UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
_X__ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
1934
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2004
Commission file number: 0-22149
THE AMERICAN ENERGY GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Nevada 87-0448843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Post Road West
Suite 202
Westport, Connecticut 06880
(Address of principal executive offices) (Zip code)
203-222-7315
(Registrant's telephone number including area code)
___________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
___________________________
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No ___
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or in any amendment of this Form 10-K. [ ]
The issuer had no revenues for the year ended June 30, 2004.
The issuer's Common Stock was not traded on a public exchange or market on
October 1, 2004. As a result, no stated market value of the issuer's Common
Stock is provided.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes _X__ No ___
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of October 1, 2004, the number of Common shares outstanding was 24,698,518
__________________________
DOCUMENTS INCORPORATED BY REFERENCE
None.
1
THE AMERICAN ENERGY GROUP, LTD.
INDEX TO FORM 10-KSB
PART 1 PAGE
Items 1and 2. Business and Properties......................................................... 3
Item 3. Legal Proceedings............................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders............................. 5
PART II
Item 5. Market For Common Equity and Related Stockholder Matters........................ 5
Item 6. Management's Discussion and Analysis
or Plan of Operation............................................................ 6
Item 7. Financial Statements ........................................................... 8
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................ 8
Item 8A Controls and Procedures......................................................... 8
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act............................... 9
Item 10. Executive Compensation.......................................................... 9
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters................................................. 9
Item 12. Certain Relationships and Related Transactions.................................. 10
PART IV
Item 13. Exhibits and Reports on Form 8-K................................................ 10
Item 14. Principal Accountant Fees and Services.......................................... 10
SIGNATURES........................................................................................ 11
2
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES.
Overview and Subsequent Events
The American Energy Group, Ltd. was, until its calendar 2002 bankruptcy, an
independent oil and natural gas company engaged in the exploration, development
acquisition and production of crude oil and natural gas properties in the Texas
gulf coast region of the United States and in the Jacobabad area of the Republic
of Pakistan. While the bankruptcy proceedings were pending, the Texas producing
oil and gas leases in Fort Bend County, Texas were foreclosed by the secured
lender. Our non-producing Galveston County, Texas oil an gas lease rights were
not affected by the foreclosure. In November, 2003, we sold the capital stock of
our Hycarbex-American energy, Inc. subsidiary, which held the exploration
license in Pakistan, to Hydro Tur (Energy) Ltd., a company organized under the
laws of the Republic of Turkey. The Company retained an 18.0% overriding royalty
interest in the production which may be derived in the future from drilling o
perations by Hydro Tur (Energy) Ltd. We emerged from bankruptcy in early 2004
with these two assets intact, but without ongoing business activities other than
the maintenance and management of these assets.
Pre-Bankruptcy History
The American Energy Group, Ltd. (formerly Belize-American Corp.
International and before that, Dim, Inc.)[hereinafter "Company"] was organized
in the State of Nevada on July 21, 1987, as a wholly owned subsidiary of
Dimension Industries, Inc. a Utah Corporation (hereinafter "Dimension"). At the
time of organization, we issued 1,366,250 shares of voting Common Stock to
Dimension, which was the sole stockholder. On April 28, 1989, our form S-18
filed with the Securities and Exchange Commission was declared effective.
Dimension distributed the 1,366,250 shares it held to the stockholders of
Dimension as a dividend. Also distributed were 1,566,250 warrants to purchase 1
share of voting Common Stock of the Company for each warrant held. The warrant
offering expired on August 11, 1989. Exercise of the warrants by shareholders
resulted in our issuing 1,547,872 shares of voting Common Stock. In 1987, we
engaged in marketing an automobile carburetor modification kit. The efforts were
not successful and were abandoned. From 1987 to 1990, we were inactive. In
October, 1990, the shareholders approved a one for ten (1:10) reverse split of
the voting Common Stock. In June, 1991, we obtained an Oil Prospecting License
from the government of Belize. At a special meeting of shareholders, resolutions
to change the name of the Company to "Belize-American Corp. International",
forward split the voting Common Stock ten for one (10:1) and a vote to ratify
the Oil Prospecting License received a vote of approval.
During 1991, we attempted various means to attract sufficient capital
investment to develop the oil prospect in Belize, but we were not successful.
The license expired due to our lack of performance. From 1992 until 1994, our
activities consisted of attempting to raise capital for a business venture and
solicitation of other business enterprises for a possible merger. On September
22, 1994, we entered into an agreement with Simmons Oil Company, Inc., a Texas
corporation (hereinafter "Simmons") whereby we issued 2,074,521 shares of
Convertible Voting Preferred Stock to the shareholders of Simmons in order to
acquire Simmons and two subsidiaries of Simmons, Simmons Drilling Company and
Sequoia Operating Company. The agreement was effective September 30, 1994. Prior
to the acquisition of Simmons, Simmons had acquired certain oil and gas
properties located in Texas. Subsequent to the acquisition, we acquired
additional oil and gas properties in the same general area through subsidiaries.
In April 1995, we acquired all of the outstanding shares of Hycarbex, Inc.,
a Texas corporation (hereinafter "Hycarbex") for 120,000 shares of our voting
Common Stock, a 1% Overriding Royalty Interest in the revenues generated through
the development of Hycarbex's Pakistan Concession, and an agreement to pay the
sole shareholder $200,000 conditioned upon the success of that development. For
accounting purposes, this acquisition was treated as a pooling of interests. We
changed the name of Hycarbex, Inc. to Hycarbex-American Energy, Inc. and
operated it as a subsidiary until the stock was sold in November of 2003.
Hycarbex holds an oil and gas Concession and Exploration License granted by the
government of Pakistan in the Sindh Province. The Yasin Concession is comprised
of approximately 2,200 square kilometers.
We began producing commercial quantities of oil on our Texas-based
properties and emerged from the development stage during the year ended June 30,
1997, during which month, we purchased oil and gas properties comprised of
approximately 1,400 acres in Texas which contained several existing producing
wells. A program of reworking the existing wells and drilling new wells on these
Texas properties ensued from that point. These Texas-based properties were, at
the time, the only source of cash flow from business operations. During 1997, we
also acquired by purchase from a bankruptcy trustee, the rights then held by
Luck Petroleum Corporation in oil and gas leases comprising approximately 593
acres in Galveston County, Texas. These rights included "after payout" interests
in shallow and mid-range horizons held and operated by third parties, as well as
interests in the deeper zones below approximately 10,000 feet.
3
During the year ended June 30, 1998, we drilled our initial well on our
Pakistan Concession, the Kharnhak #1, which indicated the presence of high BTU
methane gas in the wellbore formations, but which was not completed as a
commercial discovery well. During the year ended June 30, 1999, we drilled our
second exploration well, the David #1 Well, and due to mechanical difficulties,
abandoned it and commenced a substitute exploratory well, the David #1A Well
shortly thereafter in the Spring of 1999. The David #1A likewise experienced
problems, including the presence of hydrogen sulfide gas. Although both wells
encountered gas shows, both were plugged and abandoned as non-commercial. No
additional drilling was undertaken during the year ended June 30, 2000, and we
obtained an extension from the Pakistan Government to commence a substitute well
for the David #1A Well by November 30, 2000, conditioned upon the completion of
additional seismic surveys on the acreage. The required seismic surveys were
completed and we drilled the Jacobabad No. 3 well in January 2001. While it
demonstrated hydrocarbon presence on its analytical logs, it was plugged and
abandoned as non-commercial.
During the quarter ended March 31, 2000, we announced our intention to sell
our Texas oil and gas leases in order to focus our activities and resources
toward the development of our Pakistan concession. On May 9, 2000, we entered
into an agreement with Northern Lights Energy, Ltd. to sell our Texas oil and
gas leases for $4,000,000 after considering the relative terms of a number of
verbal and written offers from the interested parties. As a result of this
contract to sell the assets for $4,000,000, we recorded a net loss on our books
for the year ending June 30, 2000 of $12,283,248 based, in part, upon the deemed
asset impairment loss of $11,643,262 recorded by us pursuant to SFAS 121 titled
"Accounting for the Impairment of Long-Lived Assets". The asset loss calculation
was based upon the difference between the four million dollar sale price and the
value previously attributed to those assets on our books. Northern Lights
Energy, Ltd. failed to consummate the transaction and we initiated litigation
during the quarter commencing October 1, 2000, to cancel the contract, while
simultaneously commencing efforts to market the oil and gas leases to
alternative prospective purchasers. The Northern Lights Energy, Ltd. litigation
was settled in 2001. As part of the settlement, we repaid to Northern Lights, a
portion of the funds which Northern Lights had advanced toward the purchase
price at the time of the May 2000 agreement and Northern Lights released all
claims to the Texas-based oil and gas leases. The source of the repayment of the
advance was Zaber Investments, L.L.C., a Texas based company owned by William
Aber and Michael Zabransky. For providing these funds, Zaber Investments, L.L.C.
was assigned a ten percent (10%) interest in all of the Texas-based leases and
drilling equipment. Contemporaneously with this transaction, William Aber became
a member of the Board of Directors and an officer of the Company and he served
in those capacities until early in calendar 2003. Zaber Investments, L.L.C.
reassigned its interests in the Galveston County oil and gas leases to the
Company in calendar 2004.
Events Preceding Bankruptcy and During Bankruptcy
After settling the Northern Lights litigation, fervent efforts were made to
sell the Texas-based producing oil and gas leases. In January 2002, Georg von
Canal was purportedly removed from the Board by certain shareholders
constituting a majority, as prescribed by the Company's bylaws, but which votes
did not meet the two-thirds majority required by the Nevada corporate laws. In
March 2002, Mr. von Canal filed a lawsuit seeking a judicial declaration as to
his rightful management positions in the District Court of Harris County. In
April, 2002, the Company entered into a sale agreement with a German concern,
Vivus Beiteligungs-Aktiengesellschaft, which, if closed, would have resolved the
operating capital deficiency and the management dispute. The purchaser failed to
consummate the transaction and on June 28, 2002, the Company was placed in
involuntary Chapter 7 bankruptcy by three (3) creditors, one of which
subsequently withdrew and was replaced by Georg von Canal. This proceeding
stayed the attempts by the first lien creditor to foreclose on the Texas oil and
gas leases and was ultimately converted to a debtor-in-possession Chapter 11
bankruptcy in December 2002. At the request of Mr. von Canal, the Bankruptcy
Court permitted the State District Court to proceed with the Georg von Canal
lawsuit and on November 13, 2002, the State District Court granted Mr. von
Canal's motion for summary judgment and reinstated his management positions.
Thereafter, efforts continued to sell the Texas-based assets and/or to sell
securities of the Company with the permission of the Bankruptcy Court. A
contract was negotiated with Global Energy Group, AG, a Swiss company, during
January and February 2003, the terms of which provided for convertible debt
financing to the Company sufficient to discharge the first lien debt against the
Texas oil and gas assets. The purchaser did not perform the contract and, as a
result, the first lien lender foreclosed. These foreclosed assets could no
longer be considered for reorganization purposes. Management proceeded to
redirect its reorganization efforts to the remaining assets.
4
In November 2003, the Company reached an agreement with Hydro Tur (Energy)
Ltd. to sell to Hydro Tur all of the stock of Hycarbex-American Energy, Inc. in
exchange for an 18% royalty and the commitment by Hydro Tur to drill a well by
April 16, 2004. The agreement provided for the royalty to be reduced upon
certain contingencies, including the failure of Hydro Tur to drill initially a
successful discovery well and including the failure by the Company to perform
its Second Amended Plan of Reorganization. By amendment dated February 16, 2004,
these contingencies were removed in exchange for issuance to Hydro Tur of
1,500,000 restricted shares of Common Stock. The drilling obligation was
likewise extended from April 16, 2004 to November 16, 2004.
Office Facilities
The Company relinquished its leased office space in Houston, Texas at 9441
Sam Houston Parkway during the year ended June 30, 2003, and moved its principal
office to 115 Hickory Ridge Drive, Houston, Texas 77024. We did not pay a fee
for usage of the Hickory Drive address and commencing in July 2004, the
principal address was moved to 120 Post Road West, Westport, Connecticut to
accommodate the Company's sole officer, Pierce Onthank.
Employees
We did not have any paid employees on June 30, 2004, other than the
Directors and Executive Officers, Pierce Onthank and Dr. Iftihhar Zahid.
ITEM 3 - LEGAL PROCEEDINGS
We had numerous prepetition suits by creditors based upon nonpayment for
services and goods related to our Texas-based oil and gas activities, some of
which resulted in judgments. Several of these creditors asserted claims in the
bankruptcy proceedings which commenced June 28, 2002, and as a result, received
Common Stock in satisfaction of their claims pursuant to the Second Amended Plan
of Reorganization, which plan provided for cancellation of all outstanding
securities and issuance of new Common Stock to the creditors.
On January 22, 2004, we filed lawsuit in the United States Bankruptcy
Court, Southern District of Texas, as an adversary proceeding against Smith
Energy 1986-A Partnership, Smith Energy Company, Inc. and Howard Smith. The
basis of the lawsuit is a claim for unpaid working interest proceeds claimed by
The American Energy Group, Ltd. as the owner of a 15% "after payout" working
interest in certain producing zones under our Galveston County, Texas assets.
The basis of our claim is that payout may have actually been achieved resulting
in a possible wrongful retention of revenues by the named defendants. If
successful, we believe that we will recoup proceeds which should have been paid
previously as well as obtain a revenue stream from future production from these
zones. This lawsuit is pending as of the date of filing of this report.
During the period ended June 30, 2004, the Company's former operating
subsidiary, American Energy Operating Corp. ("AEOC"), received notice from the
enforcement division of the Railroad Commission of Texas that three (3)
abandoned wells in the North Dayton Field previously operated by AEOC years ago
are required to be plugged in accordance with Commission procedures and rules.
The Company is currently investigating the extent of its responsibilities, if
any, to comply with the Commission's demands upon AEOC.
Subsequent to June 30, 2004, the Company was joined in a lawsuit by Alief
Independent School District for the collection of alleged unpaid school district
taxes on office equipment and personal property for calendar year 2002. The
liability claimed by the District for the period is $6,099.05. The Company is
currently investigating the extent of its responsibilities, if any.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of the year ended June 30, 2004.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock previously traded on the National Association of
Securities Dealers Bulletin Board quotation system under the symbol "AMEL".
Although an active trading market for our Common Stock existed prior to
bankruptcy, currently our shares are not trading due to our failure to file the
annual and quarterly reports for the periods ending September 30, 2002; December
31, 2002; March 31, 2003, June 30, 2003, September 30, 2003; December 31, 2003,
and March 31, 2004. These delinquent reports have been filed, but our
application on Form 211 to the National Association of Securities Dealers for
resumption of trading is pending as of the date of this report. Additionally,
our shares are not currently traded because the outstanding securities prior to
bankruptcy were cancelled and new Common Stock issued solely to creditors,
pursuant to the Second Amended Plan of Reorganization. Upon emergence from
bankruptcy, we obtained a new CUSIP number and issued the new share
certificates. The number of record holders of the Company's $0.001 par value
Common Stock at October 1, 2004 was forty eight (48). Of the 24,698,518 shares
outstanding, 4,500,000 are restricted shares and the balance are unrestricted
shares.
5
To date, the Company has not paid dividends on its shares and we do not
anticipate paying dividends.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Forward-Looking Statements
This report contains statements about the future, sometimes referred to as
"forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. We intend the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in Section
27A of the Securities Act and Section 21E of the Exchange Act. Statements that
describe our future strategic plans, goals or objectives are also
forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding the Company or its management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as:
.. The future results of drilling individual wells and other exploration and
development activities;
.. Future variations in well performance as compared to initial test data;
.. Future events that may result in the need for additional capital;
.. Fluctuations in prices for oil and gas;
.. Future drilling and other exploration schedules and sequences for various
wells and other activities;
.. Uncertainties regarding future political, economic, regulatory, fiscal,
taxation and other policies in Pakistan;
.. Our future ability to raise necessary operating capital.
The forward-looking information is based on present circumstances and on
our predictions respecting events that have not occurred, which may not occur or
which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including the
risk factors detailed in this report. The forward-looking statements included in
this report are made only as of the date of this report. We are not obligated to
update such forward-looking statements to reflect subsequent event or
circumstances.
Overview
Prior to the Company's bankruptcy proceedings, we were an active oil and
gas exploration and development company. The foreclosure of our Fort Bend
County, Texas oil and gas leases by the secured creditor in early calendar 2003
resulted in the loss of our only revenue producing asset. We intend to initiate
new business activities by prudent management of our Pakistan overriding royalty
interest and our Galveston, Texas interests and if we are successful in
generating working capital from these investments or from sales of securities,
we intend to pursue investment opportunities in the oil and gas business.
Results of Operations
Our operations for the period ending June 30, 2004 reflected a net loss of
$928,389 on no operational revenues, all of the Company's income being derived
solely from the placement of convertible debt authorized by the Bankruptcy
Court. All of our producing oil and gas leases were foreclosed by the first lien
lender in early calendar 2003. As a result, the Company is again a development
stage company as it emerges from bankruptcy, solely dependent upon cash infusion
from the sale of securites and loans until business operations which generate an
income stream can be developed. As a result of the loss of these cash producing
assets, we have purposely omitted a detailed discussion of operational results
and their ramifications.
6
Liquidity and Capital Resources
Our recent history of a lack of liquidity and adequate capital resources
was the primary reason that the Company reorganized through bankruptcy
proceedings. Our operating company, The American Energy Operating Corp. did not
participate in the bankruptcy proceedings and its accounts payable and accrued
liabilities totaling $289,588 are still carried on our books post-bankruptcy,
despite the inactivation of the subsidiary. The sale of our other subsidiary,
Hycarbex American Energy, Inc., carried with it the assets and liabilities of
the subsidiary, including prepaid restricted deposits in Pakistan of $1,116,822
which would have been forfeited with the loss of the exploration license had the
subsidiary not been sold. This restricted cash is not reflected in the cash
assets subsequent to the sale.
Since emerging from bankruptcy, we have been funded solely through the
private sale of convertible debt securities totaling $575,000 pursuant to Second
Amended Plan of Reorganization, $450,000 of which was received after January 1,
2004, which if such $450,000 in securities are converted, will increase the
outstanding Common shares by 1,875,000 shares. This is our only current source
of capital. On a going forward basis, we believe that we will have sufficient
cash assets to meet our needs into the first calendar quarter of 2005, but the
need for additional operating capital after that time will require an infusion
of cash through loans, sales of securities, a sale or partial sale of the
Galveston County, Texas assets or successful resolution of the Smith Energy
litigation. Successful drilling on the Pakistan Concession by Hydro Tur (Energy)
Ltd. will also result in the generation of operating capital once sales into the
existing pipeline infrastructure begin. However, there can be no assurance that
we will be successful in obtaining sufficient operating capital to meet future
needs from any of these potential sources.
In light of our current lack of revenue-generating business operations and
our need to further capitalize future overhead, operations and growth, our
viability as a going concern is uncertain. There can be no assurance that we
will be successful in our efforts to improve the Company's financial position
and to develop its assets.
Business Strategy and Prospects
We believe that there have been positive developments resulting from the
bankruptcy proceedings. We have eliminated the Company's debt burden, diminished
its labor force and significantly reduced all facets of general and
administrative overhead. The cancellation and reissuance of new securities have
reduced the outstanding shares from over sixty six million shares to just over
twenty three million shares, a number which both permits the issuance of
additional securities in the future as needed to obtain strategic assets or
funding from investors, and which provides an opportunity for enhanced
shareholder value if the current assets become cash generating assets. However,
the Company does not currently enjoy a revenue stream from any business
operation or asset. We must continue to raise operating capital through other
means until a revenue stream is developed, if at all.
Pakistan Overriding Royalty
The Company, through its Hycarbex subsidiary (before the sale of that
subsidiary) expended in excess of $10,000,000.00 on drilling and seismic on the
Jacobabad and Yasin concessions in the Republic of Pakistan comprised of over
2,200 square kilometers. The structure, to date, has no Proved Reserves as that
term and the calculation for discounted future net cash flows for reporting
purposes is mandated by the Financial Accounting Standards Board in Statement of
Financial Accounting Standards No. 69, titled "Disclosures About Oil and Natural
Gas Producing Activities". While we did not obtain a commercial discovery well
in any of our previous Pakistan drilling efforts, we have been encouraged by the
technical data derived from the drilling and seismic activities. We believe that
the concession acreage contains oil and gas producing physical structures which
are worthy of further exploration. If successfully developed, our reserved 18%
overriding royalty interest would likely be a good source of cash revenues
because the royalty, by its nature, entitles us to share in gross, rather than
net, production. These revenues, if any, could be used by the Company for
further investment in other revenue generating assets or business activities.
The financial risks inherent in oil and gas drilling in Pakistan will no longer
be borne by the Company because an overriding royalty interest is not subject to
such costs. While successful production and favorable hydrocarbon prices are
necessary for the overriding royalty interest to demonstrate real value, we are
optimistic that the additional seismic and technical data generated by the
Company prior to sale and further expanded and refined after the sale by Hydro
Tur (Energy) Ltd. will enhance the chances of a commercial discovery by Hydro
Tur (Energy) Ltd. Under the terms of the stock purchase agreement with the
Company, Hydro Tur (Energy) Ltd. is required to commence its initial well prior
to November 16, 2004. However, absent successful drilling by Hydro Tur (Energy)
Ltd., the reserved overriding royalty interest is likely to have little or no
value.
7
Galveston County, Texas Leases
In 1997, we purchased the interests of Luck Petroleum Corporation from its
bankruptcy trustee in two oil and gas leases in Galveston County, Texas. The
leases are situated in an area which is productive in multiple zones or horizons
and the leases themselves have produced commercial quantities of oil and gas
from both shallow and mid-range zones. In 1986, Luck Petroleum Corporation
assigned these mid-range zones to Smith Energy, reserving for itself an
"after-payout" 15% back-in working interest. Luck Petroleum Corporation also
limited the depths assigned to Smith Energy, thereby resulting in depths
generally greater than 10,000 feet being reserved to Luck Petroleum Corporation.
We succeeded to the interests of Luck Petroleum Corporation as a result of the
1997 purchase from the bankruptcy trustee. With regard to the mid-range zones,
our research to date has given rise to the belief that "payout" has occurred, as
defined in the 1986 conveyance by Luck Petroleum Corporation to Smith Energy. If
we are correct, then we are entitled to receive 15% of the monthly working
interest production from the existing Smith Energy wells on the leases. As
indicated in this report, we have initiated a lawsuit against Smith Energy to
establish these rights.
The Smith Energy lawsuit does not pertain to the deep zones under the
leases which were acquired from Luck Petroleum Corporation. Based upon our
research, we believe that these zones have development potential. We are
exploring the various opportunities to realize value from these deep rights,
including potential sale. We have not yet determined the best course for these
assets. These leases are held in force by third party production and, therefore,
the leases do not require development of these rights by a certain date. We
believe that we will be able to continue our research and conduct future
negotiations toward a development path which best suits our goals and our cash
flow position. We are compelled to focus on these efforts for the near term in
order to generate additional working capital.
ITEM 7-FINANCIAL STATEMENTS
The consolidated financial statements required to be filed pursuant to this
item 7 begin on Page F-1 of this report. Such consolidated financial statements
are hereby incorporated by reference into this Item 7. The Supplementary Data
requirement as set forth in Item 302 of Regulation S-K is inapplicable to the
Company.
ITEM 8-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have neither changed or had disagreements with our accountants regarding
accounting and financial disclosure.
ITEM 8A-CONTROLS AND PROCEDURES
In conjunction with this Annual Report on Form 10-KSB and the certification
of the disclosures herein, the Company's principal executive officer and
principal financial officer, Pierce Onthank, evaluated the effectiveness of the
Company's disclosure controls and proceedings. This review, which occurred
within ninety (90) days prior to the filing of this Annual Report, found the
disclosure controls and procedures to be effective. There have been no
significant changes in the Company's internal controls or in other factors which
would significantly affect these controls subsequent to the evaluation by Mr.
Onthank.
PART III
ITEM 9-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company at June 30, 2004,
included the following persons, each of whom serves on the audit committee of
the Company:
Pierce Onthank, age 44, serves as President, Secretary and one of two
Directors of the Company. Mr. Onthank is currently the sole officer and succeeds
Georg von Canal, William Aber and Dean Smith in that regard. Mr. Onthank
received a BA in economics from Denison University. He served as the investment
broker for the Company from 1998 until 2001. In addition to raising millions of
dollars for American Energy Group Ltd., he has specialized in oil and gas
investments for his previous clients. With over 20 years of experience in the
securities business, Mr. Onthank has held senior positions in investment banking
firms and has managed high yield net worth and institutional portfolios. Mr.
Onthank began his career in the Merrill Lynch training program and subsequently
became a limited partner with Bear Stearns. Later he became a Senior Vice
President at Drexel Burnham Lambert, where his primary responsibilities were to
manage the private client group, which was involved in both public and private
investments for individual and institutional accounts. Mr. Onthank moved on to
serve as a Senior Vice President at Paine Webber and later at Smith Barney
Shearson where he managed the investments of institutional and individual
clients. Before becoming President of American Energy Group Ltd. he co-founded
Crary Onthank & O'Neill, an Investment Banking Company, in 1998.
8
Dr. Iftikhar Zahid, age 45, serves as the remaining Director of the
Company. Dr. Iftikhar Zahid was educated at The Dow Medical College, Karachi
University in 1979. In 1981, he joined the police services of Pakistan. In 1988,
he resigned from governmental services as a Superintendent of Police. Between
1988 and 1996, Dr. Zahid served as an advisor and consultant to several
multi-national organizations doing business in Pakistan. In 1996, Dr. Zahid
joined the Company as a Resident Director/Country Manager of the Pakistan Office
of Hycarbex-American Energy, Inc. In June 2001, he was promoted to
Vice-President and Resident Director and joined the international board of The
American Energy Group Ltd. as a director. Since the sale of Hycarbex-American
Energy Inc. by the Company, Dr. Zahid has been managing the Company's 18%
royalty interest in the Yasin Block.
For the year ended June 30, 2004, the directors of the Company incurred
filing requirements pursuant to Section 16(a) of the Securties Exchange Act of
1934 by virtue of their receipt of 1,500,000 restricted shares, each. Each
director will file a Form 5 on the EDGAR system to meet these reporting
requirements.
Code of Ethics
The Company has adopted a Code of Ethics that is applicable to all
employees of the Company and, in particular, to its senior officers. A copy of
the Code of Ethics may be obtained from the Company without charge by writing to
the Company at The American Energy Group, Ltd., 120 Post Road West, Suite 202,
Westport, Connecticut 06880.
ITEM 10-EXECUTIVE COMPENSATION
There was no executive compensation paid by the Company between July 1,
2003, and January 31, 2004. Commencing February, 2004, Pierce Onthank and Dr.
Iftikhar Zahid began receiving a $10,000 per month salary. Commencing April
2004, the Onthank salary was adjusted to $16,000 and the Zahid salary was
adjusted to $15,000. The resulting totals for the period ending June 30, 2004,
are $68,000 paid to Pierce Onthank and $65,000 paid to Dr. Iftikhar Zahid.
ITEM 11-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Each of Pierce Onthank and Dr. Iftikhar Zahid were issued for officer and
directors services rendered, 1,500,000 restricted Common shares during the
period ended June 30, 2004. Neither individual owned at the time or has since
acquired any other securities of the Company.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the period ended June 30, 2004, there were no related transactions.
PART IV
ITEM 13-EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as Exhibits to this
report:
Exh. 23.1 - Consent of Independent Auditor;
Exh. 31.1 - Certification by R. Pierce Onthank, President and
acting chief financial and accounting officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a);
Exh. 32.1 - Certification by R. Pierce Onthank, President and
acting chief financial and accounting officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, Section
1350(a) and (b).
9
(b) No reports on Form 8-K were filed during the period ended
June 30, 2004.
ITEM 14-PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Audit fees billed by the Company's Principal Accountant total $3,000 as of
the date of this report.
Audit Related Fees
There have been no audit related fees billed by the Company's Principal
Accountant as of the date of this report.
Tax Fees
There have been no tax fees billed by the Company's Principal Accountant as
of the date of this report.
All Other Fees
There have been no other fees billed by the Company's Principal Accountant
as of the date of this report.
The Registrant's audit committee is comprised solely of its Board of Directors.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE AMERICAN ENERGY GROUP, LTD.
(REGISTRANT)
By:/s/ R. Pierce Onthank
--------------------------------------------
R. Pierce Onthank, President, Secretary,
Director and acting Chief Financial Officer
By:/s/ Dr. Iftihhar Zahid
--------------------------------------------
Dr. Iftikhar Zahid, Director
DATED: October 8, 2004
11
THE AMERICAN ENERGY GROUP, LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
F-1
C O N T E N T S
Independent Auditors' Reports......................................F-3
Consolidated Balance Sheets........................................F-4
Consolidated Statements of Operations..............................F-5
Consolidated Statements of Stockholders' Equity....................F-6
Consolidated Statements of Cash Flows..............................F-8
Notes to the Consolidated Financial Statements.....................-10
F-2
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
The American Energy Group, Ltd. and Subsidiaries
Westport, CT.
We have audited the accompanying consolidated balance sheet of The American
Energy Group, Ltd. and Subsidiaries as of June 30, 2004, 2003 and 2002 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
The American Energy Group, Ltd. and Subsidiaries as of June 30, 2004, 2003 and
2002 and the consolidated results of their operations and their cash flows for
the years then ended in conformity with the standards of the Public Company
Accounting Oversight Board (United States).
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
October 1, 2004
F-3
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets
------
June 30,
---------------------------------------
2004 2003
----------------- ------------------
Current Assets
- --------------
Cash (Note 1) $ 257,899 $ 7,394
Restricted cash (Note 1) - 1,116,822
Prepaid expenses 35,000 -
----------------- ------------------
Total Current Assets 292,899 1,124,216
----------------- ------------------
Total Assets $ 292,899 $ 1,124,216
================= ==================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
- -------------------
Accounts payable $ 251,088 $ 496,378
Accrued liabilities 69,739 218,243
Current portion of capital lease obligations (Note 5) 679 679
----------------- ------------------
Total Current Liabilities 321,506 715,300
Liabilities Not Subject to Compromise
- -------------------------------------
Accrued postpetition expenses - 65,722
----------------- ------------------
Total Liabilities Not Subject to Compromise - 65,722
Liabilities Subject to Compromise
- ---------------------------------
Prepetition trade accounts payable - 565,584
Prepetition notes payable (Note 3) - 3,534,371
Accrued prepetition expenses - 1,619,679
----------------- ------------------
Total Liabilities Subject to Compromise - 5,719,634
----------------- ------------------
Total Current Liabilities - 6,500,656
----------------- ------------------
Long-Term Liabilities
- ---------------------
Convertible debt (Note 4) 375,000 -
----------------- ------------------
Total Long-Term Liabilities 375,000 -
----------------- ------------------
Total Liabilities 696,506 6,500,656
----------------- ------------------
Stockholders' Equity (Notes 6,7 and 8)
- --------------------------------------
Convertible voting preferred stock; par value $0.001
per share; authorized 15,000,000 shares; none and
41,499 shares issued and outstanding, respectively - 42
Common stock; par value $0.001 per share;
authorized 80,000,000 shares; 24,698,518 and
66,318,037 shares issued and outstanding, respectively 24,699 66,318
Capital in excess of par value 1,312,490 37,763,777
Accumulated deficit (1,740,796) (43,206,577)
----------------- ------------------
Total Stockholders' Equity (403,607) (5,376,440)
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 292,899 $ 1,124,216
================= ==================
F-4
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
June 30,
----------------------------------------------------------
2004 2003 2002
---------------- ------------------ ------------------
Revenue
- -------
Oil and gas sales $ - $ 357,062 $ 1,051,358
---------------- ------------------ ------------------
Total Revenue - 357,062 1,051,358
Expenses
- --------
Lease operating and production costs - 118,389 507,382
Penalties - 262,581 636,500
Legal and professional - 100,423 321,909
Depreciation and amortization expense - 351,652 645,582
Other general and administrative 273,323 1,089,598 1,217,980
---------------- ------------------ ------------------
Total Expenses 273,323 1,922,643 3,329,353
---------------- ------------------ ------------------
Net Operating Loss (273,323) (1,565,581) (2,277,995)
Other Income (Expenses)
- -----------------------
Loss on sale of investment in subsidiary (621,234) - -
Gain on settlement of debt (Note 2) - - 255,902
Interest income - 9,765 15,738
Interest expense (5,480) (110,228) (488,432)
Debt issuance costs - - (48,620)
Gain (loss) on sale of assets - - 5,159
---------------- ------------------ ------------------
Total Other Income (Expenses) (626,714) (100,463) (260,253)
---------------- ------------------ ------------------
Income (loss) before Reorganization Items
and Income Taxes (900,037) (1,666,044) (2,538,248)
Reorganization (Expenses)
- -------------------------
Loss on foreclosure of properties and assets - (3,813,506) -
Loss on abandonment of leases - (9,226,614) -
Legal fees (28,352) (205,292) -
---------------- ------------------ ------------------
Total Reorganization (Expenses) (28,352) (13,245,412) -
---------------- ------------------ ------------------
Net Loss $ (928,389) $ (14,911,456) $ (2,538,248)
================ ================== ==================
Basic Loss per Common Share $ (0.04) $ (0.22) $ (0.04)
================ ================== ==================
Weighted Average Number of
Shares Outstanding 23,528,518 66,318,037 65,006,780
================ ================== ==================
F-5
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2004, 2003 and 2002
Convertible Voting Capital In
Common Stock Preferred Stock Excess of Accumulated
------------ --------------- --------- -----------
Shares Amount Shares Amount Par Value Deficit
------ ------ ------ ------ --------- -------
Balance, June 30, 2001 59,991,665 $ 59,992 41,499 $ 42 $ 36,724,103 $ (25,756,873)
Common stock issued to officers
for services rendered at an
average price of $0.24 per share 950,000 950 - - 230,050 -
Common stock issued for
services rendered at an average
price of $0.20 per share 250,000 250 - - 49,750 -
Common stock re-issued for
shares previously canceled in
error at $0.00 per share 40,750 41 - - (41) -
Common stock issued in
satisfaction of penalty fee at an
average price of $0.17 per share
(Notes 3 and 6) 4,085,622 4,085 - - 670,915 -
Common stock issued as
additional interest on a note
payable at $0.25 per share 1,000,000 1,000 - - 249,000 -
Common stock issued in
conversion of debt at $0.43
per share (Note 6) 2,544,768 2,545 - - 1,091,745 -
Common stock issued in
conversion of debt at $0.10
per share (Note 6) 6,400,000 6,400 - - 633,600 -
Repurchase of common
stock previously issued
(Note 6) (8,944,768) (8,945) - - (1,885,345) -
Net (loss) for the year ended
June 30, 2002 - - - - - (2,538,248)
---------- ---------------- ------ ------------- ---------------- --------------
Balance, June 30, 2002 66,318,037 66,318 41,499 42 37,763,777 (28,295,121)
Net (loss) for the year ended
June 30, 2003 - - - - - (14,911,456)
---------- ---------------- ------ ------------- ---------------- --------------
Balance, June 30, 2003 66,318,037 66,318 41,499 42 37,763,777 (43,206,577)
F-6
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2004, 2003 and 2002
Convertible Voting Capital In
Common Stock Preferred Stock Excess of Accumulated
------------ --------------- --------- -----------
Shares Amount Shares Amount Par Value Deficit
------ ------ ------ ------ --------- -------
Balance, June 30, 2003 66,318,037 $ 66,318 41,499 $ 42 $ 37,763,777 $ (43,206,577)
January 2004, reorganization
adjustment (66,318,037) (66,318) (41,499) (42) (36,728,088) 42,394,170
January 2004, new shares issued
pursuant to bankruptcy settlement 18,898,518 18,899 - - (18,899) -
February 2004, shares issued for
royalty interest at par value 1,500,000 1,500 - - - -
February 2004, shares issued for
services at $0.03 per share 3,000,000 3,000 - - 97,000 -
June 2004, shares issued for
convertible debt at $0.15 per share 1,300,000 1,300 - - 198,700 -
Net (loss) for the year ended
June 30, 2004 - - - - - (928,389)
---------- ---------------- ------------ --------------- --------------
Balance, June 30, 2004 24,698,518 $ 24,699 - $ - $ 1,312,490 $ (1,740,796)
========== ================ ============ =============== ==============
F-7
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
June 30,
-----------------------------------------------
2004 2003 2002
--------- --------- -------
Cash Flows from Operating Activities
- ------------------------------------
Net loss $ (928,389) $ (14,911,456) (2,538,248)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization - 351,652 686,685
Less amount capitalized to oil and gas properties - (4,784) (41,103)
Common stock issued for services rendered 100,000 - 281,000
Common stock issued for penalty fee - - 540,000
Common stock issued for retirement of warrants - - -
Common stock issued for interest - - 250,000
Amortization of note payable discount - - 120,000
(Gain) loss on sale/disposal of asset - 13,040,120 (7,051)
(Gain) loss on investment 621,234 8 1,892
Note payable exchanged for liabilities - 25,000 -
Liabilities reduced on foreclosed properties - 97,329 -
Gain on settlement of debt - - (255,902)
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses (35,000) - -
(Increase) decrease in receivables - 87,360 16,748
(Increase) decrease in other current assets - 15,022 1,053
(Increase) decrease in other assets - - 48,620
(Increase) decrease in deposits - 8,491 (3,391)
Increase (decrease) in accounts payable 10,737 (4,009) (643,559)
Increase (decrease) in accrued liabilities and
other current liabilities (88,018) 946,460 157,627
--------- --------- -------
Net Cash Provided (Used) by Operating Activities (319,436) (348,807) (1,385,629)
Cash Flows from Investing Activities
Cash disposed of in sale of subsidiary (1,121,881)
Proceeds from sale of assets - 140,000 295,000
Expenditures for oil and gas property development - (59,920) (644,974)
Expenditures for other property and equipment - - (18,136)
--------- --------- -------
Net Cash Provided (Used) by Investing Activities (1,121,881) 80,080 (368,110)
--------- --------- -------
Cash Flows from Financing Activities
Proceeds from notes payable and long-term liabilities - 75,081 2,150,000
Proceeds from convertible debt 575,000 - -
Payments on notes payable and long-term liabilities - (726) (1,504)
--------- --------- -------
Net Cash Provided by Financing Activities 575,000 74,355 2,148,496
--------- --------- -------
Net Increase (Decrease) in Cash (866,317) (194,372) 394,757
Cash and Cash Equivalents at Beginning of Year 1,124,216 1,318,588 923,831
--------- --------- -------
The accompanying notes are an integral part of these consolidated financial statements.
F-8
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
June 30,
--------------------------------------------------------
2004 2003 2002
----------------- ---------------- ----------------
Cash Paid for:
- --------------
Interest $ - $ 1,586 $ 14,095
Income taxes $ - $ - $ -
Non-Cash Financing Activities:
- ------------------------------
Common stock issued in satisfaction of accrued
penalty fees $ - $ - $ 135,000
Common stock issued for services rendered $ 100,000 $ - $ 260,000
Common stock repurchased for note payable $ - $ - $ 160,000
Note payable exchanged for liabilities $ - $ 25,000 $ -
Common stock issued for royalty interest $ 1,500 $ - $ -
Common stock issued for convertible debt $ 200,000 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-9
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies
- --------------------------------------------------------------------
a. Organization
The American Energy Group, Ltd. (the Company) was incorporated in the
State of Nevada on July 21, 1987 as Dimension Industries, Inc. Since
incorporation, the Company has had several name changes including DIM,
Inc. and Belize-American Corp. Internationale with the name change to
The American Energy Group, Ltd. effective November 18, 1994.
Effective September 30, 1994, the Company entered into an agreement to
acquire all of the issued and outstanding common stock of Simmons Oil
Company, Inc. (Simmons), a Texas Corporation, in exchange for the
issuance of certain convertible voting preferred stock (see Note 5).
The acquisition included wholly owned subsidiaries of Simmons, Sequoia
Operating Company, Inc. and Simmons Drilling Company, Inc. The
acquisition was recorded at the net book value of Simmons of
$1,044,149 which approximates fair value.
During the year ended June 30, 1995, the Company incorporated additional
subsidiaries including American Energy-Deckers Prairie, Inc., The
American Energy Operating Corp., Tomball American Energy, Inc.,
Cypress-American Energy, Inc., Dayton North Field-American Energy,
Inc. and Nash Dome Field-American Energy, Inc. In addition, in May
1995, the Company acquired all of the issued and outstanding common
stock of Hycarbex, Inc. (Hycarbex), a Texas corporation, in exchange
for 120,000 shares of common stock of the Company, a 1% overriding
royalty on the Pakistan Project (see Note 2) and a future $200,000
production payment if certain conditions are met. The acquisition was
accounted for as a pooling-of-interests on the date of the
acquisition. The fair value of the assets and liabilities assumed
approximated the fair value of the 120,000 shares issued of $60,000 as
of the date of the acquisition. Accordingly, book value of the assets
and liabilities assumed was $60,000. In April 1995, the name of that
company was changed to Hycarbex-American Energy, Inc. The American
Energy Group, Ltd., The American Energy Operating Corp. and
Hycarbex-American Energy, Inc., were the only operating entities
during the years ended June 30, 2004 and 2003. The Company and its
subsidiaries were principally in the business of acquisition,
exploration, development and production of oil and gas properties.
On June 28, 2002, the Company was placed into involuntary Chapter 7
bankruptcy by three creditors, including Georg von Canal, an officer
and director who was then involved in litigation with the Company to
invalidate an attempt to remove him from his management positions. The
bankruptcy filing followed an unsuccessful effort by management to
resolve both the litigation and the need for a substantial cash
infusion through a stock sale to a German-based investor which would
have simultaneously resulted in a restructure of management. Shortly
after this bankruptcy filing, the secured creditor holding a first
lien on the Company's only producing oil and gas leases in Fort Bend
County, Texas, sought permission from the bankruptcy court to
foreclose on those assets. The Company responded by converting the
Chapter 7 bankruptcy court to foreclose on those assets. The Company
responded by converting the Chapter 7 bankruptcy proceedings to a
Chapter 11 reorganization proceeding. The company obtained approval of
a plan or reorganization in September 2002, but the secured creditor
was nevertheless permitted to foreclose upon the Fort Bend County oil
and gas leases. Subsequent to the approval of the foreclosure of the
oil and gas producing properties, the Company abandoned the remaining
oil and gas properties except for one lease in southeast Texas.
F-10
For the year ended June 30, 2003, the Company recognized a loss of
$13,040,120 on the foreclosure and abandonment of the oil and gas
properties and the sale of the fixed assets.
F-11
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
On October 26, 2003, the Company sold its wholly-owned subsidiary,
Hycarbex-American Energy, Inc., for an 18% overriding royalty interest
in the Exploration License No. 2768-7 dated August 11, 2001, of the
Yasin Exploration Block.
On January 29, 2004, the Company was released from bankruptcy. Pursuant
to the plan, all of the existing 66,318,037 shares of common stock and
41,499 shares of preferred stock were cancelled. The Company issued
18,898,518 new shares of common stock to creditors. Also, the Company
adopted the provisions for fresh-start reporting. Accordingly, the
accumulated deficit accumulated through January 29, 2004 has been
eliminated. The Company is considered to have a fresh-start due to the
cancellation of the prior shareholders' common stock and the
subsequent issuance of common stock to creditors, the new
shareholders.
b. Going Concern
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. These factors
raise substantial doubt about the Company's ability to continue as
going concerns. The Company has no operations and is dependent upon
financing to continue its operations. It is management's plan to
manage and maintain its two core assets and to develop these assets
where possible to generate cash for further investment and growth. In
the case of the southeast Texas oil and gas lease, generation of cash
will likely require an outright sale or a partial sale with a retained
interest in production, as the company does not have sufficient cash
assets to conduct drilling operations or the bonding capacity to
obtain operating authority under Texas regulations. With regard to the
Pakistan royalty, the company does not have development rights or
obligations and must await the results of drilling by Hydro Tur
(Energy) Ltd, in the latter part of calendar 2004. If either activity
is successful in generating cash assets, management plans to seek out
investment opportunities compatible with its focus upon oil and gas
properties.
The recovery of assets and continuation of future operations are dependent
upon the Company's ability to obtain additional debt or equity
financing, and their ability to generate revenues sufficient to
continue pursuing their business purpose. These financial statements
do not include any adjustments that might result from the outcome of
these uncertainties.
c. Accounting Methods
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a June 30
year-end.
d. Oil and Gas Properties
The full cost method is used in accounting for oil and gas properties.
Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related
overhead costs, are capitalized. In addition, depreciation on property
and equipment used in oil and gas exploration and interest costs
incurred with respect to financing oil and gas acquisition,
exploration and development activities are capitalized in accordance
with full cost accounting. In addition, depreciation capitalized
during the years ended June 30, 2004, 2003 and 2002 totaled $0, $4,784
F-12
and $41,103, respectively. All capitalized costs of proved oil and gas
properties subject to amortization are being amortized on the
unit-of-production method using estimates of proved reserves.
Investments in unproved properties and major development projects not
subject to amortization are not amortized until proved reserves
associated with the projects can
F-13
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
be determined or until impairment occurs. If the results of an assessment
indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. As of
June 30, 2004 and 2003, no proved oil and gas reserves had been
identified on the one remaining oil and gas property in Southeast
Texas. As of June 30, 2002, proved oil and gas reserves had been
identified on some of the Companies oil and gas properties with
revenues generated and barrels of oil produced from those properties.
Accordingly, amortization totaling $0, $13,040,120 and $637,710 have
been recognized in the accompanying consolidated financial statements
for the years ended June 30, 2004, 2003 and 2002, respectively, on
proved and impaired or abandoned oil and gas properties.
e. Principles of Consolidation
The consolidated financial statements include the Company and its
wholly-owned subsidiaries as detailed previously. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
f. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
g. Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation on drilling and
related equipment, vehicles and office equipment is provided using the
straight-line method over expected useful lives of five to seven
years. For the years ended June 30, 2004, 2003 and 2002, the Companies
incurred total depreciation of $0, $6,506, and $48,975, respectively.
In accordance with full cost accounting, $0, $4,784 and $41,103 of
depreciation was capitalized as costs of oil and gas properties for
the years ended June 30, 2004, 2003 and 2002, respectively, as
previously discussed.
h. Basic Loss Per Share of Common Stock
June 30,
----------------------------------
2004 2003
----------- -------------------
Loss (numerator) $ (928,389) $ (14,911,456)
Shares (denominator) 23,528,518 66,318,037
----------- -------------------
Per share amount $ (0.04) $ (0.22)
=========== ===================
The basic loss per share of common stock is based on the weighted average
number of shares issued and outstanding during the period of the
consolidated financial statements. Stock warrants and preferred shares
prior to conversion are not included in the basic calculation because
their inclusion would be antidilutive, thereby reducing the net loss
per common share.
F-14
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
i. 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
j. Long Lived Assets
All long lived assets are evaluated for impairment per SFAS 144 whenever
events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Any impairment in value is recognized
as an expense in the period when the impairment occurs.
In addition, pursuant to the full cost method used in accounting for oil
and gas properties, the capitalized oil and gas property costs are
subject to the full cost ceiling test to determine if the value of
proved reserves and other mineral assets in the respective cost center
are adequate to recover the unamortized costs in the full cost pool.
If the Company determines that the capitalized costs exceed the full
cost ceiling, the excess is charged to expense and separately
disclosed during the year in which the excess occurs.
k. Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure - an amendment for
FAS 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock Based
Compensation, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation.
This Statement also amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim
financial information. SFAS No. 148, is effective for annual and
interim periods beginning after December 15, 2002. The adoption of the
interim disclosure provisions of SFAS No. 148, did not have an impact
on the Company's financial position, results of operations or cash
flows. The Company is currently evaluating whether to adopt the fair
value based method of accounting for stock-based employee compensation
in accordance with SFAS No. 148 and its resulting impact on the
Company's consolidated financial statements.
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This consensus addresses certain aspects of accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities, specifically, how to determine whether
an arrangement involving multiple deliverables contains more than one
unit of accounting. EITF Issue No. 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003, or entities may elect to report the change in accounting as a
F-15
cumulative-effect adjustment. The adoption of EITF Issue No. 00-21 did
not have a material impact on the Company's consolidated financial
statements.
F-16
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. Until this
interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity
through voting interests. FIN No. 46 requires a variable interest
entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns. FIN No.46 is effective for reporting periods ending
after December 15, 2003. The adoption of FIN No. 46 did not have an
impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149, is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No.
149 will not have an impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characeristics of both Liabilities and
Equity. SFAS No. 150, changes the accounting guidance for certain
financial instruments that, under previous guidance, could be
classified as equity or "mezzanine" equity by now requiring those
instruments to be reported as liabilities. SFAS No. 150 also requires
disclosure relating to the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have an impact on the Company's consolidated financial statements.
l. Equity Securities
Equity securities issued for services rendered have been accounted for at
the fair market value of the securities on the date of issuance.
m. Restricted Cash
The Company was required under the concession agreement discussed in Note
2 to commit $2,400,000 over the next three years to explore and test
the concession. As of June 30, 2003, $1,116,822 was on deposit with
the bank in Pakistan that was to be used for these purposes, which was
classified as restricted cash in the accompanying consolidated balance
sheet as of June 30, 2003.
n. Income Taxes
At June 30, 2004, the Company had net operating loss carryforwards of
approximately $40,900,000 that may be offset against future taxable
income from the year 2004 through 2023. No tax benefit has been
reported in the June 30, 2004 consolidated financial statements since
the potential tax benefit is offset by a valuation allowance of the
same amount.
F-17
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
The income tax benefit differs from the amount computed at federal
statutory rates of approximately 38% as follows:
June 30,
--------------------------------------
2004 2003
----------------- ------------------
Income tax benefit at statutory rate $ 342,000 $ 1,520,000
Change in valuation allowance (342,000) (1,520,000)
----------------- ------------------
$ - $ -
================= ==================
Deferred tax assets are comprised of the following: June 30,
--------------------------------------
2004 2003
----------------- ------------------
Income tax benefit at statutory rate $ 15,542,000 $ 15,200,000
Valuation allowance (15,542,000) (15,200,000)
----------------- ------------------
$ - $ -
================= ==================
Note 2 - Oil and Gas Properties
- -------------------------------
At the time the Company acquired Simmons Oil Company, Inc. and its
subsidiaries, those companies had ownership interests in oil and gas
prospects located in Texas. These properties contained oil and gas
leases on which existing wells had been shut-in and abandoned and had
additional sites available for further exploration and development.
During the years ended June 30, 2003 and 2002, the Companies expended
funds in exploration and development activities and work over of
existing wells on those properties and other oil and gas properties
acquired during those years. As described in Note 1, as of June 30,
2004, the Company has one lease remaining in Southeast Texas.
On March 10, 1995, American Energy - Deckers Prairie, Inc., a
wholly-owned subsidiary of the Company, entered into an agreement with
an unrelated entity to accept the transfer of all rights, title and
interest to certain oil and gas leases located in the State of Texas
along with all personal property and equipment located on and used in
connection with those leases. In exchange, American Energy - Deckers
Prairie, Inc. assumed all contractual covenants related to those oil
and gas leases. The selling entity had previously sold working
interests in these oil and gas leases totaling from 33% to 48%
depending on the property.
As part of the acquisition agreement, American Energy - Deckers Prairie,
Inc. agreed to purchase the working interests from the individual
holders for the amount of their original investment plus interest at
7% from the date of their investment, evidenced by a "Drilling
Investor Note" to each investor, due and payable on September 15,
1995. Each working interest holder has the option to retain his
working interest or sell it to American Energy - Deckers Prairie, Inc.
At June 30, 1997, the Companies had been unable to satisfy this
obligation and the financial guaranty bond securing the payment of the
Drilling Investor Notes had not been enforced, although the Companies
intended to satisfy this obligation. Most of the obligation was
settled during the year ended June 30, 1998 by issuing 140,383 shares
of common stock valued at $325,278. Accordingly, the value of the
acquisition of these working interest has been included in the
accompanying consolidated financial statements as part of the cost of
F-18
oil and gas properties. The remaining liability of $38,117 was written
off during the year ended June 30, 2002 and recorded as a gain on
settlement of debt.
F-19
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 2 - Oil and Gas Properties (continued)
- -------------------------------------------
On April 6, 1995, Hycarbex entered into a concession agreement with and
was issued an exploration license by the President and the Federal
Government of the Islamic Republic of Pakistan. This agreement and
license related to an oil and gas property known as the "Jacobabad
Block" (Block 2768-4) or the Pakistan concession and entitled Hycarbex
to a 95% working interest in the property. The exploration license was
originally issued for a period of three years which was subsequently
extended for an additional year. During the first year Hycarbex
expended the minimum required $26,000 for processing and interpreting
data already available. In the second year which was included in the
year ended June 30, 1997, Hycarbex performed the minimum seismic work,
evaluating and interpreting the data from the work performed. As part
of the agreement, Hycarbex was to drill one exploratory well prior to
April 1998 to an agreed upon depth. During May 1998, the Company
obtained preliminary results of its first Middle Indus Basin
exploratory well in Pakistan. The well was spudded during March 1998
and was drilled to total depth during May 1998. A second exploratory
well was drilled during the year ended June 30, 1999. This well was
subsequently plugged because of encountered downhole and mechanical
conditions short of the target depth. As a result, the well bore was
plugged and the drill site moved. A replacement well was spudded on
April 5, 1999 which also was plugged due to encountering a combination
of dangerous levels of hydrogen sulfide gas and loss of circulation
while drilling and testing the well. The well was plugged to prevent
possible further release of dangerous gas. The Company intended to
pursue further plans for the drilling of another exploratory well upon
completion of geological and geophysical analysis of the test results.
Having completed its three years of work requirements and initial
license term, the Company, per the provisions of the original
exploration license, relinquished 20% of the acreage originally held
under the concession, thereby retaining approximately one million
acres for further exploration and development.
The concession agreement also required Hycarbex to provide a bank guaranty
for $551,000 which was done by an unrelated surety company. That
surety company received common stock of the Company as compensation
for providing the bond.
Effective May 29, 1999, the Government of Pakistan granted an additional
six-month extension in the existing terms of the Jacobabad Exploration
License so as to enable the Company to drill a substitute well for the
previously abandoned wells with a commitment and obligation to expend
an additional $1,100,000. The Company was granted a second renewal of
the license to November 28, 2000 to drill an exploration well. This
second renewal period was dependent on the Company fulfilling its
obligations of drilling the replacement well. The Companies were
unable to comply with the requirements of the extension for the
replacement well. Accordingly, the Jacobabad Concession was
relinquished during the year ended June 30, 2001. All costs related to
the relinquished Jacobabad Concession were fully amortized as of June
30, 2001 and written off.
On August 11, 2001, the Companies were awarded a new Concession Agreement
and Exploratory License in Pakistan known as the Yasin Concession, in
the Sindh Providence of Pakistan. During the year ended June 30, 2003,
this agreement was terminated by the Company.
In May 1997, the Companies entered into an agreement to acquire certain
oil and gas properties and equipment in the state of Texas for a total
of $1,000,000 from an unrelated party. $75,000 cash was paid with the
balance of $925,000 to be paid over a maximum of four years with a
F-20
minimum of $175,000 the first year and $250,000 per year thereafter
until paid in full (see Note 3). As described in Note 1, the secured
creditor foreclosed on the property and purchased the equipment
pursuant to approval from the bankruptcy court.
F-21
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 2 - Oil and Gas Properties (continued)
- -------------------------------------------
During the year ended June 30, 1997, the Companies received $800,000 as a
joint venture investment in certain of the Companies oil and gas
properties. In June 1997, the Companies entered into agreements
representing $500,000 of the joint venture investors to repurchase
their interests for a total of 250,000 shares of common stock and
notes payable totaling $389,000 (see Notes 6 and 3, respectively).
During the year ended June 30, 1998, the Companies acquired the
remaining $300,000 joint venture interest for 150,000 shares of common
stock (valued at $1.50 per share) and a note payable of $121,564 with
additional payments made to that individual prior to the consummation
of that transaction.
On May 9, 2000, the Companies entered into an Asset and Stock Purchase
and Sale Agreement with Northern Lights Energy, Ltd. (Northern Lights)
to sell the U.S. oil, gas and mineral leases, all related equipment to
operate such leases, and 100% of the outstanding stock of the
operating subsidiary, The American Energy Operating Corp., for a total
of $4,000,000. As of June 30, 2000, a total of $750,000 of the
$4,000,000 had been received by the Company which was originally
recorded in the accompanying consolidated balance sheet as a deposit
on the sale of assets. Northern Lights was unable to pay the remaining
$3,250,000 pursuant to the agreement. Effective July 1, 2001, Northern
Lights relinquished its purchase rights in the U.S. operations. During
the year ended June 30, 2001, the Companies had repaid a portion of
the $750,000 advance through royalty payments to Northern Lights,
leaving a balance outstanding at June 30, 2001 of $483,080. On July 1,
2001, the Company finalized its settlement with Northern Lights
Energy, Ltd. and Northern Lights relinquished its purchase rights in
the U.S. operations. Northern Lights also accepted a negotiated sum of
$285,000 as full payment of the remaining deposit owed resulting in a
gain on settlement of debt of $198,080 for the year ended June 30,
2002.
During the year ended June 30, 2002, the Company entered into a Purchase
and Sale Agreement with Zaber Investments, LLC, a company controlled
by an officer of the Company, to sell a 10% interest in certain
operating wells and assets in the United States for $300,000. The
proceeds of this agreement were used to make the settlement payment to
Northern Lights, as mentioned above.
As described in Note 1, as of June 30, 2004, the Company has one
remaining lease for oil and gas properties located in Southeast Texas.
Note 3 - Notes Payable and Long-Term Debt
- -----------------------------------------
The following is a summary of notes payable and long-term debt as of June
30, 2004 and 2003:
2004 2003
---- ----
10% note payable, due on demand, unsecured $ - $ 50,000
Note payable to Company's former President,
non-interest bearing, due on demand, unsecured. - 30,000
Note payable to a partner in a related company, non-
interest bearing, due January 2003, unsecured - 1,360,000
7% note payable to a former Director of the Company,
due January 2003, unsecured - 775,000
F-22
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 3 - Notes Payable and Long-Term Debt (continued)
- -----------------------------------------------------
2004 2003
---- ----
10% note payable to an officer of the Company, due
on demand, unsecured $ - $ 75,000
10% note payable to an officer of the Company, due
on demand, unsecured - 50,000
Convertible subordinated promissory note due to
a related company, interest at 6% per annum due
annually on January 1, principal due April 30,
2011, convertible into shares of common stock at
$0.43 per share, prepayment premiums of 1) 8%
of principal balance if paid between 2nd and 5th
anniversary date, 2) 5% of principal balance if
paid between 6th and 8th anniversary date and
3) 2% of principal balance if paid after the 8th
anniversary date. - 1,094,290
Note payable to an individual, due on demand,
unsecured - 75,081
Note payable to a company, due on demand,
unsecured - 25,000
--------- -----------------
Total notes payable and long-term debt - 3,534,371
Less: current portion - (3,534,371)
--------- -----------------
Long-Term Debt $ - $ -
========= =================
On March 17, 2002, the outstanding $1,500,000 loan secured by a first
lien on the Texas oil and gas leases matured. Negotiations to
restructure the debt were conducted by management with the note
holder, but the negotiations were unsuccessful in obtaining a
long-term extension and renewal of the note. The note holder initiated
legal proceedings to obtain foreclosure of the Texas-based oil and gas
leases but the foreclosure did not go forward because on June 28,
2002, three other alleged creditors of the Company filed an
Involuntary Petition for Bankruptcy. The bankruptcy proceedings had
the effect of automatically preventing a foreclosure unless and until
the Bankruptcy Court issues an order permitting the creditor to pursue
its remedies under State law.
On August 12, 2002, the Companies and the note holder entered into an
agreement to forego foreclosure proceeding on the properties,
conditional upon the note holder receiving certain prescribed payments
thru October 2002. If the $1,500,000 was not paid by November 10,
2002, the note holder had the right to pursue all of his legal
remedies with respect to the property in order to receive the full
$1,500,000. As described in Note 1 the $1,500,000 note payable was
settled through the foreclosure of the oil and gas properties located
in Texas.
F-24
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 4 - Convertible debt
- -------------------------
2004 2003
---- ----
Convertible promissory notes due to individuals, interest at prime
plus 1.0% per annum, principals due from December 31, 2005 through
June 2006, convertible into shares of common stock at $0.20 per share,
secured by ? of the note future production, if any received by the
company on its retained onverriding royalty interest in its Republic
of Pakistan Yasin block and its retained interest in its Maco-Stewart,
Gillock Field Oil and Gas leases in Galveston County.
$ 375,000 $ -
Total Convertible Debt 375,000 -
Less Current Portion - -
Long-Term Debt $ 375,000 $ -
Note 5 - Capital Lease Obligations
- ----------------------------------
The Company entered into a lease agreement during the year ended June 30,
2001 relating to office equipment which has been accounted for as a
capital lease. The lease has a term of 36 months with a total monthly
lease payment of $122.
The following are the scheduled annual payments on the capital lease:
Year Ending June 30,
--------------------
2005 $ 709
----------------
Total minimum lease commitments 709
Less: amount representing interest (30)
----------------
Total capital lease obligations 679
Less: current portion (679)
----------------
Total Long-Term Capital Lease Obligations $ -
================
Note 6 - Convertible Voting Preferred Stock
- -------------------------------------------
On September 22, 1994, the board of directors of the Company approved the
issuance of 2,074,521 shares of the authorized preferred stock of the
Company, to be issued in a series, to be known as the "Convertible
Voting Preferred Stock, $.025 Non-Cumulative Dividend". A
corresponding certificate of issuance was filed with the State of
Nevada. Holders of these shares are entitled to a noncumulative,
preferential dividend of $.025 per share per annum, when declared by
the board of directors, payable from the surplus, net profits or
assets of the Company. At any time after September 30, 1999, the board
of directors of the Company may elect to redeem this Convertible
Voting Preferred Stock at a redemption price of $0.50 per share. Each
share of this Convertible Voting Preferred Stock shall be convertible
into five shares of the common stock of the Company.
F-24
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 6 - Convertible Voting Preferred Stock (continued)
- -------------------------------------------------------
Under the conversion privileges of these shares, the holder may elect to
convert 20% of the Convertible Voting Preferred Stock prior to
September 30, 1995 and an additional 20% every year thereafter until
September 30, 1999. The right to convert shall terminate if not
exercised before September 30, 1999. At June 30, 2002, the remaining
41,499 preferred shares are no longer convertible. The Company has the
right to redeem these shares for $0.50 per share. Each share of this
Convertible Voting Preferred Stock shall be entitled to one
shareholder vote. These 2,074,521, shares were issued pursuant to the
acquisition by the Company of Simmons Oil Company, Inc. and its
subsidiaries. One share of Convertible Voting Preferred Stock was
issued for every four shares of common stock of Simmons Oil Company,
Inc.
As described in Note 1, pursuant to the bankruptcy proceedings, the
preferred stock was canceled.
Note 7 - Common Stock
- ---------------------
During January 2002, the Company issued 1,000,000 shares of previously
authorized but unissued common stock for interest payable, valued at
$250,000.
During January 2002, pursuant to two separate agreements, the Company
issued 2,544,768 and 6,400,000 shares of previously authorized but
unissued common stock to two separate creditors for notes payable,
valued at $1,094,290 and $640,000 (or $0.43 and $0.10 per share),
respectively. During April 2002, the Company canceled 2,544,768 of
those previously issued shares in exchange for the original debt in
order to make available a significant number of additional authorized
shares of common stock for an investment transaction contracted with a
German company which was originally scheduled to close in that month.
Simultaneously with this cancellation, the Company also repurchased
6,400,000 shares of common stock for $800,000, which were previously
issued for $640,000.
During January 2004, as described in Note 1, the Company cancelled
66,318,037 shares of existing common stock and issued 18,898,518 new
shares of common stock to creditors.
During February 2004, the Company issued 1,500,000 shares of common stock
at par value for an 18% overriding royalty interest in the Exploration
License No. 2768-7 dated August 11, 2001 of the Yasin Exploration
Block.
During February 2004, the Company issued 3,000,000 shares of common stock
for services valued at $100,000.
During June 2004, the Company issued 1,300,000 shares of common stock for
convertible debt of $200,000.
F-25
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 8 - Common Stock Warrants
- ------------------------------
The Company applies Accounting Principles Board ("APB") 25, "Accounting
for Stock Issued to Employees," and related interpretations in
accounting for all stock option plans. Under APB 25, compensation cost
is recognized for stock options and warrants granted to employees when
the option/warrant price is less than the market price of the
underlying common stock on the date of grant.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") requires the Company to provide proforma information regarding
net income and net income per share as if compensation costs for the
Company's stock option plans and other stock awards had been
determined in accordance with the fair value based method prescribed
in SFAS No. 123. The Company estimates the fair value of each stock
award at the grant date by using the Black-Scholes option pricing
model.
Under the provisions of SFAS No. 123 for warrants granted to employees, the
Company's net loss for the years ended June 30, 2004, 2003 and 2002
would have been unchanged from the reported net loss.
A summary of the status of the Company's stock warrants as of June 30,
2003 and changes during the year ended June 30, 2004 are presented
below:
Weighted Weighted
Average Average
Stock Exercise Grant Date
Warrants Price Fair Value
-------- ----- ----------
Outstanding, June 30, 2003 3,351,929 $ 1.37 $ 0.17
Granted - - -
Expired/Canceled (3,351,929) (1.37) (0.17)
Exercised - - -
---------- ----- -----
Outstanding, June 30, 2004 - - -
---------- ----- -----
Exercisable, June 30, 2004 - $ - $ -
========== ===== =====
As described in Note 1, all of the outstanding warrants were cancelled
pursuant to the bankruptcy settlement.
F-33
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004, 2003 and 2002
Note 9 - Direct Method Cash Flow Statement
- ------------------------------------------
Pursuant to SOP 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" the following statement of cash flows has
been prepared for the year ended June 30, 2003 using the direct
method.
2003
----
Cash Flows from Operating Activities:
Cash received from customers $ 443,118
Cash paid for general and administrative expenses (791,925)
------------------
Net cash used by Operating Activities (348,807)
Cash Flows from Investing Activities:
Cash received from sale of assets 140,000
Cash paid for capital leases (59,920)
------------------
Net cash provided by Investing Activities 80,080
Cash Flows from Financing Activities
Cash received from notes payable 75,081
Cash paid for capital leases (726)
Net cash provided by Financing Activities 74,355
------------------
Net Increase (Decrease) in Cash (194,372)
Cash and cash equivalents at Beginning of Year 1,318,588
------------------
Cash and cash equivalents at End of Year $ 1,124,216
==================
F-34
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
(Unaudited)
June 30, 2004 and 2003
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to Oil and Gas Producing Activities
June 30,
------------------------
2004 2003
---- ----
Proved oil and gas producing properties and related
lease and well equipment $ - $ -
---- ----
Accumulated depreciation and depletion - -
Net Capitalized Costs $ - $ -
==== ====
(2) Costs Incurred in Oil and Gas Property Acquisition,
Exploration, and Development Activities
For the Years Ended
June 30,
------------------------
2004 2003
---- ----
Acquisition of Properties
Proved $ - $ -
Unproved - -
Exploration Costs - -
Development Costs - -
The Company does not have any investments accounted for by the equity method.
(3) Results of Operations for Producing Activities
For the Years Ended
June 30,
------------------------
2004 2003
---- ----
Sales $ - $ 357,062
Production costs - (34,082)
Depreciation and depletion - (351,652)
Results of operations for producing activities
(excluding corporate overhead and interest costs) $ - $ (28,672)
F-35
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
(Unaudited)
June 30, 2004 and 2003
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (Continued)
(4) Reserve Quantity Information
Oil Gas
BBL MCF
--- ---
Proved developed and undeveloped reserves:
Balance, June 30, 2003 - -
10% of reserves sold during year - -
Change in estimates - -
Production - -
--- ---
Balance, June 30, 2004 - -
=== ===
Proved developed reserves:
Oil Gas
BBL MCF
--- ---
Beginning of the year ended June 30, 2003 - -
End of the year ended June 30, 2004 - -
During the year ended June 30, 2004, the Company did not have reserve
studies and estimates prepared on the one remaining oil and gas
property located in Southeast Texas. Therefore, the balance of the
proved reserves and underdeveloped reserves should be $0.
(5) Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows is computed
by applying year-end prices of oil and gas (with consideration of
price changes only to the extent provided by contractual arrangements)
to the estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on year-end costs) to be
incurred in developing and producing the proved reserves, less
estimated future income tax expenses (based on year-end statutory tax
rates, with consideration of future tax rates already legislated) to
be incurred on pretax net cash flows less tax basis of the properties
and available credits, and assuming continuation of existing economic
conditions. The estimated future net cash flows are then discounted
using a rate of 10 percent a year to reflect the estimated timing of
the future cash flows.
F-36
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
(Unaudited)
June 30, 2004 and 2003
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (Continued)
(5) Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves (Continued)
At June 30, 2004
The American
Energy Group
Ltd. and
Subsidiaries
------------
Future cash inflows $ -
Future production and development costs -
------------
Future net inflows before income taxes -
Future income tax expense -
Future net cash flows -
------------
10% interest held by related company -
10% annual discount for estimated timing of cash flows -
------------
Standardized measure of discounted future net cash flows $ -
============
The above schedules relating to proved oil and gas reserves, standardized
measure of discounted future net cash flows and changes in the
standardized measure of discounted future net cash flows have their
foundation in engineering estimates of future net revenues that are
derived from proved reserves and with the assumption of current
pricing and current costs of production for oil and gas produces in
future periods.
Subsequent development and production of the Company's reserves will
necessitate revising the present estimates. In addition, information
provided in the above schedules does not provide definitive
information as the results of any particular year but, rather, helps
explain and demonstrate the impact of major factors affecting the
Company's oil and gas producing activities. Therefore, the Company
suggests that all of the aforementioned factors concerning assumptions
and concepts should be taken into consideration when reviewing and
analyzing this information.
Since the Company did not complete a reserve study at June 30, 2004, the
standardized measure of discounted future net cash flows is $0.
F-37