ITEM 3. LEGAL PROCEEDINGS.
During the first quarter, the Company settled the litigation initiated by the Company in October 2000, against Northern Lights Energy, Ltd. seeking a cancellation of Northern Lights right to purchase the Texas Oil and Gas Leases under a May 9, 2000 contract. Under the terms of the settlement, Northern Lights relinquished its purchase rights, accepted a discounted cash sum in full repayment of its $750,000.00 loan, and returned operational control of the Texas-based oil and gas leases to the Company.
During the third quarter, Georg von Canal filed suit against the Company and William M. Aber, Jr. in Cause No. 2002-11247, 270th Judicial District Court of Harris County, Texas, seeking damages and an injunction from preventing his ouster as President and as a member of the Board of Directors based upon a shareholder vote in which a majority of shareholders voted for the removal of Mr. von Canal as a director under an existing bylaw provision. The bylaw provision, which requires a simple majority vote to remove a director, is in conflict with a Nevada statute which requires the vote of two-thirds of the shareholders in order to remove a director. The matter was pending and the outcome not yet determined by the Court as of the date of this report.
During the third quarter, Charles Valceschini, former President and a former member of the Board of Directors, filed suit against the Company in Cause No. CV/02-01352, Second Judicial District Court, Washoe County, Nevada, to recover a stock certificate issued to him by the Company which was in the Company's possession and to recover $222,000.00, representing a $30,000.00 loan to the Company and back salary and unreimbursed expenses. The matter was pending and the outcome not yet determined by the Court as of the date of this report.
During the fourth quarter William L. Locklear, Inc. filed suit against American Energy Operating, Corp. in Cause No. 2002-CI-09050, 285th Judicial District Court, Bexar County, Texas, seeking $59,504.50 for alleged, unpaid services as an engineering consultant. The matter was pending and the outcome not yet determined by the Court as of the date of this report.
During the third quarter, the outstanding $1,500,000.00 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, Zubair Kazi, during the fourth quarter, but the negotiations were unsuccessful in obtaining a long term extension and renewal of the note. Mr. Kazi initiated legal procedures to obtain a 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. While the original claims totaled only $49,981.13, 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. The Company entered into an agreement with Mr. Kazi after the end of the fiscal year which provides for forbearance by Mr. Kazi of pursuit by him of his available remedies until ninety (90) days after August 12, 2002.
During the fourth quarter, three alleged creditors of the Company, whose claims totaled $49,981.13, filed an Involuntary Petition for Bankruptcy against the Company in Cause No. 02/37125-H1-7, United States District Court, Southern District of Texas, Houston Division. One of the petitioning creditors, Peter Barben, who claimed a debt of $9,114.00 subsequently withdrew as a petitioning creditor but was replaced in the litigation by Georg von Canal, who joined the group of petitioning creditors with a claim that the Company separately owes him $172,689.14. The matter was pending and the outcome not yet determined as of the date of this report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year, the Company did not submit any matters to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The price of the Common Stock of the Company is quoted in the "pink sheets" published by the National Quotation Bureau and the Bulletin Board, an inter-dealer quotation system operated by the National Association of Securities Dealers, Inc. under the symbol "AMEL". These over the counter market quotations may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transaction prices.
High Bid Low Bid Fiscal years ended June 30,
First Quarter $0.29 $.016 Second Quarter $0.19 $0.09 Third Quarter $0.22 $0.07 Fourth Quarter $0.28 $0.07
First Quarter $0.66 $0.25 Second Quarter $1.28 $0.44 Third Quarter $0.72 $0.16 Fourth Quarter $0.29 $0.15
DIVIDENDS
We have not declared, distributed or paid any cash dividends in the past. We do not expect that we will have sufficient net profit and cash flow in amounts that would allow a cash dividend to be paid to our shareholders in the foreseeable near term.
RECENT SALES OF UNREGISTERED SECURITIES
During the first two quarters, the Company issued 1,200,000 shares of Common Stock, $.001 par value, to officers and third party creditors for services rendered valued at $281,000. During the same period, we issued 40,750 shares as replacement shares for shares which were erroneously canceled in a previous year in connection with broad-based, multiparty litigation initiated by the Company in order to achieve cancellation of shares. We also issued in December 2001 and May 2002, 4,085,622 shares as penalty shares pursuant to a Company obligation to register shares issued in a September 1999 placement. The penalty shares were issued in satisfaction of monetary penalties aggregating $450,000 and $225,000, respectively. During the third quarter, the Company issued 1,000,000 shares in satisfaction of interest and commissions payable in connection with an outstanding loan to the Company and 2,544,768 shares and 6,400,000 shares of Common Stock to two different creditors in satisfaction of outstanding notes in the amount of $1,094,290 and $640,000, respectively. In April 2002, these two blocks of stock were reacquired from the creditors by reversing the transactions in order to make available a significant number of authorized shares needed for an investment transaction with Vivus Beteiligungs Aktiengesellschaft, a German concern, which was proposed to be consummated in that month. The reversal of the 2,544,768 share block issuance was accomplished by canceling that transaction and reinstating the $1,094,290 debt. The reversal of the 6,400,000 share block issuance required that the $640,000 debt be reinstated with an additional reacquisition fee of $160,000 payable to the holder under the original agreement with the holder.
In connection with the above transactions, we relied upon Section 4(2) of the Securities Act in claiming exemption from registration. All of the persons had full information concerning our business affairs and acquired the securities for investment purposes. The certificates representing the shares issued contain a restrictive legend prohibiting transfer without registration or the availability of an exemption from registration.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data presented under the captions "Statements of Earnings Data" and "Balance Sheet Data' for, and as of the end of, each of the years in the five year period ended June 30, 2002, are derived from the consolidated financial statements of The American Energy Group, Ltd, and Subsidiaries. The financial data for the four years ended June 30, 1996 through 1999 have been audited by Jones, Jensen & Company, Independent Public Accountants. The financial data for the years ended June 30, 2000 and 2001 have been audited by HJ & Associates, Inc. (previously Jones Jensen & Company). This financial data for the year ended June 30, 2002 was audited by Chisholm and Associates. The selected consolidated financial data should be read in conjunction with the Consolidated Financial statements as of June 30, 2001 & 2000, and for each of the three years ended June 30, 2001, 2000 and 1999, the accompanying notes and the report thereon, which are included elsewhere in the respective Forms 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results of operations should be read in conjunction with the "Summary Consolidated Financial Data", the consolidated financial statements and related notes contained in this report.
GENERAL STATEMENT OF ACTIVITIES AND METHOD OF ACCOUNTING
As of June 30, 2002, we were engaged in our principal activity of developmental drilling of new wells and reworking operations on existing wells situated on our Texas-based oil and gas leases situated in Fort Bend County, Texas. Our wholly owned subsidiary, Hycarbex-American Energy, Inc., likewise held an oil and gas exploration license on Yasin Concession
near Jacobabad, Pakistan during the year on which we made preparations for upcoming drilling activities, but performed no drilling.
The Company utilizes the full cost method of accounting for its oil and gas properties. Under this method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized in a "full cost pool". Costs included in the full cost pool are charged to operations as depreciation, depletion and amortization using the units of production method based on the ratio of current production to estimated proven reserves as defined by regulations promulgated by the U.S. Securities and Exchange Commission. Gain or loss on disposition of oil and gas properties is not recognized unless it would materially alter the relationship between the capitalized costs and estimated proved reserves. Disposition of properties are reflected in the full cost pool. The full cost method of accounting limits the costs the Company may capitalize by requiring the Company to recognize a valuation allowance to the extent that capitalized costs of its oil and gas properties in its full cost pool, net of accumulated depreciation, depletion and amortization and any related deferred income taxes, exceed the future net revenues of proved oil and gas reserves plus the lower of cost or estimated fair market value of non-evaluation properties, net of federal income tax.
ADJUSTMENT TO FINANCIAL STATEMENTS FOR PRIOR PERIODS
In our financial statements for the periods ending June 30, 1999 and June 30, 2000, we capitalized the dry hole costs associated with the unsuccessful drilling activities in Pakistan, rather than deducting them as an expense in the year incurred, on the belief that the results of our domestic and international activities could be viewed as a whole. Based upon applicable accounting principles, the lack of proven reserves in Pakistan requires that Pakistan be treated as a separate cost center and that the dry hole costs be expensed in the year incurred. This adjustment affects the previously reported losses for the period ending June 30, 1999 by increasing those losses by $5,216,832 from $754,349 to the corrected figure $5,971,181, and affects the previously reported losses for the period ending June 30, 2000 by decreasing those losses by $9,922,073 from $12,283,248 to the corrected figure $2,361,175.
The large decrease in Other General and Administrative Expenses from $4,965,120 in the previous year to $1,217,980 for the current year is based largely upon the 6,050,000 shares of Common Stock issued to members of management and directors in November, 2000. The values attributed to these shares in the Financial Statements for purposes of calculating this expense line items were determined based upon the market value of the shares on the date of issue.
TEXAS GULF COAST OPERATIONS
As stated elsewhere in this report, we currently own and operate a total of 108 existing wellbores in two producing oil fields, the Blue Ridge Field and the Boling Dome Field, each of which are within fifty (50) miles of the Houston, Texas metropolitan area. Most of these existing wells were drilled by other oil companies prior to the Company's acquisition of the properties and were inactive at the time of such acquisition. During the fiscal year ended
June 30, 2002, an average of thirty-three (33) of the Company's 108 wells were producing daily with varying production ranging from 2 barrels per day to 55 barrels per day. A small number of these producing wells flow without mechanical pumping but the majority require mechanical pumping assistance.
Once we regained control of the Texas-based oil and gas leases and equipment, we elected to withdraw them from the sales market The Company's intent was to workover, re-complete and drill new wells in these fields to generate funds for future oil and gas exploration in the domestic U.S. We designed a program to increase productivity but the targeted goals were not achieved because of a 25% decline in the average per barrel price of oil from the previous year and because of our failure to secure the necessary working capital to jump start the designed program and make them self sufficient within the first six (6) months of this current fiscal year. Since July 1, 2001, the Company has drilled only two (2) new wells which were completed as producing wells.
The Company has not solved our working capital shortage as of the date of this report which will substantially impair our ability to enhance domestic production. We have implemented several cost saving measures including decreasing total hours of field labor and activating our two saltwater disposal wells to save costs associated with hauling and disposing of saltwater from operations. Our most substantial cost saving measures have been the deferral of salary by the three current management members, William Aber, Dean Smith and Michael Zabransky. During the current fiscal year, Mr. Aber and Mr. Smith received only one of twelve monthly salary checks and Mr. Zabransky received only two of twelve monthly salary checks. Additionally, Zaber Investments, L.L.C., which owns ten percent (10%) of the domestic production, did not receive its share of production for the fiscal year totaling $64,000 and permitted the Company to utilize these funds as working capital.
Despite these cost saving and cost deferral measures, we are likely to continue to experience a decrease in production revenues unless and until substantial working capital is secured for field development. Our domestic operating budget for the coming fiscal year includes the drilling of 4 new wells, 20 recompletions and 24 workovers but we are not likely to achieve these budgetary targets without a working capital infusion.
We believe that the we must continue to raise additional capital through outside sources for this fiscal year for the reactivation and development programs to progress, even if oil prices remain stable at a favorable level. As of the date of this report, we do not have any commitments from third party sources for the needed funding.
PAKISTAN OPERATIONS
In the fiscal year ended June 30, 2001 we shot an additional 40km of seismic line in the vicinity of proposed drilling locations. Our technical team evaluated this newly acquired seismic data, along with geological and geophysical data derived from previously drilled wells to optimize the selection of future drill sites on the approximate one million acres (fifteen hundred square miles) comprising the Jacobabad concession. Based upon the preliminary testing of the initial well drilled Kharnhak #1, in 1998, the geological
information obtained while drilling the David #1 and 1A wells and the newly acquired seismic data we selected the drill site for the Jacobabad #3 well.
The Jacobabad #3 well was drilled in Nov/Dec 2000 and plugged and abandoned as a dry hole. Although Jacobabad 3 did not result in a commercial success, we have demonstrated improved drilling and testing performance in this technically challenging environment, and have acquired important additional data that was used to further develop our geologic model of this portion of the Middle Indus Basin. Soon after plugging the Jacobabad #3 well the concession was completely reevaluated to determine areas on our Jacobabad Concession that had good hydrocarbon potential.
For strategic reasons, we elected to release the Jacobabad Concession back to the Pakistan government and nominate specific highly potential hydrocarbon areas for bidding with the expectation of being awarded the desired acreage areas. Subsequently we applied and bid for three (3) concessions closely associated with the released Jacobabad Concession. In August 2001 we were officially awarded the Yasin Concession (1211.68 sq. km) in the Sindh Province of Pakistan. The Company applied for and was granted an additional 979.58 Square Kilometers which was added to the Yasin Concession making it 2,191.26 Square Kilometers. Our subsidiary Hycarbex American Energy, Inc., has committed USD $2,400,000.00 over the course of the next three years to explore and test this concession. At least 100 km of new 2-D seismic will be shot, 150 km of older vintage 2-D data will be evaluated, and one exploration well will be drilled to test the Sui Main Limestone formation for potential gas. Hycarbex has $1.1 million on deposit in Pakistan but must obtain additional funding from third party sources in order to meet these commitments. The concession agreement contains deposit and funding requirements, geophysical requirements, social program requirements and drilling requirements which are all considered material requirements by the Government of Pakistan and must be met in a timely fashion in order to maintain the concession. In the event that we are unable to secure additional funding for Hycarbex's proposed activities in Pakistan under the Concession agreement, the Government of Pakistan may resort to its remedies for non-compliance, including possible forfeiture of the concession and possible forfeiture of all funds on deposit.
Hycarbex-American Energy Inc. has also bid and applied for two additional Pakistan concessions in the area. The Bahadurpur Concession 211.62 sq. Km is east of the Yasin Concession and north of Pakistan Petroleum Ltd. Block 22 Concession. The Miro Khan Concession (4764.87 sq. km.) is immediately to the west of the Yasin Concession on the west flank of Hycarbex's prior Jacobabad Concession. We are currently reevaluating the concessions for these two (2) blocks prior to finalizing contractual obligations.
NEED FOR ADDITIONAL FUNDS
The production derived from our Texas-based properties is insufficient to meet our future capital requirements for both Texas and Pakistan operations. We will need substantial near-term financing to meet our projected operating capital requirements in both Texas and Pakistan. We do not currently have a line of credit or other credit facility available to us to meet these cash requirements. Our cash position is critical given the Concession requirements in Pakistan and given future development requirements under certain of our Texas oil and gas leases. The lack of sufficient capital to meet these requirement and the recurring negative cash flows from operations have been considered by our auditors in their opinion that there is doubt as to our ability to continue as going concerns. We intend to continue to explore and pursue all available sources of working capital through potential loans, sales of securities, sales of assets, joint venture affiliations, and other transactions in order to meet its anticipated near term needs. There can be no assurance that these efforts will continue to prove successful. In the event that additional capital raising efforts by the Company are unsuccessful, the likely effects would be an ultimate forfeiture of the Pakistan concession and a foreclosure of our Texas-based leases by the first lien lender whose $1,500,000 note matured just prior to the end of the third quarter. Even if this debt is addressed or action on it delayed, the lack of substantial working capital will result in a slowdown or postponement of scheduled reactivation and development activities on those Texas properties.
RESULTS OF OPERATIONS
GLOSSARY
Bbl or Barrel: Forty-two (42) United States gallons liquid volume, usually used herein in reference to crude oil or other liquid hydrocarbons.
BOE or Barrel of Oil Equivalent: Generally, the conversion of gas to oil at a ratio of 6,000 cubic feet of gas to one Bbl of oil. Oil and gas are added together for total BOE.
BOPD: Barrels of oil per day.
Developmental Well: A well which is drilled to and completed in a known producing formation adjacent to a producing well in a previously discovered field and in a stratigraphic horizon known to be productive.
Exploration: The search for economic deposits of minerals, petroleum and other natural earth resources by any geological, geophysical, or geochemical technique.
Exploratory Well: A well drilled either in search of a new, as-yet undiscovered oil or gas reservoir or to greatly extend the known limits of a previously discovered reservoir, as indicated by reasonable interpretation of available data, with the objective of completing in that reservoir.
Field: A geographic area in which a number of oil or gas wells produce from a continuous reservoir.
Mcf: One thousand cubic feet of natural gas.
Net Acres or Net Wells: The sum of fractional working interests owned in gross acres or gross wells. By way of example, a 50% working interest in 100 gross acres is equivalent to 50 net acres.
Operator: The person or company actually operating an oil or gas well.
PV-10 Value: The present value, employing a 10% discount factor, of the future net revenues computed using current prices from the production of proven reserves.
REVENUES AND EXPENSES
In the fiscal year ended June 30, 2002, the Company incurred a net operating loss of $2,538,248, with oil sales of $1,051,358 as compared to a net operating loss of $13,274,092 on oil sales of $1,806,335 in the prior fiscal year ended June 30, 2001, and as compared to a net operating loss of $2,361,175 on oil sales of $1,823,276 in the fiscal year ended June 30, 2000.
This reflects a decrease in revenues for the year ended June 30, 2002 over the year ended June 30, 2001 and 2000 of approximately forty-one percent (41%).
The decreases noted above resulted from the decreases in barrels of oil sold and the sale of those barrels at prices which were significantly lower than those received during fiscal 2001. The average price per barrel of oil sold by the Company in the fiscal years ending June 30, 2001 and 2000 was $29.11 and 24.91, respectively, as compared to $21.83 per barrel in the fiscal year ending June 30, 2002. The drop in average prices by twenty-five percent (25%) and the reduction in available working capital resources for drilling of new wells and reworking of existing wells are, taken together, directly responsible for the forty one percent (41%) decrease in production revenues for the current year.
Lease operating costs incurred during the years ended June 30, 2002, 2001, and 2000 were $507,382, $811,757, and $592,502 respectively.
Depreciation and amortization expense incurred during the years ended June 30, 2002, 2001, and 2000 was $645,582, $6,389,705, and $1,249,879 respectively. The fluctuation in these accounts is a direct result of the drilling of dry holes incurred in the Pakistan cost center which, upon dry hole determination, are included in the amortization base of that cost center. As there are currently no proven reserves in this cost center, the cost of these dry holes are immediately written off.
OTHER INCOME AND EXPENSES
Interest income earned during the years ended June 30, 2002, 2001, and 2000 was $15,738, $15,466, and $5,850 respectively.
Interest expense incurred during the years ended June 30, 2002, 2001, and 2000 was $488,432, $229,887, and $123,800, respectively. The significant increase in interest expense which began during the year ended June 30, 2001 is a direct result of $1,500,000 note payable financing agreement entered into by the Company during the year ended June 30, 2000.
During the year ended June 30, 2000 the Company incurred debt issue costs in the amount of $846,992 of which $798,372 was related to the cost of warrants to the Debtor.
NET INCOME
The Company, with the inclusion of other income, foreign and domestic administrative expenses, asset impairment loss, and including interest, reported a net loss of $2,538,248 in the fiscal year ended June 30, 2002, versus a net loss of $13,274,092 in the prior fiscal year ended June 30, 2001 and a net loss of $2,361,175 for the year ended June 30, 2000.
Total Assets/Shareholder's Equity
In the fiscal year ended June 30, 2002, Total Assets of the Company increased to $16,493,866, In the year ended June 30, 2001, Total Assets were $16,434,452.
Net Shareholders Equity decreased to $9,535,016 as of June 30, 2002, from $11,027,264 as of June 30, 2002.
The Company incurred certain long term convertible debt in the amount of $1,500,000 in the quarter ended September 30, 1999, which debt is convertible at the option of the holder at the rate of one Common share for each one dollar of principal converted. A contractual provision within the lending documents required the Company to initiate a registration with the Securities & Exchange Commission of the underlying Common shares by December 16, 1999. The Company has not complied with this registration requirement, triggering a financial penalty of $45,000 per month beginning January 20, 2000, and continuing until such time that the registration is accomplished. The Company has elected to pay the penalty sum in common stock as permitted in the lending documents and will continue to incur this monthly penalty until the registration is completed. Late registration penalties equal to three percent (3%) per month of the stock purchased, payable in cash or stock at our election, are also applicable to certain private placement investors from the current fiscal year commencing 120 days after their respective acquisition dates.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have to trade in derivative financial instruments and we do not have firmly committed sales transactions. We have not entered into hedging arrangements and do not have any delivery commitments. While hedging arrangements reduce exposure to losses as a result of unfavorable price changes, they also limit the ability to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and natural gas production. The prices realized are primarily driven by prevailing domestic prices for crude oil. Historically, these prices have been volatile and unpredictable. Pricing volatility is expected to continue. Oil prices we received during the fiscal year ranged from a monthly low of $17.22 per barrel to a monthly high of $25.40 per barrel. A significant decline in the price of oil could have a material adverse effect on our financial condition and results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary financial data, which begins on page, are included elsewhere in this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
William M. Aber, Jr. 58 President, CEO and Chairman of the Board of Directors
Dean C. Smith 55 Chief Financial Officer and Secretary
George Sagredos 46 Director
Iftikar Zahid Director
WILLIAM M. ABER, JR. PRESIDENT, CEO AND CHAIRMAN OF THE BOARD OF DIRECTORS
William M. Aber, Jr. was appointed to the Board and as Vice President and Chief Executive Officer on June 27, 2001. In January 2002, Mr. Aber was appointed President and Chairman of the Board. Mr. Aber is co-founder, President and Chairman of the Board of several oil
and gas related companies in Houston, Texas. He holds a Masters Degree in physics from Sam Houston State University. He has previously worked for Getty Oil Company and Strata Energy where he gained valuable domestic exploration experience. Since 1987, Mr. Aber has been involved in oil and gas exploration worldwide. Mr. Aber has served as an exploration advisor and consultant to Hycarbex-American Energy, Inc. since 1997.
DEAN C. SMITH CHIEF FINANCIAL OFFICER AND SECRETARY
Dean C. Smith was appointed Chief Financial Officer on June 27, 2001. In May 2002, Mr. Smith was appointed Secretary of the Company. Mr. Smith is Treasurer and sits on the Board of an oil and gas consulting firm and an oil and gas investment group in Houston, Texas. He completed his education at Centenary College of Louisiana and Northwestern University of Louisiana. He has been actively involved in the oil and gas industry for 14 years.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers to file periodic reports with the SEC reporting their direct and indirect ownership and changes in ownership of our securities. To the best of our knowledge, all Section 16(a) requirements have been complied with during the year ending June 30, 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table:
Ms. Gann left the Company on April 30, 2002.
NOTE: The composition of management is currently the subject of litigation in proceedings titled No. 2002-11247; Georg von Canal vs. The American Energy Group, Ltd. and William Aber, 270th Judicial District Court, Harris County, Texas. See Item 3 - Legal Proceedings.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has two classes of voting equity securities, Common and Convertible Preferred, which are combined to accumulate the total voting shares of the Company.
The following table sets forth certain information as of October 15, 2002, with respect to the beneficial ownership of shares of common stock by (i) each person who is known to the Company to beneficially own more than 5% of the outstanding shares of common stock, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all executive officers and directors of the Company as a group. Unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares shown.
NUMBER PERCENT NAME TYPE OF SHARES OF CLASS
CURRENT OFFICERS AND DIRECTORS
William M. Aber Common 908,910 1.5%
Dean C. Smith Common 401,250 0.7%
George Sagredos Common 600,000 0.9%
Iftikar Zahid Common 255,000 0.3%
All current officers and Directors as a group (four persons) Common 2,165,160 3.3%
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, we entered into a Purchase and Sale Agreement with Zaber Investments, L.L.C. under which we sold a ten percent (10%) interest in the Texas-based oil and gas leases and wells for $300,000. The proceeds of this sale were utilized to pay the discounted loan settlement to Northern Lights Energy, Ltd., so that we could regain control of operations from Northern Lights Energy, Ltd. Zaber Investments, L.L.C. is controlled by William Aber and Michael Zabransky. During the fiscal year, Zaber Investments, L.L.C. did not receive its ten percent (10%) share of production aggregating $64,000 and permitted the Company to use these proceeds for operating capital.
In January, 2002, we entered into an agreement with the WVZC Partnership, which is comprised of Georg von Canal, Manfield Welser, Charles Valceschini and Hooman Zadeh, to convert the partnership's note in the amount of $1,094,290 to 2,544,768 shares of stock, or a conversion rate of $0.43 per share. This transaction was reversed and the note balance reinstated in April, 2002, in order to make the 2,544,768 shares available for a proposed investment by Vivus Beteilgungs Aktiengesellschaft which was scheduled to
close in April. The Vivus investment transaction was not consummated by Vivus and was subsequently cancelled.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) EXHIBITS The Financial Statement Schedules required herein are included as set forth as Exhibit A and beginning on page
(B) (99) 99.1 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
None.
SIGNATURES
Pursuant to the requirements of Section 13 of 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, on October 14, 2002.
/s/William M. Aber, Jr. President, Chairman of the Board
/s/Dean C. Smith Chief Financial Officer
- -------------------------------------------------------------------------------
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
C O N T E N T S
Independent Auditors' Reports...............................................
Consolidated Balance Sheets.................................................
Consolidated Statements of Operations.......................................
Consolidated Statements of Stockholders' Equity.............................
Consolidated Statements of Cash Flows......................................
Notes to the Consolidated Financial Statements.............................
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Shareholders of The American Energy Group, Ltd. and Subsidiaries Houston, Texas
We have audited the accompanying consolidated balance sheet of The American Energy Group, Ltd. and Subsidiaries as of June 30, 2002 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended June 30, 2002. 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. The consolidated financial statements of The American Energy Group, Ltd. and Subsidiaries as of June 30, 2001 and for the years ended June 30, 2001 and 2000 were audited by other auditors whose report, dated October 8, 2001, expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and the consolidated results of their operations and their cash flows for the year ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Companies will continue as going concerns. As discussed in Note 1 to the consolidated financial statements, the Companies has suffered recurring losses to date, has negative cash flows from operations and have been placed into involuntary bankruptcy. These factors raise substantial doubt about their ability to continue as going concerns. Management's plans with regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Chisholm & Associates North Salt Lake, Utah September 6, 2002
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Shareholders of The American Energy Group, Ltd. and Subsidiaries Houston, Texas
We have audited the accompanying consolidated balance sheet of The American Energy Group, Ltd. and Subsidiaries as of June 30, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The American Energy Group, Ltd. and Subsidiaries as of June 30, 2001 and the consolidated results of their operations and their cash flows for the years ended June 30, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company have suffered recurring losses to date, have negative cash flows from operations and have been placed into involuntary bankruptcy. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans with regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
HJ & Associates, LLC Salt Lake City, Utah October 8, 2001
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Balance Sheets
ASSETS ------
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 2002, 2001 and 2000
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 2002, 2001 and 2000 (Continued)
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 2002, 2001 and 2000 (Continued)
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued)
The accompanying notes are an integral part of these consolidated financial statements.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
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. All of these companies are collectively referred to as "the Companies".
The American Energy Group, Ltd., The American Energy Operating Corp. and Hycarbex-American Energy, Inc. are the only operating entities at June 30, 2002. Management is likely going to pursue dissolution of the remaining subsidiary companies in the near future since most of the existing charters on these subsidiaries have now been revoked.
The Company and its subsidiaries (the Companies) are principally in the business of acquisition, exploration, development and production of oil and gas properties.
b. Going Concern
The accompanying consolidated financial statements have been prepared assuming the Companies will continue as going concerns. The Companies have experienced recurring losses and negative cash flows from operations. As discussed in Note 8, the Companies have been placed into involuntary bankruptcy by three creditors. Management of the Companies is vigorously trying to reverse the order but the trial has been postponed until February 2003. These factors raise substantial doubt about the Companies' ability to continue as going concerns.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Going Concern (Continued)
The recovery of assets and continuation of future operations are dependent upon the Companies' ability to obtain additional debt or equity financing, and their ability to generate revenues sufficient to continue pursuing their business purpose. Management is actively pursuing additional equity and debt financing sources to finance future operations and anticipates a significant increase in production and revenues from oil and gas production during the coming year only if significant additional financing can be procured in the near term. It is also uncertain as to the outcome of the involuntary bankruptcy. Until the involuntary bankruptcy is resolved, no adjustment to the consolidated financial statements has been recorded.
c. Accounting Methods
The Companies' consolidated financial statements are prepared using the accrual method of accounting. The Companies' have elected a June 30 year-end.
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. Capitalized interest for the years ended June 30, 2002 and 2001 was $0 and $10,000, respectively. In addition, depreciation capitalized during the years ended June 30, 2002 and 2001 totaled $41,103 and $46,447, 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 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, 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 $637,710 and $6,372,414 has been recognized in the accompanying consolidated financial statements for the years ended June 30, 2002 and 2001, respectively, on proved and impaired or abandoned oil and gas properties.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. 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.
e. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
f. 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, 2002, 2001 and 2000, the Companies incurred total depreciation of $48,975, $63,738 and $77,831, respectively.
In accordance with full cost accounting, $41,103, $46,447 and $51,118 of depreciation was capitalized as costs of oil and gas properties for the years ended June 30, 2002, 2001 and 2000, respectively, as previously discussed.
g. Basic Loss Per Share of Common Stock
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.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Concentrations of Risk
From time to time, the cash balances in the Companies U.S. bank accounts exceed Federally insured limits. In addition, the Company had balances held in Pakistan banks that are not federally insured. The balances of $1,240,282 and $833,098 as of June 30, 2002 and 2001, respectively, held in Pakistan are subject to potential risks based on government intervention.
i. Foreign Operations
A significant portion of the operations of the Companies relate to an oil and gas concession located in the country of Pakistan (see Note 2). Pakistan has experienced recently, or are experiencing currently, economic or political instability. Hyperinflation, volatile exchange rates and rapid political and legal change, often accompanied by military insurrection, have been common in these and certain other merging markets in which the Companies are conducting operations. The Companies may be materially adversely affected by possible political or economic instability in Pakistan. The risks include, but are not limited to terrorism, military repression, expropriation, changing fiscal regimes, extreme fluctuations in currency exchange rates, high rates of inflation and the absence of industrial and economic infrastructure. Changes in drilling or investment policies or shifts in the prevailing political climate in Pakistan could adversely affect the Companies business. Operations may be affected in varying degrees by government regulations with respect to production restrictions, price controls, export controls, income and other taxes, expropriation of property, maintenance of claims, environmental legislation, labor, welfare benefit policies, land use, land claims of local residents, water use and well safety. The effect of these factors cannot be accurately predicted.
j. 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.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Debt Issuance Costs
In connection with the receipt of a $1,100,000 note payable, the Company incurred costs of $162,067. The Company capitalized these costs and amortized these costs over the term of the note payable (2.5 years) as follows:
l. 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.
m. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement No. 141 ("SFAS 141"), entitled "Business Combinations" and Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 is effective as follows: (a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001 that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 31, 2001 and provides new guidance regarding the recognition and measurement of intangible assets, eliminates the amortization of certain intangibles and requires annual assessments for impairment of intangible assets that are not subject to amortization. An initial impairment analysis is required as of the date of adoption and any resulting impairment loss is recognized as the effect of a change in accounting principle.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
m. Recent Accounting Pronouncements (Continued)
In August 2001, the Financial Accounting Standards Board issued Statement No. 143 ("SFAS 143"), "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." The objectives of SFAS 143 are to establish accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In October 2001, the Financial Accounting Standards Board issued Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 31, 2001 and generally, is to be applied prospectively.
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 ("SFAS 145"), "Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13." SFAS 145 addresses the presentation for losses on early retirements of debt in the statement of operations. Adoption of SFAS 145 had no impact on the Company's financial condition or cash flow.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146 (SFAS 146"), "Accounting for Cost Associated with Exit or Disposal Activities for Certain Employee Termination Benefits." The provisions of SFAS 146 became effective for exit or disposal activities commenced subsequent to December 31, 2002.
n. 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.
o. Restricted Cash
The Company is 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, 2002, $1,108,107 was on deposit with the bank in Pakistan that is to be used for these purposes, which was classified as restricted cash in the accompanying consolidated balance sheet as of June 30, 2002.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
p. Income Taxes
At June 30, 2002, the Companies had net operating loss carryforwards of approximately $36,000,000 that may be offset against future taxable income from the year 2003 through 2022. No tax benefit has been reported in the June 30, 2002 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
The income tax benefit differs from the amount computed at federal statutory rates of approximately 38% as follows:
Deferred tax assets are comprised of the following:
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
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, 2002 and 2001, 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.
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 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.
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
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 2 - OIL AND GAS PROPERTIES (Continued)
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. The Company has committed $2,400,000 over the next three years to explore and test the concession. The Jacobabad Concession was released to the Pakistan government in favor of the newly awarded concession.
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 minimum of $175,000 the first year and $250,000 per year thereafter until paid in full (see Note 3). This liability may be paid during each year in the form of $10,000 per drill site and certain royalty payments.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
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.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT
The following is a summary of notes payable and long-term debt as of June 30, 2002 and 2001:
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT (Continued)
In connection with the $1,500,000 note payable, the Company originally agreed to arrange third party escrow of 2,000,000 free-trading shares of common stock to secure the Company's covenant to register the stock. If the shares were not registered within 90 days, the Company further agreed to pay a penalty of 3% of the face value of the note, in either common stock or cash for each full month the Registration Statement is not declared effective. Accordingly, the Company issued 4,085,622 and 711,740 shares of common stock valued at $675,000 and $360,000 as a result of this penalty fee for the years ended June 30, 2002 and 2001, respectively.
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 is not paid by November 10, 2002, the note holder has the right to pursue all of his legal remedies with respect to the property in order to receive the full $1,500,000. The outcome of this proceeding is currently unknown.
The following are the scheduled annual repayments of notes payable and long-term debt:
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 4 - 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:
NOTE 5 - 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.
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.
During the year ended June 30, 2000, holders of shares of the Convertible Voting Preferred Stock elected to convert their shares into common stock of the Company in accordance with the conversion provisions. Accordingly, 60,496 shares of convertible voting preferred stock were converted into 302,500 shares of the Company's common stock in 2000. (Note 6).
During the year ended June 30, 2000, the Company issued 400,000 Series F Convertible Preferred Shares for total proceeds of $400,000. These 400,000 preferred shares were later converted into 1,400,000 shares of common stock at a conversion ratio of 3.5 common shares.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 6 - COMMON STOCK
During the year ended June 30, 2000, 60,496 shares of convertible voting preferred stock were converted into 302,500 shares of common stock, and 400,000 shares of Series F convertible preferred stock were converted into 1,400,000 shares of common stock (see Note 5).
During the year ended June 30, 2000, the Company issued 133,334 shares of common stock at $0.75 per share for a total of $100,000. As discussed in Note 3, the Company issued 583,659 shares of common stock valued at $270,002 as a result of a penalty fee related to a late Registration filing for certain shares of stock.
During the year ended June 30, 2001, the Company issued 13,780,083 shares of common stock and 946,929 warrants for $0.30 per share for a total of $4,134,025. Offering costs of $478,502 were paid or accrued related to the 13,780,083 shares issued. As discussed in Note 3, the Company issued 4,085,622 and 711,740 shares of common stock valued at $675,000 and $360,000 as a result of a penalty fee related to a late registration filing for certain shares of stock.
During the year ended June 30, 2001, the Company entered into certain Warrant Exchange Agreements. Pursuant to the agreements, the Company issued 2,197,500 shares of common stock valued at $1,758,000 in exchange for the cancellation of 6,680,000 warrants. The shares issued were valued at $0.80 per share based upon the trading price of the shares on the date they were issued. The Company also issued a total of 6,050,000 shares of common stock valued at $2,613,998 to certain directors of the Company in lieu of services rendered and expenses paid on behalf of the Company. In addition, the Company issued 1,293,661 shares of common stock in conversion of outstanding debt totaling $521,686, 457,500 shares of common stock for services rendered totaling $198,600 and 4,692,746 shares of common stock in conversion of debt and services rendered totaling $3,097,211.
Pursuant to a court decree and settlement agreement signed during the year ended June 30, 2001, the Company canceled a total of 321,146 shares of common stock. As part of the settlement agreement, outstanding debt of $235,000 was also released. Accordingly, the transaction and cancellation of shares was recorded as contributed capital of $235,000.
During the year ended June 30, 2001, the Company also converted 4,168,300 shares of common stock owned by certain officers of the Company to a convertible subordinated promissory note in the amount of $1,094,290 (Note 3), bearing interest at 6% per annum. The promissory note is convertible into common shares of the Company at a conversion rate of $0.43 per share, adjusted accordingly for any stock splits or dividends effected by the Company subsequent to the original issued date of the note.
During July 2001, the Company issued 200,000 and 250,000 shares of previously authorized but unissued common stock for services rendered to officers valued at $46,000 and $60,000, respectively.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 6 - COMMON STOCK (Continued)
During August 2001, the Company issued 100,000 shares of previously authorized but unissued common stock for services rendered, valued at $29,000.
During August 2001, the Company reissued 40,750 shares of common stock for shares previously canceled in error in a previous year. The original cancellation was recorded at a zero value, thus the reissuance is being recorded at the same value.
During August 2001, the Company issued 500,000 shares of previously authorized but unissued common stock for services rendered to officers, valued at $125,000.
During October 2001, the Company issued 150,000 shares of previously authorized but unissued common stock for services rendered, valued at $21,000.
During December 2001 and May 2002, the Company issued 2,607,299 and 1,478,323 shares of previously authorized but unissued common stock for conversion of penalties payable, valued at $450,000 and $225,000, respectively.
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.
NOTE 7 - 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, 2002, 2001 and 2000 would have been unchanged from the reported net loss.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 7 - COMMON STOCK WARRANTS (Continued)
However, under the provisions of SFAS No. 123 for non-employees, the Company recorded additional expense of $-0-, $-0- and $884,880 the years ended June 30, 2002, 2001 and 2000 as a result of warrants granted to non-employees based upon the Black-Scholes pricing model. Under the Black-Scholes method, the U.S. treasury rate was used as the risk-free interest rate, the expected life of the warrants was 2 months to seven years, the volatility used was based upon the historical price per share of shares sold, and there were no expected dividends.
A summary of the status of the Company's stock warrants as of June 30, 2002 and changes during the year ended June 30, 2002 are presented below:
The following summarizes the exercise price per share and expiration date of the Company's outstanding warrants to purchase common stock at June 30, 2002;
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 7 - COMMON STOCK WARRANTS (Continued)
During the year ended June 30, 2000, the Company issued 225,000 warrants ranging in exercise prices from $0.75 to $1.00 per share. These warrants were issued to various consultants for services rendered. In addition, the Company issued 1,500,000 warrants exercisable at $1.00 per share which expired unexercised after 60 days. The Company also issued an additional 1,600,000 warrants exercisable at $1.00 per share. 400,000 expire on September 15, 2001, 400,000 expire on September 15, 2002, 400,000 expire on September 15, 2003 and 400,000 expire on September 15, 2004.
During the year ended June 30, 2001, the Company granted a total of 796,929 warrants to purchase common stock at an exercise price of $0.36 per share to the placement agent pursuant to the issuance of common shares for cash. As discussed in Note 6, the Company issued 2,197,500 shares of common stock during the year ended June 30, 2001 in exchange for the cancellation of 6,680,000 warrants. An additional 1,275,000 warrants were canceled during the year, bringing the total outstanding warrants at June 30, 2001 at 3,876,929.
During the year ended June 30, 2002, 525,000 warrants expired. The total outstanding warrants at June 30, 2002 is 3,351,929.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 2, the Companies defaulted on the payment of the Drilling Investor Notes due and payable September 15, 1995 related to the acquisition of oil and gas leases in Harris County, Texas. These notes were secured by a financial guarantee bond, but there is no assurance that the bond can be enforced. During the year ended June 30, 2002, the balance payable of $38,117 was written off.
The Company leases office space at a monthly cost of $3,391. The lease expires in August 2004. The future minimum lease payments are $40,692 and $6,782 for the years 2003 and 2004, respectively.
The Companies have minimum lease and royalty obligations associated with their oil and gas properties of $77,300 annually, see also Note 2.
During the year ended June 30, 1997, the Board of Directors authorized the establishment of a Management Royalty Pool equal to 1% of the revenues from domestic oil and gas production. The beneficiaries and their ownership in this pool are subject to variance based upon certain performance criterion.
On June 8, 2002, three alleged creditors placed the Company into involuntary bankruptcy under Chapter 7 of title II of the bankruptcy code. If an order for relief were to be entered into (ie, the Company failed to demonstrate that it had been placed into bankruptcy improperly), a Chapter 7 trustee would be appointed to liquidate the assets of the Company. The trial of the proprietary of the involuntary bankruptcy is scheduled for February 12, 2003. Additionally, the Company is seeking both actual and punitive damages as a counterclaim against the petitioning creditors for placing the Company into an involuntary bankruptcy. As of the audit report, the outcome of the involuntary bankruptcy is uncertain. No adjustments have been made to the financial statements for this uncertainty.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2002, 2001 and 2000
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
The Companies are party to certain litigation and claims. The most significant are as follows:
A Company former President filed suit against the Company and its current President seeking damages and an injunction from preventing his ouster as President and as a member of the Board of Directors based upon a shareholder vote in which a majority of shareholders voted for the removal of the former President as a director under an existing bylaw provision. The bylaw provision, which requires a simple majority vote to remove a director, is in conflict with the Nevada statute which requires the vote of two-thirds of the shareholders in order to remove a director. The matter was pending and the outcome not yet determined by the Court as of the date of this report.
A separate former President and a former member of the Board of Directors filed suit against the Company to recover a stock certificate issued to him by the Company which was in the Company's possession and to recover a $30,000 loan to the Company and back salary and unreimbursed expenses. The matter is still pending and the outcome not yet determined by the Court as of the date of this report.
A former employee filed suit against American Energy Operating Corp. seeking approximately $60,000 for alleged, unpaid services as an engineering consultant. Management of the Company is disputing the claim and intends on vigorously contesting the claim. The matter is pending and the outcome not yet determined by the Court as of the date of this report.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES S.F.A.S. 69 Supplemental Disclosures (Unaudited) June 30, 2002 and 2001
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to Oil and Gas Producing Activities
(2) Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities
The Company does not have any investments accounted for by the equity method.
(3) Results of Operations for Producing Activities
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES S.F.A.S. 69 Supplemental Disclosures (Unaudited) June 30, 2002 and 2001
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(4) Reserve Quantity Information
During the year ended June 30, 2002, the Company had reserve studies and estimates prepared on the various properties acquired and developed. The difficulties and uncertainties involved in estimating proved oil and gas reserves makes comparisons between companies difficult. Estimation of reserve quantities is subject to wide fluctuations because it is dependent on judgmental interpretation of geological and geophysical data.
(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.
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES S.F.A.S. 69 Supplemental Disclosures (Unaudited) June 30, 2002 and 2001
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, 2002
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. These reserve estimates are made from evaluations conducted by Carl F. Pomeroy and Richard Alexander, registered professional engineers, of such properties and will be periodically reviewed based upon updated geological and production data. Estimates of proved reserves are inherently imprecise. The above standardized measure does not include any restoration costs due to the fact the Company does not own the land.
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.