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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year period ended May 31, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____ to ______
Commission file number 0-30474
American Group, Inc.
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(Exact name of small business issuer as specified in its charter)
Florida 88-0326984
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
10570 Hagen Ranch Road, Boynton Beach, FL 33437
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(Address of principal executive offices) (Zip Code)
561-732-4116
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (x) No ( ).
Check if disclosure of delinquent filers in response to item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB x
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State issuers revenues for is most recent fiscal year $2,497,330 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in rule
12b-2 of the exchange Act.) $2,249,063
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of July 12, 2000 the registrant
had issued and outstanding 19,715,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one);
Yes ( ) No (x)
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PART I
Item 1. Description of Business.
American Group, Inc. (the "Company"), a Nevada Corporation, was incorporated in
1994. Since May 1998 the Company's principal business has been the custom
blending of soil mixes for the commercial nursery industry. The Company through
its wholly owned subsidiary LPS Acquisition Corp. ("LPS") does business under
the name Lantana Peat and Soil ("Lantana"). Lantana is a 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.
("Kedac").
On August 15, 1999 the Company, through its wholly owned Canadian subsidiary
9075-7774 Quebec, Inc. acquired Torland, 9006-1474 Quebec, Inc., a Canadian
sphagnum peat moss bog and processing facility. The Company's Canadian
subsidiary 9075-7774 Quebec, Inc. was formed for the sole purpose of acquiring
Torland. The purchase required the Company to pay $400,000 at the time of
closing and requires payment of an additional $835,000 as follows: $200,000 on
October 15, 1999, $70,000 on November 15, 1999, $200,000 on January 15, 2000,
$200,000 on May 15, 2000 and $165,000 on August 17, 2000. This obligation is
payable with interest at 8% per annum. Further, the Company has issued an
additional 700,000 shares of its common stock to the shareholders of Torland.
The Company has not made its October, November, January and May payments under
its agreement. The Company and representatives of the former shareholders of
Torland are presently negotiating a written extension on the payment of this
obligation. The Company has not been provided with any notice of default under
this obligation. The Company believes that it will be able to negotiate a
written extension for the payment to the former shareholders of Torland. No
assurance, however, can be given that the Company will be successful in
negotiating an extension of its payment obligations or that if successful it
will be able to raise the additional capital necessary to make its payment. The
Company is presently trying to raise the capital needed to fund the balance of
the transaction. There can be no assurance that the Company will be successful
with this or any other activity to raise additional capital.
In Note 2 to the audited financial statements, the Company's independent
auditors have reported that the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. The Company's operating losses and the Company's need for financing
raises substantial doubt about the Company's ability to continue as a going
concern. During the year ended May 31, 2000, the Company incurred net losses of
$1,975,968 and during the year ended May 31, 1999, the Company incurred a net
loss of $925,599. Also, at May 31, 2000, the Company had negative working
capital of $3,895,051. These factors along with an accumulated deficit of
$3,721,970 at May 31, 2000 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 into a new state of the art soil blending facility
near Homestead, Florida, close to the major portion of its customer base.
Additionally, the Company plans, along with the integration with Torland, to
begin utilizing its new facility, which management believes will substantially
decrease its operating costs. Management believes these efforts will generate
positive cash flow. There can be no assurance that the Company's planned
financing activities will be successful or that the Company will have the
ability to implement its business plan and ultimately attain profitability. The
Company's long-term viability as a going concern is dependent upon two key
factors, as follows:
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1. The Company's ability to obtain adequate sources of debt or equity funding to
meet current levels of operations and fund the expansion of its business
operations; and
2. The ability of the Company to ultimately achieve adequate profitability and
cash flows from operations to sustain and expand its operations.
History
In December, 1994 Kedac entered into an agreement to acquire the assets and
liabilities of Can-Flo International, Inc.("Can-Flo"), 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 was the owner and executive officer of Kedac. Mr.
Deckinger had no affiliation with Can-Flo. The business reason for the
transaction was for Kedac to acquire the operations of Lantana to gain a
foothold in the custom blended soil mix business.
In July, 1997 Lator International, Inc. ("Lator"), obtained an option to
purchase Torland from the shareholders of Torland in exchange for a loan to
Torland, which loan was collateralized by inventory. This option served as the
basis of the Company's 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 claiming a fraudulent transfer of assets from Can-Flo, Kedac filed under
Chapter 11 of the Bankruptcy Code in January, 1997 in order to stop the
litigation. 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 the Company 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 shareholders of LPS sold 100% of its outstanding stock to
Coventry Industries Corp. ("Coventry") 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.
Management of the Company believed that the business purpose of this transaction
was to provide Coventry with an operating business, with existing management in
place, in the custom blended soil mix business with an option for acquiring a
Canadian peat bog and processing facility. This transaction resulted in LPS
becoming a wholly owned subsidiary of Coventry. Mr. Deckinger remained general
manager of LPS and became a preferred stockholder of Coventry in exchange for
his assumption of existing indebtedness of LPS ("Indebtedness"). Prior to the
transaction, neither Mr. Deckinger nor LPS were affiliated with Coventry. Two
family members of affiliates of Coventry, however, each owned .4% of LPS common
stock. Neither family member was an officer or director of LPS.
On May 31, 1998 the Company acquired all the common stock of LPS from Coventry
for 120,000 shares (22.4%) of the Company's common stock. As part of this
transaction Mr. Deckinger agreed to convey back his preferred stock in Coventry
and the Company agreed to assume his Indebtedness. Prior to this transaction the
American Group, Inc. had no operations or assets.
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On May 31, 1998 the Company 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 30,000 shares (6%) of the
Company's common stock and assumption of accrued expenses and notes payable.
The Company was not affiliated with Coventry, LPS, Lator or Mr. Deckinger at the
time of the acquisition. Mr. Deckinger continued to function in his capacity as
general manager of LPS and became president of the Company. The business reason
for the transaction was (1) for the Company to acquire an operating business
with an option for acquiring a Canadian peat bog and processing facility, which
the Company believes has tremendous upside potential, and (2) for Coventry to
divest itself of a subsidiary that did not fit its business profile. In
November, 1998 Mr. Deckinger assumed $750,000 of the Company's debt in exchange
for 7,500,000 shares of the Company's common stock.
On August 15, 1999 the Company, through its wholly owned Canadian subsidiary
9075-7774 Quebec, Inc. acquired Torland, a Canadian sphagnum peat moss bog and
processing facility. The Company's Canadian subsidiary 9075-7774 Quebec, Inc.
was formed for the sole purpose of acquiring Torland. The purchase required the
Company to pay $400,000 at the time of closing and requires payment of an
additional $835,000 as follows: $200,000 on October 15, 1999, $70,000 on
November 15, 1999, $200,000 on January 15, 2000, $200,000 on May 15, 2000 and
$165,000 on August 17, 2000. This obligation is payable with interest at 8% per
annum. Further, the Company has issued an additional 700,000 shares of its
common stock to the shareholders of Torland.
The Company has not made its October, November, January and May payments
totaling $670,000. The Company and representatives of the former shareholders of
Torland are presently negotiating a written extension on the payment of this
obligation. The Company has not been provided with any notice of default under
this obligation.
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, along with a controlling interest in a premium producer of Canadian
sphagnum peat moss. Mr. Deckinger has been the strategist for these
transactions, even though he was not affiliated with some of the parties when
the transactions occurred.
Business Activities
The Company, through its wholly owned subsidiary LPS, is a custom blender of
soil mixes for the commercial nursery industry. The Company's current annual
revenue is approximately $2,497,330, which is approximately 83% of the Company's
current capacity. The Company's principal supplier of sphagnum peat moss is
Torland.
In February, 1999, the Company began construction of a new $1,500,000 soil
blending facility located near Homestead, Florida, the heart of the Florida
nursery industry, which will have the capacity to produce upwards of $15,000,000
in blended soil products annually. In addition to the increased capacity, the
new facility is located within fifteen minutes drive time to the Homestead
markets. Management of the Company believes that with its increased capacity and
the proximity of the new facility to the Homestead commercial nursery market
that it will be able to increase both its revenues and operating profit.
The plant is anticipated to be completed in October, 2000 and is approximately
75% completed as of the date of this filing. The Company is presently trying to
raise the capital needed to finance the balance needed to complete the
construction of the new plant. There can be no assurance that the Company will
be successful with this or any other activity to raise additional capital.
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Overall Cash Flow Situation
A total of approximately $430,000 will be needed to complete the Company's
planned new plant facility over the next quarter. The total cost of the plant
and improvement is estimated at $1,500,000 of which the Company has already
funded $700,000. In addition, $835,000 is due in payments relating to the
Torland acquisition over the next year of which $670,000 is past due. The
Company is currently operating in a deficit cash position and does not generate
positive cash flow from its current operations.
On July 9, 2000 the Company entered into an agreement to issue an additional
1,564 shares of series B preferred stock in exchange for a total consideration
of $1,251,200. As of July 12, 2000, $305,000 has been realized from this
transaction. The balance of this funding is expected to complete the payments
needed on the new facility and move to Homestead as well as provide working
capital to the Company's operating businesses.
An abandonment or non-payment on the new Homestead plant would be catastrophic
to the operations of the Company's soil blending operation. The Company will not
operate in its current location beyond the anticipated new plant completion date
of October 2000 and its current equipment would need substantial repair to
operate beyond the anticipated completion date. Non-payment of the Torland
obligation or inability to reach agreement with the former Torland shareholders
for a written extension may result in the Company's forfeiting Torland and the
Canadian peat moss bog. The Company is not able to produce income from
operations in its existing facility. Operating at a deficit is seen as a
marketing cost to maintain existing market share until the planned move is
completed. The Company projects positive income from operations within two
months of moving into its new facility.
Soil Blending
The Company's 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, growing plants and flowers in pots. The Company obtains raw materials
for its blending processes from Torland and locations throughout Florida and
Southern Georgia.
Differentiation From Competition
The Company differentiates itself from competitors by its relationship with
Torland, which allows it 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.
The Company purchases the same size bale from Torland at $60 per bale. The
planned "state of the art" mixing plant located near Homestead, Florida will
significantly increase the Company's capacity to produce its custom blended soil
products with efficiencies that are expected to reduce the Company's current
unit costs, and enhance its commitment to customer service.
Canadian sphagnum peat moss currently represents approximately 29% of the total
product cost of the Company's various soil blends. Even with the savings the
Company has had in the purchase of Canadian sphagnum peat moss to this point it
has been unable to generate positive income from operations due to the
inefficiencies associated with the condition of the Company's present plant and
the Boynton Beach, Florida location. The present plant requires two times the
labor cost than the new plant and is over three times slower in producing an
average load of blended soil mix. It then takes approximately 2.5 hours to
deliver an average load of soil mix as compared to approximately 15 minutes from
the planned new location.
Seasonality
The Company's customers are primarily commercial nurseries, which require soil
mixes on a twelve-month basis. The Company's strongest months for delivery to
customers occurs during April through June and mid-August through November.
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Marketing
The Company markets its products by direct sales. LPS's current customer base is
composed of approximately 350 commercial nurseries throughout Florida.
Government Regulation
The Company is subject to federal, state and local regulations including
environmental protection regulations. Such regulations deal with the handling,
transport and disposal of materials the Company uses in its processes. The
Company believes that it is in compliance with these regulations.
Trademarks
The Company has registered trademarks for the names "AGRO PEAT & SOIL",
"AGROMIX" and "AGROMAX".
Employees
As of July, 2000, the Company had 12 employees of which four are in management.
The Company believes that its labor relations are good. No employee is
represented by a labor union.
Subsidiaries
The Company has 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 the
soil mixing business of the Company. Lator was acquired in order to obtain its
right to acquire Torland. 9075-7774 Quebec, Inc. acquired Torland on August 15,
1999.
The principal executive offices of the Company are located at 10570 Hagen Ranch
Road, Boynton Beach, Florida 33437, tel. (888) 328-9322. The Company's stock
symbol on the OTCBB is "MOSS".
Recent Events
On June 7, 2000, the Company borrowed $150,000 from three individuals at 10%
interest. The principal and accrued interest is due on demand.
On June 9, 2000 the Company issued 300,000 shares of common stock in connection
with the exercise of warrants associated with and to extend the due date of
certain convertible notes, originally due April 9, 2000, to September 9, 2000.
The Company received no proceeds in connection with this transaction.
On June 13, 2000 the Company designated 5,900 shares of series B convertible
preferred stock. The preferred stock has a stated value of $800 per share. The
holders of the preferred stock are entitled to receive a dividend 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. The preferred stock may be
converted into a quantity of shares of common stock of the Company 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 common stock of the Company. The
calculation is made based on, 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 the Company issued 2,400 shares of preferred
stock to M.J.Shulman, Inc. in exchange for debt outstanding at May 31, 2000 in
the original face amount of $355,000 and unpaid interest thereon and the
quantity of 862,158 shares of the Company's series A preferred stock.
Concurrent with the designation the Company issued 900 shares of 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.
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On July 9, 2000 the Company entered into an agreement to issue an additional
1,564 shares of series B preferred stock in exchange for a total consideration
of $1,251,200. The subscriber tendered and delivered to the Company a marketable
security as partial in-kind consideration of the purchase price of the series B
preferred stock. The Company shall issue preferred stock to the subscriber on a
pro rata basis as the Company receives proceeds from the liquidation of the
marketable security tendered for payment. In the event the proceeds exceed
$1,251,200 the excess shall be deemed an unsecured demand loan from the
subscriber to the Company, bearing interest at 9%. As of July 12, 2000, $305,000
has been realized in liquidation proceeds from the sale of the marketable
security and accordingly, 381 shares will be issued to the subscriber.
The Company has utilized a substantial portion of this amount to reduce current
outstanding obligations and continue funding on its planned new facility.
Risk Factors
Overall Cash Flow Situation
A total of approximately $430,000 will be needed to complete the Company's
planned new plant facility over the next quarter. The total cost of the plant
and improvement is estimated at $1,500,000 of which the Company has already
funded $700,000. In addition, $835,000 is due in payments relating to the
Torland acquisition over the next year of which $670,000 is past due. The
Company is currently operating in a deficit cash position and does not generate
positive cash flow from its current operations.
On July 9, 2000 the Company entered into an agreement to issue an additional
1,564 shares of series B preferred stock in exchange for a total consideration
of $1,251,200. As of July 12, 2000, $305,000 has been realized from this
transaction. The balance of this funding is expected to complete the payments
needed on the new facility and move to Homestead as well as provide working
capital to the Company's operating businesses.
An abandonment or non-payment on the new Homestead plant would be catastrophic
to the operations of the Company's soil blending operation. The Company will not
operate in its current location beyond the anticipated new plant completion date
of October 2000 and its current equipment would need substantial repair to
operate beyond the anticipated completion date. Non-payment of the Torland
obligation or inability to reach agreement with the former Torland shareholders
for a written extension may result in the Company's forfeiting Torland and the
Canadian peat moss bog. The Company is not able to produce income from
operations in its existing facility. Operating at a deficit is seen as a
marketing cost to maintain existing market share until the planned move is
completed. The Company projects positive income from operations within two
months of moving into its new facility.
Going Concern Considerations
In Note 2 to the audited financial statements, the Company's independent
auditors have reported that the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. The Company's operating losses and the Company's need for financing
raises substantial doubt about the Company's ability to continue as a going
concern. During the year ended May 31, 2000, the Company incurred net losses of
$1,975,968 and during the year ended May 31, 1999, the Company incurred a net
loss of $925,599. Also, at May 31, 2000, the Company had negative working
capital of $3,895,051. These factors along with an accumulated deficit of
$3,721,970 at May 31, 2000 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 into a new state of the art soil blending facility
near Homestead, Florida, close to the major portion of its customer base.
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Additionally, the Company plans, along with the integration with Torland, to
begin utilizing its new facility, which management believes will substantially
decrease its operating costs. Management believes these efforts will generate
positive cash flow. There can be no assurance that the Company's planned
financing activities will be successful or that the Company will have the
ability to implement its business plan and ultimately attain profitability. The
Company's long-term viability as a going concern is dependent upon two key
factors, as follows:
1. The Company's ability to obtain adequate sources of debt or equity funding to
meet current levels of operations and fund the expansion of its business
operations; and
2. The ability of the Company to ultimately achieve adequate profitability and
cash flows from operations to sustain and expand its operations.
Torland Obligation
In connection with its acqusition of Torland the Company is obligated to pay, in
addition to the $400,000 it paid at the time of closing, an additional $835,000
as follows: $200,000 on October 15, 1999, $70,000 on November 15, 1999, $200,000
on January 15, 2000, $200,000 on May 15, 2000 and $165,000 on August 17, 2000.
This obligation is payable with interest at 8% per annum. The Company has not
made its October, November, January and May payments totaling $670,000. The
Company and representatives of the former shareholders of Torland are presently
negotiating a written extension on the payment of this obligation. The Company
has not been provided with any notice of default under this obligation. The
Company believes that it will be able to negotiate a written extension for the
payment to the former shareholders of Torland. No assurance, however, can be
given that the Company will be successful in negotiating an extension of its
payment obligations or that if successful it will be able to raise the
additional capital necessary to make its payment. The Company is presently
trying to raise the capital needed to fund the balance of the transaction. There
can be no assurance that the Company will be successful with this or any other
activity to raise additional capital.
Financing
The Company must obtain outside financing to fund the expansion of the business
and to meet the obligations of the Company as they become due. Any additional
debt or equity financing may be dilutive to the interests of the shareholders of
the Company. 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 the Company's existing
stockholders' interest, and borrowings from third parties could result in assets
of the Company being pledged as collateral and loan terms which would increase
its debt service requirements and could restrict the Company's operations. There
is no assurance that capital will be available from any of these sources, or, if
available, upon terms and conditions acceptable to the Company.
Item 2. Description of Property.
The Company's principal executive offices are located at 10570 Hagen Ranch Road,
Boynton Beach, Florida 33437 in 1,400 square feet of office space on a month to
month lease for $6,500 per month, which includes approximately 11 acres of land
where the Company operates its soil mixing business. LPS plans on relocating
near Homestead, Florida in October, 2000. The Company will lease the Homestead
facility for $7,500 per month (adjusted annually) as part of a ten-year lease
with an additional five consecutive three-year option terms. The Company
believes that its properties are adequate for its present needs and that
suitable space will be available to accommodate its future needs.
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Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is currently traded on the over-the-counter bulletin
board ("OTCBB") under the symbol "MOSS." The following table sets forth, for the
periods indicated, the reported high and low closing bid quotations for the
common stock of the Company 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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August 31 1998 (*) $25.00 $1.25
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November 30 1998 (*) $1.87 $ .40
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February 28 1999 $6.00 $3 7/8
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May 31 1999 $4 1/8 $3.00
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August 31 1999 $3 3/8 $2.00
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November 30 1999 $2 3/16 $ 3/8
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February 29 2000 $ 7/8 $ 1/8
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May 31 2000 $ .52 $ .09
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(*) Pre-reverse split. On December 21, 1998 The Company executed a 10 to 1
reverse split of its Common Stock and all the share amounts in this Form 10SB
are reverse split amounts.
The bid price on the Company's common stock was $ 3/16 per share on July 12,
2000.
As of July 12, 2000, there were approximately 929 holders of record of the
Company's common stock.
The Company's transfer agent is Silverado Stock Transfer, Inc., 8170
Southeastern Avenue, #4-236, Las Vegas, Nevada 89123, (702) 263-0920.
Dividend Policy
The Company has not paid, and the Company does not currently intend to pay cash
dividends on its common stock in the foreseeable future. The current policy of
the Company's Board of Directors is for the Company to retain all earnings, if
any, to provide funds for operation and expansion of the Company's business. The
declaration of dividends, if any, will be subject to the discretion of the Board
of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.
Item 6. Management Discussion and Analysis or Plan of Operation
The following Management Discussion and Analysis or Plan of Operation is
qualified by reference to and should be read in conjunction with, the Company's
Consolidated Financial Statements and the Notes thereto as set forth beginning
on page F-1.
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Forward-looking Statement and Information
The Company is including the following cautionary statement in this Form 10K-SB
for any forward-looking statements made by, or on behalf of, the Company.
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. The Company's expectations, beliefs and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitations, management's examination of historical operating trends,
data contained in the Company's 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 the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: the ability
of the Company to effectuate and successfully operate acquisitions and the
ability of the Company to obtain acceptable forms and amounts of financing to
fund planned acquisitions and the new facility in Homestead.
Introduction
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems, principally by obtaining equity capital and commencing
profitable operations. While pursuing equity capital, the Company must continue
to operate on cash flow generated from operations and financing activity. The
Company experienced a loss of $1,966,914 for the year ended May 31, 2000 and has
a negative working capital of $3,901,488. 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
into a new state of the art soil blending facility in Homestead, Florida, close
to the major portion of its customer base. Additionally, the Company plans,
along with the integration with Torland, to begin utilizing this state of the
art soil blending plant, which management believes will substantially decrease
its operating costs. Management believes these efforts will generate positive
cash flow.
Year Ended May 31, 2000 compared to May 31,1999
Revenues for the year ended May 31, 2000 were $2,497,330 compared to $2,240,995
for the year ended May 31, 1999. The increase in sales can be attributed to
sales to an expanded customer base and the inclusion of nine and one half months
of sales for Torland (which was acquired on August 15, 1999).
Gross profit margins as a percentage of revenues for the year ended May 31, 2000
and 1999 were (0.5)% and 6.9%, respectively. The decrease in the gross profit
margin can be attributed to increased labor and material costs as a percentage
of sales. The Company's current facility is not adequate to handle the volume of
business currently in place. During the year ended May 31, 2000 the Company
purchased approximately $379,000 of Canadian sphagnum peat moss from suppliers
other than Torland. The Company pays a premium price for such purchases. This
resulted in approximately $200,000 of additional cost to LPS as compared to the
prior year, where the majority of the Canadian sphagnum peat moss was purchased
from Torland. Further, due to the Company's poor cash flow during the year ended
May 31, 2000, 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 currently 15% higher than the price that could be
obtained if the Company were able to take advantage of volume price concessions.
The Company is currently relocating to Homestead, Florida where it is expected
to reverse the negative gross profit trend. Operating expenses for the year
ended May 31, 2000 and 1999 were $1,679,040 and $1,000,860, respectively,
consisting of selling, general and administrative expenses. For the year ended
May 31, 2000 operation expenses include $319,000 provision against certain
officer loans, $46,000 of amortization expense of goodwill and a $119,000
increase in the amount of depreciation over the prior year. For the year ended
May 31, 1999 selling, general and administrative expenses including the
payment-in-kind of common stock of the Company valued at the then prevailing
market value of $.10, which amounted to $8,000 for legal and accounting services
during the year ended May 31, 1999.
10
<PAGE>
The net loss of $1,975,968 for the year ended May 31, 2000 consists of non-cash
losses of $612,617 (which includes depreciation and amortization costs
of $287,049 and a provision of approximately $319,671 against certain officer
loans) and operating losses of $1,363,351. The net loss of $925,599 for the year
ended May 31, 1999 consists of non-cash losses of $82,591 (which includes
depreciation and amortization costs of $74,591) and operating losses of
$846,611.
At May 31, 2000, the Company had cash and cash equivalents of $9,732, which was
an decrease of $3,665 compared to the cash held at May 31, 1999. During the year
ended May 31, 2000, the Company used net cash for operations of $1,453,128,
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
$3,895,051 at May 31, 2000.
Qualitative Discussion
The Company believes that LPS's present operations will require that LPS obtain
additional capital during the next twelve months. One of the Company's
objectives for the next twelve months is to increase the capital base of LPS, so
that LPS can increase the scope of its operation with the construction of its
new soil blending facility, and to acquire additional soil blending capacity. It
is unknown at this time whether the Company will be successful in raising
capital on reasonable terms for the purpose of increasing the capital base of
LPS. The Company anticipates that most, if not all, of any acquisitions it may
make during the next twelve months would be of operating entities that have
employees, or of assets that have employees associated with such assets.
Accordingly, the Company anticipates that there would be a significant increase
in the number of its employees at the operating unit or subsidiary level, at
such time, if any, that acquisitions may be consummated. The Company has been
unable to meet its cash requirements for its current operations through internal
cash flow in the prior twelve months. These requirements were only met by the
additional sale of stock. The Company believes that LPS's cash requirements for
LPS's current operations during the next twelve months, excluding capital
requirements for the construction of its new soil blending facility, can be met
through LPS's internal cash flow from operations. The Company's other cash
requirements would be in connection with additional capital for LPS's growth,
the funding of the acquisition of Torland or other assets, if any, in the amount
not yet determined. The Company must pay an additional $835,000 in connection
with the acquisition of the equity of Torland. Until such time as the operating
results of the Company improve sufficiently, the Company must obtain outside
financing to fund the expansion of the business and to meet the obligations of
the Company as they become due. Any additional debt or equity financing may be
dilutive to the interests of the shareholders of the Company. Such outside
financing must be provided from the Company's operations, or from the sale of
equity securities, borrowing, or other sources of third party financing in order
for the Company to expand its operations. Further, the sale of equity securities
could dilute the Company's existing stockholders' interest, and borrowings from
third parties could result in assets of the Company being pledged as collateral
and loan terms, which would increase its debt service requirements and could
restrict the Company's operations. There is no assurance that capital will be
available from any of these sources, or, if available, upon terms and conditions
acceptable to the Company.
Item 7. Financial Statements
The financial statements required in this Form 10-KSB are set forth beginning
on page F-1
Item 8. Changes in and Disagreements With Accountants.
None
11
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act. The following table sets forth the
directors and executive officers of the Company.
------------------------------------------------------------------------
Name and Address Age Position
------------------------------------------------------------------------
Eric W. Deckinger 53 Director, President, Secretary
------------------------------------------------------------------------
John Stewart 57 Director, Treasurer and Vice-president
------------------------------------------------------------------------
Directors are elected annually and hold office until the next annual meeting of
the stockholders of the Company 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 the directors and executive
officers of the Company. The Company does not pay any cash compensation for
attendance at directors meetings or participation in director's functions.
Biographies
Eric W. Deckinger is the president 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
shareholder, director and executive officer of Kedac. In December 1994, Kedac,
purchased the assets from 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 as to Kedac in August 1997. The Company subsequently
acquired LPS in May, 1998. Prior to 1994, Mr. Deckinger was the President of
Leonard L. Farber, Incorporated, a privately held developer of commercial real
estate, where Mr. Deckinger managed more than $400 million of real estate
development and construction. Mr. Deckinger has a B.S. degree from the
University of Pittsburgh. The Company owns and pays the premiums on a $3,000,000
key man life insurance policy on Mr. Deckinger of which the Company is the
beneficiary.
John Stewart was the general manager of Kedac the predecessor of LPS in 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 by Kedac, Inc., the predecessor of LPS.
Item 10. Executive Compensation.
The following table reflects compensation for services to the
Company for the fiscal years ended May 31, 2000 and 1999 of the chief executive
officer. No other executive officer of the Company received compensation, which
exceeded $100,000 during 2000 and 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric W. Deckinger 2000 $93,600 - 10,050 (1) - - - -
President
-------------------------------------------------------------------------------------------------------------------
1999 $93,600 - 10,050 (1) - - - -
-------------------------------------------------------------------------------------------------------------------
1998 $93,600 - 10,050 (1) - - - -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Car Allowance
The Company does not pay its directors any compensation for serving in such
capacity.
12
<PAGE>
Employment Agreements
The Company does not have an employment contract with any of its Employees.
Employee Stock Option Plan
The Company believes that equity ownership is an important factor in its ability
to attract and retain skilled personnel, and the Board of Directors of the
Company may adopt an employee stock option program. The purpose of the stock
option program will be to further the interest of the Company, its subsidiaries
and its 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 the Company, thus enhancing their personal interest in
the Company's continued success and progress. This program will also assist the
Company and its subsidiaries in attracting and retaining key employees and
directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of July 17, 2000, with
respect to the beneficial ownership of shares of common stock by (i) each person
who is known to the Company 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.
-------------------------------------------------------------------------------
Number of
shares of
common stock
beneficially
Name owned Percent of Class
-------------------------------------------------------------------------------
Eric W. Deckinger 7,020,000 35.6%
10570 Hagen Ranch Road
Boynton Beach, FL 33437
-------------------------------------------------------------------------------
John Stewart 0 0
10570 Hagen Ranch Road
Boynton Beach, FL 33437
-------------------------------------------------------------------------------
Evergreen Investment Group LP 1,900,000(1)(2) 9.6%
4050 NE 25th Avenue
Lighthouse Point, Florida 33064
-------------------------------------------------------------------------------
MJ Shulman, Inc. 4,731,600(3) 24.0%
7777 Glades Road #214
Boca Raton, Florida 33434
-------------------------------------------------------------------------------
Jessica Kohn 1,774,350(4) 9.0%
23 Rollingwood Dr
Voorhees, New Jersey 08043
-------------------------------------------------------------------------------
All Officers and Directors as 7,020,000 36.2%
a Group - two persons
-------------------------------------------------------------------------------
(1) Includes 1,200,000 shares which would be issuable upon conversion of
indebtedness.
(2) The shares of Evergreen Investment Group LP are voted by Roy Bresky.
(3) Includes 4,731,600 shares which would be issuable upon conversion of
preferred stock
(4) Includes 1,774,350 shares which would be issuable upon conversion of
preferred stock
13
<PAGE>
Item 12. Certain Relationships and Related Transactions.
The current Board of Directors of the Company has adopted a policy that Company
affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its 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 the independent disinterested directors of the Company.
In November, 1998, the Company issued 10,000,000 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 Company issued 7,500,000 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.
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.
On June 13, 2000 the Company designated 5,900 shares of series B convertible
preferred stock. The preferred stock has a stated value of $800 per share. The
holders of the preferred stock are entitled to receive a dividend of 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. The preferred stock may be
converted into a quantity of shares of common stock of the Company 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 common stock of the Company. The
calculation is made based on, as if, the total original issue quantity of shares
of the preferred stock is being converted in each occurrence of conversion.
14
<PAGE>
Concurrent with the designation the Company issued 2,400 shares of preferred
stock to M.J.Shulman, Inc. in exchange for debt outstanding at May 31, 2000 in
the original face amount of $355,000 and unpaid interest thereon and the
quantity of 862,158 shares of the Company's series A preferred stock.
Concurrent with the designation the Company issued 900 shares of 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.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 1. Index to Exhibits.
All exhibits set forth below are provided herewith.
No. Description
--- -----------
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
10.1* LPS Acquisition Agreement dated May 28, 1998
10.2* Torland Acquisition agreement dated May 1999
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* Bank Loan Commitment
16.1* Letter on change of certifying accountant
21.1* Subsidiaries of the registrant
27 Financial Data Schedule (Electronic filing only).
* Incorporated by reference to the Company's Form 10SB as amended
(b) Reports on Form 8-K.
During the three months ended May 31, 2000 the Company did not file any reports
on Form 8-K.
SIGNATURES
In accordance with the requirements of Section 13 or 15 (b) the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
American Group, Inc.,
a Nevada corporation
Date: August 14, 2000
By: /s/ Eric W. Deckinger
-------------------------
Eric W. Deckinger,
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date August 14, 2000
By /s/ Eric W. Deckinger
----------------------------------------------------
Eric W. Deckinger, Director, President and Secretary
Date August 14, 2000
By /s/ John Stewart
----------------------------------------------------
John Stewart, Director, Vice-president and Treasurer
15
<PAGE>
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 Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
American Group, Inc.
We have audited the accompanying consolidated balance sheets of American Group,
Inc. and subsidiaries as of May 31, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended May 31, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, 2000 and the results of its consolidated
operations and its consolidated cash flows for the years ended May 31, 2000 and
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
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 Notes 2 and 13. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Sweeney, Gates & Co.
July 22, 2000
Fort Lauderdale, FL
F-1
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 9,732
Accounts receivable, less allowance for doubtful accounts
of $10,000 108,018
Inventory 107,636
-----------
Total current assets 225,386
Property, plant and equipment, net of accumulated
depreciation of $315,982 3,073,278
Other assets:
Equipment deposit 700,000
Goodwill, net 1,751,487
Other 4,484
-----------
$ 5,754,635
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,096,603
Current portion of convertible long-term debt 118,563
Current portion of capital lease obligation payable 32,842
Accrued interest payable 278,216
Accounts payable and accrued expenses 594,213
-----------
Total current liabilities 4,120,437
-----------
Long term liabilities:
Long-term debt less current portion 292,982
Convertible long-term debt 440,700
Long-term capital lease obligation less current portion 43,621
-----------
777,303
-----------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
862,158 issued and outstanding 862
Common stock, $.001 par value, 50,000,000 shares authorized,
19,415,000 shares issued and outstanding 19,415
Additional paid-in capital 4,552,691
Comprehensive income 5,897
Accumulated deficit (3,721,970)
-----------
Total stockholders' equity 856,895
-----------
$ 5,754,635
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2000 AND 1999
2000 1999
----------- -----------
Revenue $ 2,497,330 $ 2,240,995
Cost of sales 2,509,230 2,086,746
----------- -----------
Gross profit (loss) (11,900) 154,249
Selling, general and administrative expenses 1,679,040 1,000,860
----------- -----------
Operating loss (1,690,940) (846,611)
----------- -----------
Other income (expenses):
Interest expense (286,662) (153,420)
Interest income 1,634 74,432
----------- -----------
(285,028) (78,988)
----------- -----------
Net loss $(1,975,968) $ (925,599)
=========== ===========
Net loss per share, basic and fully diluted $ (0.10) $ (0.09)
=========== ===========
Weighted average shares outstanding 19,066,781 10,001,154
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- ------------------- paid-in Comprehensive Accumulated
Shares Amount Shares Amount capital income deficit Total
-------- -------- -------- -------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1998 - $ - 535,000 $ 535 $ - $ - $ (820,403) $ (819,868)
Conversion of notes payable 862,158 862 - - 861,296 - - 862,158
Sale of common stock - - 10,000,000 10,000 940,000 - - 950,000
Conversion of notes payable - - 7,500,000 7,500 742,500 - - 750,000
Common stock issued in connection
with compensation to
consultants - - 80,000 80 7,920 - - 8,000
Net loss - - - - - - (925,599) (925,599)
------- ---- ---------- ------- ---------- ------- ----------- -----------
Balance, May 31, 1999 862,158 862 18,115,000 18,115 2,551,716 - (1,746,002) 824,691
Issuance of convertible debt
with detachable warrants 192,275 192,275
Exercise of warrants 600,000 600 59,400 - 60,000
Purchase of Torland 700,000 700 1,749,300 - 1,750,000
Net loss - - - - - - (1,975,968) (1,975,968)
Other comprehensive loss-
foreign currency translation
adjustment 5,897 5,897
------- ---- ---------- ------- ---------- ------- ----------- -----------
Balance, May 31, 2000 862,158 $862 19,415,000 $19,415 $4,552,691 $ 5,897 $(3,721,970) $ 856,895
======= ==== ========== ======= ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,975,968) $ (925,599)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 260,511 74,591
Foreign currency exchange rate gain 5,897 -
Amortization of convertible note discount 26,538 -
Issuance of common stock for services - 8,000
Changes in assets and liabilities:
Accounts receivable (17,916) 137,578
Other receivables - (58,320)
Inventory (48,230) (34,893)
Prepaid expenses - 7,890
Bank overdraft - (39,357)
Accounts payable and accrued expenses 296,040 252,802
------------ -----------
Net cash used in operations (1,453,128) (577,308)
------------ -----------
Cash flows from investing activities:
Purchase of equipment - (231,490)
Cash used in business acquisition, net of cash acquired (398,045) -
Deposit on new equipment (513,000) (187,500)
------------ -----------
Net cash used by investing activities (911,045) (418,990)
------------ -----------
Cash flows from financing activities:
Payment of notes receivable - (568,500)
Proceeds from notes payable and long-term debt 725,000 740,208
Proceed from loans payable 2,884,187 -
Payments on loans payable (1,460,518) (1,575,879)
Proceeds from sale of common stock 211,839 2,410,319
------------ -----------
Net cash provided by financing activities 2,360,508 1,006,148
------------ -----------
Net increase in cash (3,665) 9,850
Cash at beginning of year 13,397 3,547
------------ -----------
Cash at end of year $ 9,732 $ 13,397
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 83,875 $ 145,434
============ ===========
Cash paid during the year for taxes $ - $ -
============ ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
In November 1998, the Company issued 7,500,000 shares of common stock to its
President in exchange for $750,000 of Debt assumed by the President. On May 31,
1999 the Company issued 862,158 shares of preferred stock to an invesment banker
in exchange for $862,158 of debt and accrued interest due the investment banker.
In November 1998, the Company issued 80,000 shares of common stock at $.10 per
share (market value) in exchange for professional services rendered to the
Company. On August 15, 1999, the Company issued 700,000 shares of common stock
in connection with the acquisition of Torland.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
("SFAS 121")". SFAS 121 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.
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. There was no amortization
expense for the year ended May 31, 1999. Amortization expense for the year ended
May 31, 2000 was $46,245.
Comprehensive Income - In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
"SFAS No. 130" establishes standards for reporting and display of comprehensive
income and its components. SFAS 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.
F-6
<PAGE>
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, "Foreign Currency Translation
Adjustments."
Comprehensive income is reported on the Consolidated 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 of 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
generally accepted accounting principles 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 per share in
accordance with FASB's Financial Accounting Standard No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 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 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.
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.
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 a loss of $1,975,968 and $925,599 for the years ended May 31, 2000
and 1999, respectively, and has a negative working capital of $3,895,051 at May
31, 2000. In addition, various notes payable are delinquent or in default. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
F-7
<PAGE>
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. See Note 13 for further information.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
3. ACQUISITIONS
On August 18, 1997 the Company's subsidiary LPS purchased the assets and
liabilities of Kedac, Inc. On May 28, 1998, the Company acquired all the common
stock of LPS for 120,000 shares of the Company's stock and assumption of
accounts payable, accrued expenses and notes payable. In addition, on that same
date, the Company purchased all the common stock of Lator for 30,000 shares of
the Company's stock and assumption of accrued expenses and notes payable. For
accounting purposes 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 and Lator, as if, they had been the reporting entities
since inception.
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 period August 16,
1999 through May 31, 2000.
The purchase price was 700,000 shares of the Company's common stock, and
$1,235,000 in cash and a note payable, and the assumption of accounts payable
and notes payable. The note called for payments of $200,000 on October 15, 1999;
$70,000 on November 15, 1999; $200,000 on January 15, 2000; $200,000 on May 15,
2000; and $165,000 on August 17, 2000. The Company has not made any of the
required payments since closing and was delinquent at May 31, 2000 for $670,000.
The Company and representatives of the former stockholders of Torland are
presently negotiating a written extension for the payment of this obligation.
The Company has not been provided with any notice of default under this
obligation, and the Company believes that it will be able to negotiate a written
extension for the payment of its obligation to the former stockholders of
Torland. No assurance, however, can be given that the Company will be successful
in negotiating an extension of its payment obligations or that, if successful,
it will be able to raise the additional capital necessary to make the payments.
In addition, the Company issued 700,000 shares of its common stock to the seller
valued at $1,750,000, which approximated market value.
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-8
<PAGE>
Payment consisted of the following:
Common stock $1,750,000
Note receivable 967,500
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, 1999 as if the acquisition
had occurred on June 1, 1998:
Revenue $2,983,115
Net loss $924,071
Net loss per share $(0.09)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 2000:
Estimated
useful life
-----------
Machinery and equipment $ 1,305,500 5 years
Furniture and fixtures 22,746 10 years
Building 192,190 20 years
Vehicles 112,364 3 years
Land improvements 1,323,268 8-17 years
Sphagnum peat reserves 433,192 20 years
-----------
3,389,260
Less:accumulated
depreciation (315,982)
-----------
$ 3,073,278
===========
Depreciation expense for the years ended May 31, 2000 and 1999 was $220,037 and
$101,716, respectively.
F-9
<PAGE>
5. LONG-TERM DEBT AND NOTES PAYABLE
Notes payable consisted of the following at May 31, 2000:
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 $ 52,689
Demand note payable, 10% interest due to an individual,
guaranteed by American Risk Management, Inc., formerly known
as Coventry Industries Corp. and the President of the
Company, collateralized by accounts receivable and inventory 137,500
Note payable, 11.6% interest, due to a finance company,
payable in monthly installments of $3,747, due December 2001,
secured by equipment 67,445
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. Loan in
default 172,666
Term loan payable, Canadian prime plus 1.5% interest, due to
a bank, payable in monthly installments of $2,767 plus
interest, due May 2000, secured by equipment, and the
personal guarantee of the President of Torland 2,767
Loan payable, Canadian prime plus 1.25% interest, due to a
bank, payable in monthly installments of $1,107 plus
interest, due November 2002, secured by general lien on
movable equipment of Torland 17,709
Loan payable, Canadian prime plus 1.5% interest, due to a
bank, payable in monthly installments of $1,826, plus
interest, due May 2003, secured by equipment, and the
personal guarantee of the president of Torland 54,124
Term loan payable, Canadian prime plus 1.0% interest, due to
a bank, payable in monthly installments of $3,953, plus
interest, due July 2002, secured by equipment, and the
personal guarantee of the President of Torland 201,602
Loan payable, 7.8% interest, due to a finance company,
payable in monthly installments of $1,826, due July 2002,
secured by equipment of Torland 55,520
Note payable, 8% interest, due to Jennica Development
Limited, collateralized by the Torland lease agreements, due
in installments of $200,000 on October 28, 1999, $70,000 on
November 15, 1999, $200,000 on January 15, 2000 and May 15,
2000 and $165,000 on August 17, 2000. Loan is delinquent (See
Note 3) 835,000
F-10
<PAGE>
10% demand note payable due to a corporation (preferred
stockholder) 517,563
10.66% demand note payable due to an individual, guaranteed
by the preferred stockholder 275,000
9% note payable due to an individual, due on September 7,
2000 750,000
10% note payable due to a limited partnership, due on
September 15, 2000 250,000
-----------
3,389,585
Less: current maturities (3,096,603)
-----------
Long-term debt $ 292,982
===========
Maturities of long-term debt are as follows:
2001 $ 3,096,603
2002 146,734
2003 86,954
2004 47,436
2005 11,858
-----------
$ 3,389,585
===========
6. CAPITAL LEASE OBLIGATIONS
The Company leases operating equipment accounted for as capital leases. At May
31, 2000, the equipment and accumulated depreciation were recorded as follows:
Machinery and equipment $ 171,481
Less: accumulated depreciation (37,668)
------------
$ 133,813
============
F-11
<PAGE>
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, 2000:
2001 $ 43,012
2002 26,940
2003 22,404
2004 3,734
-----------
Total minimum lease payments 96,090
Less: amount representing interest (19,627)
-----------
Present value of net minimum lease payments 76,463
Less: current portion (32,842)
-----------
$ 43,621
===========
7. CONVERTIBLE LONG-TERM DEBT
On July 29, 1999, the Company entered into a $600,000 promissory note, interest
payable quarterly, at 10%, and principal due in full on July, 2004. The note is
convertible, all or in part, into the Company's common stock at a price of $0.50
per share. As part of this transaction, the Company issued 600,000 warrants with
an exercise price of $.10 per share. For accounting purposes 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.
On December 9, 1999, the Company raised $125,000 from five investors issuing
convertible debt and, 250,000 common stock warrants. The warrants have an
exercise price of $.05 per share and expire on December 2001 (see Note 13). The
convertible debt consists of five 18% promissory 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 $0.40 per share. Using the same method as outlined above, the Company
assumed, at this 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. At May 31, 2000, amortization was $6,438.
8. 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. 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.
F-12
<PAGE>
At May 31, 2000 future minimum rental payments for operating leases with initial
or remaining noncancelable lease terms in excess of one year are as follows:
2001 $ 168,000
2002 168,000
2003 168,000
2004 42,000
----------
Total minimum payments $ 546,000
==========
9. 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 pays a 5% dividend, payable semi-annually in arrears in cash
or by the in-kind payments of common stock. A cash dividend may only be paid out
of earnings. If dividends are paid in common stock, the value of the in-kind
common stock shall be the current market price. The Company has the right to
redeem the preferred stock at 140% of its face value if the Company is not sold,
or at 300% if the Company is sold. At May 31, 2000 the Company owed $43,108 in
dividends to the holder of the series A preferred stock. Since earnings were not
available for the dividend to be paid in cash, the Company was obligated to pay
the dividend with in-kind common stock (see Note 13).
Common Stock
On November 16, 1998 the Company sold 10,000,000 shares of its common stock for
cash consideration of $950,000 pursuant to an exemption under Rule 504 of
Regulation D of the Securities Act of 1933, as amended. This amount was received
by the Company during June 1999. In November 1998 the Company also issued
7,500,000 shares of common stock to its President, in exchange for $750,000 of
his outstanding debt (See Note 5). On November 16, 1998, the Company issued
80,000 shares of common stock at $.125 per share in exchange for professional
services rendered to the Company.
On July 29, 1999 the Company issued 600,000 shares of its common stock upon the
exercise by one investor of 600,000 warrants to purchase common stock. The
exercise price of each warrant was $.10 per share and the Company received
$60,000 in cash.
On August 15, 1999 the Company issued 700,000 shares of its common stock in
connection with the acquisition of Torland. The stock was valued at $1,750,000
(see Note 3).
10. INCOME TAXES
The Company had available at May 31, 2000, a net operating loss carry-forward
for federal and state tax purposes of approximately $2,863,000 which could be
applied against taxable income in subsequent years through 2020. The tax effect
of the net operating loss is approximately $1,077,000, and a full valuation
allowance has been recorded, since realization is uncertain.
F-13
<PAGE>
Reconciliation of the differences between income taxes computed at the federal
and state statutory tax rates and the provision for income taxes for the year
ended May 31, 2000 is as follows:
Income taxes computed at federal statutory
tax rate (34%) $ 659,000
===========
State tax provision, net of federal benefits
(3.63%) 70,000
Increase in valuation allowance (729,000)
-----------
Provision for income taxes $ -
===========
Temporary differences that give rise to significant deferred tax assets were not
material at May 31, 2000. A reconciliation of the Company's deferred tax asset
at May 31, 2000 is as follows:
Net operating loss carryforward $ 2,863,000
===========
Total deferred tax assets 1,077,000
Valuation allowance (1,077,000)
-----------
Net deferred tax asset $ -
===========
11. COMMITMENTS AND CONTINGENCIES
LPS had a lease for its operating facilities that expired on December 31, 1998.
LPS continues to occupy the facility on a month-to-month basis. The Company
intends to relocate in 2000 (See Note 8).
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.
LPS has purchased a state of the art conveyor system for its new facility. The
total price of the conveyor system is approximately $1,500,000 and as of May 31,
2000 the Company paid $700,000 toward the system. The $700,000 was recorded as a
deposit against the system since the system has not been delivered and installed
and the Company has not taken title to the system.
12. CONCENTRATION OF SUPPLIER AND SALES
The Company purchases sphagnum peat moss from Torland, a wholly owned
subsidiary. The Company was dependent upon Torland continuing in business in
1999, and its continuing ability to ship to the United States (see Notes 3 and
6). During fiscal 1999, the Company purchased approximately $290,000 of sphagnum
peat moss from Torland.
F-14
<PAGE>
13. SUBSEQUENT EVENTS
The Company issued 300,000 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.
On June 13, 2000, the Company 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 the Company has earnings. The preferred stock may be converted into a
quantity of shares of common stock of the Company 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 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 B preferred stock, the Company
issued 2,400 shares of Series B preferred stock to MJ Shulman, Inc. 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 dividends thereon.
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 tendered and delivered to the
Company marketable securities as in-kind consideration of the purchase price of
the series B preferred stock. The Company shall issue series B preferred stock
to the subscriber on a pro rata basis as the Company receives proceeds from the
liquidation of the marketable securities. In the event the proceeds exceed
$1,251,200, the excess shall be deemed an unsecured demand loan from the
subscriber to the Company, bearing interest at 9%. As of July 19, 2000, the
Company realized $305,000 in proceeds from the sale of the marketable
securities.
F-15
