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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-SB 12G
AMENDMENT NUMBER 4
GENERAL INFORMATION FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 88-0326984
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(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10570 Hagen Ranch Road, Boynton Beach, Florida 33437
(Address of Principal Executive Offices) (Zip Code)
tel. (888) 328-9322 fax (561) 477-7255
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(Registrant's Telephone Number, including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None.
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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TABLE OF CONTENTS
PART I
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Item 1. Description of Business.............................................. 1
Item 2. Management's Discussion and Analysis................................. 5
Item 3. Description of Property.............................................. 8
Item 4. Security Ownership of Certain Beneficial Owners and Management....... 8
Item 5. Directors, Executive Officers, Promoters and Control Persons......... 9
Item 6. Executive Compensation...............................................10
Item 7. Certain Relationships and Related Transactions.......................11
Item 8. Description of Securities............................................11
PART II
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Item 1. Market Price of and Dividends
on the Registrant's Common Equity and
Other Shareholder Matters...................................13
Item 2. Legal Proceedings....................................................13
Item 3. Changes in and Disagreements With Accountants........................13
Item 4. Recent Sales of Unregistered Securities..............................14
Item 5. Indemnification of Directors and Officers............................15
PART F/S
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The financial information required by this item is included as
set forth on Page F-1.
PART III
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Item 1. Index to Exhibits....................................................16
Item 2. Description of Exhibits
The Exhibits required by this item are included as set forth
in the Exhibit Index.
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PART I
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Item 1. Description of Business
Introduction
An investment in these securities involves risks. See "Risk Factors".
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") See "History".
The Company has obtained a firm commitment from a bank to provide
$800,000 toward the completion of the Company's planned new plant facility. The
commitment is contingent upon the Company obtaining an equity investment of
$1,500,000, which investment will fund the balance of the Company's Torland
obligation and fund the move into its new location. While the Company has
several interested investors it has yet to consummate an agreement regarding the
$1,500,000 equity investment. Based upon the present stock price of the Company,
the sale of securities will substantially dilute the Company's existing
stockholders' interest. There can be no assurance that the Company will be
successful in finding such an investor or group of investors.
An abandonment or non payment on the 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
(August 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 an agreement with the former Torland shareholders for a
written extension may result in the Company's forfeiting Torland and the
Canadian peat moss bog. Torland is the owner of the Canadian sphagnum peat moss
bog operation which the Company relies on for its supply of Canadian sphagnum
peat moss. 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.
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 and January payments
totaling $470,000. 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. See "Risk Factors."
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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, 1999, the Company
incurred net losses of $925,599 and during the year ended May 31, 1998, the
Company incurred a net loss of $818,088. Also, during the year ended May 31,
1999, the Company had negative working capital of $585,516. These factors along
with an accumulated deficit of $1,746,002 at May 31, 1999 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 9006-1474 Quebec, Inc.
("Torland"), a Canadian sphagnum peat moss bog and processing facility 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:
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.
1
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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 7.4%
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.
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 beleives 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.
2
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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 and January payments
totaling $470,000. 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. See "Risk Factors."
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 Companys current
annual revenue is approximately $2,200,000, which is approximately 75% 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 August, 2000 and is approximately
40% 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.
3
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Overall Cash Flow Situation
A total of approximately $830,000 will be needed to complete the
Company's planned new plant facility over the next year. The total cost of the
plant and improvement is estimated at $1,500,000 of which the Company has
already funded $395,000. In addition, $835,000 is due in payments relating to
the Torland acquisition over the next year of which $470,000 is past due. The
Company is currently operating in a deficit cash position and does not generate
positive cash flow from its current operations.
The Company has obtained a firm commitment from a bank to provide
$800,000 toward the completion of the Company's planned new plant facility. The
commitment is contingent upon the Company obtaining an equity investment of
$1,500,000, which investment will fund the balance of the Company's Torland
obligation and fund the move into its new location. While the Company has
several potential interested investors it has yet to consummate an agreement
regarding the $1,500,000 equity investment. Based upon the present stock price
of the Company the sale of securities to raise the $1,500,000 will substantially
dilute the Company's existing stockholders' interest. There can be no assurance
that the Company will be successful in finding such an investor or group of
investors.
An abandonment or non payment on the 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
(August 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.
<PAGE>
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. Currently the
company has an operating loss per unit (cubic yard) of approximately $10.60. The
Company anticipates an operating profit per unit (cubic yard) of approximately
$9.14 in the first year of operations in the new plant.
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 three times
the labor cost than the new plant and is over two 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.
Marketing
The Company markets its products by direct sales. LPS's current
customer base is composed of approximately 350 commercial nurseries throughout
Florida.
4
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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 September, 1999, 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
The Company has obtained a letter of commitment from a bank in the
amount of $800,000. The loan is subject to the Company obtaining additional
equity financing in the amount of at least $1.5 million and the Company
maintaining certain financial ratios. When borrowed, these funds will be used
for the Company's state-of-the-art custom soil blending facility near Homestead,
Florida. The Company expects this facility to come on line during the quarter
ending May 31, 2000. The new facility is designed to blend 350 cubic yards of
soil mixes per hour, compared to the 80 cubic yards per hour that our present
equipment produces. The new facility is expected to reduce labor costs as well.
In December 1999, the Company raised $125,000 by issuing debt and warrants. The
Company also issued 250,000 warrants in connection with the same transaction.
The warrants have an exercise price of $.05 per share and expire on December
2001.
On March 9, 2000 the Company borrowed $100,000 from an individual,
guaranteed by the president, at 9% interest. Interest is payable monthly. The
principal is due on September 9, 2000. In addition, the maker of the note has
entered into an agreement with the Company to provide an additional $400,000 in
capital. These funds are specifically designated for the Company's new soil
blending plant.
On March 13, 2000, the Company borrowed $750,000 from an individual at
9% interest. The principal and accrued interest is due on September 7, 2000. The
Company has utilized a substantial portion of this amount to reduce current
outstanding obligations.
<PAGE>
Risk Factors
Overall Cash Flow Situation
A total of approximately $830,000 will be needed to complete the
Company's planned new plant facility over the next year. The total cost of the
plant and improvement is estimated at $1,500,000 of which the Company has
already funded $395,000. In addition, $835,000 is due in payments relating to
the Torland acquisition over the next year of which $470,000 is past due. The
Company is currently operating in a deficit cash position and does not generate
positive cash flow from its current operations.
The Company has obtained a commitment from a bank to provide $800,000
toward the completion of the Company's planned new plant facility. The
commitment is contingent upon the Company obtaining an equity investment of
$1,500,000, which investment will fund the balance of the Company's Torland
obligation and fund the move into its new location. While the Company has
several potential interested investors it has yet to consummate an agreement
regarding the $1,500,000 equity investment. Based upon the present stock price
of the Company the sale of securities to raise the $1,500,000 will substantially
dilute the Company's existing stockholders' interest. There can be no assurance
that the Company will be successful in finding such an investor or group of
investors.
An abandonment or non payment on the plant would be catastrophic to the
operations of the Company's soil blending operation. The Company can not operate
in its current location beyond the anticipated new plant completion date 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.
<PAGE>
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, 1999, the Company
incurred net losses of $925,599 and during the year ended May 31, 1998, the
Company incurred a net loss of $818,088. Also, during the year ended May 31,
1999, the Company had negative working capital of $585,516. These factors along
with an accumulated deficit of $1,746,002 at May 31, 1999 raise substantial
doubt about the Company's ability to continue as a going concern.
In the event that the Company is unable to obtain additional financing
or is unable to generate sufficient revenues from operations in the future, it
may be unable to provide for its present cost levels, and this raises
substantial doubt about the Company's ability to continue as a going concern and
the stockholders may lose their entire investment.
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. 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. 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. 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.
5
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Torland Obligation
In connection with its acquisition 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.
The Company has not made the October, November and January payments
totaling $470,000. 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 of its obligation 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.
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.
Competition
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 the Company's competitors are well established
companies with substantially greater capital resources, research and development
staffs and facilities, and substantially greater marketing capabilities than the
Company. No assurances can be given that the Company will be able to
successfully compete with such companies or alternative technologies.
Penny Stock Securities Law Considerations
The Company's 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. The effect of these regulations may be to delay
transactions in stocks that are deemed to be penny stocks, and therefore sales
of the Company's common stock by brokers or dealer and resales by investors
could be adversely affected.
Shares Eligible for Future Sale
Of the outstanding shares of common stock of the Company as of March
23, 2000, the Company had outstanding 19,415,000 shares of common of which
approximately 10,535,000 are free trading shares, and approximately 8,180,000
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 the Company's ability to raise capital through the sale of its
equity securities.
6
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Item 2. Management Discussion and Analysis of Financial Condition
The following Management Discussion and Analysis of Financial Condition
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.
Forward-looking Statement and Information
The Company is including the following cautionary statement in this
Form 10-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.
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 $925,599 for the year ended May
31, 1999 and has a negative working capital of $585,516. In 1998 and 1999, the
Company loaned Torland $967,500 (in connection with four different agreements
totaling $967,500) to fund its operations and to acquire capital assets. In that
the Company completed its acquisition of Torland this indebtedness has become an
intercorporate liability. 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, 1999 compared to the period ended June 18, 1997
(date of inception) through May 31, 1998
Revenues for the year ended May 31, 1999 were $2,240,995 compared to
$1,769,179 for the period ended June 18, 1997 (date of inception) through May
31, 1998. The increase in sales can be attributed to sales to an expanded
customer base.
Gross profit margins as a percentage of revenues for the year ended May
31, 1999 and 1998 were 6.9% and 17.3%, respectively. The decrease in the gross
profit margin can be attributed to increased labor and material costs as a
percentage of sales.
Operating expenses for the year ended May 31, 1999 and 1998 were
$1,000,860 and $1,048,212, respectively, consisting of 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.
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. The net loss of $818,088 for the
year ended May 31, 1998 consists of operating losses.
At May 31, 1999, the Company had cash and cash equivalents of $13,397
which was an increase of $9,850 compared to the cash held at May 31, 1998.
During the year ended May 31, 1999, the Company used net cash for operations of
$577,308, 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 $585,516 at May 31, 1999.
7
<PAGE>
Six months Ended November 30, 1999 compared to the Six months ended November 30,
1998
Revenues for the six months ended November 30, 1999 were $1,406,134
compared to $1,292,386 for the six months ended November 30, 1998. 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. Gross profit margins as a
percentage of revenues for the six months ended November 30, 1999 and 1998 were
5.0% and 19.5%, 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. The Company is currently relocating to Homestead, FL where
it is expected to reverse this trend. Operating expenses for the six months
ended November 30, 1999 and 1998 were $470,682 and $476,410, respectively,
consisting of selling, general and administrative expenses.
The net losses for the six months ended November 30, 1999 and 1998 were
$455,669 and $269,895, respectively. The decrease is due to the deterioration on
the Company's gross profit margin during 1999.
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 and 700,000 shares of its common stock 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.
8
<PAGE>
Year 2000 Issues
The Company has not had any Year 2000 deficiencies and does not expect
to have any Y2K deficiencies in the future.
Y2K Contingency Plans. In the event that the Company's computers
ultimately are shown not to be Y2K compliant, the Company will acquire compliant
computers.
Item 3. 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 February, 2000. The Company will lease
that 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.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 23,
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 Percent
Name Beneficially Owned of Class
---- ------------------ --------
Eric W. Deckinger 7,020,000 36.2%
10570 Hagen Ranch Road
Boynton Beach, Florida 33437
John Stewart -0- -0-%
10570 Hagen Ranch Road
Boynton Beach, Florida 33437
Evergreen Investment Group LP 1,800,000(1)(2) 9.3%
4050 NE 25th Avenue
Lighthouse Point, FL 33064
All Officers and Directors as
a Group--Two Persons 7,020,000 36.2%
- -----------
(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.
9
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The following table sets forth the directors and executive officers of
the Company.
Name and Address Age Position
---------------- --- --------
Eric W. Deckinger 52 Director, President
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 directors 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 mananger 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.
10
<PAGE>
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 of
$500,000. The premiums relating to the remaining $2,500,000 is charged to Mr.
Deckinger as compensation as he has designated the beneficiaries.
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 6. Executive Compensation.
The following table reflects compensation for services to the
Company for the fiscal years ended May 31 , 1999 and 1998 of the chief executive
officer. No other executive officer of the Company received compensation which
exceeded $100,000 during 1999 and 1998.
<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 (1) BONUS SATION AWARDS OPTIONS/SARS PAYOUTS SATION
- ----------- ----- ---------- ----- ------ ------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric W. 1999 $ 93,600 -0- 10,050(1) -0- -0- -0- -0-
Deckinger 1998 $ 93,600 -0- 10,050(1) -0- -0- -0- -0-
President
</TABLE>
(1) Car Allowance
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.
11
<PAGE>
Item 7. 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.
Item 8. Description of Securities.
The authorized capital stock of the Company 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 March 23, 2000, the Company had issued and
outstanding 19,415,000 shares of common stock and 862,158 shares of Series A
preferred stock.
The following summary description of the securities of the Company is
qualified in its entirety by reference to the Articles of Incorporation
("Articles") and the Bylaws of the Company, copies of which are filed as
exhibits to this Form 10-SB.
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 stockholders of the
Company. 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.
12
<PAGE>
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 the affairs of the Company, 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.
Preferred Stock
There have been designated 1,000,000 shares of Series A Preferred
Stock (the "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 the sole
discretion of the Company, 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 (as defined below). In
the event the Company fixes 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) securities of the Company 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 of the
Company 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.
The Preferred Stock is not convertible into any security of the
Company. 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 Corporation, then the Corporation, 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 Corporation, 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. The Company has issued and outstanding 862,158 shares
of Preferred Stock.
13
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Stock and
Other Shareholder 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.
To the best of the Company's knowledge, from March 31, 1997 to May 31,
1998, no broker-dealer made an active market or regularly submitted quotations
for the Company's stock, and that during this period, there was only a de
minimis and infrequent number of trades and de minimis trading volume.
HIGH LOW
QUARTER ENDED BID BID
- ------------------ ----- -----
August 31, 1997 $ (*) $ (*)
November 30, 1997 $ (*) $ (*)
February 28, 1998 $ (*) $ (*)
May 31, 1998 $ (*) $ (*)
August 31, 1998 (**) $ 25.00 $ 1.25
November 30, 1998 (**) $ 1.87 $ .40
February 28, 1999 $ 6.00 $ 3-7/8
May 31, 1999 $ 4-1/8 $ 3.00
August 31, 1999 $ 3-3/8 $ 2.00
November 30, 1999 $ 2-3/16 $ 3/8
- -----------
(*) During this period, there were only a de minimis and infrequent number of
trades and a de minimis trading volume.
(**) 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 $.25 per share on March
23, 2000.
As of March 23, 2000, there were approximately 675 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 2. Legal Proceedings.
None.
14
<PAGE>
Item 3. Changes in and Disagreements With Accountants.
Mr. Kurt D. Saliger, C.P.A. ("Saliger"), conducted the audits of the
Company for the years ended December 31, 1997 and 1996. Saliger was dismissed on
December 21, 1998. There were no disagreements on accounting matters or
financial disclosures. Kurt D. Saliger, C.P.A. has provided the Company with a
letter pursuant to Rule 304 of Regulation S-B.
(a) On December 21, 1998, the Company engaged Sweeney, Gates &
Co.("Sweeney, Gates") as its independent accountant. The
decision to engage Sweeney, Gates as the Company's independent
accountant was approved by the President of the Company. The
decision to change auditors was based on the Company's
relocation of its executive offices to Florida.
(b) In a report dated March 2, 1998 Saliger reported on the
Company's financial statements as of December 31, 1997, and
the related statements of operations, stockholders' equity and
cash flows for the year then ended. The report did not contain
an adverse opinion or disclaimer of opinion, nor was such
report qualified or modified as to uncertainty, audit scope,
or accounting principles.
(c) Since December 31, 1997 and through the present, there were no
reportable events requiring disclosure pursuant to Item 304 of
Regulation S-B.
(d) Effective December 21, 1998, the Company engaged Sweeney,
Gates as its independent accountant. During the two calendar
years ended December 31, 1997, and through December 21, 1998,
neither the Company nor anyone on its behalf consulted
Sweeney, Gates regarding either the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered
on the Company's financial statements, nor has Sweeney, Gates
provided to the Company a written report or oral advice
regarding such principles or audit opinion.
Item 4. 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.
<PAGE>
In November, 1998 the Board of Directors issued 120,000 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 Board of Directors issued 30,000 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 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. 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.
15
<PAGE>
In November, 1998 the Company issued 80,000 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 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 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 250,000 warrants in connection with
the same transaction. The warrants have an exercise price of $.05 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 600,000 shares of 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. 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.
Item 5. Indemnification of Directors and Officers.
The following summary description of material provisions of the
Company's 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 this Form 10-SB.
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.
16
<PAGE>
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.
PART F/S
The financial information required by this item is included as set
forth on Page F-1.
PART III
Item 1. Index to Exhibits.
All exhibits set forth below are provided herewith.
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
27.1* Financial Data Schedule for the period ended May 31, 1998
27.2* Financial Data Schedule for the year ended May 31, 1999.
27.3* Financial Data Schedule for the quarter ended August 31, 1999.
27.4* Financial Data Schedule for the six months ended November 30,
1999
- --------------
* Previously provided
17
<PAGE>
Item 2. Description of Exhibits.
The Exhibits required by this item are included as set forth
in the Exhibit Index.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
American Group, Inc.
May 1, 2000 By /s/ Eric W. Deckinger
---------------------------
Director and President
18
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
the Stockholders
American Group, Inc.
We have audited the accompanying consolidated balance sheet of American Group,
Inc. and subsidiaries as of May 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
May 31, 1999, and for the period June 18, 1997 (date of inception) through May
31, 1998. 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. and subsidiaries, as of May 31, 1999 and the results of its
consolidated operations and consolidated cash flows for the year ended May 31,
1999, and for the period June 18, 1997 (date of inception) through May 31, 1998,
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 Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Sweeney, Gates & Co.
July 22, 1999
Fort Lauderdale, Florida
F-1
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS May 31, November 30,
1999 1999
------- ------------
<S> <C> <C>
(unaudited)
Current assets:
Cash $ 13,397 $ 250
Accounts receivable, less allowance for doubtful accounts
of $10,000 90,102 173,002
Stock subscription receivable 151,839 -
Inventory 79,009 39,436
Prepaid expenses - 2,070
---------- -----------
Total current assets 334,347 214,758
Property, plant and equipment, net of accumulated
depreciation of $101,716 and $176,003 respectively 309,082 2,888,077
Other assets:
Note receivable 967,500 -
Interest receivable 101,987 -
Equipment deposit 187,500 310,500
Goodwill, net - 1,976,707
Other 3,984 3,984
---------- -----------
$1,904,400 $ 5,394,026
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 199,751 $ 1,244,633
Current portion of capital lease obligation payable 75,343 90,649
Accounts payable and accrued expenses 644,769 759,538
---------- -----------
Total current liabilities 919,863 2,094,820
---------- -----------
Long term liabilities:
Long term debt less current portion 52,689 465,070
Convertible long term debt - 600,000
Long term capital lease obligation less current portion 107,157 55,114
---------- -----------
159,846 1,120,184
---------- -----------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
862,158 issued and outstanding 862 862
Common stock, $.001 par value, 50,000,000 shares authorized,
18,115,000 and 19,415,000 shares issued and outstanding,
respectively 18,115 19,415
Additional paid-in capital 2,551,716 4,360,416
Accumulated deficit (1,746,002) (2,201,671)
---------- -----------
Total stockholders' equity 824,691 2,179,022
---------- -----------
$1,904,400 $ 5,394,026
========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-2
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the period
June 18, 1997 For the six For the six
(date of inception) months ended months ended
Year ended through November 30, November 30,
May 31, 1999 May 31, 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 2,240,995 1,769,179 1,406,134 1,292,386
Cost of sales 2,086,746 1,462,640 1,336,168 1,040,829
------------ ------------ ------------ ------------
Gross profit 154,249 306,539 69,966 251,557
Selling, general and administrative expenses 1,000,860 1,048,212 470,682 476,410
------------ ------------ ------------ ------------
Operating loss (846,611) (741,673) (400,716) (224,853)
------------ ------------ ------------ ------------
Other income (expenses):
Interest expense (153,420) (87,734) (67,954) (45,042)
Interest income 74,432 69 12,895 --
Other income -- 11,250 106 --
------------ ------------ ------------ ------------
(78,988) (76,415) (54,953) (45,042)
------------ ------------ ------------ ------------
Net loss $ (925,599) $ (818,088) $ (455,669) $ (269,895)
============ ============ ============ ============
Net loss per share, basic and fully diluted $ (0.09) $ (1.53) $ (0.02) $ (0.15)
============ ============ ============ ============
Weighted average shares outstanding 10,001,154 535,000 18,716,648 1,790,714
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-3
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- --------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 18, 1997 (date of inception) -- $ -- 150,000 $ 150 $ -- $ -- $ 150
Recapitalization of American Group, Inc. -- -- 385,000 385 -- (2,315) (1,930)
Net loss -- -- -- -- -- (818,088) (818,088)
------- ---------- ---------- ---------- ---------- ----------- ----------
Balance, May 31, 1998 -- -- 535,000 535 -- (820,403) (819,868)
Sale of common stock -- -- 10,000,000 10,000 940,000 -- 950,000
Conversion of notes payable 862,158 862 -- -- 861,296 -- 862,158
Conversion of notes payable -- -- 7,500,000 7,500 742,500 -- 750,000
Common stock issued in connection with
compensation to certain 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
Purchase of Torland 700,000 700 1,749,300 1,750,000
Exercise of warrants 600,000 600 59,400 60,000
Net loss (unaudited) -- -- -- -- -- (455,669) (455,669)
------- ---------- ---------- ---------- ---------- ----------- ----------
Balance, November 30, 1999 (unaudited) 862,158 $ 862 19,415,000 $ 19,415 $4,360,416 $(2,201,671) $2,179,022
======= ========== ========== ========== ========== =========== ==========
</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
<TABLE>
<CAPTION>
For the period
June 18, 1997 For the six For the six
(date of inception) months ended months ended
Year ended through November 30, November 30,
May 31, 1999 May 31, 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (925,599) $ (818,088) $ (455,669) $ (269,895)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 74,591 27,125 91,287 37,296
Issuance of common stock for services 8,000 -- 8,000
Recapitalization of American Group, Inc. -- (1,780)
Changes in assets and liabilities
Accounts receivable 137,578 (227,680) (82,900) 36,757
Other receivables (58,320) (43,667) 101,987 (24,933)
Inventory (34,893) (44,116) 19,970 15,458
Prepaid expenses 7,890 (7,890)
Other assets -- (3,984)
Bank overdraft (39,357) 39,357
Accounts payable and accrued expenses 252,802 391,571 183,149 115,495
----------- ----------- ----------- -----------
Net cash provided by (used in) operations (577,308) (689,152) (142,176) (81,822)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment (231,490) (179,308) --
Cash used in business acquisition, net of cash acquired -- (397,520) --
Deposit on new equipment (187,500) -- (123,000) (75,000)
----------- ----------- ----------- -----------
Net cash used by investing activities (418,990) (179,308) (520,520) (75,000)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance (payment) of notes receivable (568,500) (399,000) (110,000) (344,500)
Proceeds from notes payable and long term debt 740,208 1,281,531 600,000 552,000
Payments on loans payable (1,575,879) (10,524) (52,290) (767,542)
Proceeds from sale of common stock 2,410,319 -- 211,839 752,120
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 1,006,148 872,007 649,549 192,078
----------- ----------- ----------- -----------
Net increase in cash 9,850 3,547 (13,147) 35,256
Cash at beginning of year 3,547 -- 13,397 3,547
----------- ----------- ----------- -----------
Cash at end of year $ 13,397 $ 3,547 $ 250 $ 38,803
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 145,434 $ 87,732 $ 67,954 $ 45,042
=========== =========== =========== ===========
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; 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") and Lator International, Inc. ("Lator"). LPS and Lator were
affiliated with each other through common loans and advances prior to the May
31, 1998 transaction. The Company changed its year-end from December 31 to May
31, effective May 31, 1998. On May 31, 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, 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. These acquisitions were
treated as reverse mergers. LPS wholesales custom blended soil mixes to
customers in Florida. Lator had no transactions except notes receivable and
payable. Lator owns the right to purchase 9006-1974 Quebec, Inc. ("Torland"), a
Canadian entity that controls leases for a peat bog and operates a facility that
harvests and packages peat.
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 - Finished products and work in process are stated at lower of cost or
net realizable value. 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 the 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, comparing the respective carrying
values to the current and expected future cash flows to be generated from such
assets. The recoverability of property, plant, and equipment, are evaluated on a
separate basis for the Company and each acquisition.
Goodwill - Goodwill represents the excess of the cost of a company acquired over
the fair value of their 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 fiscal year ended May 31, 1999, since that was the date of the
acquisition. Amortization expense for the six months ended November 30, 1999 was
$28,120.
Income tax - Income tax assets and liabilities are computed for temporary
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible
F-6
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Valuation allowances are established, when it is more likely than not that some
or all of the deferred tax assets 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 according
to Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires presentation of basic and diluted earnings or loss per share.
Shares related to convertible securities and notes were excluded from the
computation of net loss per share because the effect of inclusion would be
anti-dilutive due to the Company's net loss. 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.
Foreign currency translation - The effects of translating to U.S. dollars the
financial statements of a Canadian subsidiary, whose functional currency is the
Canadian dollar, are included in comprehensive income. Assets and liabilities
are translated at period ended exchange rates, while revenues and expenses are
translated at average rates for the period.
Unaudited interim financial statements - The accompanying financial statements
of the Company for the six months ended November 30, 1999 and 1998 are
unaudited, but, in the opinion of management, reflect the adjustments, all of
which are of a normal recurring nature, necessary for a fair presentation of
such financial statements in accordance with generally accepted accounting
principles. The results of operations for an interim period are not necessarily
indicative of the results for a full year.
2. GOING CONCERN
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems, principally by obtaining capital and commencing profitable
operations. During the interim, the Company must continue to operate on cash
flows generated from loans and raising capital. The Company experienced a loss
of $925,599 for the year ended May 31, 1999, and has a negative working capital
of $585,516. 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,
F-7
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOING CONCERN (continued)
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. Additionally, the Company plans, upon integration with
Torland, to begin utilizing this new facility, which management believes will
substantially decrease its operating costs. Management believes these efforts
will generate positive cash flow.
3. ACQUISITIONS
On August 18, 1997, the Company's subsidiary, LPS, purchased the assets and
liabilities of Kedac, Inc. On May 31, 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, the Company
(which had no operations at the time of the transaction) 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 (See Note 4). Torland is a
Canadian sphagnum peat moss bog and processing facility. The acquisition was
accounted for as a purchase. The results of operations of Torland are included
in the consolidated statement of operations of the Company for the period August
16, 1999 through November 30, 1999.
The purchase required the Company to pay $400,000 at the time of closing and an
additional $835,000 during the following year. The Company is presently trying
to raise the capital needed to fund the balance of the transaction in an exempt
offering of debt. There can be no assurance that the Company will be successful
with this or any other activity to raise additional capital. In addition, the
Company issued 700,000 shares of its common stock to the seller valued at
$1,750,000.
The purchase price was allocated as follows (unaudited):
Current assets $ 287,699
Property, plant and equipment 2,312,773
Sphagnum Peat Reserves 257,280
Goodwill 1,993,707
Other assets 102,256
Liabilities assumed (783,895)
-----------
$ 4,169,820
===========
F-8
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (continued)
Payment consisted of the following (unaudited):
Common stock $ 1,750,000
Note receivable 1,077,500
Interest 107,320
Cash 400,000
Note payable 835,000
-----------
$ 4,169,820
===========
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. NOTE RECEIVABLE - TORLAND
The note receivable consisted of the following at May 31, 1999:
10% demand note receivable due from 9006-1474,
Quebec, Inc. $ 967,500
=========
At May 31, 1999, $101,987 was due the Company for interest. This amount was
classified as long term since it would be used for the acquisition of Torland's
peat reserves.
F-9
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 1999 and
November 30, 1999:
<TABLE>
<CAPTION>
Estimated
May 31, 1999 November 30, 1999 Useful Life
------------ ----------------- -----------
(unaudited)
<S> <C> <C> <C>
Machinery and equipment $ 279,134 $ 1,220,628 5 years
Furniture and fixtures 19,300 19,300 10 years
Building 275,611 20 years
Vehicles 112,364 207,871 3 years
Land Improvements - 1,083,390 8-17 years
Sphagnum Peat Reserves - 257,280 20 years
--------- ------------
410,798 3,064,080
Accumulated depreciation (101,716) (176,003)
--------- ------------
$ 309,082 $ 2,888,077
========= ============
</TABLE>
Depreciation expense for the year ending May 31, 1999 was $74,591 and $21,287
for the six months ending November 30, 1999.
F-10
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Notes payable at May 31, 1999 and November 30, 1999 were as follows:
<TABLE>
<CAPTION>
May 31, November 30,
1999 1999
-------- ------------
(unaudited)
<S> <C> <C>
Demand note, non-interest bearing, due to the President $ 17,425 1,589
Demand note, non-interest bearing, due to an individual,
payable in monthly installments of $1,500 27,160 21,160
Note payable, 10% interest, due to a finance company, payable in monthly
installments of $1,992 due October 2002, secured by 1998 dump truck 70,355 61,742
Demand note payable, 10% interest due to an individual, guaranteed by
American Risk Management Group and the President collateralized by
accounts receivable and inventory 137,500 137,500
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 835,000
Notes payable, Canadian Prime plus 1.5%, due to banks in monthly
installments in United States dollars through April, 2003,
collateralized by Torland equipment -- 652,712
--------- ---------
252,440 1,7009,703
--------- ---------
Less: current maturities (199,751) (1,244,633)
--------- ---------
$ 52,689 $ 465,070
========= =========
</TABLE>
F-11
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (continued)
Maturities of long-term debt at May 31, 1999 are as follows:
2000 $ 199,751
2001 19,516
2002 21,560
2003 11,613
------------
$ 252,440
============
7. CONVERTIBLE NOTE PAYABLE
On July 29, 1999, the Company borrowed $600,000 from an individual, guaranteed
by the President, at 10% interest. Interest is payable quarterly. The principal
is due in July 2004. This note is convertible, at any time, all or in part into
1,200,000 shares of the Company's common stock.
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain operating equipment, which were accounted for as
capital leases. At May 31, 1999, the equipment and accumulated depreciation were
as follows:
Machinery and equipment $ 225,887
Less: accumulated depreciation (31,103)
------------
$ 194,784
============
F-12
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LEASE OBLIGATIONS (continued)
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, 1999:
2000 $ 105,953
2001 64,177
2002 22,401
2003 22,401
2004 3,734
------------
Total minimum lease payments 218,666
Less: amount representing interest (36,166)
------------
Present value of net minimum lease payments 182,500
Less: current portion (75,343)
------------
$ 107,157
============
9. OPERATING LEASES
The Company has various operating leases with terms from one to six years.
Expenses for the leases for the year ended May 31, 1999 totaled $147,460. The
Company conducts its operations from a leased facility which is renewed on a
month to month basis pending the Company's relocation to its new facility in
Homestead, Florida.
Future minimum rental payments for operating leases with initial or remaining
noncancelable lease terms in excess of one year are as follows at May 31, 1999:
2000 $ 54,185
2001 54,185
2002 29,216
2003 22,362
2004 1,863
-------------
Total minimum payments $ 161,811
=============
F-13
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ISSUANCE OF COMMON STOCK
Equity transactions prior to the acquisition of LPS
In November 1994, the Company issued 30,000 shares of common stock for $7,500.
In June 1996, the Company issued 10,000 shares of common stock for $12,503. In
October 1996, the Company issued 100,000 shares of common stock for $25,000. On
April 19, 1997, the board of directors approved, effective immediately, a
forward stock split of 25 to 1; increasing the number of common shares
outstanding from 140,000 to 3,500,000.
On December 18, 1997, the board of directors approved, effective immediately, a
forward stock split of 1.1 to 1; increasing the number of common shares
outstanding from 3,500,000 to 3,850,000. As a result of the acquisition of LPS
and the recapitalization of the Company, the prior owners of the Company
retained 385,000 shares of common stock.
Equity transactions after acquisition of LPS
On November 16, 1998, the Company approved a reverse stock split of 1 to 10,
decreasing the number of common shares outstanding from 3,850,000 to 385,000.
This reverse split has been retroactively applied to all periods presented.
On November 16, 1998, the Company sold 10,000,000 shares of common stock for
consideration of $950,000, pursuant to an exemption under Rule 504 of Regulation
D of the Securities Act of 1933, as amended. In connection with this
transaction, stock subscriptions receivable were $151,839 at May 31, 1999. This
amount was received by the Company during June 1999. In November 1998, the
Company also issued 7,500,000 of common stock to its President, in exchange for
$750,000 of debt due to the President (See Note 6). The Company issued 80,000
shares of common stock at $.10 per share in exchange for professional services
rendered to the Company.
11. PREFERRED STOCK
On May 31, 1999, the Company issued 862,158 shares of preferred stock to an
investment banker, in exchange for $862,158 of debt and accrued interest. The
terms of the preferred stock include a 5% non-cumulative dividend, payable in
stock or cash. The Company has the right to redeem the preferred stock at 140%
if the Company is not sold or at 300% if the Company is sold.
F-14
<PAGE>
AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
The Company had available at May 31, 1999, a net operating loss carry-forward
for federal and state tax purposes of approximately $926,000 which could be
applied against taxable income in subsequent years through 2019. The tax effect
of the net operating loss is approximately $350,000, and a full valuation
allowance has been recorded, since realization is uncertain.
13. COMMITMENTS AND CONTINGENCIES
LPS, which was acquired on May 31, 1998, 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 will have to relocate in 1999.
Management has completed negotiations for the new facility. The Company also
deposited $187,500 as of May 31, 1999 and $310,500 as of November 30, 1999, for
equipment to be used in its operating facilities
14. CONCENTRATION OF SUPPLIER AND SALES
The Company purchases its sphagnum peat moss from Torland, which it purchased on
August 15, 1999.
During fiscal 1999 and 1998, the Company purchased approximately $290,000 and
$145,000, respectively, of sphagnum peat moss from Torland and had accounts
payable to Torland at May 31, 1999 and 1998 of $264,126 and $145,160,
respectively.
15. SUBSEQUENT EVENTS (UNAUDITED)
In connection with its acquisition 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.
The Company has not made the October and November 1999 and January 2000
payments. 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, and believes that it will be able to negotiate a written extension
for the payment of its obligation to the former shares 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 this payment.
On March 9, 2000 the Company borrowed $100,000 from an individual, guaranteed by
the president, at 9% interest. Interest is payable monthly. The principal is due
on September 9, 2000. In addition, the maker of the note has entered into an
agreement with the Company to provide an additional $400,000 in capital. These
funds are specifically designated for the Company's new soil blending plant.
On March 13, 2000, the Company borrowed $750,000 from an individual at 9%
interest. The principal and accrued interest is due on September 7, 2000.
F-15
<PAGE>
9006-1474 QUEBEC INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDING MAY 31, 1999
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholder's Equity F-4
Consolidated Statement 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
the Stockholder
9006-1474 Quebec Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of 9006-1474 Quebec
Inc. and subsidiary as of May 31, 1999, and the related consolidated statements
of operations, stockholder's equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides 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
9006-1474 Quebec Inc. and subsidiary as of May 31, 1999, and the consolidated
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
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
January 18, 2000
F-1
<PAGE>
9006-1474 QUEBEC INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MAY 31, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 6,171
Accounts receivable 435,239
Inventory 30,159
Prepaid expenses 3,184
-----------
Total current assets 474,753
Property, plant and equipment, net of accumulated
depreciation of $494,848 1,853,262
Notes receivable - officer 295,892
-----------
$ 2,623,907
===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Cash overdraft $ 18,076
Current portion of notes payable 959,223
Current portion of capital lease obligation payable 59,259
Accounts payable and accrued expenses 303,041
Income tax payable 82,437
-----------
Total current liabilities 1,422,036
-----------
Long term liabilities:
Due to related party 1,628,562
Long term debt less, current portion 414,227
Long term capital lease obligation, less current portion 44,257
-----------
2,087,046
-----------
Stockholder's deficit:
Preferred stock, no par value, unlimited shares authorized,
963,597 issued and outstanding 963,597
Common stock, no par value, unlimited shares authorized,
10 shares issued and outstanding in 1999 100
Other comprehensive income 1,718
Accumulated deficit (1,850,590)
-----------
Total stockholder's deficit (885,175)
-----------
$ 2,623,907
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
9006-1474 QUEBEC INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
(CANADIAN DOLLARS)
Revenue $ 534,783
Cost of sales 141,211
---------
Gross profit 393,572
Selling, general and administrative expenses 882,178
---------
Operating loss (488,606)
---------
Other expenses:
Interest expense (262,435)
Other income 4,399
---------
(258,036)
---------
Net loss $(746,642)
=========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
9006-1474 QUEBEC INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED MAY 31, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1998 963,597 $ 963,597 10 $ 100
Net loss -- -- -- --
Other comprehensive loss -
foreign currency translation
adjustments -- -- -- --
------- ----------- -- ------
Balance, May 31, 1999 963,597 $ 963,597 10 $ 100
======= =========== == ======
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Comprehensive Accumulated
Income deficit Total
------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, June 1, 1998 $ -- $(1,103,948) $ (140,251)
Net loss -- (746,642) (746,642)
Other comprehensive loss -
foreign currency translation
adjustments 1,718 -- 1,718
------- ----------- -----------
Balance, May 31, 1999 $ 1,718 $(1,850,590) $ (885,175)
======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
9006-1474 QUEBEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1999
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net loss $ (746,642)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 157,486
Currency exchange rate gain (4,935)
Changes in assets and liabilities:
Accounts receivable (223,305)
Prepaid expenses 21,457
Bank overdraft (30,035)
Accounts payable and accrued expenses 3,184
Income tax payable 59,380
---------
Net cash used in operations (763,410)
---------
Cash flows from investing activities:
Payments on loan to officer 41,475
Purchase of equipment (46,725)
---------
Net cash used by investing activities (5,250)
---------
Cash flows from financing activities:
Proceeds from notes payable 651,045
Proceeds from capital lease 45,154
Proceeds from related parties 847,235
Payments to related party (25,211)
Payments on capital leases payable (54,209)
Payments on loans payable (690,679)
---------
Net cash provided by financing activities 773,335
---------
Net decrease in cash 4,675
Effect of currency exchange rate changes
on cash (82)
Cash at beginning of year 1,578
-----------
Cash at end of year $ 6,171
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 145,831
===========
Cash paid during the year for taxes $ --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
9006-1474 QUEBEC INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - 9006-1974 Quebec Inc. ("the Company"), is a Canadian entity
incorporated under the Quebec Companies Act, that leases peat bogs and operates
a facility that harvests, packages and ships sphagnum peat moss. Its wholly
owned subsidiary, Torland, Inc. (the "Subsidiary") was incorporated on August
16, 1996, under the laws of the state of Florida. The Subsidiary's purpose is to
facilitate currency exchange transactions for the Company in the United States.
Unless otherwise indicated, all references to the Company refer to the Company
and its subsidiary.
Basis of presentation and currency - The financial statements and footnotes are
prepared in accordance with U. S. generally accepted accounting principles. The
financial statements and all references to dollar figures in the footnotes,
except Note 3, are presented in Canadian dollars. Footnote 3 translates a
condensed version of the financial statements to U. S. dollars.
Cash and cash equivalents - The Company considers all unrestricted deposits and
highly liquid investments, readily convertible to known amounts, with an
original maturity of three months or less, to be cash equivalents.
Accounts receivable - The Company considers accounts receivable to be fully
collectable; accordingly, no allowance for doubtful accounts is recorded. If an
amount becomes uncollectable, an expense is charged to operations.
Inventory - Finished products and work in process are stated at lower of cost
(average cost method) or net realizable value. 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. Depreciation is computed over the estimated useful lives of depreciable
assets using a declining balance method. The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective carrying
values to the current and expected future cash flows to be generated from such
assets. The recoverability of property, plant, and equipment, are evaluated on a
separate basis for the Company and each acquisition.
Income tax - The Company accounts for Canadian income taxes on an asset and
liability approach to financial accounting. Deferred income tax assets and
liabilities are computed for the difference between the financial statement and
tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to 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
F-6
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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 Company's continued existence is dependent upon its ability to resolve its
liquidity problems, principally by obtaining capital and commencing profitable
operations. During the interim, the Company must continue to operate on cash
flows generated from loans and raising capital. The Company experienced a loss
of $746,642 for the year ended May 31, 1999, and has negative working capital of
$947,283 and a deficit of capital of $885,175 at May 31, 1999. 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 the American Group, Inc.
("American") (see Note 10). Management believes these efforts will generate
positive cash flow. The financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 1999:
Estimated
Useful Lives
------------
Machinery and equipment $ 1,458,161 15 years
Building 424,017 20 years
Developed peat reserves 318,998 20 years
Vehicles 146,934 3 years
-------------
2,348,110
Less: Accumulated depreciation (494,848)
-------------
$ 1,853,262
=============
Depreciation expense for the year ending May 31, 1999 was $157,486.
F-7
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
<TABLE>
<CAPTION>
Notes payable consisted of the following at May 31, 1999:
<S> <C>
Line of credit, due on demand, Canadian prime plus 1.5% interest, due to a
bank, interest payable monthly, due on demand, secured by accounts
receivable and inventory $ 180,000
Term loan payable, Canadian prime plus 1.5% interest, due to a bank,
payable in monthly installments of $4,167 plus interest, due May 2000,
secured by equipment, and the personal guarantee of the President 54,167
Loan payable, Canadian prime plus 1.25% interest, due to a bank, payable
in monthly installments of $1,667 plus interest, due August 2001, secured
by a general lien on movable equipment 45,000
Loan payable, Canadian prime plus 1.5% interest, due to a bank, payable in
monthly installments of $2,750 plus interest, due April 2000, secured by
equipment, and the personal guarantee of the President 114,500
10% demand note payable due from a corporation 495,800
Term loan payable, Canadian prime plus 1% interest, due to a bank, payable
in monthly installments of $5,952 plus interest, due July 2002, secured by
equipment, and the personal guarantee of the President 375,000
Loan payable, 7.8% interest, due to a finance company, payable in monthly
installments of $2,767 principal and interest, due July 2002, secured by
equipment 108,983
------------
1,373,450
Less current portion of notes payable (959,223)
------------
$ 414,227
============
</TABLE>
F-8
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (continued)
Maturities of long-term debt are as follows:
2000 $ 959,223
2001 118,862
2002 106,068
2003 189,297
----------
$1,373,450
==========
5. CAPITAL LEASE OBLIGATIONS
Torland leases certain operating equipment that are recorded as capital leases.
At May 31, 1999, the equipment and accumulated depreciation represented by the
capital leases were as follows:
Machinery and equipment $ 183,117
Less: accumulated depreciation (15,302)
------------
$ 167,815
============
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, 1999:
2000 $ 70,127
2001 43,591
2002 8,968
---------------
Total minimum lease payments 122,686
Less: amount representing interest (19,170)
--------------
Present value of net minimum lease payments 103,516
Less: current portion (59,259)
--------------
$ 44,257
==============
F-9
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The Company had available at May 31, 1999, a net operating loss carryforward of
approximately $1,850,000 that could be applied against taxable income in
subsequent years through 2006. The tax effect of the net operating loss is
approximately $750,000, and a full valuation allowance has been recorded, since
realization is uncertain. Utilization of the net operating loss may be
substantially limited by the change of control (see Note 9).
7. RECONCILIATION OF CURRENCY
The financial statements and financial tables presented herewith are presented
in Canadian dollars. The following is a reconciliation of significant financial
statement amounts converted from Canadian dollars to U. S. dollars. The
conversion rate used is $0.67705 which was the rate in effect on May 31, 1999.
<TABLE>
<CAPTION>
Balance sheet:
Canadian U. S.
Dollars Dollars
------------ -------------
<S> <C> <C>
Current assets $ 474,753 $ 321,432
Property, plant and equipment, net 1,853,262 1,254,751
Notes receivable - officer 295,892 200,334
------------ ------------
Total assets $ 2,623,907 $ 1,776,517
============ ============
Current liabilities $ 1,422,036 $ 962,789
Long term liabilities 2,087,046 1,413,034
Stockholder's deficit (885,175) (599,308)
------------- -------------
Total liabilities and deficit $ 2,623,907 $ 1,776,517
============ ============
Statement of Operations:
Canadian U. S.
Dollars Dollars
------------ ------------
Revenue $ 534,783 $ 362,075
Cost of sales 141,211 95,607
Selling, general and administrative expenses 882,178 597,279
Other expenses 258,036 (174,703)
------------ -------------
Net loss $ (746,642) $ (505,514)
============ ============
</TABLE>
F-10
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RECONCILIATION OF CURRENCY (continued)
Statement of Changes in Stockholder's Equity:
<TABLE>
<CAPTION>
Canadian U. S.
Dollars Dollars
----------- -----------
<S> <C> <C>
Preferred stock $ 963,597 $ 652,403
Common stock 100 68
Comprehensive income 1,718 1,163
Accumulated deficit (1,850,590) (1,252,942)
---------- -----------
Balance, May 31, 1999 $ (885,175) $ (599,308)
=========== ===========
Statement of Cash Flows:
Canadian U. S.
Dollars Dollars
----------- -----------
Net cash used in operating activities $ (763,410) $ (516,867)
Net cash used in investing activities (5,250) (3,554)
Net cash provided by financing activities 773,335 523,586
----------- -----------
Net decrease in cash $ 4,675 $ 3,165
=========== ===========
</TABLE>
8. CONCENTRATION OF SUPPLIER AND SALES
The Company sells the majority of its sphagnum peat moss to LPS Acquisition
Corp., dba Lantana Peat & Soil ("LPS"), a wholly owned subsidiary of American
(see Note 10), which acquired the Company on August 15, 1999. LPS is a
distributor of custom blended soil mixes to several hundred wholesale nursery
customers located primarily in Florida.
During the fiscal year ended May 31, 1999, the Company sold approximately
$203,000 of sphagnum peat moss to LPS and had accounts receivable from LPS at
May 31, 1999 of $369,776.
9. RELATED PARTY TRANSACTIONS
From time to time the Company's preferred stockholder, Zanette Construction,
Inc., advances working capital to the Company. At May 31, 1999 the Company owed
Zanette Construction, Inc. $205,809.
The Company has a demand note payable to Lator International, Inc., a
wholly-owned subsidiary of American Group, Inc. of $508,853.
The Company has a demand note payable to American Group, Inc. of $913,900.
F-11
<PAGE>
9006-1474 QUEBEC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
Subsequent to May 31, 1999, the Company was acquired by American Group, Inc. on
August 15, 1999.
In connection with the acquisition, American 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.
American has not made the October, November and January payments. American and
representatives of the former stockholders of the Company are presently
negotiating a written extension on the payment of this obligation. The former
stockholder of the Company has not provided American with any notice of default
under this obligation, and the Company believes that it will be able to
negotiate a written extension for the realization of its obligation from
American. No assurance, however, can be given that the American 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.
F-12
<PAGE>
Appraisal report for mining property located at
Official register lot 21 of
Babel township
Port-Cartier (Quebec)
Prepared for ,
American Group Appraisal
10570 Hager Ranch Rd
Boynton Beach, FL 33437
File Number: 13678
Report prepared by: Les Evaluations Manicouagan Inc.
<PAGE>
TABLE OF CONTENTS
SECTION I: GENERAL REMARKS
1.1 Outstanding information and significant conclusions 6
1.2 Porpose of the appraisal 7
1.3 Effective date of the appraisal 7
1.4 Definition of the market value 7-8
1.5 Principles of appraisal 8
1.6 Estrictive conditions and basic hypothesis 9-10
1.7 Landscape and neighbourhood 11
1.8 The zoning 11
1.9 The utilities 11
1.10 The municipal appraisal 12
1.11 The land taxes 12
1.12 The legal description of the land 12-14
1.13 The best and the most profitable use 14
1.14 Appraisement process 15
SECTION II: THE COST APPROACH
2.1 Market value of surface lease (bex 120,122,123,124 and 125) 17-18
2.2 Market value for lease number 76789 19-20
2.3 Market value of land improvements 21-22
2.4 Buildings description and value 23
2.4.1 Factory building 23
2.4.2 Garage 24
2.4.3 Mobil office 25
<PAGE>
2.4.4 Office 26
2.2.5 Building value 26-28
2.5 Appraising equipement value 29-34
SECTION III: THE INCOME APPROACH
3.1 Appraising the market value of raw material 36-37
3.2 Sales income 37
3.3 Gross income 37
3.4 Expences before amortization, income taxes and financial expences 38
3.5 Net income 38
3.6 Summary of value 39
CERTIFICATION OF THE APPRAISER 40
APPPENDIX:
Appendix "A": Potentiel value of the peat bog if some new investment are done
Appendix "B": Photos
Appendix "C": Buildings sketches
Appendix "D": Leases localisation plans
Appendix "E": Statement of operations
<PAGE>
================================================================================
SECTION I
General remarks
================================================================================
<PAGE>
1.1 OUTSTANDING INFORMATION AND SIGNIFICANT CONCLUSIONS
Date of the Appraisal: Febuary 23th, 2000
Purpose of this Report: To appraise, for business
purposes, the market value of
the property including leases
right, land improvements,
buildings, equipments and raw
material.
Address of the property
Legal address Block 21, lot 2948 plus non
subdivised Parts of Babel
township.
Type of property Industrial property, serving to
the exploitation of a peat bog.
Owners: 9006-1474 Quebec inc.
Total area for land under survey 1,906.02 hectares (4709,7 acres)
Market value of lease
a) Bog plan 376,500,00$
b) Plan land 7,500,00$
Market value of land improvements
a) Bog plan 1 609 000,00$
b) Plan land 8 000,00$
Market value of buildings 289 400,00$
Market value of equipments 1 545 500,00$
Market value of raw material 652 300,00$
Total market value 4 448 300,00$
- --------------------------------------------------------------------------------
Les Evaluations Manicouagan Inc. Page 6
<PAGE>
1.2 PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the most probable market value
of the assets of an entreprise known under the name of 9006-1474 Quebec inc.
located at Port-Cartier, Quebec, Canada, and serving to the exploitation of a
peat bog. Those assets include surface rights obtain by leases, land
improvements, buildings, equipments and the raw material.
This appraisal is done for financial purpose.
1.3 EFFECTIVE DATE OF THE APPRAISAL
Febuary 23th, 2000.
1.4 DEFINITION OF THE MARKET VALUE
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and seller
each acting prudently and knowledgeably, and assuming the price is not affected
by undue stimulus. Implicit in this definition is the consummation of a sale as
of a specified date and the passing of title from seller to buyer under
conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised of the state of the
property, the market conditions and reasonably informed of the most
probable use of the property;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in Canadian dollars or in terms of
financial arrangements comparable thereto; and
- the price has to abstract any consideration not related directly to the
property itself, and has to represent the real consideration for the
property unaffected by any incentives, conditions, or profitable
financing.
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Les Evaluations Manicouagan Inc. Page 7
<PAGE>
1.5 PRINCIPLES OF APPRAISAL
The value of an asset is dependent on exterior factors at different levels.
Based on the socio-economic principles, one can establish the basic rules
guiding the Appraisal process. These principles are listed as follows:
- the principle of supply and demand;
- the principle of anticipation;
- the principle of evolution;
- the principle of progression and regression;
- the principle of conformity;
- the principle of equilibrium;
- the principle of productivity surplus;
- the principle of increasing and decreasing yield;
- the principle of contribution;
- the principle of competition;
- the principle of unique use;
- the principle of substitution;
- the principle of optimal use;
In the following Sections of this Report, one will see the application of
some of these principles that will be defined as one will use them.
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<PAGE>
1.6 RESTRICTIVE CONDITIONS AND BASIC HYPOTHESIS
- At the request of America Group Appraisal, our client, I prepared this
present report of appraisal which shall only be used in the context of
the exact purpose indicated in this Report. The use of this report in
other context or purposes may invalidated its conclusions and is
prohibited. The partial reproduction of this report is prohibited and it
is not reasonable for any person other than the clients to rely upon
this appraisal without first obtaining written authorization from the
clients and this appraiser.
- This report of appraisal is valid only with the original signature of
the appraiser.
- If the market value established is allocated between the building, the
land, and ground improvements, this allocation is only valid in the
context of this appraisal and cannot be used for any other purposes.
- The effective date of the appraisal is the date at which I have
estimated the market conditions. As these conditions may evolve rapidly
at one time, the estimated value expressed in this report cannot be used
to establish the market value at another date than the effective date of
the appraisal.
- While expert in appraisal matters, the author is not qualified and does
not purport to give legal advice. It is understood that in the present
report, the following hypothesis were not verified but they are assumed
as exact and true, such as:
a) the legal descriptions given by leases are exact;
b) the title to the property is good and marketable with a value
indicated in Canadian dollars;
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Les Evaluations Manicouagan Inc. Page 9
<PAGE>
c) the existing use is a legally conforming use which may be continued
by any purchaser from the existing owners, except as expressly noted
herein;
d) there are no encroachments, encumbrances, restrictions, leases or
covenants that would in any way affect the valuation, except as
expressly noted herein;
- No topographic report of the property were done and this present report
cannot constitute a guarantee for surveying purposes. The author is not
a qualified surveyor. So, sketches, drawings, diagrams, photographs,
etc. presented in this report are for the limited purpose of
illustration and are not to be relied upon in themselves.
- Except as otherwise expressed in this report, I am not aware and did not
find any contamination or pollution on or close by the land under study.
Being not an expert in contamination or pollution, no responsibility is
assumed for detection of any substance of pollution or contamination and
for determining their importance.
- No investigation has been undertaken with the local zoning office, the
fire department, the buildings inspector, the health department or any
government regulatory agency unless such investigations are expressly
represented to have been made in this report. The subject property must
comply with such government codes and regulations and, if it does not
comply, its non-compliance may affect its market value. To be certain of
compliance, further investigations may be necessary.
- The compensation for services rendered in this report does not include a
fee for court preparation or court appearance, which must be negotiated
separately. However, neither this nor any other of these limiting
conditions is an attempt to limit the use that might be made of this
report should it properly become evidence in a judicial proceeding.
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<PAGE>
1.7 LANDSCAPE AND NEIGHBORHOOD
The peat bog site is located close to a forester sector and accesible by
the Provincial Park Sept-Iles/Port-Cartier road. It is a vast extended land,
constitued principaly of swamps and having a topography relatively flat, even
though there are differents levels of elevation.
The neighborhood is constitued of swamps, rivers, lakes, forests and of
mineralogical sites of wwhich the exploitation is relatively limited. The land
under leases are located at about 5 kilometers from Port-Cartier urban zone. The
City of Port-Cartier is located at about 60 kilometers of Sept-Iles City on the
north side of St-Laurent river in Quebec. Thoses Cities are at approximatively
600 kilometers from Quebec City.
The Cities of Sept-Iles and Port-Cartier have a strategical localisation.
The Sept-Iles harbor is one of the most occupied in Canada and it is the first
for tonnage.
1.8 THE ZONING
Under the zoning bylaws in force on the territory of the City of
Port-Cartier, the land under study is located in a zone with a lumbering
vocation (53-F) ,but also the owner has a right acquirement for the type of
exploitation that he does.
1.9 THE UTILITIES
There is no services offering by the Port-Cartier City in this area.
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<PAGE>
1.10 THE MUNICIPAL APPRAISAL
The company assets is registred on the evaluation role of the City, but
just for factory land and buildings.
Land 8 000.00$
2000 Buildings 132 100.00$
Total 140 100.00$
1.11 THE LAND TAXES
Municipal taxe 4 427.16$
2000 School taxe 490.35$
Total taxe 4 917.51$
1.12 THE LEGAL DESCRIPTION OF THE LAND:
This entreprise doesn't possess any lot, she takes care rather some lots
belonging to the Government of Quebec, that she rents by long term leases. The
description of each lease is like following.
Lease number 74789
Land: Block 21 of Babel township
Land utility For factory plant
Land area 1,6 hectares (3,95 acres)
Lengh rental 20 years (01/12/1991 to 31/12/2011)
Yearly rental 579.00$ by year
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<PAGE>
Lease BEX 120
Object: Exclusive right for exploitation of mineral surface.
Land Lot 2948 of Babel township.
Land area 395,43 hectares ( 977,16 acres)
Lenht of lease 15 years (from 01/12/1993 to 11/01/2008)
Total rental 1 100.00$ for 15 years
Lease BEX 122
Object: Exclusive right for exploitation of mineral surface.
Land Non subdivised parts of Babel and Grenier townships.
Land area 608,99 hectares ( 1 504,90 acres)
Lenht of lease 15 years (from 22/02/1993 to 23/02/2008)
Total rental 1 100.00$ for 15 years
Lease BEX 123
Object: Exclusive right for exploitation of mineral surface.
Land Non subdivised parts of Arnaud townships.
Land area 300 hectares ( 741,34 acres)
Lenht of lease 15 years (from 08/11/1993 to 07/11/2008)
Total rental 1 100.00$ for 15 years
Lease BEX 124
Object: Exclusive right for exploitation of mineral surface.
Land Non subdivised parts of Arnaud townships.
Land area 300 hectares ( 741,34 acres)
Lenht of lease 15 years (from 08/11/1993 to 07/11/2008)
Total rental 1 100.00$ for 15 years
Lease BEX 125
Object: Exclusive right for exploitation of mineral surface.
Land Non subdivised parts of Arnaud townships.
Land area 300 hectares ( 741,34 acres)
Lenht of lease 15 years (from 08/11/1993 to 07/11/2008)
Total rental 1 100.00$ for 15 years
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<PAGE>
1.13 THE BEST AND THE MOST PROFITABLE USE
The appraiser must evaluate the land under study as if it was a waste land,
reasonably ready to be developed for its best and most profitable use.
The best use of a land must meet the following conditions:
- have a real potential physical development;
- be in conformity with the laws and regulations;
- be financially feasible;
- be realistic on a short term;
- be likely realizable instead of just be a simple possibility;
- have a demand for the land at its best use;
- the best use must be the most profitable.
Taking into consideration the zoning and the bylaws limiting its uses, and
considering the site, the neighborhood and its use as of the appraisal date, the
appraiser opinion regarding the best and the most profitable use of the land
under study is a industrial use for exploitation of naturals ressources.
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<PAGE>
1.14 APPRAISEMENT PROCESS
After have defined the probleme in the previous pages, the following known
process decomposes like that.
- Appraising the market value of surface leases.
- Appraising the market value of lease number 76789, plant land.
- Appraising the market value of land improvement, a) Peat bog b) Plant
- Appraising the market value of buildings
- Appraising the market value of equipments
- Appraising the present value of raw material.
All evaluation is founded on the principle of substitution who means that :
<< the market value of a good could not exceed the one of a surrogate also
desirable if this last is available without damaging time limits. >>
Now this principle is adapted to the different methods in order to permit
to the appraiser to transmitting a motivated opinion of the market value of the
appraise properties.
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<PAGE>
================================================================================
SECTION II
Estimation of values
================================================================================
<PAGE>
2.1 Appraising the market value of surface lease (Bex 120,122,123,124 and 125)
The mining lease who actualy belong to company 9006-1474 Quebec inc., touch
1904,6 hectares or 4706 acres of land situated in the Babel, Grenier and Arnaud
townships, in the province of Quebec. These leases give the right to their
holder:
Extracting and merchandising, all the mineral surface substances belonging
to government, in the designated lots on lease, but it doesn't give right to the
others mineral substance, petroleum, natural gas etc...
However, the government could extract all the quantity of mineral he needs
for maintain his works, without obligation to indemnifying the tenant.
The holder of a lease could transfer his right, with registration into the
public register of mining right, a copy of the act attesting his transfert and
the payment of the set expences by regulation.
These leases are done for a 15 years term at a total rent of 1,100.00$
each. This rent is a nominal rate and represent administration fees rather than
a rental rate. Actually, this amount of 1 100.00$ for 15 years is not tributary
of the area or the localisation of the rent lot.
In fact, the rights on the mining lease, have a value if the lots that they
imply contain some mineral substances on surface. The value of these rights is
often affect in function of the quantity and quality of the ore and in function
of his accessibility.
In this case, only two leases (Bex 120 and Bex 122) are located close to
the factory plant, others are near the Ste-Marguerite River at east side of
Sept-Iles City.
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<PAGE>
Actualy the harvester land is exploited on lease Bex 120. There is no study
done on the peat quality. However, the peat actualy harvested, is a satisfying
quality and it seems that this exploitation could be profitable.
We didn't fine any transaction or sales for this type of surface lease in
this area.
By reason of the measurment work, analysis and others done on the lease
lots, and mainly by reason of a study that we already did for some others peat
bog across the province of Quebec, we are in opinion to respect the consensus
around 80.00$ by acres for the value of surface right.
We will take this rate as representative of market value for surface right.
Area: 4706,00 acres
Unit rate: 80,00$ per acres
Value: 376 480,00$
Round: 376 500,00$
Market value of surface right: 376 500,00$
===========
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<PAGE>
2.2 Appraising the market value of lease 76789 ( plant land)
Lease number 76789 imply the Quebec Government as owner and the company
9006-1474 Quebec inc. as lease holder. The land is block 21 of official cadaster
of Babel township, having in area , 1,6 hectares or 3,95 acres.
This lease is made for 20 years , from 1/12/1991 to 31/11/2011. A condition
of the lease is than the tenant must built and maintain, at is own expences,
buildings and improvements need for industrial exploitation of a peat bog.
Actualy we find many buildings and equipments on this land.
The rent rate is 579.00$ per year, payable in advance on the first day of
december of each year. This lease is a normal lease and contain standard terms
and one renewal possibility, no other particulary conditions and terms for lease
like this one.
In fact, the tenant of this land have all the rights, exept the right to
dispose, but only as long as he will exploit the land as an industrial purpose.
More, the tenant could not transfert his right on the land without prealable
autorisation from owner and only if the transfert fees are paied.
This lot will be transfered with some conditions and fees, by opposed to
the possibility for an eventual purchaser to rent any vacant lot in the
neighborhood of subject property and belong to government. It is possible to
estimate that it will cost less to transfert the lease rather to buy a new one
mainly by reason of the measuring cost, land improvement and others.
It is impossible to calculate this difference, because it can varying
between a land to another. Our opinion is that the market value of this right
will be the result of the capitalisation of actual annual rent
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<PAGE>
So, the market value will be represented by the present value to receive an
amount of 579.00$ per year, at an interest rate of 6% during the remaining life
of lease, plus one renewal term of 15 year.
PV 1/p at 6% during 26 years = 13,003166
or
579.00$ x 13,003166 = 7 528.00$
round to
7 500.00 $
Market value of the right of lease 76789: 7 500,00$
=========
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<PAGE>
2.3 APPRAISING THE MARKET VALUE OF LAND IMPROVEMENTS
A) Peat bog
Here, we will estimate the market value of land improvements, done to
permit industrial exploitation as peat bog. Those improvements are :
deforestation and clear trees stumps, drain and ditches, bridges and access
roads.
Actually the area of vacuum harvest land is 300 acres located on BEX 120,
plus 200 acres exploitable at about 40% of is capability, and also a part of 480
acres (1 miles x 0,75 miles) who has been improved for block cut harvester. On
this last part, we find 9 rows of 1 mile long.
According to recommandation of consulted experts, and information gotten
for Sept-Iles and Baie Comeau peat bog, we estimate the improvement cost at 4
000.00$ per acres for vacuum harvest land and at 1 500.00$ for block cut harvest
land. These figures are estimated as following:
- Deforestation and clear trees stumps: 1,000.00$ per acres;
- Drain ans ditches 1 500.00$ per acres;
- Bridges and access roads 1 500.00$ per acres.
Value for vavuum harvest:
Replacement cost:
---------------------------------------------------------------------------
300 acres a 4 000.00$
---------------------------------------------------------------------------
200 acres at 40% at 4 000.00$ 320 000.00$
---------------------------------------------------------------------------
Total 1 520 000.00$
---------------------------------------------------------------------------
Depreciation:
---------------------------------------------------------------------------
Economique life 25 years
---------------------------------------------------------------------------
Efffective age 8 years
---------------------------------------------------------------------------
Remaining life 17 years
---------------------------------------------------------------------------
Depreciation 8/17 32% 486 000.00$
---------------------------------------------------------------------------
Depreciated value 1 033 600.00$
---------------------------------------------------------------------------
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<PAGE>
Value for block cut harvest
---------------------------------------------------------------------------
Replacement cost
---------------------------------------------------------------------------
480 acres at 1 500.00$ 720 000.00$
---------------------------------------------------------------------------
Depreciation
---------------------------------------------------------------------------
Economical life 10 years
---------------------------------------------------------------------------
Effective age 2 years
---------------------------------------------------------------------------
Remaining life 8 years
---------------------------------------------------------------------------
Depreciation 2/10 20% 144 000.00$
---------------------------------------------------------------------------
Depreciated value 576 000.00$
---------------------------------------------------------------------------
For a total of land improvement of: 1 609 600.00$
B) Plant land
This land has been sand filled and niveling on 3,95 acres. We estimate the
contributive value of that at 2 000,00$ per acres or 7 900,00$ round to 8000,00$
Market value total for land improvements: 1 617 000.00$
=============
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<PAGE>
2.4 DESCRIPTION AND APPRAISING THE MARKET VALUE OF BUILDINGS
The subject property includes 4 buildings who will be described separately
and on wich the market value will also be estimated separately.
2.4.1 Factory building
Year of built 1987, 1996
Ground perimeter 611 feet
Ground area 9000 square feet
Wall height 23,5 feet
Fondation Concrete
Floor Concrete on ground
Exterior walls 2 "x6" at 24 "c/c wood stud
Wall covering Galvanixed steel
Roof structure Wood rafther 2 "x6" at 24 "c/c
Roof cover Galvanized steel
Electrical Lighting only
Heating None
Plumbing None
Openning Steel and wood doors (2 garage doors 14')
Misselaneous and particularities
State and conditions Average good
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<PAGE>
2.4.2 Garage
Year of built 1984
Ground perimeter 304 feet
Ground area 5149 square feet
Wall height
Fondation Concrete
Floor Concrete on ground
Exterior walls Prefabricated steel (qunset)
Wall covering Galvanixed steel
Roof structure Prefabricated steel qunset,
Roof cover Galvanized steel
Electrical Lighting with 225 amp,600 volts
Heating None
Plumbing None
Openning 2 garage doors 12'x16') wood
Misselaneous and particularities
State and conditions Average
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<PAGE>
2.4.3 Mobil office
Year of built 1975
Ground perimeter 100 feet
Ground area 400 square feet
Wall height
Fondation Wood piles
Floor Wood structure with vinyl tiles
Exterior walls Wood stud
Wall covering Aluminium siding
Roof structure Wood,
Roof cover Galvanized steel
Electrical Fluorescent Lighting
Heating Electrical baseboard
Plumbing None
Openning 2 steel doors, stell windows
Misselaneous and particularities
State and conditions Average
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<PAGE>
2.4.4 Office
Year of built 1984
Ground perimeter 165 feet
Ground area 1632 square feet
Wall height
Fondation Concrete
Floor Concrete on ground
Exterior walls Prefabricated steel (qunset)
Wall covering Galvanixed steel
Roof structure Prefabricated steel qunset,
Roof cover Galvanized steel
Electrical Fluorescent Lighting
Heating Electrical baseboards
Plumbing 1 w.c. ;1 lavabo, 1 electrical heater
tank 40 gls, 1 septic tank
Openning Wood doors and windows
Misselaneous and particularities Ridgid insulation ; wood stairs
State and conditions Average
Mezanine Plywood floor 1632 square feet
2.4.5 BUILDINGS VALUE
The buildings replacement cost has been calculated with unit in place
method. We have different indexes of unit rate for estimating the replacement
cost of a building. The knownest are Boeckh Building Valuation Table ; Marshall
and Swift Valuation Quaterly and the << Manuel d'evaluation fonciere du Quebec
>> whom was used in this present case.
The amount estimated like replacement cost new include the material and
labour cost at valuation date and represent the cost to rebuilt a building.
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<PAGE>
The physical depreciation is calculated for each buildings by a
pourcentage of the replacement cost, regarding effectives age versus economic
life, the state of observed maintenance and reparation to make , are also take
in consideration.
Functionnal and economical obsolescence used, take in order that the
buildings has been builted for a specific need and that they are located in a
specific site where the real estate market is inexisting.
Factory building
- --------------------------------------------------------------------------------
Replacement cost new 287 900.00$
- --------------------------------------------------------------------------------
Physical depreciation (30%) 86 370.00$
- --------------------------------------------------------------------------------
Depreciate cost 201 500.00$
- --------------------------------------------------------------------------------
Functionnal and economical obsolescent (25%) 50 380.00$
- --------------------------------------------------------------------------------
Depreciation cost 151 150.00$
- --------------------------------------------------------------------------------
Retained value for factory building 151200.00$
- --------------------------------------------------------------------------------
Garage
- --------------------------------------------------------------------------------
Replacement cost new 177 400.00$
- --------------------------------------------------------------------------------
Physical depreciation (35%) 62 100.00$
- --------------------------------------------------------------------------------
Depreciate cost 115 300.00$
- --------------------------------------------------------------------------------
Functionnal and economical obsolescent(25%) 28 800.00$
- --------------------------------------------------------------------------------
Depreciate cost 86 500.00$
- --------------------------------------------------------------------------------
Retained value for garage 86 500.00$
- --------------------------------------------------------------------------------
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<PAGE>
Mobil office
- --------------------------------------------------------------------------------
Replacement cost new 18 000.00$
- --------------------------------------------------------------------------------
Physical depreciation (65%) 11 700.00$
- --------------------------------------------------------------------------------
Depreciate cost 6 300.00$
- --------------------------------------------------------------------------------
Functionnal and economical obsolescent (25%) 1 600.00$
- --------------------------------------------------------------------------------
Depreciate cost 4 700.00$
- --------------------------------------------------------------------------------
Retained value for mobil office 4 700.00$
- --------------------------------------------------------------------------------
Office building
- --------------------------------------------------------------------------------
Replacement cost new 96 500.00$
- --------------------------------------------------------------------------------
Physical depreciation (35%) 33 775.00$
- --------------------------------------------------------------------------------
Depreciate cost 62 725.00$
- --------------------------------------------------------------------------------
Functionnal and economical obsolescent(25%) 15 725.00$
- --------------------------------------------------------------------------------
Depreciate cost 47 025.00$
- --------------------------------------------------------------------------------
Retained value for office building 47 000.00$
- --------------------------------------------------------------------------------
Total of buildings market value 289 400.00$
===========
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<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Bog plant
2.5 APPRAISING EQUIPMENT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Peat line
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 Uppers bucket with chain conveyor and 2 hydraulics
pumps, 15 hp Verville 34 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
2 1 Strar screen with belt conveyor 30" X 20' Tardif JEF 6034 95038 12 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
3 1 Waste belt conveyor 18" X 20' Tardif 3 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
4 1 Waste belt conveyor 18" X 20' (exterior) 3 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
5 1 Peat belt conveyor, inclined, 36" X 25' Tardif 12 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
6 1 Rubber star screen Tardif TEC 108-1 95039 7 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
7 1 Waste belt conveyor, 16" X 20' (exterior) Tardif 3 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
8 1 Recuperation belt conveyor, 36" X 8' Tardif 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
9 1 Screw separator with belt conveyor 30" X 35' Tardif 10 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
10 1 Recuperation belt conveyor 30" X 10' Tardif 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
11 1 Peat belt conveyor 36" X 8' (from 6 to 12) Tardif 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
12 1 Peat belt conveyor 36" X 20' inclined Tardif 8 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
13 1 Shaking screen (non utilised) Tardif 6' X 14' 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
14 1 Peat belt conveyor 36" X 20' 8 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
15 1 Peat bin, steel, 4' h x 8' dia. 6 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
16 1 Peat belt conveyor 36" x 24' (fron 15 to 18) 8 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
17 1 Elevator conveyor for recuperation 12" x 16' 1 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Bog plant
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
18 1 Big bale bagging press with hydraulic pump belt
conveyor and vacuum cleaner 40 hp Verville 2 bags 200 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
19 1 Roller conveyor 48" X 10' 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
20 1 4 boxes bagging press, 4 to 6 cubic feet
(not in operation) Verville 20 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
BLOCK CUT LINE
- ------------------------------------------------------------------------------------------------------------------------------------
21 1 Upper bucket, with hydraulic pump 15 hp for
pallet lift, chain conveyor Verville 35 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
22 1 Block belt conveyor 16" X 16' 3 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
23 1 Block shreder, 55 hp 35 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
24 1 Peat belt conveyor, 24" X 20', closed and inclined Tardif 10 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
25 1 Rotatif screen with conveyor (from 24 to 12) Tardif 10 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
26 1 Electrical distribution panel 100 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 540 500,00 $
--------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Harvester and yard
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
27 8 Belt conveyors, hydraulics, on wheels, 50' 20 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
28 2 Right-angle rollers conveyors 1 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
29 2 Telescopic belt conveyor, hydraulic on wheels 14 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
30 1 Tractor with telescopic pilling belt conveyor M.F. 283 30 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
31 1 Tractor, 4 X 4 M.F. 283 12 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
32 2 Tractor, 4 X 4, 1988 with cab M.F. 399 15 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
33 3 Tractor, 4 X 4, 1991 with cab M.F. 399 90 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
34 2 Tractor, 4 X 4, 1993 with cab M.F. 399 64 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
35 1 Tractor John Deer 2755 25 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
36 1 Mechanical shovel with 2 X 4' wide wood rails John Deer 120 125 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
37 1 Peat block cutting machine 30 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
38 1 Telescopic loader JCB Turbo 5253 3,67E-06 100 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
39 4 Attachments for loader or shovel 12 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
40 1 Fuel steel tank on wheels with manual pump 8' X 4'
dia 1 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
41 1 Shunter truck (old) Ford 8000 5 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
42 1 Hydraulic hiab, telescopic 40' on 8 wheels trailer Hiab Beaulieu 105 70 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
43 1 Pick up truck, 1990 Chevrolet 1600 Cheyenne 10 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
44 1 Steel portable ramp 6 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Harvester and yard
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
45 1 Fuel tank, 1000 gls, on concrete base, with pump 2 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
46 1 Agrator chopper Tardif 86-301 3 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
47 1 Rotovator Tardif 86-10-4005 3 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
48 1 Screw levelling 40' Tardif 87-1035 20 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
49 3 Hydraulic dumper trailer, tandem 18 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
50 4 Flat bed trailer, 30' Beaulieu 100 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
51 1 Springs harrow, 50' 5 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
52 1 Springs harrow, 20' 3 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
53 1 Springs harrow, 12' 2 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
54 1 Rotary harrow, 25' 5 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
55 4 Vacuum harvester, double heads Tardif 100 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
56 1 Conditionnor 48' Tardif 8 500,00
- ------------------------------------------------------------------------------------------------------------------------------------
57 1 Ditcher Dandi 4 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
58 1 Spader Tardif 900548 4 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
59 1 Scraper 1 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
60 1 Sun raker Beaulieu 2 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
61 1 Roots picker Beaulieu 9 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 922 500,00 $
--------------------------
</TABLE>
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Les Evaluations Manicouagan Inc. Page 32
<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Miscellaneous
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
62 Lot of office furniture 2 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
63 Electrical line, 2000 volts 70 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
64 Air compressor 5 hp 5 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
65 Lot of manual, air and electrical tools 5 000,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 82 500,00 $
--------------------------
</TABLE>
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Les Evaluations Manicouagan Inc. Page 33
<PAGE>
<TABLE>
<CAPTION>
TORLAND INC. MACHINERY AND EQUIPMENT
====================================================================================================================================
Division: Port-Cartier (Quebec) Department: Miscellaneous
- ------------------------------------------------------------------------------------------------------------------------------------
Ref Number Description Brand Model Serial Market value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Bog plan 540 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
Harvester equipment 922 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 82 500,00 $
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 1 545 500,00 $
--------------------------
</TABLE>
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Les Evaluations Manicouagan Inc. Page 34
<PAGE>
================================================================================
SECTION III
The income approach
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<PAGE>
3.1 APPRAISING THE MARKET VALUE OF RAW MATERIAL
The process that we have used in order to appraise the present value of the
raw material, consist to calculate, in a first time, the entreprise market
value.
This value will be established considering the annual potential net income
of the entreprise. This will be done in accordance with the financial sheet for
incomes and expences. The net income will be actualised in taking order the
remaining life and the interest rate available. From this value obtained by
actualization we will deduct the value of already established assets, in order
to get residual value that will attribute in a very large portion to the
presence of raw material.
Our estimate will be based on the productivity capacity of the plant in
accordance with the machineries and equipments in place, the harvester area, and
the financial statement. So we will obtain the followings :
Capacity of production:
a) Vacuum production:
300 acres, less 10% of non productive area,(ditches, roads) = 270 acres or
11 762 002 square feet or 1 960 333 cubic feet (11 762 002 / 6)*
200 acres at 40% productive, less 10% (ditches and road)= 72 acres or 3 136
533 square feet or 522 755 cubic feet ( 3136533 / 6)*
o 2" inches harvest by year.
b) Block cut production :
9 rows x 5280 linear feet x 16 cubic feet = 760 320 cubic feet
Total 3 243 408 cubic feet
Less lost 10% 324 340 cubic feet
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Les Evaluations Manicouagan Inc. Page 36
<PAGE>
Total quantity disponible 2 919 068 cubic feet
Quantity of big bale bags 55 c.f. compress 2 for 1 26 536 bags
As said by Mr Clement, Torland manager, annual production with equipment in
place, is about 25000 bags more or less, 55 cubic feet compress 2 for 1 per bag
or 2 750 000 cubic feet.
So, our opinion is that an average of 25 750 bags or 2 834 480 cubic feet
per year will give a good idea of the actual capacity of this peat plant.
3.2 SALES INCOME
Actual price for a big bale of 55 cubic feet is 68.00$ .Using this price and
the number of bag precedently summit, we obtain the amount of sales for the
year.
25 750 bag at 68.00$ = 1 751 000.00$
If we take a look to the income and expences sheet for 1997, 1998, we see
that the sales for this two years are respectively 1 226 448.99$ and 1 364
433.00$ . So we estimate sale for 1999 at 1 751 000.00$. . This augmentation has
been created by changement in the harvester and packaging technics whow will
permit to increase the production.
So we think than the number of bags and the unit price are valid and
representative.
3.3 GROSS INCOME
According with statement of operation 1998, the gross income was 493
000.00$ or 0.363 of sales. For 1999 the estimate of gross income will be 635
613.00$ (1 751 000$ x .363).
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Les Evaluations Manicouagan Inc. Page 37
<PAGE>
3.4 EXPENCES BEFORE AMORTIZATION, INCOME TAXES AND FINANCIAL EXPENCES
Always regarding the statement sheet for 1998, the total expences was
442 111.00$, from witch we substract 139 989.00 for amortization and 91 902.00$
for financial expences. The result 210 220.00$ represent 0.426 of the 1998 gross
income. For 1999 our estimate will be 270 771.00$ (635 613 $ x .426)
3.5 NET INCOME
635 613.00$ - 270 271.00$ = 364 842.00$
This net income is allocated to all physical assets and raw materials. We
think than the value of raw materials will be obtained by making the difference
beetwen the present value to receive this net income of 364 842.00$ every years
during the remainning life of 23 years, calculated at 6% of interest , and the
value already estimate for all the other physical assets.
P.V 1/p = 12,303378 x 364 842.00$ = 4 488 789.00$
This result less the total value of all assets establish precedently at
3 836 500.00$ will give the value of raw materials 652 289.00 $. Round to
652 300,00 $.
Market value of raw materials: 652 300.00$
===========
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Les Evaluations Manicouagan Inc. Page 38
<PAGE>
3.6 SUMMARY OF VALUE
Market value of surface right a) Bog 376 500.00$
b) Plant 7 500.00$
Market valu of land improvements a) Bog 1 609 000.00$
b) Plant 8 000.00$
Market value of buildings 289 400.00$
Market value of equipments 1 545 500.00$
Market value of raw material 652 300.00$
TOTAL MARKET VALUE 4 448 300.00$
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Les Evaluations Manicouagan Inc. Page 39
<PAGE>
CERTIFICATION OF THE APPRAISER
The present report is based on an analysis of data obtained from the owner
and a visit at the plant, and from other reliable sources.
I, hereby, following a visit of the said property, certify that, to the
best of my knowledge and belief:
- the statements of fact contained in this report are true and correct.
- the reported analyses, opinions and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased, professional analyses, opinions and conclusions,
- I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
- my compensation is not contingent upon the reporting of predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event.
- no one provided significant professional assistance to the person
signing this report.
- Our final estimate of the market value for the described property is as
of Febuary 23 th, 2000, 4 448 800,00 $.
Marcel Furlong, Bacc. Adm., C.A.
Chartered Appraiser,
Gerard Legare C.A.
Chartered Appraiser
Note : Our customer, ask us to proceed to an evaluation of potential market
value that would have the Port-Cartier peat bog, if some major investments were
done and the results assumptions prepare by the owner of Torland entreprise are
take into account. At the appendice we estimate than the potentiel market value
of the Port-Cartier peat bog could be 13 600 000,00 $ cdn if the major
investments are done and the assumptions of results are proofs by the
exploitation of the peat bog.
<PAGE>
DESCRIPTION OF SITUATION:
Our customer, American Group Appraisal, and the owner of Torland
entreprise, ask us to proceed to an evaluation of potential market value that
would have the Port-Cartier peat bog, if some major investments were done
(13 000 000.00$cdn) in order to increase the procuction.
The Port-Cartier peat bog possesses currently some rights on 4 710,03 acres
of which 3,95 acres are useful for industrial site (plant) where the buildings
are erected, and where equipments and inventory are stocked. The balance of lot,
4 706 acres are available for the production, except that only 480 acres (300 +
40% of 200) is prepared for vacuum harvest and other 480 acres is for block cut
production. So there are only 960 acres, all implied in the same lease, which
are prepared and capable to produce.
These 960 acres represent only 20% of total area under lease and in
addition the present production of these 960 acres could be increased if some
investments were done in order to increase equipments and man-power.
Our proxy asks us to appraise the potential market value of Torland peat
bog at Sept-Iles in considering the previsions of investments and of results
presented by Mr. Louis Zenette, Torland representative.Previsions are jointed at
the end of the present appendix.
As we already are March 15th, 2000 and that the investments anticipated for
the 1th november 1999 was not done, it is necessary to delay the previsions of
one year, this means that the 1th november 1999 becomes the 1th november 2000
and that the years of anticipated exploitation will be May 31th 2001, 2002, 2003
and 2004.
The foreseen investments are in order of 13M$ of which 1,6M$ in 2000, 6,2M$
in May 2001 and 5,2M$ in May 2002. The works and purchases joined to the
anticipated investments retailed to the joined chart to the evaluations of
results. The acquisition cost foreseen for equipments seem realist. On the other
hand, the cost estimated for the land preparation, appear to us lower than the
reality, since it is recognized that this preparation cost, including
deforestation, cleaning, access ways construction, bridges and others, represent
an investment of about 4 000.00$ by acre. The prevision of Torland are from
250.00$ to 300.00$ by acre, so, it would be necessary to demonstrate the
validity of these previsions.
<PAGE>
The previsions of results were make on 4 years of which 3 who will take in
account some anticipated investments. The fourth year, on May 2004, it is
anticipated that the entreprise will produce 300 000 bags of peats and will
generate some incomes of 25 000 000.00$. The net anticipated incomes are of the
order of 12 411 000.00$, that who would allow to justify, for the peat bog, a
value besides of 100 000 000.00$ in 2005.
It seem to us very unprobably that in investing only 13M$cdn, the peat bog
could produce 300 000 bags of peat by year and of a recurrent way. Besides,
there is a lot of factors who could influence the profitability of the
entreprise like, the capability of market to absorb the surplus of offering, the
influence on the prices that could have the surplus of offering, the
temperature, the transportation cost and others, that it appears to us ,little
applicable ,considering this very important increase of production.
In our opinion, the analysis in order to appraise the potential market
value of the peat bog, it is preferable to considering only the first year of
investment and production of this project. It seems us probable that an
investment of 1,6M$ could increase the capacity of production of peat bog at 50
000 bags by year, and that on a recurrent way.
The acquisition of anticipated equipments could permit the increase of
production even tough the productive area is not increase on an important way,
as it would be suffucient of harvesting some more inches in tickness every year.
On the other hand, the reserve of raw materials will decrease more quickly, so
it will be necessery to foresee and reinvest in the preparation of capable lot
to be harvested.
According to anticipated incomes, if we take into account a production of
50 000 bags of 55 cubic feet,be 3 857 700.00$, the expences of foreseeable
exploitation will be 1 183 000.00$ and the cost of sales will be estimated at
1 254 300.00$, the potential net income of this peat bog entreprise, before tax,
amortization and interest, would be situate at 1 420 400.00$.
Sales: 3 857 700.00$
Less: Cost of sales 1 254 300.00$
Gross incomes: 2 603 400.00$
Less: Exploitation expences: 1 183 000.00$
Net income: 1 420 400.00$
(Before tax,amortization and interest)
The gross income anticipated represent 67,5% of sales for the projection
year, whereas in 1997 it was 45,8% and in 1998 36,2%. It is apparent that the
fact of increasing the production will provoke an economy, but the difference
seems important.
The exploitation expences before amortization, taxes and interest have to
represent 52,6% of gross incomes in 1997 and 42,6 in 1998. The estimate
anticipated represent 45,4% for projected year, that seems normal.
Our opinion is that the estimated potential net incomes, 1 420 400.00$,
represent the maximum because it is possible to have somes variation in sales
cost. In our estimation of the peat bog potential market value, taking in
account a production of 50 000 bags, we have to take care of a rate of risk
joined to the uncertainly of the investment, in the purpose of adjusting the
actualisation rate allowing to establish the value of the entreprise.
<PAGE>
The factors allowing to estimate the risk are the followings.
o Economical condition loined to the entreprise
o Character of the clientele
o Importance of the competition
o Character of products or services
o Personnal and management
o Method of working
o State of physical facilities
o Pasted financial situation
o Increase rate of the entreprise
The ponderation of the whole of these factors allows to appraise the rate
of risk at 3,0%.
The potential market value of the entreprise will be estimate in
accordance with a global rate of actualisation of 9,0% , be 3,0% for the rate
of risk and 6,0% for the efficiency or financing rate. The final calculation
will be summarized like follows.
<PAGE>
SUMMARIZED OF BASIS DATE (PROJECTED YEAR)
Gross incomes 2 603 400.00$
Total exploitation expences 1 183 000.00$
Net incomes (before amortization,taxes and interest) 1 420 400.00$
Anticipated length of benefits 23 years
Efficiancy or financing rate 6%
Rate of risk 3%
Global actualisation rate 9%
Actualisation factor (VA 1/P) 9,580206
Entreprise value (1 420 400.00$ x 9,580206) 13 607 725.00$
Rounded market value 13 600 000.00$
==============
This market value of 13 600 000.00$ is called potential value because it is
done in accordance with the potential incomes, it could vary in fontion of
certain elements like the market prices, the capability of the market to absorb
an increase in offering, the temperature who will affect the peat bog site and
others. This potential market value coult be effective only after the
anticipated investments will done.
Retained potential market value: 13 600 000.00$
==============
<PAGE>
================================================================================
APPENDIX E
Statement of operations
================================================================================
<PAGE>
================================================================================
APPENDIX D
Leases localisation plans
================================================================================
<PAGE>
================================================================================
APPENDIX A
Potentiel value of the peat bog if some new investment are done
================================================================================
<PAGE>
================================================================================
APPENDIX B
Photos
================================================================================
<PAGE>
================================================================================
APPENDIX C
Buildings sketches
================================================================================
