the Company shall
be prospective only, and shall not adversely affect any limitation on the
personal liability of a director or officer of the Company for acts or omission
prior to such repeal or modification.
The Company's Bylaws, Article IX, provides:
a.) Any person made a party to any action, suit or proceeding, by
reason of the fact that he, his testator or interstate
representative is or was a director, officer or employee of the
Company or any company in which he served as such at the request
of the Company shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense of
such action, suit or proceedings, or in connection with any
appeal therein, except in relation to matters as to which it
shall be adjudged in such action suit or proceeding or in
connection with any appeal therein that such officer director or
employee is liable for the gross negligence of misconduct in the
performance of his duties.
b.) The foregoing right of indemnification shall not be deemed
exclusive of any other rights to which any officer or director or
employee may be entitled apart from the provisions of the section
c.) The amount of indemnity to which any officer or any director may
be entitled shall be fixed by the Board of Directors, except that
in any case in which there is no disinterested majority of the
Board available, the amount shall be fixed by arbitration
pursuant of the then existing rules of the American Arbitration
Association.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our current board of directors has adopted a policy that our affairs
will be conducted in all respects by standards applicable to publicly-held
corporations and that we will not enter into any transactions and/or loans
between ourselves and our officers, directors and 5% stockholders, unless the
terms are no less favorable than could be obtained from independent third
parties and unless such transactions are approved by a majority of our
independent disinterested directors.
In May, 1999, we issued 862,158 shares of non-voting Series A preferred
stock to MJ Shulman, Inc. in exchange for $862,158 of our debt held by MJ
Shulman, Inc. We believe that MJ Shulman, Inc. had knowledge and experience in
financial and business matters which allowed it to evaluate the merits and risk
of the purchase of our securities. We believe that MJ Shulman, Inc. was
knowledgeable about our operations and financial condition. The terms and
conditions of this financing were determined by the parties through arms length
negotiations.
On June 13, 2000 we designated 5,900 shares of Series B convertible
preferred stock. The preferred stock had a stated value of $800 per share. The
holders of the preferred stock were entitled to receive a dividend at the rate
of 5% per annum payable semi-annually, in arrears. The dividend could be paid in
cash, or by the in-kind payment of common stock. The preferred stock could be
converted into a quantity of shares of our common stock that, after conversion,
equal 59% of the then outstanding common stock on the day immediately prior to
the conversion and each share of preferred stock was convertible into its pro
rata quantity of our common stock. The calculation was made, as if, the total
original issue quantity of shares of the preferred stock was being converted in
each occurrence of conversion.
Concurrent with the designation, we issued 2,400 shares of Series B
preferred stock to M.J.Shulman, Inc. in exchange for debt outstanding at May 31,
2000 in the original amount of $355,000 and unpaid interest thereon and the
quantity of 862,158 shares of our series A preferred stock.
Concurrent with the designation we issued 937 shares of Series B
preferred stock to Jessica Kohn in exchange for debt in the original face amount
of $750,000 outstanding at May 31, 2000 and unpaid interest thereon. These
shares were later transferred to Robert Kohn in a private transaction.
On July 9, 2000 we entered into an agreement to issue up to an
additional 1,564 shares of series B preferred stock in exchange for total
consideration of up to $1,251,200. Jeffrey and Keith Kohn (sons of Robert Kohn)
tendered and delivered to the Company marketable securities as in-kind
consideration of the purchase price of the Series B preferred stock. We issued
Series B preferred stock to the subscribers on a pro rata basis as we received
proceeds from the liquidation of the marketable securities. In the event the
proceeds exceeded $1,251,200, the excess would have been deemed an unsecured
demand loan from the subscriber, bearing interest at 9%. We issued 740 shares of
Series B preferred stock for total consideration of $305,000 pursuant to this
agreement. These shares were later transferred to Robert Kohn in a private
transaction.
14
On October 26, 2000, we designated 9,000 shares of convertible
preferred stock as Series C which has a stated value of $800 per share. The
holders of the Series C preferred stock are entitled to receive dividends at the
rate of 5% per annum payable semi-annually, in arrears. The dividends may be
paid in cash, or by the in-kind payment of common stock. Payment of dividends in
cash can only be paid if we have earnings. The preferred stock may be converted
into a quantity of shares of our then outstanding common stock that, after
conversion, equal 90% of the then outstanding common stock on the day
immediately prior to the conversion, and each share of preferred stock is
convertible into its pro rata quantity of our common stock. The calculation is
made based as if the total original issue quantity of shares of the preferred
stock is being converted in each occurrence of conversion.
Concurrent with the designation of the Series C preferred stock, we
issued 2,400 shares of the Series C preferred stock to MJ Shulman, Inc. in
exchange for 2,400 shared of the Series B preferred stock; 2,000 shares of the
Series C preferred stock to Robert Kohn in exchange for 1,677 shared of the
Series B preferred stock, and concurrent with the designation of the Series C
preferred stock, we issued 800 shares of the Series C preferred stock to
Evergreen Investment Group, LP, a limited partnership, in exchange for $600,000
of convertible debt.
On October 24, 2000 we entered into a total of $643,283 of convertible
promissory notes, with interest at 10%, interest and principal due in full on
March 31, 2001 with MJ Shulman, Inc. ($407,283) and Robert Kohn ($235,000). The
notes were issued in exchange for notes outstanding in similar amounts. The
entire unpaid principal balance and all unpaid accrued interest owing, together
with all other charges, if any, on these notes, were payable by either (i) cash
or (ii) conversion into our common stock at a conversion price of $.25 per
share.
On March 31, 2001, in consideration for delays experienced in the
opening of the Homestead plant, $407,283 of the above convertible notes were
modified as follows:
1. The notes shall be converted at any time prior to April 30, 2001, at
such date as the note holder shall determine by written notice to
the Company,
2. The price of conversion shall be the market price
3. The convertible notes shall include a detachable warrant to purchase
2,000,000 shares of common stock at $.10 per share for a period of
one year
4. The Company shall file a registration statement with regard to the
underlying shares.
On April 30, 2001 $407,283 of notes together with $21,029 of accrued
interest held by MJ Shulman were converted into 5,366,405 shares of common
stock.
On the same date, in consideration for delays experienced in the
opening of the Homestead plant, $235,000 of the convertible notes held by Robert
Kohn were modified as follows: 1. The notes shall be converted at any time prior
to April 30, 2001, at such date as the note holder shall determine by written
notice to the Company, 2. The price of conversion shall be the market price 3.
The Company shall file a registration statement with regard to the underlying.
On April 30, 2001 $235,000 of notes together with $12,104 accrued
interest were converted into 3,088,801 shares of common stock.
On September 26, 2000, we entered into a credit facility with Robert I.
Claire, our President to provide for an investment of up to $1,500,000 to
finance our operations and growth. All amounts advanced are to be added to an
existing promissory note to the President dated May 28, 1998, which note bears
interest at 10% per annum. All amounts advanced under the credit facility and
the note shall be secured by a first lien on our new plant equipment to be
installed in Homestead, Florida. All or part of the total monies advanced may be
classified as a bridge loan which shall be repayable at such time permanent
financing is obtained with respect to the Plant. The holder of the note has the
option to convert all or part of the principal and accrued interest due under
the note into our Series C preferred stock. As of April 8, 2002 the holder had
not made any election to convert any of the outstanding balance due. The
approximate outstanding balance including amounts advanced under the future
provisions of the note, on this loan at April 8, 2002 is approximately
$2,000,000.
15
During the year ended May 31, 2001 the Company entered into an
agreement with an accounting services corporation owned by a Director in order
to obtain accounting and consulting services for the Company and its wholly
owned subsidiaries. The agreement calls for payments of $11,700 per month.
During the years ended May 31, 2001 and 2000 payments to this corporation
totaled $113,900 and $93,740, respectively.
PLAN OF DISTRIBUTION/SELLING SECURITY HOLDERS
Plan of distribution
The shares offered hereby may be sold from time to time directly by the
selling security holders. Alternatively, these selling security holders may from
time to time offer the shares through underwriters, dealers or agents. The
distribution of the shares by the selling security holders may be effected in
one or more transactions that may take place on the over-the-counter market in
the event a trading market is established on the over-the-counter market,
including:
o ordinary broker's transactions,
o privately-negotiated transactions or
o through sales to one or more broker-dealers for resale, at market
prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Customary or specifically negotiated brokerage fees or commissions may
be paid by the selling security holders in connection with such sales of shares.
The shares offered by the selling security holders may be sold by one or more of
the following methods, without limitations:
o a block trade in which a broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
o face-to-face transactions between sellers and purchasers without a
broker-dealer.
In effecting sales, brokers or dealers engaged by the selling security
holders may arrange for other brokers or dealers to participate. The selling
security holders and intermediaries through whom such shares are sold may be
deemed "underwriters" within the meaning of the Securities Act of 1933 with
respect to the shares offered, and any profits realized or commissions received
may be deemed underwriting compensation.
At the time a particular offer of shares is made by or on behalf of a
selling security holder, to the extent required, a prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for shares
purchased from the selling security holder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
16
The following security holders may offer shares of common stock
pursuant to the Prospectus. Except as indicated below, none of the selling
security holders having any affiliation with us other than as security holders:
NUMBER NUMBER OF SHARES NUMBER OF WARRANTS NUMBER OF COMMON SHARES
OF SHARES AND WHICH MAY BE TO BE OWNED BENEFICIALLY OWNED
WARRANTS OFFERED PURSUANT TO AFTER THE AFTER THE
NAME OWNED THIS PROSPECTUS OFFERING OFFERING*
- ---- ------------- ------------------- ------------------ ------------------------
MJ Shulman, Inc. 7,366,405(*) 7,366,405 -- --
Jessica Kohn 1,853,281 1,853,281 -- --
Jeffrey Kohn 926,640 926,640 -- --
Mark Quinn 154,440 154,440 -- --
Ben Kafka 154,440 154,440 -- --
Glenn A. Bonnema 96,888 96,888 -- --
Anthony S. Moreno 96,888 96,888 -- --
Paul R. Mathis 48,444 48,444 -- --
Leo and Shirly Hejmanowski 144,773 144,773 -- --
Catherine M. Hejmanowski 217,999 217,999 -- --
*Assuming all Shares are sold in this offering.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, $0.001 par value and 10,000,000 shares of preferred stock, $.001 par
value. As of April 8, 2002, we had issued and outstanding 9,440,954 shares
of common stock and 5,913 shares of Series C preferred stock.
The board of directors has the authority, without the action of the
existing common shareholders, to issue all or a portion of the authorized but
unissued shares of common stock. Such shares may be issued to management,
promoters, or their affiliates or associates, for compensation for services
rendered to us as the Board of Directors may, from time to time deem
appropriate. A large issuance of common stock would most likely have a material
adverse effect on prevailing market prices, impair our ability to raise capital
through the sale of equity securities and increase dramatically the number of
common shares issuable upon conversion of the Series C convertible preferred
stock.
Common Stock
The holders of common stock are entitled to one vote per share with
respect to all matters required by law to be submitted to our stockholders. The
holders of common stock have the sole right to vote, except as otherwise
provided by law or by the Articles of Incorporation. The common stock does not
have any cumulative voting, preemptive, subscription or conversion rights. The
election of directors and other general stockholder action requires the
affirmative vote of a majority of shares represented at a meeting in which a
quorum is represented.
The holders of common stock are entitled to receive dividends when, as
and if declared by the board of directors out of funds legally available
therefor only after accrued dividends are paid to holders of preferred stock and
other senior securities. In the event of liquidation, dissolution or winding up
of our affairs, the holders of common stock are entitled to share ratably in all
assets remaining available for distribution to them subject to the rights of
holders of preferred stock and other senior securities.
As part of an agreement to modify certain convertible notes we issued
2,000,000 detachable warrants to purchase common stock at $.10 per share for a
period of one year.
Preferred Stock
Series A
There have been designated 1,000,000 shares of Series A preferred
stock. The preferred stock has a stated value of $1.00 per share. The holders of
preferred stock are entitled to receive dividends at the rate of 5% per annum
payable semi-annually, in arrears. At our sole discretion, the dividends may be
paid in cash, or by the in-kind payment of common stock. A cash dividend shall
only be made out of funds legally available therefor. If dividends are paid in
common stock, the value of the in-kind common stock shall be the current market
price. In the event we fix a record date for the determination of holders of
common stock entitled to receive a dividend or other distribution with respect
to the common stock payable in (i) our securities other than shares of common
stock or (ii) assets, then and in each such event the holders of preferred stock
shall receive, at the same time such distribution is made with respect to common
stock, the number of securities or such other assets which they would have
received had their preferred stock been converted into common stock immediately
prior to the record date for determining holders of common stock entitled to
receive such distribution.
17
The preferred stock is not convertible into any of our securities. The
preferred stock shall have no voting rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of shares of preferred stock then outstanding shall be entitled to
receive out of assets of the Corporation available for distribution to
stockholders, before any distribution of assets is made to holders of any other
class of capital stock of the Corporation, an amount equal to $1.00 per share,
plus accumulated and unpaid dividends thereon to the date fixed for
distribution.
At or before May 31, 2004, if there is a transaction resulting in any
person or group acquiring beneficial or pecuniary ownership of 50% or more of
the common equity of the Company, then the Company, at its sole discretion, may
redeem any and/or all of the shares of Series A preferred stock as may be
outstanding, upon thirty days written notice to holders. In such event, the
redemption price for each share of Series A preferred stock shall be $3.00, plus
cash payment for accumulated and unpaid dividends thereon to the date fixed for
redemption. At any time after May 31, 2004, the Company, at its sole discretion,
may redeem any and/or all of the shares of Series A preferred stock as may be
outstanding, upon thirty days written notice to holders. The redemption price
for each share of Series A preferred stock shall be $1.40, plus cash payment for
accumulated and unpaid dividends thereon to the date fixed for redemption. We
had previously issued and outstanding 862,158 shares of Series A preferred
stock. This stock was subsequently retired and presently there are no shares of
Series A preferred stock outstanding.
Series B
On June 13, 2000, we designated 5,900 shares of convertible preferred stock as
series B which has a stated value of $800 per share. The holders of the Series B
preferred stock are entitled to receive dividends at the rate of 5% per annum
payable semi-annually, in arrears. The dividend may be paid in cash, or by the
in-kind payment of common stock. Payment of dividends in cash can only be paid
if we have earnings. The preferred stock may be converted into a quantity of
shares of our common stock that, after conversion, equal 59% of the then
outstanding common stock on the day immediately prior to the conversion, and
each share of preferred stock is convertible into its pro rata quantity of our
common stock. The calculation is made based as if the total original issue
quantity of shares of the preferred stock is being converted in each occurrence
of conversion. This Series B preferred stock was subsequently retired and
presently there are no shares of Series B preferred stock outstanding.
Series C
On October 26, 2000, we designated 9,000 shares of convertible preferred stock
as Series C which has a stated value of $800 per share. There are presently
5,913 shares outstanding. The holders of the Series C preferred stock are
entitled to receive dividends at the rate of 5% per annum payable semi-annually,
in arrears. The dividends may be paid in cash, or by the in-kind payment of
common stock. Payment of dividends in cash can only be paid if we have earnings.
Our preferred stock may be converted into a quantity of shares of our then
outstanding common stock that, after conversion, equal 90% of the then
outstanding common stock on the day immediately prior to the conversion, and
each share of preferred stock is convertible into its pro rata quantity of
common stock. The calculation is made based as if the total original issue
quantity of shares of the preferred stock is being converted in each occurrence
of conversion.
"The computation of the 67,644,720 shares of the common stock issuable upon
conversion of the 5912.50 shares of Series C preferred stock (which is currently
65.69% of the total 9,000 shares of Series C preferred stock that can be issued)
is computed by assuming the entire 9,000 shares of Series C preferred stock was
converted into common stock, which would result in 102,968,707 shares of common
stock. The current outstanding Series C preferred stock represents 65.69% of
the total available, thus 65.69% of 102,968,707 shares is 67,644,720 shares."
The following is a computation showing how the Series C preferred stock that is
currently outstanding is convertible into over 67 million shares of common
stock.:
Shares of Shares of
Preferred Stock Common Stock Percentage
--------------- ------------ ----------
Common stock outstanding prior to conversion 9,440,956
Common stock warrants outstanding prior to conversion 2,000,000
---------
Total common stock and shares issuable upon conversion
of common stock warrants 11,440,956 10%
Total preferred stock issuable whereby after conversion
will equal 90% of the then total outstanding common stock 9,000.00 102,968,707 90%
======== -----------
Then total outstanding common stock 114,409,663
===========
Total preferred stock outstanding 5,912.50 67,644,720
======== ===========
18
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for us
by Axelrod Smith & Kirshbaum, Houston, Texas. Robert D. Axelrod, Esquire owns
1500 shares our common stock.
EXPERTS
The financial statements appearing in this prospectus and registration
statement have been audited by Sweeney, Gates & Co. independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
in the registration statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are a reporting company and file reports on Forms 10-KSB, 10-QSB,
8-K and other reports with the Securities and Exchange Commission. We have filed
with the Securities and Exchange Commission a registration statement on Form
SB-2 under the Securities Act with respect to the securities being offered. This
prospectus, filed as a part of the registration statement, does not contain
certain information contained in or annexed as exhibits to the registration
statements. Reference is made to exhibits to the registration statement for the
complete text. For further information with respect to us and the securities
hereby offered, reference is made to the registration statement and to the
exhibits filed as part of it, which may be inspected and copied at the public
reference facilities of the commission in Washington D.C., and at the
Commission's regional offices at
o 500 West Madison Street, Chicago, IL 60604;
o and 5757 Wilshire Boulevard, Los Angeles, CA 90034;
o and copies of such material can be obtained from the Public Reference
Section of the Commission, 450 5th Street, N.W., Washington, D.C.
20549, at prescribed rates and are available on the World Wide Web at:
HTTP://WWW.SEC.GOV.
Information about the public reference room is available from the Commission by
calling 1-800-SEC-0330.
19
No dealer, salesman or other person is authorized to give any information or
make any representations not contained in this Prospectus with respect to the
offering made hereby. This Prospectus does not constitute an offer to sell any
of the securities offered hereby in any jurisdiction where, or to any person to
whom it is unlawful to make such an offer.
TABLE OF CONTENTS
Prospectus Summary.................................1
Risk Factors.......................................1
Market for the Shares..............................4
Dividend Policy....................................4
Business...........................................5
Management's Discussion and Analysis of Financial
Condition and Results of Operations .............9
Management........................................11
Executive Compensation............................12
Security Ownership of Certain Beneficial PROSPECTUS
Owners and Management...........................13
Indemnification...................................15
Certain Relationships and Related
Transactions.....................................15 April __, 2002
Plan of Distribution/Selling Security Holders.....16
Description of Securities.........................17
Legal Matters.....................................19
Experts...........................................19
Additional Information............................19
Financial Statements.............................F-1
20
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Changes to Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
American Group, Inc.
We have audited the accompanying consolidated balance sheet of American Group,
Inc. and subsidiaries as of May 31, 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended May 31, 2001 and 2000. 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 generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about 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 consolidated financial position of
American Group, Inc. as of May 31, 2001 and the results of its consolidated
operations and its consolidated cash flows for the years ended May 31, 2001 and
2000, 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 2 to the
consolidated financial statements, the Company has suffered losses from
operations and has a net working capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
August 23, 2001
F-1
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31,2001
ASSETS
Current assets:
Cash $ 1,471
Accounts receivable, less allowance for doubtful accounts
of $45,169 135,299
Inventory 49,254
-----------
Total current assets 186,024
Property, plant and equipment, net of accumulated
depreciation of $557,072 2,772,404
Other assets:
Equipment deposit 1,220,000
Goodwill, net 640,000
Other 11,309
-----------
$ 4,829,737
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,838,800
Current portion of capital lease obligation payable 22,940
Accrued interest payable 205,117
Accounts payable and accrued expenses 905,723
-----------
Total current liabilities 2,972,580
-----------
Long term liabilities:
Long-term debt less current portion 960,236
Long-term capital lease obligation less current portion 20,257
-----------
980,493
Stockholders' equity:
Preferred stock, $.001 par value, 9,991,000 shares authorized;
no shares issued and outstanding --
Preferred stock, Series C, $.001 par value, 9,000 shares authorized;
5,913 issued and outstanding 6
Common stock, $.001 par value, 50,000,000 shares authorized,
9,440,956 shares issued and outstanding 9,441
Additional paid-in capital 8,532,502
Comprehensive income (56,011)
Accumulated deficit (7,609,274)
-----------
Total stockholders' equity 876,664
-----------
$ 4,829,737
===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2001 AND 2000
For the years ended
May 31,
2001 2000
---- ----
Revenue $ 3,070,376 $ 2,497,330
Cost of sales 3,170,628 2,509,230
----------- -----------
Gross loss (100,252) (11,900)
Selling, general and administrative 1,817,943 1,679,040
----------- -----------
Operating loss (1,918,195) (1,690,940)
----------- -----------
Other income (expenses):
Interest expense (518,412) (286,662)
Impairment of goodwill (1,051,562) --
Interest income 792 1,634
----------- -----------
(1,569,182) (285,028)
Loss before extrordinary item (3,487,377) (1,975,968)
Extraordinary item (399,927) --
----------- -----------
Net loss (3,887,304) (1,975,968)
Preferred stock dividend and other charges (783,343) --
----------- -----------
Net loss available to common stockholders $(4,670,647) $(1,975,968)
=========== ===========
Earnings per share
Loss before extraordinary item $ (2.05) $ (2.07)
Extraordinary item ( .23) --
----------- -----------
Net loss (2.28) (2.07)
Preferred stock dividend and other charges ( .46) --
----------- -----------
Net loss available to common stockholders,
basic and diluted $ (2.74) $ (2.07)
=========== ===========
Weighted average shares outstanding 1,702,746 953,339
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES TO STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 2000 AND 2001
Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, June 1, 1999 862,158 $ 862 -- $ -- -- $ --
Issuance of convertible debt with
detachable warrants -- -- -- -- -- --
Exercise of warrants -- -- -- -- -- --
Stock issued to purchase of Torland -- -- -- -- -- --
Other comprehensive gain-
foreign currency translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- ---------- ----------- ----------- ----------
Balance, May 31, 2000 862,158 862 -- -- -- --
Issuance of common stock for inducement
to extend convertible debt -- -- -- -- -- --
Retire Series A preferred stock (862,158) (862) -- -- -- --
Issuance of Series B preferred stock -- -- 4,077 4 -- --
Retire Series B preferred stock -- -- (4,077) (4) -- --
Issuance of Series C preferred stock -- -- -- -- 5,913 6
Preferred stock dividend -- -- -- -- -- --
Other preferred stock charges -- -- -- -- -- --
Common stock issued for conversion
of debt -- -- -- -- -- --
Issuance of common stock warrants -- -- -- -- -- --
Other comprehensive loss-
foreign currency translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- ---------- ----------- ----------- ----------
Balance, May 31, 2001 -- $ -- -- $ -- 5,913 $ 6
========= =========== ========== =========== =========== ==========
[RESTUBBED TABLE]
Additional
Common Stock paid-in Comprehensive Accumulated
Shares Amount capital income deficit Total
------ ------ ------- ------ ------- -----
Balance, June 1, 1999 905,750 $ 906 $ 2,568,925 $ -- $(1,746,002) $ 824,691
Issuance of convertible debt with
detachable warrants -- -- 192,275 -- -- 192,275
Exercise of warrants 30,000 30 59,970 -- -- 60,000
Stock issued to purchase of Torland 35,000 35 1,749,965 -- -- 1,750,000
Other comprehensive gain-
foreign currency translation
adjustment -- -- -- 5,897 -- 5,897
Net loss -- -- -- -- (1,975,968) (1,975,968)
---------- -------- ----------- --------- ----------- -----------
Balance, May 31, 2000 970,750 971 4,571,135 5,897 (3,721,970) 856,895
Issuance of common stock for inducement
to extend convertible debt 15,000 15 56,235 -- -- 56,250
Retire Series A preferred stock -- -- (861,296) -- -- (862,158)
Issuance of Series B preferred stock -- -- 3,261,883 -- -- 3,261,883
Retire Series B preferred stock -- -- (3,261,883) -- -- (3,261,883)
Issuance of Series C preferred stock -- -- 4,730,009 -- -- 4,730,015
Preferred stock dividend -- -- (133,000) -- -- (133,000)
Other preferred stock charges -- -- (650,343) -- -- (650,343)
Common stock issued for conversion
of debt 8,455,206 8,455 667,962 -- -- 676,417
Issuance of common stock warrants -- -- 151,800 -- -- 151,800
Other comprehensive loss-
foreign currency translation
adjustment -- -- -- (61,908) -- (61,908)
Net loss -- -- -- -- (3,887,304) (3,887,304)
---------- -------- ----------- --------- ----------- -----------
Balance, May 31, 2001 9,440,956 $ 9,441 $ 8,532,502 $ (56,011) $(7,609,274) $ 876,664
========== ======== =========== ========= =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2001 AND 2000
Year ended Year ended
May 31, 2001 May 31, 2000
------------ ------------
Cash flows from operating activities:
Net loss $(3,887,304) $(1,975,968)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 305,638 260,511
Goodwill impairment charge 1,051,562 --
Foreign currency exchange rate gain (loss) (3,814) 5,897
Amortization of convertible debt discount -- 26,538
Issuance of common stock for debt conversion and
release of an unasserted claim 776,162 --
Changes in assets and liabilities
Accounts receivable (27,281) (17,916)
Inventory 58,382 (48,230)
Other assets (270) --
Accounts payable and accrued expenses 490,212 296,040
----------- -----------
Net cash used in operations (1,236,713) (1,453,128)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (2,933) --
Cash used in business acquisition, net of cash acquired -- (398,045)
Deposit on new equipment (526,555) (513,000)
----------- -----------
Net cash used in investing activities (529,488) (911,045)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and long term debt 85,000 725,000
Proceeds from loans payable 1,298,188 2,884,187
Payments on loans payable (200,248) (1,460,518)
Proceeds from sale of common stock 575,000 211,839
----------- -----------
Net cash provided by financing activities 1,757,940 2,360,508
----------- -----------
Net decrease in cash (8,261) (3,665)
Cash at beginning of year 9,732 13,397
----------- -----------
Cash at end of year $ 1,471 $ 9,732
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 89,323 $ 83,875
=========== ===========
Cash paid during the year for taxes $ -- $ --
=========== ===========
Continued
F-5
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended May 31, 2001 and 2000
Continued
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
On August 15, 1999 the Company issued 35,000 shares of common stock in
connection with the acquisition of Torland.
On June 13, 2000, the Company issued 2,400 shares of Series B preferred stock to
the existing Series A preferred stockholder in exchange for the outstanding
Series A preferred stock and $456,928 in notes and accrued interest due to the
stockholder. On June 13, 2000, the Company issued 959 shares of Series B
preferred stock to an individual in exchange for $766,875 in notes and accrued
interest due to the individual. The Series B preferred stock had a stated value
of $800.
On October 24, 2000, the Company issued 2,400 shares of Series C preferred stock
to the existing Series B preferred stockholder in exchange for the outstanding
Series B preferred stock. On October 24, 2000, the Company issued 2,000 shares
of Series C preferred stock to an individual in exchange for 1,677 shares of
outstanding Series B preferred stock. On October 24, 2000 the Company issued 800
shares of Series C preferred stock to a limited partnership in exchange for
$600,000 of convertible debt. On May 31, 2001 the Company issued 313 shares of
Series C preferred stock to a limited partnership in exchange for $250,000 of
notes payable.
On November 30, 2000, the Company issued 400 shares of Series C preferred stock
to an individual for a release of an unasserted claim.
On April 30, 2001, the Company issued 8,455,206 shares of common stock to the
convertible debt holders in exchange for $676,417 in outstanding convertible
debt and accrued interest.
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - American Group, Inc. (the "Company") was incorporated on October
14, 1994, under the laws of the State of Nevada. The Company was inactive and in
the development stage until May 31, 1998 when it purchased LPS Acquisition Corp.
("LPS"). The acquisition was treated as a reverse merger. LPS wholesales custom
blended soil mixes to customers in Florida.
On August 15, 1999, the Company acquired all of the common stock of Torland
9006-1974 Quebec, Inc. ("Torland"), a Canadian entity incorporated under the
Quebec Companies Act, that controls leases for a peat bog and operates a
facility which harvests, packages and ships sphagnum peat moss. The acquisition
was accounted for as a purchase.
Principles of consolidation - The accompanying consolidated financial statements
include the accounts of the Company and all subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Inventory - Inventory, consisting mainly of finished product, is stated at lower
of cost or market. Provision for potentially unsaleable inventory is made based
upon management's analysis of inventory levels and future sales forecasts.
Property, plant, and equipment - Property, plant, and equipment are stated at
cost. Major renewals and improvements are capitalized, while maintenance and
repairs are expensed when incurred. The cost and accumulated depreciation for
property, plant and equipment sold, retired, or otherwise disposed of are
relieved from the accounts, and resulting gains or losses are reflected in
income. Depreciation is computed over the estimated useful lives of depreciable
assets using the straight-line method. The Company periodically evaluates the
recoverability of its long-lived assets in accordance with Statement of
Financial Accounting Standards Board ("FASB") No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of
("FASB 121")" which compares the respective carrying values of long-lived assets
to the current and expected future cash flows to be generated from such assets.
The recoverability of property, plant, and equipment, is evaluated on a separate
basis for the Company and each subsidiary. There were no impairments recognized
during 2001 and 2000.
Goodwill - Goodwill represents the excess of the cost of a company acquired over
the fair value of its net assets at the date of acquisition. Goodwill is being
amortized on the straight-line basis over 30 years. Amortization expense for the
year ended May 31, 2001 and 2000 was $59,295 and $46,245. The Company
periodically evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards Board ("FASB") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of ("FASB 121")" which compares the respective carrying values of
long-lived assets to the current and expected future cash flows to be generated
from such assets. (See Note 6).
Fair value of financial instruments - The fair value of the Company's financial
instruments such as accounts receivables, accounts payable, and notes payable
approximate their carrying value.
Comprehensive Income - The Company accounts for comprehensive income in
accordance with Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FASB No. 130") which establishes standards for reporting
and display of comprehensive income and its components. FASB No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Results of
operations for the Company's foreign entities are translated using the average
exchange rates during the period. For foreign entities, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the balance
sheet date. Resulting translation adjustments are recorded as a component of
other comprehensive income. Comprehensive income is reported on the Consolidated
F-7
Statement of Stockholders' Equity and accumulated other comprehensive income is
reported on the Consolidated Balance Sheet.
Income tax - Income tax assets and liabilities are computed annually for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future,
based upon enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Income tax expense is the tax payable or refundable for the period, plus or
minus the change during the period in deferred tax assets and liabilities.
Use of estimates - 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 disclosures 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 differ
from those estimates.
Income (loss) per share - The Company accounts for earnings or loss per share in
accordance with FASB's Financial Accounting Standard No. 128, "Earnings per
Share" ("SFAS 128") which requires presentation of basic and diluted earnings or
loss per share. The Company does not include potentially dilutive
shares outstanding in its calculation of earnings or loss per share since they
would be anti-dilutive. Earnings or loss per share is computed by dividing net
income or loss by the weighted average number of shares outstanding during the
period.
Recent Pronouncements - In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which
establishes standards for reporting business combinations entered into after
June 30, 2001 and supercedes APB Opinion 16, "Business Combinations" and FASB
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". SFAS
requires that all business combinations be accounted for as purchase
transactions.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("FASB 142"), which establishes
standards for financial accounting and reporting for intangible assets acquired
individually or with a group of other assets and for the reporting of goodwill
and other intangible assets acquired in a business acquisition subsequent to
initial accounting under FASB 141. FASB 142 supercedes APB Opinion No. 17,
"Intangible Assets" and related interpretations. FASB 142 is effective for
fiscal years beginning after December 15, 2001. The Company will adopt FASB 142
for its fiscal year commencing June 1, 2002, and the Company has not concluded
the effect, if any, FASB 142 will have on its financial statements.
F-8
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's continued existence
is dependent upon its ability to resolve its liquidity problems, principally by
obtaining equity capital and commencing profitable operations. During the
interim, the Company must continue to operate on cash flows generated from
loans, raising capital and internally generated cash flow. The efforts to raise
capital, while including the possible exercise of the warrants, refer to our
ability to be advanced funds under the existing credit facility with the
President to finish the new plant facility. The Company experienced net losses
available to common stockholders of $4,670,647 and $1,975,968 for the years
ended May 31, 2001 and 2000, respectively, and had a negative working capital of
$2,786,556 at May 31, 2001. In addition, the note for the Canadian peat bog, one
of the Company's principal suppliers, is delinquent. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are to (i) raise capital, (ii)
become profitable by integrating with Torland and by utilizing shared
management, support services to increase sales to existing customers and (iii)
increase efficiency by relocating its operations to a new facility in Homestead,
Florida, near its customer base. The Company plans, upon integration with
Torland, to begin utilizing the new facility, and management believes operating
costs will decrease due to the efficiencies of the new facility. Management
believes these efforts will generate positive cash flow.
3. RELATED PARTY TRANSACTIONS
In May, 1999, the Company issued 862,158 shares of non-voting Series A preferred
stock to a related party Company in exchange for $862,158 of the Company debt
held by MJ Shulman, Inc.
On June 13, 2000 the Company designated 5,900 shares of Series B convertible
preferred stock. The preferred stock had a stated value of $800 per share. The
holders of the preferred stock were entitled to receive a dividend at the rate
of 5% per annum payable semi-annually, in arrears. The dividend could be paid in
cash, or by the in-kind payment of common stock. The preferred stock could be
converted into a quantity of shares of common stock that, after conversion,
equal 59% of the then outstanding common stock on the day immediately prior to
the conversion and each share of preferred stock was convertible into its pro
rata quantity of common stock. The calculation was made, as if, the total
original issue quantity of shares of the preferred stock was being converted in
each occurrence of conversion.
Concurrent with the designation, the Company issued 2,400 shares of Series B
preferred stock to the same related party company in exchange for debt
outstanding at May 31, 2000 in the original amount of $355,000 and unpaid
interest thereon and the quantity of 862,158 shares of series A preferred stock.
Concurrent with the designation the Company issued 900 shares of Series B
preferred stock to a stockholder in exchange for debt in the original face
amount of $750,000 outstanding at May 31, 2000 and unpaid interest thereon.
These shares were later transferred to another stockholder in a private
transaction.
On July 9, 2000 the Company entered into an agreement to issue up to an
additional 1,564 shares of series B preferred stock in exchange for total
consideration of up to $1,251,200. Two relatives of a stockholder
tendered and delivered to the Company marketable securities as in-kind
consideration of the purchase price of the Series B preferred stock. The Company
issued Series B preferred stock to the subscribers on a pro rata basis as the
Company received proceeds from the liquidation of the marketable securities. In
the event the proceeds exceeded $1,251,200, the excess would have been deemed an
unsecured demand loan from the subscriber, bearing interest at 9%. The Company
issued 777 shares of Series B preferred stock for total consideration of
$305,000 pursuant to this agreement. These shares were later transferred to
another stockholder in a private transaction.
On October 26, 2000, the Company designated 9,000 shares of convertible
preferred stock as Series C which has a stated value of $800 per share. The
holders of the Series C preferred stock are entitled to receive dividends at the
rate of 5% per annum payable semi-annually, in arrears. The dividends may be
paid in cash, or by the in-kind payment of common stock. Payment of dividends in
cash can only be paid if the Company had have earnings. The preferred stock may
be converted into a quantity of shares of the Company had then outstanding
common stock that, after conversion, equal 90% of the then outstanding common
stock on the day immediately prior to the conversion, and each share of
preferred stock is convertible into its pro rata quantity of common stock. The
calculation is made based as if the total original issue quantity of shares of
the preferred stock is being converted in each occurrence of conversion.
Concurrent with the designation of the Series C preferred stock, the Company
issued 2,400 shares of the Series C preferred stock to a related party company,
in exchange for 2,400 shared of the Series B preferred stock; 2,000 shares
of the Series C preferred stock to a related party company in exchange for 1,677
shared of the Series B preferred stock, and concurrent with the designation of
the Series C preferred stock, the Company issued 800 shares of the Series C
preferred stock to stockholder in exchange for $600,000 of convertible debt.
On October 24, 2000 the Company entered into a total of $643,283 of convertible
promissory notes, with interest at 10%, interest and principal due in full on
March 31, 2001 with two stockholders. The notes were issued in exchange for
notes outstanding in similar amounts. The entire unpaid principal balance and
all unpaid accrued interest owing, together with all other charges, if any, on
these notes, were payable by either (i) cash or (ii) conversion into out common
stock at a conversion price of $.25 per Share.
On March 31, 2001, in consideration for delays experienced in the opening of the
Homestead plant, $407,283 of the above convertible notes were modified as
follows:
1. The notes shall be converted at any time prior to April 30, 2001, at such
date as the note holder shall determine by written notice to the Company,
2. The price of conversion shall be the market price
3. The convertible notes shall include a detachable warrant to purchase
2,000,000 shares of common stock at $.10 per share for a period of one year
4. The Company shall file a registration statement with regard to the underlying
shares.
On April 30, 2001 $407,283 of notes together with $21,029 of accrued interest
held by a related party Company were converted into 5,366,405 shares of common
Stock.
On the same date, in consideration for delays experienced in the opening of the
Homestead plant, $235,000 of the convertible notes held by a stockholder were
modified as follows: 1. The notes shall be converted at any time prior to April
30, 2001, at such date as the note holder shall determine by written notice to
the Company, 2. The price of conversion shall be the market price 3. The Company
shall file a registration statement with regard to the underlying.
On April 30, 2001 $235,000 of notes together with $12,104 accrued interest were
converted into 3,088,801 shares of common stock.
On September 26, 2000, the Company entered into a new credit facility with its
President to provide for an investment of up to $1,500,000 to finance the
operations and growth of the Company. All amounts advanced are to be added to an
existing promissory note due the President dated May 28, 1998, which note bears
interest at 10% per annum. All amounts advanced under the credit facility and
the note shall be secured by a first lien on the Company's new plant in
Homestead, Florida. The holder of the note has the option to convert all or part
of the principal and accrued interest due thereunder on the note into the
Company's Series C preferred stock. As of May 31, 2001 the holder had not made
any election to convert any of the outstanding balance due. (See Note 7)
During the year ended May 31, 2001 we entered into an agreement with a
consulting firm owned by a director. The Company provides certain accounting and
advisory services. The agreement calls for payments of $11,700 per month. During
the years ended May 31, 2001 and 2000 payments to this corporation totaled
$113,900 and $93,740, respectively.
4. ACQUISITION
The Company acquired Torland on August 15, 1999. Torland is a Canadian sphagnum
peat moss bog and processing facility. The acquisition was accounted for as a
purchase. The results of the operations of Torland are included in the
consolidated statement of operations of the Company for the year ended May 31,
2001 and for the period August 16, 1999 (date of acquisition) through May 31,
2000.
The purchase price was 35,000 shares valued at $1,750,000 of the Company's
common stock, $400,000 in cash, notes receivable from Torland, accrued interest,
a note payable, and the assumption of accounts and notes payable. On January 18,
2001, the Company entered into an agreement with the former Torland Stockholders
to restructure the terms of the existing $835,000 promissory note whereby the
unpaid principal and accrued interest will be payable as follows: $50,000 due on
February 28, 2001, $50,000 due on July 31, 2001, $100,000 due on December 31,
2001 and the balance in 60 annual payments of principal and interest beginning
February 1, 2002. Interest shall accrue at the rate of 8% until the note is paid
in full. The Company is delinquent on the February, July and December 2001
payments.
The purchase price of the Torland transaction was allocated as follows:
Current assets $ 233,331
Property, plant and equipment 2,545,270
Sphagnum peat reserves 433,192
Goodwill 1,797,732
Liabilities assumed (955,038)
----------
$4,054,487
==========
F-9
Payment consisted of the following:
Common stock $1,750,000
Note receivable from Torland 967,500
Accrued interest 101,987
Cash 400,000
Note payable 835,000
----------
$4,054,487
==========
The following unaudited pro forma summary presents the consolidated results of
operations of the Company for the year ended May 31, 2000 as if the acquisition
had occurred on June 1, 1999:
2000
----
Revenue $ 2,497,330
Net loss $ 1,989,750
Net loss per share $(2.09)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 2001:
Estimated
useful life
-----------
Machinery and equipment $ 1,286,795 5 years
Furniture and fixtures 22,746 10 years
Building 188,139 20 years
Vehicles 112,364 3 years
Land improvements 1,295,372 8-17 years
Sphagnum peat reserves 424,060 20 years
-----------
3,329,476
Less:accumulated
depreciation (557,072)
-----------
$ 2,772,404
===========
Depreciation expense for the years ended May 31, 2001 and 2000 was $245,713 and
$220,037, respectively.
F-10
6. IMPAIRMENT OF GOODWILL
In May 2001, as a result of continuing and increasing operating losses at the
Torland facility, the Company evaluated the expected future cash flows from this
facility and determined that a portion of the goodwill was impaired. In order to
obtain the sales volume to recover the goodwill, major infrastucture is required
that can only be funded by public sources in Canada. This funding, if obtained,
would take three to five years prior to actual construction.
The evaluation was undertaken due to a change in circumstances involving the
Company's ability to finance an expansion of its Canadian facilities. Based upon
the comparison of the carrying value of the goodwill to future cash flow
projections for the Canadian operation, the Company concluded that the
impairment charge of $1,051,562 should be recorded.
7. LONG-TERM DEBT AND NOTES PAYABLE
Notes payable consisted of the following at May 31, 2001:
May 31,
2001
Note payable, 10% interest, due to a finance company, payable in monthly
installments of $1,992, due October 2002, secured by a 1998 dump truck. $ 33,173
Credit facility, 10% interest due to the President of the Company,
collateralized by accounts receivable, inventory and a first lien on
the Company's new plant facility (see Note 3) 1,285,688
Note payable, 11.6% interest, due to a finance company, payable in monthly
installments of $3,747, due December 2001, secured by equipment. 38,489
Line of credit, due on demand, Canadian prime plus 1.5% interest, due to a
bank, interest payable monthly, secured by accounts receivable and
inventory of Torland, and the personal guarantee of the President of Torland. 156,024
Loan payable, Canadian prime plus 1.25% interest, due to a bank, payable in
monthly installments of $1,084 plus interest, due November 2002, secured by
a general lien on movable equipment of Torland. 4,334
Loan payable, Canadian prime plus 1.5% interest, due to a bank, payable in
monthly installments of $1,788, plus interest, due May 2003, secured by
equipment, and the personal guarantee of the President of Torland. 31,530
Term loan payable, Canadian prime plus 1.0% interest, due to a bank,
payable in monthly installments of $3,870, plus interest, due July 2002,
secured by equipment, and the personal guarantee of the President of Torland. 150,916
Loan payable, 7.8% interest, due to a finance company, payable in monthly
installments of $1,799, due July 2002, secured by equipment of Torland. 32,443
Note payable, 8% interest, due to a Canadian company, collateralized by the
Torland lease agreements, due in installments of $50,000 on February 28,
2001, $50,000 on July 31, 2001, $100,000 on December 31, 2001 and the
balance in 60 annual payments of principal and interest begining
February 1, 2002. The February and July payments are past due. 921,283
9% note payable due to individuals, collateralized by a lien on the new
plant equipment, due in installments of $1,839 begining November 2001
through October 2002 with a balloon payment for the unpaid balance
due at maturity. 145,156
---------
2,799,036
Less: current maturities 1,838,800
---------
Long-term debt $ 960,236
=========
F-11
Maturities of long-term debt at May 31, 2001 are as follows:
2002 $ 1,838,800
2003 216,154
2004 312,265
2005 158,826
thereafter 272,991
-----------
$ 2,799,036
===========
8. CAPITAL LEASE OBLIGATIONS
The Company leases operating equipment accounted for as capital leases. At May
31, 2001, the equipment and accumulated depreciation were recorded as follows:
Machinery and equipment $ 75,000
Less: accumulated depreciation (45,000)
------------
$ 30,000
============
The following is a schedule by year of the future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of May 31, 2001:
2002 $ 25,030
2003 22,401
2004 3,734
-----------
Total minimum lease payments 51,165
Less: amount representing interest (7,968)
-----------
Present value of net minimum lease payments 43,197
Less: current portion (22,940)
-----------
$ 20,257
===========
F-12
9. CONVERTIBLE LONG-TERM DEBT
On July 29, 1999, the Company entered into a $600,000 promissory note with a
limited partnership, interest payable quarterly, at 10%, and principal due in
full on July, 2004. The note was convertible, all or in part, into the Company's
common stock at a price of $10.00 per share. As part of this transaction, the
Company issued 30,000 warrants with an exercise price of $2.00 per share. The
warrants were valued at $179,400 and a discount of the same amount was applied
to the promissory note. At the time of the transaction, the Company believed the
value of the warrants could not be based on the market value of the common stock
because shares issued would be restricted and could not be sold in large lots
without depressing the market value. Therefore, the Company valued the warrants
based upon an assumed borrowing rate of 20%. The warrant value was established
based on the difference between 20% and 10% discounting to present value over
the term of the note. Amortization of the discount was $20,100 for the year
ended May 31, 2000. This note was subsequently converted into the Company's
Series C preferred stock. (see note 11)
On December 9, 1999, the Company raised $125,000 from five investors issuing
convertible debt and 12,500 common stock warrants. The warrants have an exercise
price of $1.00 per share and expire on December 2001. The convertible debt
consisted of five 18% notes payable, originally due June 9, 2000, but
renegotiated to be paid in full on September 9, 2000. These notes are
convertible, all or in part, into the Company's common stock at a price of $8.00
per share. Using the same method as outlined above, the Company assumed, at that
date, a borrowing rate of 36% and assigned a value of $12,875 to the warrants
and a discount of the same amount to the promissory notes. The amortization
period is ten months. During the year ended May 31, 2000 the Company expensed
$6,438 of amortization. This note was subsequently restructured into a 9% note
payable due to individuals, collateralized by a lien on the new plant equipment,
due in installments of $1,839 beginning November 2001 through October 2002 with
a balloon payment for the unpaid balance due at maturity.
On October 24, 2000, the Company entered into convertible promissory notes
totaling $643,283, with interest at 10%, interest and principal due in full on
March 31, 2001. The promissory notes were issued in exchange for other notes
outstanding in the same amount. The entire unpaid principal balance and all
unpaid accrued interest owing thereon was payable at the discretion of the
Company in either cash or common stock at a conversion price of $.25 per share.
On March 31, 2001, in consideration for delays experienced by the Company in
opening its new plant facility, $407,283 of the convertible promissory notes
were modified to provide for conversion to common stock at the discretion of the
Company by April 30, 2001, at the market price on the date of conversion.
Additionally, the modification provided for 2,000,000 warrants to issued at a
conversion price of $.10 per common share. On April 30, 2001, the convertible
promissory notes totaling $407,283 and accrued interest thereon in the amount of
$22,030 were converted into 5,366,405 common shares, at a conversion price of
$.08 per common share, which approximated market value. Further on March 31,
2001, in consideration for delays experienced by the Company in opening its new
plant facility, $235,000 of the convertible promissory notes were modified to
provide for conversion to common stock at the discretion of the Company by April
30, 2001, at the market price on the date of conversion. On April 30, 2001, the
Company and the convertible promissory note holders converted the remaining
$235,000 of convertible promissory notes and $12,104 of accrued interest thereon
into 3,088,801 shares of common stock at $.08 per share, which approximated
market value.
The Company has agreed to file a registration statement for the 8,455,206 common
shares and the 2,000,000 common shares underlying the warrants. As of the date
of this report the Company has not filed the required registration statement,
however the Company has obtained extensions for the filing of the registration
statement from the stockholders effected.
10. OPERATING LEASES
The Company leases trucks under operating leases that expire during March 2004.
Payment on the leases vary according to usage, but average $14,000 per month.
Lease expense for the years ended May 31, 2000 and 1999 totaled $272,329 and
$147,460, respectively.
F-13
LPS leases its facility on a month to month basis,(pending its relocation to its
new facility in Homestead, Florida), at $6,500 per month (See Note 12).
At May 31, 2001, future minimum rental payments for operating leases (not
including the Homestead, Florida since the Company has not occupied the
facility) with initial or remaining noncancelable lease terms in excess of one
year are as follows:
2002 $ 168,000
2003 168,000
2004 42,000
----------
Total minimum payments $ 378,000
==========
11. EQUITY
Preferred Stock
On May 31, 1999, the Company issued 862,158 shares of Series A preferred stock
to an investment banker, in exchange for $862,158 of debt and accrued interest.
The preferred stock called for a 5% dividend, payable semi-annually in arrears
in cash or by in-kind payments of common stock. A cash dividend may only be paid
out of earnings.
On June 13, 2000, the Company designated 5,900 shares of convertible preferred
stock as series B, which had a stated value of $800 per share. The holders of
the Series B preferred stock were entitled to receive dividends at the rate of
5% per annum payable semi-annually, in arrears. The dividend could be paid in
cash, or by the in-kind payment of common stock.
Concurrent with the designation of the Series B preferred stock, the Company
issued 2,400 shares of Series B preferred stock to the existing Series A
preferred stockholder in exchange for debt outstanding at May 31, 2000, in the
original face amount of $355,000, plus unpaid interest of $115,000 thereon, and
the exchange of 862,158 series A preferred shares of the Company which included
all unpaid dividends. As a result of this transaction the Company recorded (i)
an extraordinary charge of $208,127 representing the fair value of the Series B
preferred stock over the carrying value of the debt and accrued interest and
(ii) other preferred stock charges of $392,215 (a return to the preferred
shareholder) representing the fair value of the Series B preferred stock over
the carrying value of the Series A preferred stock. (See Note 12)
Concurrent with the designation of the series B preferred stock, the Company
issued 937 shares of Series B preferred stock to an individual in exchange for
debt in the original face amount of $750,000 outstanding at May 31, 2000, plus
unpaid interest thereon.
On July 9, 2000 the Company entered into an agreement to issue up to an
additional 1,564 shares of series B preferred stock in exchange for total
consideration of up to $1,251,200. The subscriber was to tender and deliver to
the Company marketable securities as in-kind consideration of the purchase price
of the series B preferred stock. The Company realized $592,000 in proceeds from
the sale of the marketable securities tendered and issued 740 shares of Series B
preferred stock on a pro rata basis.
F-14
On October 26, 2000, the Company designated 9,000 shares of convertible
preferred stock as Series C which has a stated value of $800 per share. The
holders of the Series C preferred stock are entitled to receive dividends at the
rate of 5% per annum payable semi-annually, in arrears. The dividends may be
paid in cash, or by the in-kind payment of common stock. Payment of dividends in
cash can only be paid if the Company has earnings. The preferred stock may be
converted into a quantity of shares of the then outstanding common stock of the
Company that, after conversion, equaling 90% of the then outstanding common
stock on the day immediately prior to the conversion, and each share of
preferred stock is convertible into its pro rata quantity of common stock of the
Company. The calculation is made based as if the total original issue quantity
of shares of the preferred stock is being converted in each occurrence of
conversion.
Concurrent with the designation of the Series C preferred stock, the
Company issued (i) 2,400 shares of the Series C preferred stock to the existing
Series B preferred stockholder in exchange for 2,400 shared of the Series B
preferred stock;(ii) 2,000 shares of the Series C preferred stock to an
individual in exchange for 1,677 shares of the Series B preferred stock,
resulting in other preferred stock charges of $258,128 (a return to the
preferred shareholder) representing the fair value of the Series C preferred
stock over the carrying value of the Series B preferred stock, and (iii) 800
shares of the Series C preferred stock to a limited partnership in exchange for
$600,000 of convertible debt resulting in an extraordinary charge of $40,000
representing the fair value of the Series C preferred stock over the carrying
value of the debt. (See Note 12)
On November 30, 2000 the Company issued 400 shares of the Series C
preferred stock to an individual for release of a claim and expensed $320,000.
Concurrent with the issuance the Company and its president guaranteed an
obligation to the same individual for approximately $352,000. The guarantee is
removed pro rata with the individual's proceeds resulting from the sale or
partial sale of the 400 shares of Series C preferred stock.
During the year the Company recorded preferred stock dividends of
$133,000 in addition to the above charges relating to preferred stock
transactions.
Common Stock
On October 3, 2000 the Company split its shares 1 for 20. All share amounts have
been reflected retroactively.
On July 29, 1999 the Company issued 30,000 shares of common stock upon the
exercise by one investor of 30,000 warrants. The exercise price of each warrant
was $2.00 per share and the Company received $60,000 in cash.
On August 15, 1999 the Company issued 35,000 shares of its common stock in
connection with the acquisition of Torland. The stock was valued at $1,750,000,
which approximated market value. (See Note 4).
The Company issued 15,000 shares of common stock in exchange for the retirement
of certain warrants issued in connection with convertible debt originally due
June 9, 2000, but renegotiated to be paid in full on September 9, 2000. The
stock was valued at $56,250. Interest expense of $56,250 was recorded for the
issuance of the shares.
On April 30, 2001, convertible promissory notes totaling $407,283 and accrued
interest thereon in the amount of $22,030 were converted into 5,366,405 common
shares, at a conversion price of $.08 per common share, which approximated
market value. On April 30, 2001, the Company and convertible promissory note
holders converted the remaining $235,000 of convertible promissory notes and
$12,104 of accrued interest thereon into 3,088,801 shares of common stock at
$.08 per share, which approximated market value.
The Company issued 2,000,000 warrants to purchase common stock at a conversion
price of $.10 per common share to the holders of convertible promissory notes.
The warrants were valued using the Black Scholes calculation at $151,800, which
charges was recorded as an extraordinary item (See Notes 9 and 12).
On May 31, 2001 the Company issued 313 shares of the Series C preferred stock in
exchange for $250,000 of debt.
12. EXTRAORDINARY ITEM
In accordance with FASB No. 4 "Reporting Gains and Losses From Extinguishment of
Debt", the Company recorded a charge for debt extinguishment of $399,927.(See
Note 11)
13. INCOME TAXES
The Company had available at May 31, 2001, net operating loss carryforwards for
F-15
federal and state tax purposes of approximately $6,980,000 which could be
applied against taxable income in subsequent years through 2021. The tax effect
of the net operating loss is approximately $2,625,000, and a full valuation
allowance has been recorded, since realization is uncertain.
Reconciliation of the differences between income tax benefits computed at the
federal and state statutory tax rates and the provision for income tax benefits
for the year ended May 31, 2001 and 2000 is as follows:
For the year ended May 31,
2001 2000
---- ----
Income tax benefit computed at federal statutory
tax rate (34%) $ 2,375,000 $659,000
State tax benefit, net of federal benefits
(3.63%) 250,000 70,000
Increase in valuation allowance (2,625,000) (729,000)
----------- ---------
Provision for income tax benefit $ - $ -
=========== ==========
Temporary differences that give rise to significant deferred tax assets were not
material at May 31, 2001. A reconciliation of the Company's deferred tax asset
at May 31, 2001 is as follows:
Total deferred tax assets 2,625,000
Valuation allowance (2,625,000)
-----------
Net deferred tax asset $ -
===========
14. COMMITMENTS AND CONTINGENCIES
In December 1998, LPS entered into a lease for its new facility in Homestead,
Florida. The lease is for a term of ten years with five consecutive three year
renewable options, exercisable at LPS's discretion (twenty-five years including
options). The terms of the lease call for monthly lease payments of $7,500 in
year one, $9,000 in year two and $15,000 for years thereafter. LPS will commence
monthly rental payments when it occupies the facility. The Company has not moved
into the facility as of May 31, 2001.
LPS has purchased a conveyor system for its new facility. The total price of the
conveyor system is approximately $1,500,000. As of May 31, 2001, the Company
paid $1,220,000 toward the system which was recorded as a deposit since the
system has not been delivered and installed.
15. CONCENTRATION OF SUPPLIER AND SALES
The Company purchases sphagnum peat moss from Torland, a wholly owned
subsidiary. During fiscal 2001 and 2000, the Company purchased approximately
$102,790 and $80,610, respectively, of sphagnum peat moss from Torland.
16. SUBSEQUENT EVENTS
Line of credit
In June 2001, the Company obtained a line of credit from a bank in the amount of
$200,000. The line of credit is guaranteed by the Company's president and the
presidents of each operating subsidiary. The line of credit is further
collateralized by certificates of deposit on account with the bank in the amount
of $200,000, which have been advanced by its President.
F-16
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 2001 (Unaudited) and MAY 31, 2001
November 30, 2001 May 31, 2001
----------------- -------------
ASSETS
Current assets:
Cash $ 119,097 $ 1,471
Accounts receivable, less allowance for doubtful
accounts of $76,185 and $45,169, respectively 114,701 135,299
Inventory 33,608 49,254
-------------- -------------
Total current assets 267,406 186,024
Property, plant and equipment, net of accumulated
depreciation of $669,947 and $557,072, respectively 2,639,161 2,772,404
Other assets:
Equipment deposit 1,407,571 1,220,000
Goodwill, net 629,000 640,000
Other 17,238 11,309
-------------- -------------
$ 4,960,376 $ 4,829,737
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable $ 3,072,291 $ 1,838,800
Current portion of capital lease obligation payable 18,160 22,940
Accrued interest payable 315,530 205,117
Accounts payable and accrued expenses 1,253,379 905,723
-------------- -------------
Total current liabilities 4,659,360 2,972,580
-------------- -------------
Long term liabilities:
Long-term debt less current portion 550,673 960,236
Long-term capital lease obligation less current portion 16,954 20,257
-------------- -------------
567,627 980,493
-------------- -------------
Stockholders' deficit:
Preferred stock, $.001 par value, 9,991,000 shares authorized;
no shares issued and outstanding - -
Preferred stock, Series C, $.001 par value, 9,000 shares authorized;
5,913 issued and outstanding 6 6
Common stock, $.001 par value, 50,000,000 shares authorized,
9,440,956 shares issued and outstanding 9,441 9,441
Additional paid-in capital 8,413,928 9,182,845
Comprehensive income 142,641 (56,011)
Accumulated deficit (8,832,627) (8,259,617)
-------------- -------------
Total stockholders' deficit (266,611) 876,664
-------------- -------------
$ 4,960,376 $ 4,829,737
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(Unaudited)
For the six months ended
November 30,
2001 2000
---- ----
Revenue $ 1,479,591 $ 1,842,537
Cost of sales 1,551,066 1,959,831
--------------- ---------------
Gross loss (71,475) (117,294)
Selling, general and administrative 1,016,299 914,127
--------------- ---------------
Operating loss (1,087,774) (1,031,421)
--------------- ---------------
Other income (expenses):
Interest expense (136,468) (322,236)
Interest income 889 718
--------------- ---------------
(135,579) (321,518)
--------------- ---------------
Loss before extraordinary item (1,223,353) (1,352,939)
Extraordinary item - (248,127)
--------------- ---------------
Net loss (1,223,353) (1,601,066)
Preferred stock dividend and other charges (118,574) (668,343)
--------------- ---------------
Net loss available to common stockholders $ (1,341,927) $ (2,269,409)
=============== ===============
Loss before extraordinary item $ (.13) $ (1.38)
Extraordinary item - ( .25)
--------------- ---------------
Net loss $ (.13) $ (1.63)
Referred stock dividend and other charges (.01) ( .68)
--------------- ---------------
Net loss available to common stockholders, basic and diluted $ (.14) $ (2.31)
=============== ===============
Weighted average shares outstanding 9,440,956 979,569
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(Unaudited)
For the three months ended
November 30,
2001 2000
---- ----
Revenue $ 663,153 $ 979,686
Cost of sales 683,739 1,052,180
------------- -------------
Gross loss (20,586) (72,494)
Selling, general and administrative 495,688 524,724
------------- -------------
Operating loss (516,274) (597,218)
------------- -------------
Other income (expenses):
Interest expense (72,843) (173,891)
Interest income 701 209
------------- -------------
(72,142) (173,682)
------------- -------------
Loss before extraordinary item (588,416) (770,900)
Extraordinary item - (40,000)
--------------- ---------------
Net loss (588,416) (810,900)
Preferred stock dividend and other charges (58,963) (276,128)
------------- -------------
Net loss available to common stockholders $ (647,379) $ (1,087,028)
============= =============
Loss before extraordinary item $ (.06) $ ( .78)
Extraordinary item - ( .04)
------------- -------------
Net loss $ (.06) $ ( .82)
Referred stock dividend and other charges (.01) ( .28)
------------- -------------
Net loss available to common stockholders, basic and diluted $ (.07) $ (1.10)
============= =============
Weighted average shares outstanding 9,440,956 985,750
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(Unaudited)
For the six months ended
November 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $ (1,223,353) $ (1,601,066)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 123,875 313,858
Foreign currency exchange rate gain (loss) 198,652
Issuance of common stock for debt conversion and
release of an unasserted claim - 624,389
Changes in assets and liabilities
Accounts receivable 20,598 (110,812)
Inventory 15,646 1,784
Other assets - (44,529)
Accounts payable and accrued expenses 339,495 224,396
--------------- -------------
Net cash used in operations (525,087) (591,980)
--------------- -------------
Cash flows from investing activities:
Purchase of equipment (19,632) -
Proceeds from equipment 40,000 -
Deposit on new equipment (193,500) (261,079)
--------------- -------------
Net cash used in investing activities (173,132) (261,079)
--------------- -------------
Cash flows from financing activities:
Proceeds from loans payable 823,928 326,669
Payments on loans payable (8,083) (48,357)
Proceeds from sale of common stock - 575,000
--------------- -------------
Net cash provided by financing activities 815,845 853,312
--------------- -------------
Net increase in cash 117,626 253
Cash at beginning of period 1,471 9,732
--------------- -------------
Cash at end of period $ 119,097 $ 9,985
=============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,930 $ 55,045
=============== =============
Cash paid during the period for taxes $ - $ -
=============== =============
The accompanying notes are an integral part of these consolidated financial
statements
F-20
AMERICAN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2001
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions of Form 10-QSB and Article 310 of Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by accounting
principals generally accepted in the United States of America. The preparation
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results may differ
from these estimates. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended November 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending May 31, 2002.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended May 31, 2001 as filed with the Securities and Exchange
Commission.
Note 2 - Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company's continued
existence is dependent upon its ability to resolve its liquidity problems,
principally by obtaining equity capital and commencing profitable operations.
During the interim, the Company must continue to operate on cash flows generated
from loans, raising capital, and internally generated cash flow. The Company
experienced net losses available to common stockholders of $1,341,927 for the
six months ended November 30, 2001, and has a negative working capital of
$4,391,954 at November 30, 2001. In addition, the note payable to the former
owners of the Canadian peat bog is delinquent. This note is collateralized by
the peat bog and default of this note may result in the Company forfeiting this
asset. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plans in regard to this matter are to raise capital,
become profitable by integrating its operations with Torland, and increase
efficiency by relocating its operations to a new facility in Homestead, Florida,
near its customer base. The Company plans, upon integration with Torland, to
begin utilizing the new facility, and management believes operating costs will
decrease due to the efficiencies of the new facility. Management believes these
efforts will generate positive cash flow. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
F-21
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Reference is hereby made to the provisions of the Nevada General
Corporation Act which provides for indemnification of directors and officers
under certain circumstances.
Reference is hereby made to Article IX of Registrant's Articles of
Incorporation which is incorporated by reference to the Company's Form 10SB.
Reference is hereby made to Article IX of Registrant's By-Laws which
are incorporated by reference to the Company's Form 10SB.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
issuance and distribution of the securities offered hereby.
Registration Fee $ 525
Printing Expenses* 2,000
Legal Fees and Expenses* 20,000
Accounting Fees and Expenses* 10,000
Blue Sky Fees and Expenses* 0
Transfer Agent Fees and Expenses* 500
Misc.* 476
-------
Total $33,501
=======
*Estimated
RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following transactions were effected
by the Company in reliance upon exemptions from registration under the
Securities Act of 1933 as amended (the "Act") as provided in Section 4(2)
thereof except as otherwise indicated below. Each certificate issued for
unregistered securities contained a legend stating that the securities have not
been registered under the Act and setting forth the restrictions on the
transferability and the sale of the securities. No underwriter participated in,
nor did the Company pay any commissions or fees to any underwriter in connection
with any of these transactions. None of the transactions involved a public
offering.
II-1
In November, 1998 the Board of Directors issued 6,000 shares of common
stock to Coventry Industries Corp. to complete the previous acquisition of LPS
from Coventry pursuant to an agreement dated May 28, 1999 between the Company
and Coventry. Based on the market value of the Company's common stock the
transaction would be valued at $12,000. The transaction was accounted for as a
reverse merger. As such, the financial statements of the Company reflect the
assets, liabilities and operations of LPS as if it had been the reporting entity
since inception. The Company believes that Coventry had knowledge and experience
in financial and business matters which allowed it to evaluate the merits and
risk of the receipt of these securities of the Company, and that it was
knowledgeable about the Company's operations and financial condition.
Transactions were effected by the Company in reliance upon exemptions from
registration under the Securities Act of 1933 as Amended ("Act") as provided in
Section 4(2) thereof.
In November, 1998, the Company issued 500,000 shares of common stock to
Atlas Marketing Association, Inc. for cash consideration of $950,000 pursuant to
an exemption under Rule 504 of Regulation D of the Act. Atlas was an accredited
investor. The Company believes that Atlas had knowledge and experience in
financial and business matters which allowed it to evaluate the merits and risk
of the purchase of these securities of the Company, and that it was
knowledgeable about the Company's operations and financial condition. The terms
and conditions of this financing were determined by the parties through arms
length negotiations and the Company believes the terms are no less favorable to
the Company than terms attainable from unaffiliated third parties.
In November, 1998 the Board of Directors issued 1,500 shares of common
stock to Roy Bresky to complete the previous acquistion of Lator from Roy Bresky
pursuant to an agreement dated May 28, 1999 between the Company and Roy Bresky.
Based on the market value of the Company's common stock the transaction would be
valued at $3,000. The transaction was accounted for as a reverse merger. As
such, the financial statements of the Company reflect the assets, liabilities
and operations of Lator as if it had been the reporting entity since inception.
The Company believes that Roy Bresky had knowledge and experience in financial
and business matters which allowed it to evaluate the merits and risk of the
receipt of these securities of the Company, and that he was knowledgeable about
the Company's operations and financial condition. Transactions were effected by
the Company in reliance upon exemptions from registration under the Securities
Act of 1933 as Amended ("Act") as provided in Section 4(2) thereof.
In November, 1998 the Company issued 4,000 shares of common stock
valued at $8,000, to three persons who provided professional services to the
Company. The Company believes that each of these persons had knowledge and
experience in financial and business matters which allowed them to evaluate the
merits and risk of the receipt of these securities of the Company. All of these
persons were providers of professional services to the Company and in such
capacity they were knowledgeable about the Company's operations and financial
condition. Transactions were effected by the Company in reliance upon exemptions
from registration under the Securities Act of 1933 as Amended ("Act") as
provided in Section 4(2) thereof.
In January, 1999 the Company issued 375,000 shares of common stock to
Eric W. Deckinger in exchange for the assumption by Mr. Deckinger, a Director
and President of the Company of $750,000 of the Company's debt to third parties.
The Company believes that Mr. Deckinger had knowledge and experience in
financial and business matters which allowed him to evaluate the merits and risk
of the receipt of these securities of the Company, and that he was knowledgeable
about the Company's operations and financial condition. The terms and conditions
of this financing were determined by the parties through arms length
negotiations and the Company believes the terms are no less favorable to the
Company than terms attainable from unaffiliated third parties. Transactions were
effected by the Company in reliance upon exemptions from registration under the
Securities Act of 1933 as Amended ("Act") as provided in Section 4(2) thereof.
II-2
In May, 1999, the Company issued 862,158 shares of nonvoting preferred
stock to MJ Shulman, Inc. in exchange for $862,158 of the Company's debt held by
and loaned by MJ Shulman, Inc. The Company believes that MJ Shulman, Inc. had
knowledge and experience in financial and business matters which allowed it to
evaluate the merits and risk of the purchase of these securities of the Company.
The Company believes that MJ Shulman, Inc. was knowledgeable about the Company's
operations and financial condition. The terms and conditions of this financing
were determined by the parties through arms length negotiations and the Company
believes the terms are no less favorable to the Company than terms attainable
from unaffiliated third parties. Transactions were effected by the Company in
reliance upon exemptions from registration under the Securities Act of 1933 as
Amended ("Act") as provided in Section 4(2) thereof.
In December 1999, the Company raised $125,000 from five investors by
issuing debt and warrants. The Company also issued 12,500 warrants in connection
with the same transaction. The warrants have an exercise price of $1.00 per
share and expire on December 2001. The Company believes that the investors had
knowledge and experience in financial and business matters which allowed it to
evaluate the merits and risk of the purchase of these securities of the Company,
and that it was knowledgeable about the Company's operations and financial
condition. Transactions were effected by the Company in reliance upon exemptions
from registration under the Securities Act of 1933 as Amended ("Act") as
provided in Section 4(2) thereof.
In October 1999 the Company issued 30,000 shares of common stock upon
the exercise by one investor of 30,000 warrants to purchase common stock. The
exercise price of each warrant was $2.00 per share and the Company received
$60,000 in cash. The Company believes that the investor had knowledge and
experience in financial and business matters which allowed it to evaluate the
merits and risk of the purchase of these securities of the Company, and that it
was knowledgeable about the Company's operations and financial condition.
Transactions were effected by the Company in reliance upon exemptions from
registration under the Securities Act of 1933 and Amended ("Act") as provided in
Section 4(2) thereof.
On June 9, 2000, the Company issued 15,000 shares of common stock as an
inducement to extend the debt of five debt holders. The transaction was valued
at $57,000. This transaction was made in reliance on an exemption pursuant to
4(2) of the Securities Act.
On October 26, 2000, the Company designated 9,000 shares of convertible
preferred stock as Series C which has a stated value of $800 per share. The
holders of the Series C preferred stock are entitled to receive dividends at the
rate of 5% per annum payable semi-annually, in arrears. The dividends may be
paid in cash, or by the in-kind payment of common stock. Payment of dividends in
cash can only be paid if the Company has earnings. The preferred stock may be
converted into a quantity of shares of the then outstanding common stock of the
Company that, after conversion, equal 90% of the then outstanding common stock
on the day immediately prior to the conversion, and each share of preferred
stock is convertible into its pro rata quantity of common stock of the Company.
The calculation is made based as if the total original issue quantity of shares
of the preferred stock is being converted in each occurrence of conversion.
Concurrent with the designation of the Series C preferred stock, the
Company issued 2,400 shares of the Series C preferred stock to MJ Shulman, Inc.
in exchange for 2,400 shares of the Series B preferred stock.
Concurrent with the designation of the Series C preferred stock, the
Company issued 2,000 shares of the Series C preferred stock to an individual in
exchange for 1,677 shares of the Series B preferred stock.
Concurrent with the designation of the Series C preferred stock, the
Company issued 800 shares of the Series C preferred stock to a limited
partnership in exchange for $600,000 of convertible debt.
II-3
On November 30, 2000 the Company issued 400 shares of the Series C
preferred stock to an individual for a release of an unasserted claim.
Concurrent with the issuance the Company and its president guaranteed an
obligation to the same individual for approximately $352,000 undertaken by an
officer of the Company. The guarantee is removed pro rata with the individual's
proceeds from the 400 shares of the Series C preferred stock.
On October 24, 2000 we entered into a total of $643,283 of convertible
promissory notes, with interest at 10%, interest and principal due in full on
March 31,2001. The notes were issued in exchange for notes outstanding in
similar amounts. The entire unpaid principal balance and all unpaid accrued
interest owing, together with all other charges, if any, on these notes, were
payable by either (i) cash or (ii) conversion into out common stock at a
conversion price of $.25 per share.
On March 31, 2001, in consideration for delays experienced in the
opening of the Homestead plant, $407,283 of the above convertible notes were
modified as follows:
1. The notes shall be converted at any time prior to April 30, 2001, at
such date as the note holder shall determine by written notice to
the Company,
2. The price of conversion shall be the market price
3. The convertible notes shall include a detachable warrant to purchase
2,000,000 shares of common stock at $.10 per share for a period of
one year
4. The Company shall file a registration statement with regard to the
underlying shares.
On April 30, 2001 $407,283 of notes together with $21,029 of accrued
interest were converted into 5,366,405 shares of common stock.
On the same date, in consideration for delays experienced in the
opening of the Homestead plant $235,000 of the convertible notes were modified
as follows: 1. The notes shall be converted at any time prior to April 30, 2001,
at such date as the note holder shall determine by written notice to the
Company, 2. The price of conversion shall be the market price 3. The Company
shall file a registration statement with regard to the underlying.
On April 30, 2001 $235,000 of notes together with $12,104 accrued
interest were converted into 3,088,801 shares of common stock.
On May 31, 2001 the Company issued 313 shares of the Series C preferred
stock in exchange for $250,000 of debt.
Item 27. EXHIBITS.
3.1* Articles of Incorporation and Amendments thereto.
3.2* By-Laws and Amendments thereto.
4.1* Form of Common Stock Certificate.
4.2* Form of Certificate of the Designation, Preferences,
Rights and Limitations of Series A Preferred Stock
4.3** Form of Certificate of the Designation, Preferences,
Rights and Limitations of Series B Preferred Stock
4.4** Form of Certificate of the Designation, Preferences,
Rights and Limitations of Series C Preferred Stock
5.1 Opinion of Axelrod Smith & Kirshbaum.
10.1* LPS Acquisition Agreement dated May 28, 1998
10.2* Torland Acquisition agreement dated May 1999
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10.3* Torland loan document #1
10.4* Torland loan document #2
10.5* Torland loan document #3
10.6* Torland loan document #4
10.7** $85,000 Convertible note with Robert Kohn
10.8** $150,000 Convertible note with Robert Kohn
10.9** $133,283 Convertible note with MJ Shulman, Inc.
10.10** $275,000 Convertible note with MJ Shulman, Inc.
10.11* Torland Extention
10.12* May 28, 1998 note with Bob Claire
10.13*** Credit Facility
21.1* Subsidiaries of the registrant
23.1 Consent of Axelrod Smith & Kirshbaum (contained in Exhibit 5
above)
21.2 Consent of Sweeney, Gates & Co.
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* Incorporated by reference to Form 10SB as amended.
** Incorporated by reference to Form 10-KSB for the fiscal year ended
May 31, 2001
*** Filed herewith
Item 2. Description of Exhibits.
The Exhibits required by this item are included as set forth in the
Exhibit Index.
Item 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That for the purpose of determining any liability under the
Securities Act of 1935, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Boynton
Beach and State of Florida on April 10, 2002.
AMERICAN GROUP, INC.
By: /S/ ROBERT CLAIRE
-----------------------
Robert Claire
President/principal executive officer/principal accounting officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Robert Claire
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Robert Claire Director April 10, 2002
/s/ Eric W. Deckinger
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Eric W. Deckinger Director April 10, 2002
/s/ John Stewart
- ---------------------
John Stewart Director April 10, 2002
/s/ Timothy S. Hart
- ---------------------
Timothy S. Hart Director April 10, 2002
/s/ Louis Zannette
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Louis Zannette Director April 10, 2002
/s/ Jerry Jennings
- -------------------
Jerry Jennings Director April 10, 2002
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