SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event Reported) February 25, 1997
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AMERICAN INTERNATIONAL PETROLEUM CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada No. 0-14905 13-3130236
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation
or organization)
444 MADISON AVENUE, SUITE 3203, NEW YORK, NEW YORK 10022
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(Address of principal executive offices) (Zip Code)
(212)688-3333
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(Registrant's telephone number, including area code)
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(Former name or former address if changed from last report)
Item 2. Acquisition or Disposition of Assets
On February 25, 1997, the Registrant sold all of the issued and
outstanding shares of common stock of its wholly-owned subsidiaries,
American International Petroleum Corporation of Colombia ("AIPCC") and
Pan American International Petroleum Corporation ("PAIPC") (the
"Purchased Shares") in an arms length transaction to Mercantile
International Petroleum Inc. ("MIP").
(i) The assets of AIPCC and PAIPC consisted of oil and gas
properties and equipment in South America with an aggregate
net book value of approximately $17.9 million.
(ii) The total aggregate purchase price payable by MIP for the
Purchased Shares was valued at up to approximately $20.2
million, determined as follows:
(a) Cash payments of approximately $3.9 million, of which
approximately $2.2 million was paid simultaneously
with the closing to retire Registrant's 12% Secured
Debentures due December 31, 1997, which were secured
by the Registrant's shares of AIPCC.
(b) Assumption of AIPCC and PAIPC debt of an aggregate
amount of $634,000.
(c) 4,384,375 shares of MIP Common Stock with a trading
price of approximately $2.00 on the date the parties
agreed in principle to the sale.
(d) A two-year $3 million 5% exchangeable subordinated
debenture of AIPCC, exchangeable into shares of
common stock of MIP on the basis of $3 principal
amount of such debenture for one share of MIP on
or after February 25, 1998; or Registrant may
demand payment on that date of $1.5 million of the
principal balance thereof in cash.
(e) A $1.4 million "performance earn-out" from future
production in Colombia, plus interest at 8% per
annum.
(f) Up to $2.5 million (reduced proportionately to the
extent the Net Operating Loss and Deferred Cost
Deductions accrued by AIPCC through December 31, 1996
("Accrued Tax Benefit Deductions") is less than $50
million but more than $20 million) payable from 25%
of AIPCC's future tax savings related to any Accrued
Tax Benefit Deductions available to AIPCC on future
tax filings in Colombia.
(iii) As a result of this disposition, the Registrant now owns
approximately 11.3% of MIP's outstanding share capital on a
fully-diluted basis (47,720,867 shares). MIP is traded in U.S.
Dollars on the Toronto
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Stock Exchange under the symbol MPT.U. On March 6, 1997, the
closing price of MIP's common stock was $1.95 per share.
(iv) The Registrant intends to utilize the proceeds to repay
certain debts, expand its refinery and for general corporate
use.
Item 7. Financial Statements, Pro-forma Financial Information and
Exhibits
Exhibits:
Exhibit No. Description
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99.1 Share Purchase Agreement dated February 25,
1997, among the Registrant, AIPCC, PAIPC and
MIP.
99.2 $3 million 5% exchangeable debenture,
granted by AIPCC to the Registrant, due
February 25, 1999.
99.3 Pledge Agreement dated February 25, 1997
among the Registrant, MIP and MG Trade
Finance Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 12, 1997
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
By: /s/ Denis J. Fitzpatrick
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Denis J. Fitzpatrick
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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99.1 Share Purchase Agreement dated February 25,
1997, among the Registrant, AIPCC, PAIPC and
MIP.
99.2 $3 million 5% exchangeable debenture,
granted by AIPCC to the Registrant, due
February 25, 1999.
99.3 Pledge Agreement dated February 25, 1997
among the Registrant, MIP and MG Trade
Finance Corp.
EXHIBIT 99.1
'
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
AND
AMERICAN INTERNATIONAL PETROLEUM
CORPORATION OF COLOMBIA
AND
PAN AMERICAN INTERNATIONAL PETROLEUM CORPORATION
AND
MERCANTILE INTERNATIONAL PETROLEUM INC.
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SHARE PURCHASE AGREEMENT
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Dated this 25th day of February, 1997
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SHARE PURCHASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
ARTICLE 1
INTERPRETATION
1.1 Defined Terms................................................................................. 2
1.2 Gender and Number............................................................................. 11
1.3 Headings, Etc................................................................................. 11
1.4 Currency...................................................................................... 11
1.5 Severability.................................................................................. 11
1.6 Entire Agreement.............................................................................. 12
1.7 Amendments.................................................................................... 12
1.8 Waiver........................................................................................ 12
1.9 Governing Law................................................................................. 12
1.10 Inclusion..................................................................................... 12
1.11 Accounting Terms.............................................................................. 12
1.12 Knowledge..................................................................................... 12
1.13 Incorporation of Schedules.................................................................... 12
ARTICLE 2
PURCHASED SHARES AND PURCHASE PRICE
2.1 Purchase and Sale............................................................................. 13
2.2 Purchase Price................................................................................ 14
2.3 Calculation of Purchase Price................................................................. 15
2.4 Closing Balance Sheet and .................................................................... 16
2.5 Payment of Taxes and Registration Charges on Transfer......................................... 17
2.6 Performance Earn-Out Payment.................................................................. 17
2.7 Tax Pools..................................................................................... 19
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE VENDOR
3.1 Representations and Warranties of the Vendor.................................................. 19
3.2 Information Known by Purchaser................................................................ 38
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
4.1 Representations and Warranties of the Purchaser............................................... 38
ARTICLE 5
CLOSING
5.1 Date, Time and Place of Closing............................................................... 41
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Page
5.2 Closing Procedures............................................................................ 41
ARTICLE 6
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITIES AND SET-OFF
6.1 Survival of Representations and Warranties.................................................... 44
6.2 Indemnification in Favour of the Purchaser.................................................... 44
6.3 Indemnification in Favour of the Vendor....................................................... 45
6.4 Indemnification Proceedings................................................................... 45
6.5 Limitation.................................................................................... 46
6.6 Exclusion of Other Remedies................................................................... 47
6.7 Right of Set-Off.............................................................................. 47
6.8 Tax Audit..................................................................................... 47
6.9 Compliance with Environmental Law............................................................. 48
ARTICLE 7
POST-CLOSING COVENANTS
7.1 Access to Books and Records................................................................... 48
7.2 Further Assurances............................................................................ 49
7.3 Cooperation of the Vendor..................................................................... 49
7.4 Common Shares................................................................................. 49
7.5 NASDAQ........................................................................................ 50
7.6 Employment.................................................................................... 50
7.7 Rio Bravo..................................................................................... 50
7.8 Tax Election.................................................................................. 50
7.9 Continued Cooperation......................................................................... 51
7.10 Continued Listing............................................................................. 51
7.11 Guarantee..................................................................................... 51
7.12 Opinion for Transfer Agent.................................................................... 51
7.13 No Contrary Instructions...................................................................... 51
7.14 Legend........................................................................................ 51
7.15 Toronto Stock Exchange........................................................................ 51
7.16 Name Change................................................................................... 51
7.17 Accounting.................................................................................... 52
7.18 Transfer of Colombian Debentures.............................................................. 52
7.19 Report........................................................................................ 52
7.20 Right of First Refusal........................................................................ 52
ARTICLE 8
ARBITRATION
8.1 Best Endeavours to Settle Disputes............................................................ 52
8.2 Arbitration................................................................................... 52
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ARTICLE 9
MISCELLANEOUS
9.1 Notices....................................................................................... 53
9.2 Publicity..................................................................................... 54
9.3 Time of the Essence........................................................................... 54
9.4 Brokers....................................................................................... 55
9.5 Third Party Beneficiaries..................................................................... 55
9.6 Expenses...................................................................................... 55
9.7 Enurement..................................................................................... 55
9.8 Counterparts.................................................................................. 55
9.9 Joint and Several Liability................................................................... 55
9.10 Assignment.................................................................................... 55
9.11 Non-Merger.................................................................................... 55
</TABLE>
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SHARE PURCHASE AGREEMENT
MEMORANDUM OF AGREEMENT made the 25th day of February, 1997 between
AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a corporation incorporated under
the laws of Nevada (the "Vendor"), AMERICAN INTERNATIONAL PETROLEUM CORPORATION
OF COLOMBIA, a corporation incorporated under the laws of Oklahoma (the
"Colombian Subsidiary"), PAN AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a
corporation incorporated under the laws of Nevada (the "Peruvian Subsidiary" and
together with the Colombian Subsidiary, the "Corporations") and MERCANTILE
INTERNATIONAL PETROLEUM INC., a corporation incorporated under the laws of the
Cayman Islands (the "Purchaser") witnesses that;
WHEREAS:
(a) an agreement in principle (the "Agreement in Principle") was entered
into between the Vendor and the Purchaser on January 29, 1997 for the
purchase by the Purchaser of the Peruvian and Colombian upstream oil
and gas operations of the Vendor, and all properties and other assets
relating thereto;
(b) the Colombian Subsidiary carries on the business consisting of oil and
gas operations in the Magdalena Valley of Colombia;
(c) the Peruvian Subsidiary carries on the business consisting of oil and
gas operations in the Talara Basin in Peru;
(d) each of the Corporations is a direct wholly-owned subsidiary of the
Vendor; and
(e) the Vendor has agreed to sell to the Purchaser and the Purchaser has
agreed to purchase from the Vendor, each in reliance upon the
representations and warranties contained herein, all of the issued and
outstanding shares in the capital of the Corporations, in accordance
with the terms of this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
agreements contained in this Agreement and other valuable consideration (the
receipt and adequacy of this consideration by each of the Parties are
acknowledged), the Parties covenant and agree as follows:
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ARTICLE 1
INTERPRETATION
1.1 Defined Terms. As used in this Agreement, including the recitals hereto, the
following terms have the following meanings:
"Accounts Receivable" means all accounts receivable, notes receivable
and other current debts due or accruing due to each of the Corporations in
connection with the Business;
"Adjusted Working Capital" of each of the Corporations means the amount
by which the aggregate of the total current assets of the Corporations as
reflected on the Closing Balance Sheet exceeds the lesser of the (i) aggregate
of the liabilities (except for deferred taxes and the Colombian Debenture); and
(ii) $2,600,000, relating to the Corporations as at the respective valuation
date;
"Adjustment Amount" has the meaning ascribed in Subsection 2.4(e);
"Affiliate" shall have the meaning set out in the Securities Act
(Ontario);
"Agreement" means this share purchase agreement and all schedules and
instruments in amendment or confirmation of it; "hereof", "hereto" and
"hereunder" and similar expressions mean and refer to this Agreement and not to
any particular Article, Section, Subsection or other subdivision; "Article",
"Section", "Subsection" or other subdivision of this Agreement followed by a
number means and refers to the specified Article, Section, Subsection or other
subdivision of this Agreement;
"AIPC Debentures" means the 12% Secured Debentures of the Vendor;
"Ancillary Agreements" means all agreements, certificates and other
instruments delivered or given pursuant to this Agreement; and "Ancillary
Agreement" means any one of such agreements, certificates or other instruments;
"Assets" means all property and assets of the Corporations of every
kind and wheresoever situate, including (i) all right, title and interest of the
Corporations in and to the Leases and any other Contracts in Colombia and Peru
(including any working or other interest in Lands); (ii) all machinery,
equipment, jigs, drills, dies, tools, handling equipment, furniture, furnishings
and accessories and supplies of all kinds including those described in Schedule
4; (iii) all trucks, cars and other vehicles including those described in
Schedule 5; (iv) the Inventories; (v) all Accounts Receivable and the full
benefit of all security for the Accounts Receivable; (vi) all prepaid expenses
of the Business; (vii) the leasehold interest of the Vendor in and to the Leased
Properties and all right, title and interest of the Vendor in and benefits of
the Vendor to and under the Leases; (viii) the Intellectual Properties; (ix) the
Books and Records and the Corporate Records; (x) the goodwill of the Business,
including the exclusive right of each of the Corporations, (A) to carry on the
Business from and after the Time of Closing, and (B) to use any words indicating
that the Business is so carried on, including all of the Corporations' right,
title and interest in and to the names "American International Petroleum
Corporation of
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Colombia" and "Pan American International Petroleum Corporation", respectively,
or any variation thereof, as part of the name of or in connection with the
Business or any part thereof carried on or to be carried on by the Purchaser;
(xi) the Owned Properties; and (xii) any right the Vendor or the Colombian
Subsidiary may have to the area known as "Bunde" in the restrictive area of
Block C under the Puli Association Contract;
"Authorization" means, with respect to any Person, any authorization,
permission, order, permit, approval, grant, licence, consent, right, franchise,
privilege, certificate, judgment, writ, injunction, award, determination,
direction, decree, or by-law, rule or regulation of any Governmental Entity
having jurisdiction over such Person;
"Benefit Plans" means all employee benefit plans relating to the
employees of the Corporations, including profit sharing, deferred compensation,
phantom stock option, stock option, employee stock purchase, share compensation
arrangement, bonus, retirement, health or insurance plans (in each case, oral or
written);
"Books and Records" means all technical, industrial, business, and
financial and accounting records, financial books and records of account, books,
data, reports, files, lists, drawings, plans, logs, briefs, customer and
supplier lists, manuals, deeds, certificates, contracts, surveys, title opinions
or any other documentation and information in any form whatsoever (including
written, printed, electronic or computer printout form) relating to the
Business;
"Branches" means the registered, legal corporate branches of each of
the Corporations, as applicable, being in Peru, "Pan American International
Petroleum Corporation, Peruvian Branch" and in Colombia "American International
Petroleum Corporation of Colombia" and "Branch" shall mean any one of such
Branches;
"Buildings and Fixtures" means all plant, buildings, structures,
erections, improvements, appurtenances and fixtures (including fixed machinery
and fixed equipment) situate on the Owned Properties or the Leased Properties,
or both as the context requires;
"Business" means the business presently and heretofore carried on by
the Corporations consisting of oil and gas operations in Latin America,
specifically, in the case of the Colombian Subsidiary, in the Magdalena Valley
in Colombia and, in the case of the Peruvian Subsidiary, in the Talara Basin in
Peru, and all properties and other assets relating thereto;
"Business Day" means any day of the year, other than a Saturday, Sunday
or any day on which banks are required or authorized to be closed in New York,
New York;
"Capital Expenditures" means any and all direct capital expenditures as
determined in accordance with COPAS Guidelines incurred by the Purchaser in
connection with the drilling of Oil and Gas Wells on the Colombian Properties;
"Chicoral Formation" means a geological formation known as "Chicoral"
which has been shown to exist on certain Lands described as "Toqui-Toqui" which
are subject to the Puli Association Contract;
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"Claim" means any claim of any nature whatsoever, including any demand,
liability, obligation, debt, action, cause of action, suit, proceeding,
judgment, award, assessment and reassessment;
"Closing" means the completion of the transaction of purchase and sale
of the Purchased Shares contemplated in this Agreement which shall occur
immediately following the signing of this Agreement;
"Closing Balance Sheet" has the meaning ascribed in Subsection 2.4(d);
"Closing Date" means the date hereof;
"Collective Agreements" means all collective agreements between the
Corporations and the various unions, as listed in Schedule 14;
"Colombian Debenture" means the $3,000,000 principal amount of 5%
subordinated debenture of the Colombian Subsidiary which may be exchanged into
1,000,000 common shares in the capital of the Purchaser;
"Colombian Properties" means those certain areas in Colombia known as
the "ToquiToqui" property and the "Puli" property in which the Colombian
Subsidiary has certain legal and/or equitable interests pursuant to the "Puli
Association Contract", which interests in such areas, together with the Accounts
Receivable of the Colombian Subsidiary, comprise substantially all of the assets
of the Colombian Subsidiary;
"Colombian Subsidiary" means American International Petroleum
Corporation of Colombia, a corporation existing under the laws of Oklahoma, and
includes its Branch;
"Colombian Tax Authority" has the meaning ascribed in Section 2.7;
"Completed" means, with respect to an Oil and Gas Well drilled, a well
which is subsequently perforated and equipped for the purpose of oil and/or
natural gas production;
"Common Shares" means, collectively, the MIP Shares and any common
shares in the capital of the Purchaser issued upon any exchange of all or part
of the Colombian Debenture;
"Consents" means the consents of contracting parties to any material
Contract and of governments or Governmental Entities to the change in control of
either of the Corporations contemplated in this Agreement, and "Consent" means
any one of such Consents;
"Contracts" means all material contracts to which either of the
Corporations are a party including all material contracts, leases of personal
property, licenses, undertakings, engagements or commitments of any nature,
written or oral, to which either of the Corporations is entitled in connection
with its Business, including; (a) material unfilled purchase orders received by
either of the Corporations; (b) material forward commitments by either of the
Corporations for supplies or materials entered into the ordinary course of the
Business; (c) the Contracts listed in Schedule
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6; (d) the Leases listed in Schedule 6; (e) the leases in respect of the Lease
Properties listed in Schedule 8;
"COPAS Guidelines" means the guidelines and accounting procedures of
the Council of Petroleum Accountants Society;
"Corporations" means each of the Colombian Subsidiary and the Peruvian
Subsidiary;
"Corporate Records" means the corporate records of the Corporations,
including (i) all articles or similar constating documents, by-laws, any
unanimous shareholders agreements and any amendments thereto; (ii) all minutes
of meetings and resolutions of shareholders, directors and any committee
thereof; and (iii) the share certificate books, register of shareholders,
register of transfers and register of directors;
"Dealing" means any past or present activity, event or circumstance in
respect of a Hazardous Substance, including using, generating, manufacturing,
refining, treating, transporting, storing, handling, labelling, documenting,
recycling, disposing of, depositing, transferring, producing or processing the
Hazardous Substance;
"Draft Closing Balance Sheet" has the meaning ascribed in Subsection
2.4(a);
"Ecopetrol" means Empresa Colombiana de Petroleos, the Colombian
government national oil company;
"Effective Time" means 12:01 a.m. on the Closing Date (New York time);
"Encumbrances" means any liens, charges, mortgages, pledges, security
interests, claims, defects of title, restrictions and any other rights of third
parties relating to any property, including rights of set-off and voting trusts,
and other encumbrances of any kind;
"Environment" means, air, land and water (including without limitation
navigable waters, waters of the contiguous zone, ocean waters, surface waters,
ground water, drinking water supply, land surface, subsurface strata, ambient
air, both inside and outside of buildings and structures), plant, animal and
human life and all other natural resources;
"Environmental Laws" means all applicable Laws relating to the
protection of the Environment and to health and safety matters;
"Environmental Claims" means all claims, losses, costs, expenses,
fines, penalties, payments and/or damages, including without limitation, all
reasonable solicitor fees on a solicitor and client basis, relating to, arising
out of, resulting from or in any way connected with the Release in, on, over,
upon or from the Lands of any Hazardous Substance, including without limitation,
all costs and expenses of any Remediation Action or restoration of the Lands
and/or any property adjoining or in the vicinity of the Lands required or
mandated by Environmental Law;
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"Environmental Permits" means all permits, certificates, approvals,
registrations and licences issued or issuable by any Governmental Entity
pursuant to any Environmental Law;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and all regulations promulgated thereunder;
"Farm-Out" means, with respect to any licence, association or any other
type of joint venture or operating agreement whatsoever, the effect of selling,
assigning or sub-contracting certain working interests or drilling, completing,
operational and/or production duties, responsibilities or obligations pursuant
to such agreements; and the term "Farming-Out" shall have the corresponding
meaning;
"Financial Statements" means, collectively, the unaudited balance
sheets of each of the Corporations for the fiscal years ending December 31,
1996, and the accompanying statements of income, retained earnings and changes
in financial position of each of the Corporations, together with the same
financial information of each of the Corporations for the fiscal years ending
December 31, 1995 and December 31, 1994, provided on an audited basis in the
case of the Colombian Subsidiary, as reported upon by Price Waterhouse, and on
an unaudited basis in the case of the Peruvian Subsidiary, for the years then
ended and all notes thereto;
"GMP" means Grana Montero Petrolera, a corporation operating in Peru;
"Governmental Entity" means (i) any multinational, federal, provincial,
state, municipal, local or other governmental or public department, court,
commission, board, bureau, agency or instrumentality, domestic or foreign; (ii)
any subdivision, agent, commission, board, or authority of any of the foregoing;
or (iii) any quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any of the
foregoing;
"Government List" means a public list maintained by any Governmental
Entity of sites identified for investigation or clean-up pursuant to any
Environmental Law;
"Hazardous Substance" means any contaminant, pollutant, dangerous
substance, noxious substance, toxic substance, hazardous waste, flammable or
explosive material, radio-active material, urea formaldehyde foam insulation,
asbestos, polychlorinated biphenyls ("PCB's"), crude oil and natural gas,
including any substances or materials resulting from, directly or indirectly, an
oil spill or natural gas fires, and any other substance or material declared,
defined or deemed to be regulated or controlled pursuant to Environmental Law or
other applicable Laws;
"Intercompany Debt" means amounts owing from a Corporation to the
Vendor;
"Interim Balance Sheet Date" means January 31, 1997;
"Interim Period" means the period between the close of business on
January 31, 1997 and the Time of Closing on the Closing Date;
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"Interim Financial Statements" means, collectively, the unaudited
balance sheets of each of the Corporations as at the Interim Balance Sheet Date
and the accompanying statements of income of each of the Corporations for the
one (1) month period then ended;
"Internal Revenue Code" means the U.S. Internal Revenue Code of 1986,
as amended together with the regulations thereunder;
"International GAAP" means at any time, internationally generally
accepted accounting principles and practices as in effect from time to time and
applied consistently throughout the periods involved;
"Intellectual Properties" means all right, title, interest and benefit
of the Corporations in and to any registered or unregistered worldwide trade
marks, trade or brand names, service marks, copyrights, copyright applications,
designs, inventions, patents, patent applications, patent rights (including any
patents issuing on such applications or rights), licences, sub-licences,
franchises, formulas, processes, know-how, technology, computer rights, seismic
data (including any interpretive work) and other intellectual or industrial
property of the Corporations or pertaining to the Business, including the
property listed in Schedule 9;
"Inventories" means all inventories of the Corporations including (i)
all finished goods, work in process, raw materials, new and unused production,
and packing and shipping supplies; (ii) all new and unused maintenance items;
(iii) all other materials and supplies on hand to be used or consumed in the
production of products; and (iv) any oil in storage tanks, chemicals, office
supplies, production related equipment and materials such as structural steel or
other tubing, casing, wellhead and other wellbore and artificial lift equipment,
field processing and transformation related supplies, owned by the Vendor as of
the Closing Date (all such Inventory other than oil in storage tanks as of
January 31, 1997 being set out in Schedule 4);
"Joint Operating Agreement" means the joint operating agreement in
effect as of the date hereof between Petroleros Del Norte and the Colombian
Subsidiary relating to exploration of Petroleum Substances on the Colombian
Properties;
"Lands" means all real property to the extent that the Corporations
have the right to explore, develop or recover Petroleum Substances pursuant to
the Leases;
"Laws" means all statutes, codes, ordinances, decrees, rules,
regulations, municipal by-laws, judicial or arbitral or administrative or
ministerial or departmental or regulatory judgments, orders, decisions, rulings
or awards, policies, voluntary restraints, guidelines, or any provisions of the
foregoing, including general principles of common and civil law and equity,
binding on or affecting the Person referred to in the context in which such word
is used; and "Law" means any one of them;
"Leased Properties" means the real property subject to the office and
vehicle leases and subleases listed in Schedule 8;
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"Leases" means the license agreements, association contracts and joint
operating agreements to which either of the Corporations is a party, as listed
and described in Schedule 6, including, collectively, the Talara License
Contract, the Puli Association Contract, the Joint Operating Agreement, the
Talara Operating Agreement and all other licence agreements, association
contracts, joint operating agreements and other Contracts between any of the
Vendors and the Corporations and any Person or Governmental Entity in Colombia
and Peru and all leases, reservations, permits or other documents of title under
and by virtue of which the holder thereof is entitled to drill for, win, take,
own, store and remove the Petroleum Substances within, upon or under any real
property to the extent provided in such respective leases and subleases;
"Loss" means any loss whatsoever, including expenses, costs, damages,
penalties, fines, charges, claims, demands, liabilities, interest and any and
all reasonable legal fees and disbursements;
"Maximum Tax Pool Payment" has the meaning ascribed in Section 2.7;
"MG" means MG Trade Finance Corp.;
"MIP Shares" has the meaning ascribed in Subsection 2.2(a)(iv);
"Net Operating Income" means, with respect to certain business
operations, the gross revenue of the Purchaser, after deduction by the Purchaser
of any and all applicable royalties, taxes (including remittance taxes) and
other amounts payable to any Governmental Entity and any and all applicable bona
fide transportation, direct lifting and other direct costs and expenses of the
Corporations incurred in connection with the production of oil and/or natural
gas, all as determined in accordance with COPAS Guidelines;
"Notice" means any claim, citation, directive, request for information,
statement of claim, notice of investigation, letter or other written
communication from any Person;
"Oil and Gas Wells" means any and all wells drilled, or caused to be
drilled, by the Purchaser on the properties described as "Toqui-Toqui" and
"Puli" on the Colombian Properties for the purpose of finding and producing
Petroleum Substances; and "Oil and Gas Well" shall have a corresponding meaning;
"Override" means, with respect to the right of Carbopetrol S.A. to
certain production payments from the Chicoral Formation, the entitlement of
Carbopetrol S.A. to receive, at any given time, a certain percentage of the
Colombian Subsidiaries' revenue interest in the Chicoral Formation after
deduction of any applicable royalty payments;
"Owned Properties" means, collectively, the land and premises listed on
Schedule 3 and the Buildings and Fixtures thereon;
"Panama Loan" has the meaning ascribed in Subsection 2.2(a)(ii);
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"Parties" means the Vendor, the Purchaser, each of the Corporations and
their respective permitted successors and any other Person who may become a
party to this Agreement; and "Party" means any one of them;
"Pension Plans" means all the pension plans relating to the employees
of the Corporations;
"Performance Earn-Out" has the meaning ascribed in Subsection 2.6(a);
"Performance Earn-Out Balance" has the meaning ascribed in Subsection
2.6(a);
"Permitted Encumbrances" means (i) Encumbrances for taxes, assessments
or governmental charges or levies on property not yet due and delinquent; (ii)
easements, encroachments and other minor imperfections of title which do not,
individually or in the aggregate, detract from the value of or impair the use or
marketability of any real property; and (iii) Encumbrances disclosed in Schedule
16;
"Person" means an individual, partnership, corporation, trust,
unincorporated association, joint venture or other entity or Governmental
Entity, and pronouns have a similarly extended meaning;
"Perupetro" means Perupetro S.A., the oil and gas regulatory body of
the Peruvian government;
"Peruvian Property" means that certain area in Peru known as "Block IV"
in which the Peruvian Subsidiary has certain legal and/or equitable interests
pursuant to the Talara License Contract, which interests in such area, together
with the Accounts Receivable of the Peruvian Subsidiary, comprise substantially
all of the net assets of the Peruvian Subsidiary;
"Peruvian Subsidiary" means Pan American International Petroleum
Corporation, a corporation existing under the laws of Nevada and includes its
Branch;
"Petroleum Substances" means liquid or gas hydrocarbons produced by oil
and gas wells;
"Petroleros Del Norte" means Petroleros Del Norte, a corporation
operating in Colombia;
"Pre-Transfer Legal Requirements" means any and all requirements under
or prescribed by Environmental Laws in effect on the Closing Date;
"Puli Association Contract" means the association contract or contracts
between the Colombian Subsidiary and Ecopetrol in which the Colombian Subsidiary
obtained working interest in the area of the Middle Magdalena Valley Region of
Colombia and pursuant to which the Colombian Subsidiary currently acts as the
operator of such association contract or contracts in Colombia;
"Purchase Price" has the meaning ascribed in Section 2.2;
"Purchased Shares" has the meaning ascribed in Section 2.1;
<PAGE>
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"Purchaser" means Mercantile International Petroleum Inc., a
corporation existing under the laws of the Cayman Islands;
"Release" means any release, spill, emission, leakage, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration;
"Remedial Action" means a program of remedial measures or actions,
satisfactory to the applicable authorized Governmental Entity, including but not
limited to the removal, disposal and treatment of any Hazardous Substance
located, on, upon, under, above, at or in the vicinity of the Lands and/or
Leased Properties in accordance with Environmental Law and the commissioning and
conduct of any studies, investigations, audits, assessments, monitoring and
screening of the Lands and/or Leased Properties following such removal, disposal
and treatment;
"Rio Bravo" means Compania Petrolera Rio Bravo S.A., a corporation
operating in Peru;
"Talara Operating Agreement" means the operating agreement between Rio
Bravo and the Peruvian Subsidiary related to the exploitation of Petroleum
Substances on the Peruvian Property;
"Talara License Contract" means the license agreement for the
exploitation of Petroleum Substances in Block IV, approved by Supreme Decree No.
16-95-EM and entered into by and between Perupetro, Rio Bravo and the Peruvian
Subsidiary signed on August 18, 1995 in connection with the Peruvian Property;
"Tax" means any tax (including any income tax, capital gains tax, value
added tax, sales tax, property tax, gift tax or estate tax), levy, assessment,
tariff, duty (including any customs duty), deficiency or other fee, related
charge or amount (including any fine, penalty, interest, or addition to tax),
imposed, assessed or collected by or under the authority of any Government
Entity or payable pursuant to any tax-sharing agreement or any other Contract
relating to the sharing or payment of any such tax, levy, assessment, tariff,
duty, deficiency or fee; and "Taxes" shall have a corresponding meaning;
"Tax Pools" means, with respect to the Branch of the Colombian
Subsidiary, expenditures and deductions which were available (as adjusted in
accordance with Colombian Tax Law for any increase or decrease through December
31, 1996 resulting from inflation or deflation) to the Colombian Subsidiary as
of December 31, 1996 and which can be utilized to offset future income on which
Colombian income tax would otherwise be payable;
"Tax Pool Amount" means the amount of the Tax Pools available as of
December 31, 1996, as audited and certified by Price Waterhouse following
Closing, acting reasonably;
"Tax Pool Balance" means the balance of the Tax Pool Amount after
deduction of any amount used to offset income tax in Colombia;
"Tax Pool Payment" has the meaning ascribed in Section 2.7;
"Tax Return" means, any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required
<PAGE>
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to be filed with or submitted to, any Governmental Entity in connection with the
determination, assessment, collection, or payment of any Tax or in connection
with the administration, implementation, or enforcement of or compliance with
any applicable Law relating to any Tax;
"Time of Closing" means 5:00 p.m. (New York time) on the Closing Date
or such later time as the Closing may occur;
"Threatened" means, a claim, proceeding, dispute, action, or other
matter which is not pending but where a demand or statement has been made in
writing or any notice has been given in writing, or if any other event has
occurred or any other circumstances exist, that would lead a prudent Person to
conclude that such a claim, proceeding, dispute, action, or other matter is
likely to be asserted, commenced, taken, or otherwise pursued in the future;
"Trustee" means Mellon Bank F.S.B., successor to Society National Bank,
the existing trustee of the AIPC Debentures, or such other successor trustee
appointed from time to time pursuant to the Trust Indenture dated January 20,
1993 between the Vendor and Society National Bank;
"U.S. GAAP" means at any time, United States generally accepted
accounting principles and practices as in effect from time to time and applied
consistently throughout the periods involved; and
"Vendor" means American International Petroleum Corporation, a
corporation existing under the laws of Nevada.
1.2 Gender and Number. Any reference in this Agreement to gender shall include
all genders, and words importing the singular number only shall include the
plural and vice versa.
1.3 Headings, Etc. The provision of a Table of Contents, the division of this
Agreement into Articles, Sections, Subsections and other subdivisions and the
insertion of headings are for convenience of reference only and shall not affect
or be utilized in the construction or interpretation of this Agreement.
1.4 Currency. All references in this Agreement or any Ancillary Agreement to
dollars, unless otherwise specifically indicated, are expressed in United States
currency.
1.5 Severability. Any Article, Section, Subsection or other subdivision of this
Agreement or any Ancillary Agreement or any other provision of this Agreement or
any Ancillary Agreement which is, or becomes, illegal, invalid or unenforceable
shall be severed from this Agreement and any Ancillary Agreement and be
ineffective to the extent of such illegality, invalidity or unenforceability and
shall not affect or impair the remaining provisions hereof or thereof.
1.6 Entire Agreement. This Agreement together with the Ancillary Agreements
constitutes the entire agreement between the Parties pertaining to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the Parties. There are no
representations, warranties, conditions or other agreements, express or implied,
statutory or otherwise, between the Parties in connection with the subject
matter of this
<PAGE>
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Agreement, except as specifically set forth herein and therein. If there is any
conflict between the provisions of this Agreement and the provisions of any
Ancillary Agreement, the provisions of this Agreement shall govern.
1.7 Amendments. This Agreement and any Ancillary Agreement may only be amended,
modified or supplemented by a written agreement signed by all of the parties to
such agreement.
1.8 Waiver. No waiver of any of the provisions of this Agreement or any
Ancillary Agreement shall be deemed to constitute a waiver of any other
provision (whether or not similar), nor shall such waiver constitute a waiver or
continuing waiver unless otherwise expressly provided in writing duly executed
by the Party to be bound thereby.
1.9 Governing Law. This Agreement and all Ancillary Agreements shall be governed
by and interpreted and enforced in accordance with the laws of the Province of
Ontario and the federal laws of Canada applicable therein which apply to
contracts made and to be performed entirely in Ontario.
1.10 Inclusion. Where the word "including" or "includes" is used in this
Agreement it means "including (or includes) without limitation".
1.11 Accounting Terms. All accounting terms not specifically defined in this
Agreement shall be construed in accordance with U.S. GAAP, unless otherwise
specified herein.
1.12 Knowledge. A Party will be deemed to have "knowledge" of a particular fact
or other matter if, as at the Closing Date:
(a) an executive officer of the respective Party, other than Dr.
Enrique Davila de Heridia, is actually aware of such fact or
other matter; or
(b) such individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of
discussions in contemplation of this transaction with their
respective Party's lawyers, accountants, environmental
consultants, and with respect to the Vendor and the
Corporations, Ecopetrol and the Ministry of Energy and Mines
in Peru.
1.13 Incorporation of Schedules. The following are the schedules attached to and
incorporated in this Agreement:
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Financial Schedules
Schedule 1 - Financial Statements/Interim Financial Statements
Schedule 2 - Inventory Policies, Practices and Procedures
Asset Schedules
Schedule 3 - Owned Properties
Schedule 4 - Machinery, Equipment and Inventories
Schedule 5 - Motor Vehicles
Schedule 6 - Contracts, Leases and Notices of Default
Schedule 7 - Intentionally Omitted
Schedule 8 - Leased Properties
Schedule 9 - Intellectual Properties
Disclosure Schedules
Schedule 10 - Jurisdictions in which Business Carried On
Schedule 11 - Bank Accounts
Schedule 12 - Environmental Disclosure (including Abandoned and
Plugged Oil and Gas Wells)
Schedule 13 - Authorizations and Consents
Schedule 14 - Collective Agreements
Schedule 15 - Insurance Policies
Schedule 16 - Encumbrances
Schedule 17 - Pension Plans and Benefit Plans, Employee Matters and
Designated Employees
Schedule 18 - Intentionally Omitted
Schedule 19 - Litigation
Schedule 20 - Interests of Ecopetrol and Petroleros Del Norte
Schedules of Forms and Other Matters
Schedule 21 - Intentionally Omitted
Schedule 22 - Form of Acknowledgement
Schedule 23 - Form of Legend
1
ARTICLE 2
PURCHASED SHARES AND PURCHASE PRICE
2.1 Purchase and Sale. Subject to the terms and conditions hereof, the Vendor
agrees to sell, assign and transfer to the Purchaser and the Purchaser agrees to
purchase from the Vendor at the Time of Closing on the Closing Date, all (but
not less than all) of the issued and outstanding shares of common stock in the
capital of each of the Corporations (collectively, the "Purchased Shares").
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2.2 Purchase Price. The total aggregate purchase price (the "Purchase Price")
payable by the Purchaser to the Vendor for the Purchased Shares shall be the sum
of (a), (b) and (c) below, subject to adjustment, deduction or set-off in
accordance with this Article 2 or as otherwise specifically provided herein
shall be paid as follows:
(a) (i) the Purchaser shall pay and deliver by wire transfer of
immediately available funds to the order of the Vendor the sum
of $1,266,000;
(ii) the Purchaser shall pay and deliver by wire transfer of
immediately available funds to the order of Banco De Occidente
Panama on behalf of the Vendor the sum of $100,000 for the
payment in full and final satisfaction of the loan (the
"Panama Loan") between the Vendor and Banco De Occidente
Panama;
(iii) the Purchaser shall pay and deliver by wire transfer of
immediately available funds to the Trustee on behalf of the
Vendor the sum of $361,620 to be allocated as to $337,500 to
the payment in full and final satisfaction of the unpaid
principal amount of the AIPC Debentures and $24,120 to be
allocated to accrued interest, the optional redemption premium
and the Trustee's fees. Simultaneously with the Closing, the
Vendor will acquire the AIPC Debentures held by MG as set out
in (iv) below;
(iv) the Vendor shall direct that $2,000,000 of the Purchase Price
be paid to MG to acquire the AIPC Debentures in the principal
amount of $2,000,000; Purchaser shall borrow from MG the sum
of $2,000,000 and direct that the proceeds of said loan be
paid to the Vendor and the Vendor shall direct that such
payment be applied in full payment for the purchase of the
AIPC Debentures held by MG and upon such acquisition, the AIPC
Debentures shall be deemed cancelled;
(v) the Purchaser shall authorize, create, issue and deliver to
the Vendor 4,384,375 common shares (the "MIP Shares") in the
capital of the Purchaser;
(vi) the Purchaser shall pay and deliver, if, as and when any such
amount shall be due and payable, by bank draft or certified
cheque to or to the order of the Vendor an additional amount
of up to a total aggregate maximum sum of $1,365,000 pursuant
to Section 2.6; and
(vii) the payment of any additional amounts by the Colombian
Subsidiary, if, as and when any such amounts shall become due
and payable, in immediately available funds of up to a maximum
sum of $2,500,000 pursuant to Section 2.7;
(b) as part of the Purchase Price, the Parties acknowledge payment by the
Purchaser to the Vendor in connection with the execution of the
Agreement in Principle the sum of $210,000; and
<PAGE>
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(c) the Purchaser shall guarantee the payment of the Colombian Debenture,
together with any amounts payable under Subsection 2.2(a)(vii) above,
pursuant to the continuing corporate guaranty dated even date herewith;
the Colombian Subsidiary shall issue and deliver the Colombian
Debenture simultaneously with Closing.
2.3 Calculation of Purchase Price. The Parties acknowledge that the
Purchase Price for the Purchased Shares of up to $20,205,370, which,
because of the contingent nature of certain elements of the purchase
price and the valuation of the MIP Shares, does not reflect fair market
value as at Closing, was determined as follows:
(i) the prepayment of the sum of $210,000, which sum was delivered
to the Vendor prior to Closing;
(ii) the payment to the Vendor of the sum of $1,534,750 which
amount reflects a downward adjustment of the cash portion of
the Purchase Price payable at Closing by $134,000 to reflect
an increase in Subsection 2.3(viii) below of net deficit
working capital to $634,000 from $500,000 to the Vendor;
(iii) the payment to the Trustee on behalf of the Vendor of the sum
of $192,870 to be allocated to the payment of a portion of the
redemption amount of the outstanding AIPC Debentures (except
the AIPC Debenture held by MG), together with the delivery of
an additional 84,375 MIP Shares to the Vendor in return for
the Vendor paying the Trustee the remaining redemption amount
of $168,750 of principal amount of the outstanding AIPC
Debentures, and the payment by the Purchaser to the Vendor of
the sum of $2,000,000 borrowed from MG pursuant to a
promissory note issued by the Purchaser to MG to acquire and
cancel the AIPC Debenture of MG, all having an aggregate
allocation value of $2,361,620;
(iv) by the issuance and delivery of 4,300,000 MIP Shares,
allocated an aggregate value of $8,600,000;
(v) the issuance and delivery by the Colombian Subsidiary of
$3,000,000 principal amount of the Colombian Debenture;
(vi) the payment of the sum of up to an aggregate of $1,365,000,
pursuant to Performance Earn-Out;
(vii) the payment of the sum of up to an aggregate of $2,500,000 as
any additional amounts pursuant to the Tax Pools; and
(viii) upon the acquisition of the Corporations, such Corporations
having net deficit working capital of $634,000.
<PAGE>
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2.4 Closing Balance Sheet and Adjusted Working Capital
(a)
Within ninety (90) days following the Closing Date (or such other date
as is mutually agreed to by the Vendor and the Purchaser in writing),
the Purchaser will, at its direction and expense, prepare and deliver
to the Vendor a draft audited closing balance sheet (the "Draft Closing
Balance Sheet") of the Corporations prepared as at the Effective Time
on the Closing Date, together with a draft auditor's report. The Draft
Closing Balance Sheet with respect to (x) the Colombian Subsidiary will
be prepared on an audited basis in accordance with U.S. GAAP applied on
a basis consistent with the preparation of the audited Financial
Statements, except that (i) any exceptions from U.S. GAAP set forth in
Schedule 1 will be adhered to, and (ii) the Inventories will be valued
in accordance with U.S. GAAP only to the extent that U.S. GAAP is
consistent with the inventory policies, practices and procedures of the
Colombian Subsidiary, which inventory policies, practices and
procedures are referred to in Schedule 2 and which are hereby
incorporated by reference into Schedule 2; and (y) the Peruvian
Subsidiary will be prepared on an unaudited basis in a manner
consistent with prior practice which prior practice, as a result of the
Rio Bravo dispute, requires the omission of earned but unpaid revenues
and accrued but unpaid expenses related to the oil and gas production
with respect to the Peruvian Property as well as the omission of the
booking of any contingent results of the Rio Bravo dispute. The
Purchaser shall provide access, upon every reasonable request, to the
Vendor and its auditors to all work papers of the Purchaser's auditors,
accounting books and records relating to the Business and the
appropriate personnel to verify the accuracy, presentation and other
matters relating to the preparation of the Draft Closing Balance Sheet
and the Vendor and the Purchaser shall otherwise fully cooperate with
each other in the preparation of the Draft Closing Balance Sheet. The
Vendor and the Purchaser shall each bear the fees and expenses of their
respective auditors in preparing or reviewing the Draft Closing Balance
Sheet and the Closing Balance Sheet.
(b) The Draft Closing Balance Sheet prepared and delivered as aforesaid
shall be final and binding upon the Parties for all purposes hereof,
absent manifest error, unless the Vendor notifies the Purchaser in
writing that it disputes the Draft Closing Balance Sheet within fifteen
(15) Business Days after receipt by the Vendor of the Draft Closing
Balance Sheet.
(c) In the event that the Vendor disputes the Draft Closing Balance Sheet
or the amount of the Tax Pool Amount, the Parties will work
expeditiously and in good faith in an attempt to resolve such disputes
within a further period of twenty (20) Business Days after the date of
notification by the Vendor to the Purchaser of such disputes, failing
which such disputes shall be submitted for determination to an
independent national firm of accountants mutually agreed to by the
Vendor and the Purchaser (and, failing such agreement between the
Vendor and the Purchaser within a further period of fifteen (15)
Business Days, such independent national firm of accountants shall be
Arthur Andersen, or if such firm refuses to act because of a
professional conflict or otherwise, Coopers & Lybrand). The
determination of such third firm of chartered accountants shall be
final and binding upon the Parties and not subject to appeal, absent
manifest error. The third firm of chartered accountants shall be deemed
to be acting as experts and not as arbitrators. The costs and expenses
of such third firm of chartered accountants shall be borne equally by
the Vendor and the Purchaser. The Vendor and the Purchaser shall each
<PAGE>
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bear their own costs in presenting their cases to such third firm of
chartered accountants. The accountants will accept as accurate the
Financial Statements.
(d) Immediately following the fifteen (15) Business Day period referred to
in Subsection 2.4(b) or the resolution of any dispute in accordance
with the foregoing, as the case may be, the Purchaser shall forthwith
deliver to the Vendor the final Closing Balance Sheet (the "Closing
Balance Sheet") together with the auditor's report thereon. Such
Closing Balance Sheet shall be final and binding upon the Parties,
absent manifest error.
(e) In the event the Adjustment Amount (as defined below) is positive, then
such corresponding amount shall, upon receipt of the Closing Balance
Sheet, be forthwith applied as an increase to the Performance Earn-Out
(and consequent adjustment to the Performance Earn-Out Balance)
pursuant to Section 2.6. In the event the Adjustment Amount is
negative, then such amount shall, upon receipt of the Closing Balance
Sheet, be forthwith applied as a reduction to the Performance Earn-Out
(and consequent adjustment to the Performance Earn-Out Balance)
pursuant to Section 2.6. Any such adjustment shall be made as of the
Closing Date. For the purposes hereof, "Adjustment Amount" means the
amount, whether positive or negative, by which the Adjusted Working
Capital as determined from the Closing Balance Sheet exceeds $634,000.
(f) If the liabilities (excluding deferred taxes and the Colombian
Debenture) of the Corporations shown on the Closing Balance Sheet
exceed $2,600,000, the amount of any such excess shall be paid by the
Vendor to the Purchaser at its address for notice set out herein 30
days after the delivery to the Vendor of the final Closing Balance
Sheet.
(g) For purposes of computing Adjusted Working Capital, notwithstanding
anything contained herein to the contrary, expenses attributable to the
Environmental Claims set forth on Schedule 12 hereof shall not be
booked as a liability and the government mandated Pension Plan
contingent liability set forth in Schedule 17 shall be booked as a
liability in the amount of $40,000.
2.5 Payment of Taxes and Registration Charges on Transfer. The Purchaser shall
be liable for and shall pay all taxes, duties, registration charges (including
the fees of the Trustee, fees of legal counsel to MG and The Toronto Stock
Exchange listing fees) or other like charges properly payable by a buyer upon
and in connection with the conveyance and transfer of the Purchased Shares by
the Vendor to the Purchaser hereunder.
2.6 Performance Earn-Out Payment.
(a) As additional consideration for the Purchased Shares, the Purchaser
shall grant, or cause to be granted, to the Vendor the right to receive
fifty percent (50%) of the Net Operating Income from an Oil and Gas
Well, after the recovery by the Purchaser of one hundred percent (100%)
of the Capital Expenditures relating thereto, up to a total aggregate
maximum to be received by the Vendor of $1,365,000 (the "Performance
Earn-Out"), plus interest, earned from all Oil and Gas Wells. Interest
on any unpaid amount of the Performance Earn-Out (the "Performance
Earn-Out Balance") shall accrue to increase the Performance Earn-Out
Balance at the rate of eight percent (8%) per annum (compounded
<PAGE>
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annually) commencing from the Closing Date. The Purchaser shall provide
the Vendor with quarterly "payout statements" (as such term is used in
the oil and gas industry) until total recovery of Capital Expenditures
has occurred. After total recovery of the Capital Expenditure in
respect of an Oil and Gas Well, the Purchaser shall provide the Vendor
with monthly reports of its Net Operating Income in respect of such Oil
and Gas Wells within 30 days of the end of such month and pay to the
Vendor any amounts due to the Vendor pursuant to the Performance
Earn-Out within 30 days after the end of each calendar quarter. The
Purchaser shall also provide annual statements to the Vendor setting
out the Performance Earn-Out Balance at each calendar year-end, and
upon the commencement of any Performance Earn-Out payment, additional
statements will be provided with each such Performance Earn-Out
payment.
(b) In the event that (i) the Purchaser has not Completed drilling on at
least ten (10) Oil and Gas Wells on the Colombian Properties by the
second anniversary date of the Closing; and (ii) the Performance
Earn-Out Balance has not been paid in full by the third anniversary
date of the Closing, then the Vendor may elect to receive on the third
anniversary date of the Closing the Performance Earn-Out Balance in
three (3) equal annual instalment payments, plus interest on the unpaid
balance at 8%, commencing on the third anniversary date of the Closing
with the final payment occurring on the fifth anniversary date of the
Closing. Such election must be made not more than sixty (60) days and
not less than thirty (30) days prior to the third anniversary date.
(c) (i) In the event that the Purchaser sells, directly or
indirectly, all of its interest (other than to an Affiliate)
in the Colombian Properties at any time after Closing, then
the Performance Earn-Out Balance shall become immediately due
and payable by the Purchaser on the closing of such purchase
and sale transaction.
(ii) In the event that the Purchaser sells, directly or indirectly,
less than all of its interest (other than to an Affiliate) in
the Colombian Properties at any time after Closing, then a
corresponding equivalent percentage of the Performance
Earn-Out Balance to such sold interest shall become
immediately due and payable by the Purchaser on the closing of
such purchase and sale transaction and the Performance
Earn-Out Balance shall be reduced accordingly.
(iii) In the event that the Colombian Subsidiary Farms-Out any
percentage of its interest in the Colombian Properties
following closing, then a corresponding equivalent percentage
of the Performance Earn-Out Balance to such Farmed-Out
interest shall become immediately due and payable by the
Purchaser on the closing of such Farming-Out transaction and
the Performance Earn-Out Balance shall be reduced accordingly.
(d) The Performance Earn-Out Balance is subject to adjustment, deduction
and/or set-off as provided in Subsections 2.4(e), 2.6(c), 6.7, 6.9 and
7.8 or as otherwise specifically provided herein.
2.7 Tax Pools. The Colombian Subsidiary (but not the Branch of the
Colombian Subsidiary) shall pay the Vendor twenty-five percent (25%) (a
"Tax Pool Payment") of any amount
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otherwise payable by the Colombian Subsidiary to the appropriate
Colombian Governmental Entity responsible for tax matters (the
"Colombian Tax Authority") but for the utilization by the Colombian
Subsidiary of any portion of the Tax Pools Balance. Any Tax Pool
Payment to which the Vendor is entitled to herein shall be paid to the
Vendor within sixty (60) days of the date such amounts would otherwise
have been payable to the Colombian Tax Authority. The aggregate of all
Tax Pool Payments (and deemed Tax Pool Payments pursuant to Section
6.7) to the Vendor shall not exceed a maximum amount (the "Maximum Tax
Pool Payment"). The Maximum Tax Pool Payment shall be $2,500,000 if the
Tax Pool Amount is equal to or greater than the sum of $50,000,000 on
December 31, 1996. The Maximum Tax Pool Payment shall be zero if the
Tax Pool Amount is equal to or less than the sum of $20,000,000. The
Maximum Tax Pool Payment will be pro-rated downwards if the Tax Pool
Amount is less than $50,000,000. For example, if the Tax Pool Amount is
equal to $30,000,000, then the Maximum Tax Pool Payment shall be
$833,000; if the Tax Pool Amount is equal to $40,000,000, the Maximum
Tax Pool Payment is equal to $1,666,000. The Tax Pool Amount shall be
calculated in U.S. dollars using the exchange rate available for the
purchase of U.S. dollars using Colombian pesos on the Closing Date, for
the purpose of calculating the Maximum Tax Pool Payment. The Tax Pool
Balance at the end of a calendar year will be adjusted to reflect both
any inflationary adjustment under the rules of the Colombian Tax
Authority and any change in the exchange rate between the US$ and the
Colombian peso (or any successory currency) from the beginning of such
year to the last day of such year, provided however that such
adjustment shall in no event increase the Maximum Tax Pool Payment
computed as at Closing. All annual payments to be made to the Vendor in
respect thereof shall be made in U.S. dollars using the exchange rate
available for the purchase of U.S. dollars using Colombian pesos on the
date such payment would otherwise have been payable to the Colombian
Taxing Authority. In the event that the Purchaser sells more than fifty
percent (50%) of the shares in the common stock of the Colombian
Subsidiary, the Purchaser shall pay to the Vendor an amount equal to
50% of the difference between the Maximum Tax Pool Payment and the
aggregate of all Tax Pool Payments made prior thereto and require that
the subsequent purchaser assume the Purchaser's obligations under its
Continuing Corporate Guaranty for the remainder of the Maximum Tax Pool
Payment (and the Purchaser shall be relieved of its obligations in
respect thereof pursuant to such guarantee at such time.)
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE VENDOR
3.1 Representations and Warranties of the Vendor. The Vendor represents and
warrants as follows to the Purchaser and acknowledges and confirms that the
Purchaser is relying upon such representations and warranties in connection with
the purchase by the Purchaser of the Purchased Shares:
CORPORATE MATTERS RELATING TO THE VENDOR AND THE CORPORATIONS
<PAGE>
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(a) Due Incorporation and Existence of the Corporations and the Branches.
The Colombian Subsidiary is a corporation incorporated, existing and in
good standing under the laws of Oklahoma and its Branch in Colombia is
in good standing under the laws of Colombia. The Peruvian Subsidiary is
a corporation incorporated, existing and in good standing under the
laws of Nevada and its Branch in Peru is in good standing under the
laws of Peru.
(b) Due Incorporation and Existence of the Vendor. The Vendor is a
corporation incorporated, existing and in good standing under the laws
of Nevada.
(c) Corporate Power. Each of the Corporations has the corporate power to
own its property and to carry on its Business as now being conducted by
it.
(d) Qualification To Carry on Business. The Corporations and their
respective Branches are duly qualified, licensed or registered to carry
on business in the jurisdictions or applicable contract areas, as the
case may be, listed in Schedule 10. The jurisdictions listed in
Schedule 10 include all jurisdictions in which the nature of the Assets
or the Business makes such qualification necessary or where failure to
be so qualified would have a material adverse effect on the affairs,
assets, liabilities, business or prospects, operations or conditions of
any of the Corporations or the Business, financial or otherwise, or
where any of the Corporations own or lease any material properties or
assets or conduct any material business.
(e) Authorized and Issued Capital of the Colombian Subsidiary. The
authorized capital of the Colombian Subsidiary consists of 5000 shares
divided into one class of common stock, U.S. $1.00 par value, of which,
at the date hereof and at the Time of Closing, 500 shares of common
stock (and no more) and have been and shall have been duly issued and
are outstanding as fully paid and non-assessable.
(f) Authorized and Issued Capital of the Peruvian Subsidiary. The
authorized capital of the Peruvian Subsidiary consists of 200 shares,
all of which are of a par value of $0.01, and all such shares are of
one class and are designated as common stock, of which, at the date
hereof and at the Time of Closing, 200 shares of common stock (and no
more) have been and shall have been duly issued and are outstanding as
fully paid and non-assessable.
(g) Branch Capital. Each Branch has sufficient capital either assigned or
available for designation from the "Home Office Intercompany Account"
to comply with the requirement of any Governmental Entity having
jurisdiction over such Branch which specifies minimum capital
requirements.
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(h) Options, etc. Except for the Purchaser's rights hereunder and the
rights of the holders of the AIPC Debentures to the shares in the
common stock of the Colombian Subsidiary under a certain pledge and
security agreement, no Person has any option, warrant, right, call,
commitment, conversion right, right of exchange or other agreement or
any right or privilege (whether by law, pre-emptive or contractual)
capable of becoming an option, warrant, right, call, commitment,
conversion right, right of exchange or other agreement (i) for the
purchase from the Vendor of any of the Purchased Shares; or (ii) for
the purchase, subscription, allotment or issuance of any of the
unissued shares in the capital of the Corporations or of any securities
of the Corporations. The Vendor agrees to cause any creditor to whom
the Vendor transfers any Common Shares pursuant to any pledge or other
grant of security interest, including MG to execute an acknowledgment,
substantially in the form of the unexecuted acknowledgment in Schedule
22, to ensure that the terms and conditions of resale of the Common
Shares shall be, in aggregate, the same as those under which the Vendor
is bound.
(i) Title to Purchased Shares. The Purchased Shares are owned by the Vendor
as the registered and beneficial owner thereof with good title thereto,
free and clear of all Encumbrances, other than with respect to the
security interest in favour of the Trustee which is being released
simultaneously with the execution hereof. The Vendor has the right,
power and authority to enter into this Agreement and to sell such
Purchased Shares as contemplated herein. The delivery of the Purchased
Shares to the Purchaser pursuant to the provisions hereof will transfer
to the Purchaser valid title thereto, free and clear of all
Encumbrances, except for any Permitted Encumbrance.
(j) Dividends and Distributions. Except as specifically provided for in
this Agreement, since the date of the Financial Statements, neither of
the Corporations have, directly or indirectly, declared or paid any
dividends or declared or made any other distribution on any of its
shares of any class and has not, directly or indirectly, redeemed,
purchased or otherwise acquired any of its shares of any class or
agreed to do so as contemplated hereunder. The Vendor and the
Corporations have agreed to contribute to the capital of the
Corporations all Intercompany Debt other than the $3,000,000 which will
remain outstanding as the Colombian Debenture.
(k) Corporate Records. Each of the Corporations, with respect to all
material corporate proceedings and actions, is in compliance with all
applicable Laws and with the articles and by-laws of the Corporations,
and without limiting the generality of the foregoing, (i) the minute
books contain complete and accurate minutes of all meetings of the
directors and shareholders of the Corporations held since the
incorporation of each of the Corporations on duly authorized activities
having a material effect on the Business, and all such meetings were
duly called and held or to the extent not reflected in such minutes, in
the minutes executed by the Vendor as sole shareholder of the
Corporation on the date hereof confirming all actions previously taken;
(ii) the share certificate books, register of shareholders and register
of transfers of each of the Corporations are complete and accurate, and
all such transfers have been duly completed and approved and any
exigible tax payable in connection with the transfer of any securities
of the Corporations has been duly paid; and (iii) the registers of
directors and officers are complete and accurate and
<PAGE>
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all former and present directors and officers of each of the
Corporations were duly elected or appointed, as the case may be.
(l) Validity of Agreement. Each of the Vendor and the Corporations has all
necessary corporate power to enter into and perform its obligations
under this Agreement and the Ancillary Agreements to which it is a
party. Assuming the Authorizations and Consents set forth in Schedule
13 have been obtained, the execution, and delivery and performance by
the Vendor and the Corporations, as the case may be, of this Agreement
and the Ancillary Agreements to which each of the Vendor and the
Corporations is a party and the consummation of the transactions
contemplated thereby:
(i) have been duly authorized by all necessary corporate action on
the part of each of the Vendor and the Corporations; and
(ii) do not (or would not with the giving of notice or the lapse of
time) result in a violation or a breach of, or a default under
or give rise to a right of termination, amendment or
cancellation or the acceleration of any obligation under (A)
any charter or by-law instruments of either of the Vendor or
the Corporations; (B) any contracts or instruments to which
either of the Vendor or the Corporations is a party or by
which either of the Corporations or the Vendor is bound, the
breach of which would materially adversely affect either of
the Corporations; or (C) of any Laws applicable to it.
This Agreement and any Ancillary Agreement to which the Corporations or
the Vendor is a party constitute legal, valid and binding obligations
of each of the Corporations and the Vendor, as the case may be,
enforceable against them in accordance with their respective terms.
(m) Restrictive Documents. Neither the Corporations nor the Vendor is
subject to, or a party to, any charter or by-law restriction, any Law,
any Claim, any contract or instrument, any Encumbrance or any other
restriction of any kind or character which would prevent the
consummation of the transactions contemplated by this Agreement or
compliance by either of the Corporations or the Vendor with the terms,
conditions and provisions hereof or to the knowledge of the Vendor the
continued operation of the Business by the Corporations after the date
hereof or the Closing Date on substantially the same basis as
heretofore operated or which would restrict the ability of the
Purchaser to acquire any of the Purchased Shares or (except for the
dispute with Rio Bravo) to conduct the Business in any area.
GENERAL MATTERS RELATING TO THE BUSINESS
(n) Conduct of Business in Ordinary Course. Provided sufficient capital is
provided by the Purchaser, the Assets include all rights and property
necessary to the conduct of the Business by the Corporations
immediately following the Closing substantially in the manner presently
carried on by it. The Corporations have not committed to acquire any
machinery, equipment or inventory for which a Corporation would be
liable to pay in excess of $25,000 and for which the Corporation has
not received an account, invoice or
<PAGE>
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other document evidencing such liability which is not reflected on the
books and records of such Corporation. Since the Interim Balance Sheet
Date, the Business has been carried on in the ordinary course and each
of the Corporations has not:
(i) incurred any liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise) other than in the
ordinary course of business, which individually or in the
aggregate exceeds $25,000;
(ii) sold, transferred or otherwise disposed of any of the Assets
except for the sale of Inventories in the ordinary course of
the Business;
(iii) made any capital expenditure or commitment therefor which
individually or in the aggregate exceeds $25,000;
(iv) made any bonus or profit sharing distribution or payment of
any kind in excess of $25,000;
(v) increased its indebtedness for borrowed money, except current
borrowings from banks in the ordinary course of its Business,
or made any loan to any Person in excess of $25,000;
(vi) written off as uncollectible any notes or Accounts Receivable,
except write-offs in the ordinary course of the Business
charged to applicable reserves, none of which individually or
in the aggregate is material to the Corporations or is in
excess of $25,000;
(vii) cancelled or waived any material claims or rights;
(viii) except as specifically disclosed in Subsection 2(4)(g) above,
made any change in any method of accounting or auditing
practice;
(ix) amended its articles or by-laws; or
(x) agreed, whether or not in writing, to do any of the foregoing.
(o) No Material Adverse Change. Since the Interim Balance Sheet
Date, there has been no change in the affairs, assets,
liabilities, business, prospects, operations or conditions of
the Corporations or the Business, financial or otherwise,
whether arising as a result of any legislative or regulatory
change, revocation of any licence or right to do business,
fire, explosion, accident, casualty, labour trouble, flood,
drought, riot, storm, condemnation, act of God, public force
or otherwise, which has materially adversely affected or which
will, to the knowledge of the Vendor, materially adversely
affect the Corporations or the Business, except for general
economic conditions affecting Colombia or Peru or the oil and
gas industry.
<PAGE>
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(p) Compliance with Laws. Each of the Corporations and its Branches is
conducting its Business in compliance with all applicable Laws of each
jurisdiction in which its Business is carried on, except for acts of
non-compliance which in the aggregate would not materially adversely
affect either of the Corporations or its Business.
(q) Environmental.
(i) Except as set forth in Schedule 12 to the knowledge of the
Vendor none of the Lands, Owned Properties or Leased
Properties have ever been used by any Person as a landfill
site, a waste disposal site or as a location for the disposal
(as such term is customarily used under applicable Colombian
Law) of Hazardous Substance or waste and has ever had urea
formaldehyde foam insulation, asbestos, PCB waste, radioactive
substances or aboveground or underground storage vessels,
active or abandoned, located thereon.
(ii) Except as set forth in Schedule 12, to the knowledge of the
Vendor and the Corporations, none of the Corporations has been
required by any Governmental Entity to:
(A) alter the Lands, Owned Properties or Leased
Properties in a material way in order to be in
compliance with Environmental Laws;
(B) remove any material from any of the Lands, Owned
Properties or Leased Properties; or
(C) perform any remedial studies, investigations,
closure, decommissioning, rehabilitation, restoration
and post-remedial studies, investigations or
monitoring on about or in connection with any of the
Lands, Owned Properties or Leased Properties.
(iii) Except as set forth in Schedule 12, to the knowledge of the
Vendor, no Environmental Law limits the production rates of
any Asset of the Corporation.
(iv) Except as set forth in Schedule 12, none of the Lands, Owned
Properties or Leased Properties or, to the knowledge of the
Vendor any other property formerly owned or leased by or under
the charge, management or control of the Corporations, is
listed or is proposed for listing on any Governmental List and
to the knowledge of the Vendor, none of the Corporations or
any Person acting on its behalf has transported or arranged
for the transportation of any Hazardous Substance (except for
those substances ordinarily connected with the drilling and
operation of oil and gas wells) to, or disposed (as such term
is customarily used under applicable Colombian Law) of any
Hazardous Substance present at any location which is on a
Governmental List or which is proposed for listing on a
Governmental List.
<PAGE>
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(r) Authorizations. Each of the Corporations owns, holds,
possesses or lawfully uses in the operation of the Business
all material Authorizations which are in any manner necessary
for it to conduct the Business as presently or previously
conducted or for the ownership and use of the Assets, free and
clear of all Encumbrances and in compliance with all Laws
applicable thereto. All material Environmental Permits
required by the Corporations or the Business are listed and
described in Schedule 12. Except as set forth in Schedule 12,
each of the Corporations is not in material default, nor has
it received any Notice of any Claim in default, with respect
to any material Authorizations. All such Authorizations are
renewable by their terms, if any, or in the ordinary course of
business without the need for the Corporations to comply with
any special qualification or procedures or to pay any amounts
other than routine filing fees. None of such Authorizations
will be adversely affected by the consummation of the
transactions contemplated hereby, except as set forth in
Schedule 13. Neither the Vendor nor any affiliate of the
Vendor owns or has any proprietary, financial or other
interests (direct or indirect) in any Authorization which the
Corporations own, possess or use in the operation of the
Business as now or previously conducted.
MATTERS RELATING TO THE ASSETS
(s) Title to the Assets. Except as set forth in Schedule 16, each of the
Corporations has good and valid title to or interest in all of the
Assets and good and marketable title in fee simple to the Owned
Properties. Each of the Corporations has legal and beneficial ownership
of or right to use the Assets free and clear of all Encumbrances,
except for Permitted Encumbrances and the rights of the lessor under
any Leases or any leases in connection with Leased Properties. The
Vendor and the Corporations further represent and warrant that, except
as set forth in Schedule 16:
(i) neither the Vendor, the Corporations or their respective
Branches, have done any act nor to the knowledge of the Vendor
or the Corporations has any act been done, whereby any of the
interests of the Corporations in the Assets may be cancelled,
terminated or modified, except as provided by the specific
terms thereof or, where such cancellation, termination or
modification, would otherwise not have a material adverse
effect;
(ii) the Vendor, its subsidiaries, the Corporations and their
respective Branches have not encumbered, granted a security
interest in or transferred, leased, licensed or otherwise
disposed of the Assets or any interest therein other than
Permitted Encumbrances and other than the rights of the lessor
under any Lease or under any lease of the Leased Properties;
(iii) the Assets are free and clear of all liens, Encumbrances,
adverse claims, demands and royalties created by, through or
under the Vendor, its subsidiaries, the Corporations or their
respective Branches,
except for Permitted Encumbrances or encumbrances that arise
by operation of law;
<PAGE>
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(t) Quiet Enjoyment. Subject to the rents, covenants, conditions and
stipulations in the Leases and the express terms of any Contracts, any
agreements pertaining to the Assets and on the lessee's or holders part
thereunder to be paid, performed and observed, the Purchaser may, at
Closing, to the knowledge of the Vendor, hold and enjoy the Assets for
the remainder of their respective terms and all renewals or extensions
thereof, where applicable, for its own use and benefit without any
lawful interruption of or by the Vendor or any other Person whomsoever
claiming by, through or under the Vendor other than the Purchaser
itself, and the Vendor binds itself to warrant and defend all and
singular the Assets against all such Persons so claiming.
(u) Production Sales Contracts. Each of the Vendor, its subsidiaries, the
Corporations and their respective Branches has no production sales
contracts to which it is a direct party that is not terminable by the
Vendor on ninety (90) days or less notice, except for those described
in Schedule 6;
(v) Notices of Default. Except as disclosed in Schedules 6 or 8, each of
the Vendor, its subsidiaries, the Corporations and their respective
Branches has not received any Notices of default relating to any
material Assets or any part of them which has not been subsequently
cured or waived and, to the knowledge of the Vendor, all relevant
deposits, rentals and royalties have been paid within the applicable
permitted time limits and all obligations and covenants required to
keep the Leases in full force and effect and in good standing have been
performed and observed in connection with the Business or otherwise;
(w) Drilling Practices. Except for operations under the Talara License
Contract, to the knowledge of the Vendor, the Lands that have been
drilled and, if completed, subsequently operated by the Vendor or the
operator of the Lands, in accordance with good oilfield practice, in
compliance with the applicable Laws and in accordance with the terms
and conditions of all agreements applicable thereto;
(x) Payments of Taxes. Taxes, other than income taxes, payable in respect
of the Assets operated by the Vendor, its subsidiaries, the
Corporations or their Branches, as the case may be, up to the Effective
Time (including all prior years) have been properly and fully paid and
discharged, such that there are no unpaid Taxes which have or could
result in a lien, charge or other Encumbrance on the Assets or the
Purchased Shares, except as described (and accrued) in the Financial
Statements or in the Interim Balance Sheet;
(y) Reduction of Interests. To the knowledge of the Vendor, information and
belief, the working interests set forth in Schedule 6 in respect of the
Leases are not subject to reduction on any account whatsoever as a
result of actions or omissions taken or omitted to be taken by the
Vendor or any other Person on its behalf, and none of the Encumbrances
described in Schedule 16 are convertible or subject to change to an
interest of any other size or nature, except as specifically set forth
in Schedule 16;
(z) Tangible Assets. To the knowledge of the Vendor, the tangible Assets
operated by the Vendor, taken as a whole, have been maintained by it in
accordance with good oilfield practice, in compliance with applicable
Laws and in accordance with the terms and conditions of all agreements
applicable thereto;
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(aa) Sale/Leasebacks. At the Closing Date, the tangible Assets shall not be
subject to any lease, leaseback or sale/leaseback arrangements, except
as set forth in Schedule 6;
(bb) Defaults under Regulations. Except as set forth in Schedule 12, to the
knowledge of the Vendor, its subsidiaries, the Corporations and their
respective Branches have not received any Notices of any breach by them
of any applicable Laws in relation to the Assets or the operation
thereof, including those pertaining to the protection of the
Environment;
(cc) Oil or Gas Balancing Agreements. Except as set forth in Schedule 6,
neither the Vendor, its subsidiaries, the Corporations or their
respective Branches have entered into any agreement or arrangements
commonly known as an oil or gas balancing, swaps, over- production or
underlift-overlift agreements or arrangements by any other Person on
their behalf, which are among two or more Persons owning interests in a
portion of the Lands, or pooled or unitized therewith, nor, to the
knowledge of the Vendor and the Corporations, has there been any
circumstance or case whereby one of such Persons has taken, or may
hereafter take, a share of the production of Petroleum Substances from
such Lands greater than it would otherwise be entitled to by virtue of
its interest in such Lands and which excess taking entitled the other
Persons to a credit in respect of subsequent production of the
Purchaser's Petroleum Substances produced from such Lands by which
Vendor or the Purchaser are bound;
(dd) Areas Of Mutual Interest. There are no areas of mutual interest
provisions applicable to and binding upon the Vendor, except as
disclosed to the Purchaser on or before the Closing and set forth in
Schedule 6;
(ee) Documents. All Leases are set forth on Schedule 6;
(ff) Assets Subject to Obligations. The Assets are not affected by any
"take" or "pay" obligations;
(gg) Abandoned Wells. To the knowledge of the Vendor, Schedule 12 includes a
list of all oil and gas wells on the Lands that have been either
plugged and abandoned, or drilled and abandoned, in which the Vendor,
its subsidiaries, the Corporations or their respective Branches had or
now have an interest and which Authorization, if required, has been
obtained for each such well from the applicable Governmental Entity;
(hh) Allowables. To the knowledge of the Vendor, none of the oil and gas
wells operated by the Vendor, its subsidiaries, the Corporations or
their respective Branches on the Lands have been produced in excess of
applicable production allowables imposed by applicable Laws since the
Vendor, the Corporations or their respective Branches acquired its
interest therein. Such oil and gas wells are not subject to any
production penalty and, to the knowledge of the Vendor and the
Corporations, it is not aware of any impending change in statutorily
imposed or sanctioned production allowables imposed by applicable
Governmental Entities currently applicable to any of the oil and gas
wells other than changes which are in the public domain;
<PAGE>
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(ii) No Options, etc. No Person has any written or oral agreement, option,
understanding or commitment, or any right or privilege capable of
becoming such for the purchase from any of the Corporations of any of
the Assets, other than pursuant to purchase orders accepted by the
Corporations in the ordinary course of the Business, and to the
Override right of Carbopetrol S.A. disclosed in Schedule 6.
(jj) Accounts.
(i) Accounts Receivable. To the knowledge of the Vendor, all
Accounts Receivable are bona fide, and, subject to an
allowance for doubtful accounts taken in accordance with U.S.
GAAP, collectible without set-off or counterclaim and a
complete and accurate list of all Accounts Receivable
outstanding as at January 31, 1997 indicating which have been
unpaid for 30, 60, 90 and greater than 120 days is set out in
Schedule 1;
(ii) Accounts Payable. To the knowledge of the Vendor, the accounts
payable set forth in Schedule 1 is a complete and accurate
list of all accounts payable by the Corporations indicating
which have been unpaid for 30, 60, 90 and greater than 120
days as at January 31, 1997; and
(iii) Intercompany Debt. Intercompany Debt does not exceed
$3,000,000, which amount is represented by the Colombian
Debenture.
(kk) Real Property.
(i) Each of the Corporations is not the owner of, or under any
agreement or option to own, any real property or any interest
therein, other than as referred to in Schedule 6 and the
Leases;
(ii) To the knowledge of the Vendor, except as set out in Schedule
6, all of the Buildings and Fixtures on the Lands, the Owned
Properties and the Leased Properties, in totality (A) were
constructed in accordance with all applicable Laws and with
all Authorizations validly issued pursuant thereto; (B) are
generally in good operating condition and in a state of good
maintenance and repair; and (C) are adequate and suitable for
the purposes for which they are presently being used; and with
respect to each (and to the Lands, the Owned Properties and
the Leased Properties), the appropriate Corporation has
adequate rights of ingress and egress for the operation of the
Business in the ordinary course, except for the Peruvian
Property. To the knowledge of the Vendor, none of the Lands,
the Owned Properties, the Leased Properties or the Buildings
and Fixtures thereon, nor the use, operation or maintenance
thereof for the purpose of carrying on the Business, violates
any restrictive covenant or any provision of any Law or
encroaches on any property owned by any other Person. No
condemnation or expropriation proceeding is pending or, to the
knowledge of the Vendor or the Corporations, threatened which
would preclude or impair the use of any such property or any
part thereof for the purposes for which it is currently used.
Except as set forth in Schedule 12, there are no outstanding
written work orders with respect to any of
<PAGE>
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the Assets from or required by any municipality, police
department, fire department, sanitation, health or safety
authorities or from any other Governmental Entity and, to the
knowledge of the Vendor, there are no matters under discussion
with or by the Corporations relating to work orders.
(ll) Leases. Each of the Corporations is not a party to, or under any
agreement or option to become a party to, any lease with respect to
real property used or to be used in the Business, other than the Leases
or leases with respect to the Lease Properties. Each Lease is in good
standing, creates a good and valid leasehold estate in the Lands
thereby demised and is in full force and effect without amendment
thereto, except as disclosed in Schedule 6. With respect to each Lease,
except as set forth in Schedule 6:
(i) all rents and additional rents due to the date hereof have
been paid;
(ii) neither the lessee, nor to the knowledge of the Vendor, the
lessor is in default thereunder;
(iii) no waiver, indulgence or postponement of the lessee's
obligations thereunder has been granted by the lessor which
adversely affects the Corporations rights and obligations
under the Lease;
(iv) to the knowledge of the Vendor, there exists no event of
default or event, occurrence, condition or act (including
the purchase of the Purchased Shares hereunder) which, with
the giving of notice, the lapse of time would become a
default under such Lease;
(v) each of the Corporations has not violated (except to the
extent subsequently cured) any of the terms or conditions
under any such Lease in any material respect; and
(vi) to the knowledge of the Corporations, all of the covenants
to be performed by any other party under any such Lease have
been fully performed.
To the knowledge of the Vendor, each of the Leased Properties, other
than with respect to vehicles, is in a state of good maintenance and
repair, normal wear and tear excepted, and is adequate and suitable for
the purposes for which it is presently being used.
True, correct and complete copies of the Leases have been provided to
the Purchaser. Schedule 6 contains a true, correct and complete list of
all of the Leases, together with a brief and accurate description of
each Lease, including the material terms thereof, the term of the
Lease, any rights of renewal and the term thereof, and any restrictions
on assignment.
<PAGE>
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(mm) Material Contracts. Schedule 6 contains a list all Contracts (other
than Leases or leases of Leased Properties) of the Corporations which
involve the expenditure of more than $25,000 or have a term left to run
of more than 90 days with a minimum payment to be made of $10,000
thereunder. Except as set forth in Schedules 6 or 8 and the specific
thresholds set forth below, each of the Corporations is not a party to
or bound by:
(i) any agreement or commitment relating to capital expenditures
more than $25,000;
(ii) any bonds, debentures, mortgages, notes or other similar
indebtedness or liabilities whatsoever or any agreement to
create or issue any bonds, debentures, mortgages, notes or
other similar indebtedness more than $10,000;
(iii) any guarantee or other contingent liability in respect of
any indebtedness or obligation of any other Person;
(iv) any management, consulting or any other similar agreement or
commitment;
(v) any agreement or commitment limiting the freedom of the
Corporations or the owner of the Assets or the Business to
engage in any line of business or to compete with any other
Person;
(vi) any licensing or other agreement or commitment relating to
intellectual property used by the Corporations in the
conduct of its Business; and
(vii) any agreement or arrangement with any Person with whom the
Corporations or the Vendor (or their present or former
directors, officers and employees) does not deal at arm's
length within the meaning of the Internal Revenue Code.
except for the Contracts, the Leases, the Collective Agreements, the
insurance policies described in Schedule 15, the Pension Plans and the
Benefit Plans.
(nn) No Breach of Contracts. Each of the Contracts listed in Schedule 6,
except as specifically set forth in such Schedules 6, is in full force
and effect and there exists no material default or event of default or
event, occurrence, condition or act (including the purchase of the
Purchased Shares hereunder) which, with the giving of notice or the
lapse of time would become a default or event of default thereunder.
Each of the Corporations has not violated or breached, in any material
respect, except to the extent specifically cured, any of the terms or
conditions of any Contract listed on Schedule 6, and to the knowledge
of the Vendor and the Corporations, all the covenants to be performed
by any other party thereto have been materially performed. True,
correct and complete copies of all Leases set out on Schedule 6 have
been delivered to the Purchaser and all other written Contracts set out
thereon have been delivered or made available to the Purchaser.
(oo) Intellectual Property Rights. The Intellectual Properties used in whole
or in part in, or required for the carrying on, of the Business in the
manner heretofore carried on are set out in Schedule 9 and are owned
by, or validly licensed to, the Corporations as indicated in Schedule
9. Except as otherwise expressly stated in Schedule 9, each of the
<PAGE>
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Corporations (iii) has the exclusive right to use such Intellectual
Properties, (iv) is the owner of record of such Intellectual Properties
except as set out in Schedule 9, and (v) has not conveyed, assigned or
encumbered any of them so as to interfere in any way with the operation
of the Business by the Purchaser or its ability to use any of them as
provided for herein. All registrations and filings necessary to
preserve the rights of the Corporations in the Intellectual Properties
in Colombia and Peru have been made and are in good standing. To the
knowledge of the Vendor and the Corporations, the conduct of the
Business does not infringe upon the intellectual properties of any
other Person.
(pp) Inventories. All Inventories of the Corporations reflected in the
Interim Financial Statements or acquired after the date thereof and not
subsequently disposed of in the ordinary course of the Business taken
as a whole are merchantable and fit for the specific purpose for which
they are to be used at levels sufficient for the continuation of the
Business in the ordinary course in the manner carried on at the date
hereof. The value of such Inventories (determined and valued in
accordance with the policies, practices and procedures of the
Corporations set forth on Schedule 2 which policies, practices and
procedures are hereby incorporated by reference and forms an integral
part of this Agreement) is not less than the value shown on the balance
sheet forming part of the Interim Financial Statements.
(qq) Subsidiaries. Each of the Corporations has no subsidiaries or
agreements of any nature to acquire any subsidiary or to acquire or
lease any other business operations.
FINANCIAL MATTERS
(rr) Books and Records. Except for revenues and direct operating expenses of
the Peruvian Subsidiary, all Books and Records of the Corporations have
substantially been, properly and accurately kept and completed in
accordance with U.S. GAAP and there are no material inaccuracies or
discrepancies of any kind contained or reflected therein. The
Corporations' records, systems, controls, data or information are not
recorded, stored, maintained, operated or otherwise wholly or partly
dependent upon or held by any means (including any electronic,
mechanical or photographic process, whether computerized or not) which
(including all means of access thereto and therefrom) are not under the
exclusive ownership and direct control of the Corporations.
(ss) Financial Statements. The Financial Statements have been prepared on a
basis consistent with those of previous fiscal years and except for
revenues and direct operating expenses of the Peruvian Subsidiary are
in accordance with U.S. GAAP (subject to any exceptions set forth in
Schedule 1) and present fairly:
(i) the Assets, liabilities, (whether accrued, absolute,
contingent or otherwise) and financial condition of the
Corporations as at the respective dates of the relevant
statements;
(ii) the financial position of the Corporations as at the
respective dates of the relevant statements; and
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(iii) the sales and earnings of the Corporations during the
periods covered by the Financial Statements or Interim
Financial Statements, as the case may be.
The Parties hereto agree that the Environmental Claims set forth in
Schedule 12 are not to be set forth in the Financial Statements.
Complete copies of the Financial Statements and the Interim Financial
Statements are attached as Schedule 1. The Interim Financial Statements
of the Corporations disclose no material changes from the Financial
Statements.
(tt) Tax Pool Amount. The Tax Pool Amount is not less than $20,000,000.
PARTICULAR MATTERS RELATING TO THE BUSINESS
(uu) Employees.
(i) Each of the Corporations is in compliance with all Laws
respecting employment and employment practices, terms and
conditions of employment, pay equity and wages and hours and
has not and is not engaged in any unfair labour practice,
which non compliance would not materially adversely affect the
Business.
(ii) No unfair labour practice, complaint or grievance against the
Corporations is pending or, to the knowledge of the
Corporations, threatened before any labour relations board or
similar Governmental Entity with respect to the Business.
(iii) There is no labour strike, dispute, slowdown or stoppage
actually pending or involving or, to the knowledge of the
Corporations, Threatened against the Vendor and the
Corporations with respect to its Business.
(iv) No union representation question exists respecting the
employees of the Corporations in connection with its Business.
(v) Each of the Corporations has never maintained or contributed
to (x) a multi-employer plan as defined under section 3(37) of
ERISA; or (y) a defined benefit plan as defined under section
3(35) of ERISA; or (z) a plan to which section 302 of ERISA or
section 412 of the Internal Revenue Code applies.
(vi) No grievance which might have a material adverse effect upon
the Corporations or the conduct of its Business exists, no
arbitration proceeding arising out of or under any Collective
Agreement is pending, and no claim therefor has been asserted.
(vii) No collective bargaining agreement is currently being
negotiated by the Corporations with respect to any employees
of the Corporations and the only collective agreements in
force with respect to its employees are the Collective
Agreements, true, correct and complete copies of which have
been provided to the Purchaser.
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(viii) Schedule 17 contains a complete list of all permanent and full
time employees of the Corporations earning in excess of
$10,000 on an annual basis, their salaries and wage rates,
bonus arrangements, benefits, positions and length of service.
Schedule 17 provides a correct and complete list showing all
amounts due or accrued due for all salary, wages, bonuses,
commissions, vacation with pay, pension benefits or other
employee benefits relating to all employees.
(ix) No employee of the Corporations has any agreement as to length
of notice required to terminate his or her employment, other
than such as results by law from the employment of an employee
without agreement as to such notice or as to length of
employment, except as set forth in Schedule 17.
(x) All wages and associated benefits to which an employee was
entitled to be paid on or prior to Closing have been paid in
full and all vacation pay (including all accrued vacation
pay), bonuses, commissions and other employee benefit payments
are reflected and have been accrued in the Books and Records
of the Corporations.
(xi) The only benefit plans existing in respect of the employees of
the Corporations are the Benefit Plans disclosed in Schedule
17. True, correct and complete copies of all written Benefit
Plans and related documentation have been provided to the
Purchaser and any oral or written Benefit Plans are accurately
described on Schedule 17. The Benefit Plans are duly
registered where required by, and are in good standing under,
all applicable Laws. All required employer and employee
contributions and premiums under the Benefit Plans to the date
hereof have been made, and no past service funding liabilities
exist thereunder. Except as set out in Schedule 17, all
Benefit Plans are fully funded both on a going concern and on
a solvency basis.
(xii) The only pension plans existing in respect of the employees of
the Corporations are the Pension Plans disclosed in Schedule
17. True, correct and complete copies of all Pension Plans and
related documentation (including trust agreements, funding
agreements, actuarial reports and investment reports) have
been provided to the Purchaser. The Pension Plans are duly
registered where required by, and are in good standing under,
all applicable Laws including the Internal Revenue Code and
ERISA and all applicable policies. Except as set out in
Schedule 17, all required employer and employee contributions
and premiums under the Pension Plans to the date hereof have
been made, the respective fund or funds established under the
Pension Plans are funded in accordance with applicable Laws
and the rules of the Pension Plans, and no past service
funding liabilities exist thereunder.
(xiii) None of the Benefit Plans, nor any trust created thereunder,
nor any trustee or administrator thereof, has engaged in any
"prohibited transaction" as defined in Section 406 of ERISA,
or Section 4975 of the Internal Revenue Code. The 401k Plan is
(A) "qualified" within the meaning of Section 401(a) of the
Internal Revenue Code; (B) no facts or circumstances exist
which would adversely affect the qualified status of the 401k
Plan; and (C) the trust established pursuant to the
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401k Plan is tax exempt under section 501(a) of the Internal
Revenue Code. No matter relating to any of the Benefit Plans
is pending before any court or government agency. Each of the
Benefit Plans which is group health plans, as defined in
Section 4980(B) of the Internal Revenue Code, is in compliance
with the requirements of Internal Revenue Code Section 4980(B)
and Part 6 of Subtitle B of Title I of ERISA.
(xiv) No payments have been made or authorized since the date of the
Financial Statements by the Corporations to its officers,
directors, former directors, shareholders or employees or to
any Person not dealing at arm's length (as such term is
construed under the Internal Revenue Code) with any of the
foregoing, except in the ordinary course of the Business and
at the regular rates payable to them of salary, pension,
bonuses, rents or other remuneration of any nature.
(xv) The Corporations are in compliance with the requirements of
the Workers Adjustment and Retraining Notification Act and
have no liabilities pursuant to such legislation.
(vv) Insurance. Schedule 15 contains a correct and complete list of
insurance policies which are maintained by the Corporations
with respect to the Business, its Assets, employees, and
otherwise, together with a brief description of each such
policy including the type of policy, name of insurer, coverage
allowance, expiration dates, annual premiums and any pending
Claims thereunder. Each of the Corporations is not in default
with respect to the payment of any premiums under any such
insurance policy and has not failed to give any notice or to
present any Claim under any such insurance policy in a due and
timely fashion. Each of the Corporations is not aware of any
circumstances in respect of which any Person may make a Claim
against the Corporations, whether covered by insurance or not.
Such policies of insurance coverage are in full force and
effect free from any right of termination on the part of the
insurers, except upon notice as stipulated in such policies.
True, correct and complete copies of such insurance policies
and the most recent inspection reports received from insurance
underwriters have been delivered or made available to the
Purchaser and are listed in Schedule 15. There has not been
any material adverse change in the relationship of the
Corporations with its insurers, the availability of coverage,
or in the premiums payable pursuant to such policies. Part of
Schedule 15 is a list setting forth any and all material
Claims, with reasonable particulars, made under any policies
of insurance maintained by or for the benefit of the
Corporations over the past two (2) calendar years prior to the
date hereof.
(ww) Litigation. There is no action, suit or proceeding, at law or
in equity, by any Person, nor any arbitration, administrative
or other proceeding by or before (or to the knowledge of the
Vendor and the Corporations any investigation by) any
Governmental Entity pending, or, to the knowledge of the
Vendor or the Corporations, Threatened against or affecting
the Corporations, its Branches or any of its properties or
rights or any of the Assets, and neither the Vendor nor the
Corporations know of any valid basis for any such action,
suit, proceeding, arbitration or investigation, except as
disclosed and set forth in Schedule 19, which provides a true,
correct and complete list of all such proceedings. Each of the
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Corporations and its Branches is not subject to any judgment,
order or decree entered in any lawsuit or proceeding in any
jurisdiction.
(xx) Taxes.
(i) Each of the Corporations has filed or caused to be filed,
within the times and within the manner prescribed by Law, all
federal, state, provincial, local and foreign tax returns and
tax reports which are required to be filed prior to the date
hereof by or with respect to the Corporations. The information
contained in such returns and reports is correct and complete
and such returns and reports reflect accurately all liability
for Taxes of the Corporations for the periods covered thereby.
All foreign federal, state, provincial and local income,
profits, franchise, sales, use, occupancy, excise and other
Taxes and assessments (including interest and penalties) that
are or may become payable by or due from the Corporations have
been fully paid or fully disclosed and fully provided for in
the Books and Records and the Financial Statements. The
federal income tax liability of the Corporations has been
assessed, paid or accrued for all fiscal years to and
including its fiscal year ended on the date of the Financial
Statements. No examination of any Tax Return of the
Corporations is currently in progress, there are no
outstanding agreements or waivers extending the statutory
period providing for an extension of time with respect to the
assessment or re-assessment of Tax or the filing of any Tax
Return by, or any payment of any Tax by the Corporations, and
there are no Claims now Threatened or pending against the
Corporations in respect of Taxes or any matters under
discussion with any Governmental Entity relating to Taxes.
Each of the Corporations has withheld from each payment made
by it the amount of all Taxes and other deductions required to
be withheld therefrom and has paid the same to the proper
taxing or other authority within the time prescribed under any
applicable Law.
(ii) The Vendor has forwarded to the Purchaser a determination of
the Tax basis of the Vendor in the Assets of each of the
Colombian Subsidiary and Peruvian Subsidiary.
(yy) Bank Accounts and Powers of Attorney. Schedule 11 contains a correct
and complete list showing (vi) the name of each bank in which each of
the Corporations has an account or safe deposit box and the names of
all Persons authorized to draw thereon or to have access thereto; and
(vii) the names of any Persons holding powers of attorney from the
Corporations and a summary statement of the terms thereof.
(zz) Full Disclosure. To the knowledge of the Vendor, none of this Agreement
or any Ancillary Agreement or any certificate or statement in writing
which has been supplied by or on behalf of the Corporations or the
Vendor or by any of the directors, officers or employees of the
Corporations or the Vendor in connection with the transactions
contemplated hereby contains any untrue statement of a material fact,
or omits any statement of a material fact necessary in order to make
the statements contained herein or therein not misleading. To the
knowledge, information and belief of the Vendor, there is no fact known
to the Corporations or the Vendor which may materially and adversely
<PAGE>
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affects the affairs, businesses, prospects operations or conditions of
the Corporations, financial or otherwise, or the Business or the
Assets, or which might reasonably be expected to deter the Purchaser
from completing the transaction of purchase and sale herein
contemplated, which has not been set forth in this Agreement.
(aaa) Halliburton. There is no legally binding agreement, arrangement,
obligation, commitment or understanding between the Vendor or either of
the Companies and Halliburton Energy Services and/or Halliburton del
Peru S.A. (together, "Halliburton") relating to the provision of
turn-key services to any of the Corporations by Halliburton or any of
its Affiliates. Halliburton and its Affiliates, have not received, and
there is no legally binding agreement, arrangement, obligation,
commitment or undertaking relating to receipt of, any interest in the
Business or the Corporations, including any participation in the income
of the Corporations or the Business. As at the Time of Closing, all
financial obligations of the Corporations to Halliburton, and its
Affiliates, relating to the Business or otherwise, do not exceed the
sum of $626,000, of which approximately $426,000 is evidenced by notes
issued by the Peruvian Subsidiary, details of which notes are set out
in Schedule 1.
MATTERS RELATING TO THE COLOMBIAN SUBSIDIARY
(bbb) Ecopetrol and Petroleros Del Norte. As at the Time of Closing, except
to the extent disclosed in Schedule 6, there is no entitlement by
Ecopetrol or Petroleros Del Norte to any production or revenue in
excess of its respective working interest percentage under any
association or joint venture agreement, arrangement, obligation,
commitment understanding or other Contract relating thereto with
respect to the Business of the Colombian Subsidiary, the particulars of
which working interest are set forth in Schedule 20, and there has been
no challenge by Ecopetrol and Petroleros Del Norte to the status of the
Colombian Subsidiary or as owner and/or operator of the Colombian
properties.
(ccc) Puli Association Contract and other Matters.
(i) Except with respect to the Puli Association Contract, the
Colombian Subsidiary and its Branch has no contractual
relationship with Ecopetrol, other than in respect of the
property known as Lagunillas, which obligation in respect
thereof do not exceed $15,000 unless the Colombian subsidiary
elects to exploit the prospect.
(ii) To the knowledge of the Vendor, there has not been any breach
of, or any existing grounds for termination, rescission,
avoidance or repudiation of, the Puli Association Contract or
of any threat or allegation thereof, except any breach which
has been cured, and such contract is not invalid;
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(iii) The Colombian Subsidiary, through its Branch, has obtained all
material Authorizations and other approvals required by
applicable Laws for or in connection with the carrying on of
the project for exploration and exploitation of Petroleum
Substances under the Puli Association Contract through the
date hereof, and such Authorizations and approvals are not
limited in duration, other than the actual duration of the
Puli Association Contract, and are materially in full force
and effect as of the date hereof;
(iv) All material Authorizations and other approvals required for
or in connection with the Business in Colombia by the
Colombian Subsidiary, through its Branch, are listed in
Schedule 13 and are in full force and effect and all material
reports, returns and information required by Law or as a
condition of any such Authorization or other approval to be
made or given to any Person or in connection with the
Business, as of the date hereof, of the Colombian Subsidiary
through its Branch in Colombia, have been made or given to the
appropriate Person or Governmental Entity and there is no
circumstance which indicates that any such Authorization or
approval is likely to be revoked or which may confer a right
of revocation; and
(v) To the knowledge of the Vendor, no Authorization or other
approval is required for or in connection with giving effect
to the Agreement and the transactions contemplated hereunder
by any applicable Law or by any Governmental Entity including
the Colombian Ministry of Mines and Energy and Ecopetrol or
under the Puli Association Contract.
(ddd) Payments under Royalty and Option Agreement. No payments of monies was
made from the date of execution of the Agreement in Principle to and
including the Closing Date by or on behalf of Carbopetrol S.A. to the
Vendor, any of its subsidiaries or Affiliates or the Colombian
Subsidiary in connection with the existing royalty and option agreement
between Carbopetrol S.A. and the Colombian Subsidiary involving the
Chicoral Formation.
MATTERS RELATING TO THE PERUVIAN SUBSIDIARY
(eee) GMP. There is no legally binding agreement, arrangement, obligation,
commitment or understanding between the Vendor and GMP relating to the
provision of turn-key services to any of the Corporations by GMP or any
of its Affiliates. GMP, and its Affiliates, have has not received, and
there is no legally binding agreement, arrangement or understanding
relating to the receipt of, any interest in the Business or the
Corporations, including any participation in the income of the Business
or the Corporations. As at the Time of Closing, any and all financial
obligations of the Corporations to GMP, and its Affiliates, relating to
the Business or otherwise, do not exceed the sum of $383,000.
<PAGE>
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OTHER MATTERS
(fff) U.S. Securities Law Representations. The Vendor is acquiring the MIP
Shares, the Colombian Debenture and will acquire the common shares of
Purchaser issuable upon exchange of the Colombian Debenture (the
"Exchange Shares") for its own account for investment and with no
present intention of distributing or reselling such securities or any
part thereof. The Vendor acknowledges that the MIP Shares, the
Colombian Debenture and the Exchange Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), or
the securities laws of any state of the United States, and may not be
transferred in the United States except pursuant to an effective
registration statement under the Securities Act and applicable state
law or an available exemption therefrom. Subject to Section 7.4, it is
acknowledged that a sale of the Common Shares on The Toronto Stock
Exchange is not a violation of this representation.
3.2 Information Known by Purchaser. To the extent that the Purchaser has
knowledge of any breach of any representation or warranty of the Vendor and/or
the Corporations set forth in Section 3.1 hereof as at the Time of Closing and
the Vendor does not have actual knowledge which it believes is contrary to the
knowledge of the Purchaser, then the Purchaser shall be estopped from claiming a
breach of any such representation and warranty hereunder.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
4.1 Representations and Warranties of the Purchaser. The Purchaser represents
and warrants as follows to the Vendor and acknowledges and confirms that the
Vendor is relying on such representations and warranties in connection with the
sale by the Vendor of the Purchased Shares:
(a) Due Incorporation and Existence. The Purchaser is a corporation
incorporated and existing under the laws of the Cayman Islands. The
common shares of the Purchaser are listed and posted for trading on The
Toronto Stock Exchange.
(b) Validity of Agreements. The Purchaser has all necessary corporate power
to enter into and to perform its obligations under this Agreement and
the Ancillary Agreements to which it is a party. The execution,
delivery and performance by the Purchaser of this Agreement and the
Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of the Purchaser. This Agreement
and the Ancillary Agreements to which it is a party constitute legal,
valid and binding obligations of the Purchaser enforceable against it
in accordance with their respective terms.
(c) Restrictive Documents. The Purchaser is not subject to, or a party to,
any charter or by-law restriction, any Law, any Claim, any contract or
instrument, any Encumbrance or any other restriction of any kind or
character which would prevent consummation of the transactions
contemplated by this Agreement except for:
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(i) the necessity of passing the appropriate resolutions of the
directors of the Purchaser to permit the purchase of the
Purchased Shares; and
(ii) the necessity of obtaining approval from The Toronto Stock
Exchange and any other applicable regulatory approvals;
(d) Purchaser's Financing. The Purchaser has, or at the Time of Closing
will have, sufficient funds to complete the transaction of purchase and
sale and to perform its obligations hereunder.
(e) Authorized and Issued Capital. The authorized capital of the Purchaser
consists of 50,000,000 common shares of which, at the date hereof,
37,987,067 common shares have been duly issued and are outstanding as
fully paid and non assessable and after giving effect to the
transaction hereunder, 47,720,867 common shares shall have been issued
or reserved for issuance.
(f) Conditional Approval. The Toronto Stock Exchange has accepted notice
for filing under Section 19.09 of the General By-laws of The Toronto
Stock Exchange in connection with the transactions contemplated
hereunder and has granted conditional approval for the issuance of
4,384,375 MIP Shares on Closing and 1,000,000 MIP Shares upon the
exercise of the exchange rights by the holders of the Colombian
Debenture, (the final approval of which is subject to the satisfaction
of certain conditions, all as set out in the letter dated February 17,
1997 from The Toronto Stock Exchange to counsel for the Purchaser).
(g) Full Disclosure. To the knowledge of the Purchaser, none of this
Agreement or any Ancillary Agreement, any certificate or statement in
writing which has been supplied by or on behalf of the Purchaser or by
any of the directors, officers or employees of the Purchaser in
connection with the transactions contemplated hereby contains any
untrue statement of a material fact , or omits any statement of a
material fact, necessary in order to make the statements contained
herein or therein not misleading.
(h) Litigation. There is no action, suit or proceeding, at law or in
equity, by any Person, nor any arbitration, administrative or other
proceeding by or before (or to the knowledge of the Purchaser, any
investigation by) any Governmental Entity pending, or, to the knowledge
of the Purchaser, Threatened against or affecting the Purchaser, and
the Purchaser does not know of any valid basis for any such action,
suit, proceeding, arbitration or investigation. The Purchaser is not
subject to any judgment, order or decree entered in any lawsuit or
proceeding in any jurisdiction.
(i) Listing. The Common shares of the Purchaser are listed and posted for
trading on The Toronto Stock Exchange and the Purchaser is not, as of
the date hereof, in default of any of the requirements of The
Securities Act (Ontario) or the regulations thereto, nor is the
Purchaser on the list of defaulting reporting issuers pursuant to
Section 72(9) of the Securities Act (Ontario).
<PAGE>
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(j) No Breach of Contracts. As of the date hereof, each of the material
contracts of the Purchaser are in full force and effect and there
exists no default or event of default or event, occurrence, condition
or act (including the purchase of the Purchased Shares by the Purchaser
hereunder) which, with the giving of notice, the lapse of time or the
happening of any other event or condition, would become a default or
event of default thereunder. The Purchaser has not violated or
breached, in any respect, any of the terms or conditions of any
material contract and, to the knowledge of the Purchaser, all the
covenants to be performed by any other party thereto have been fully
performed.
(k) No Material Adverse Change. Since the date of the third quarter
financial statements of the Purchaser, there has been no change in the
affairs, assets, liabilities, business, prospects, operations or
condition of the Purchaser, financial or otherwise, whether arising as
a result of any legislative or regulatory change, revocation of any
licence or right to do business, fire, explosion, accident, casualty,
labour trouble, flood, drought, riot, storm, condemnation, act of God,
public force or otherwise, which has materially adversely affected or
which will, to the knowledge of the Purchaser, materially adversely
affect the Purchaser, except for general economic conditions affecting
the Purchaser, or the oil and gas industry in which the Purchaser
operates, as the case may be, other than any material adverse charge of
the Purchaser which has been previously disclosed to the Vendor.
(l) Transferability. The MIP Shares shall, at the Time of Closing, be
transferable, subject to any restrictions contained in this Agreement.
(m) No Pending Mergers. As of the date hereof, the Purchaser is not
currently contemplating any merger with, or acquisition or takeover of,
any other business, nor is any such merger, acquisition or takeover
currently pending, except as previously disclosed to the Vendor.
(n) Escrow Arrangements. As of the date hereof, to the knowledge of the
Purchaser, 1,243,001 common shares of the Purchaser are held in escrow
pursuant to the rules, by-laws and policies of The Toronto Stock
Exchange and no shares are held pursuant to Lock-up agreements. The
common shares of the Purchaser held in escrow are scheduled to be
released from escrow on a pro rata basis of 33.33% on each of the
first, second and third anniversary dates of April 22, 1996.
(o) No Pending Proceedings. As of the date hereof, to the knowledge of the
Purchaser, there is no existing or Threatened proceedings or
investigations against the Purchaser by The Toronto Stock Exchange or
by any other Canadian securities regulatory authority.
(p) Investment Purposes. The Purchaser is acquiring the Purchased Shares
for investment and not for resale. The Purchased Shares are not
registered under U.S. or state securities laws.
(q) Reserves. The Purchaser acknowledges that neither the Vendor nor the
Corporations have made any representation to Purchaser with respect to
oil and natural gas reserves.
ARTICLE 5
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CLOSING
5.1 Date, Time and Place of Closing. The completion of the transactions
contemplated by this Agreement shall take place at the offices of Snow Becker
Krauss P.C., 605 Third Avenue, New York, New York, at the Time of Closing or at
such other place, on such other date, and at such other time as may be agreed
upon in writing between the Vendor and the Purchaser.
5.2 Closing Procedures. At the Time of Closing the Vendor shall deliver or
caused to be delivered actual possession of the Purchased Shares and upon such
deliveries the Purchaser shall pay or satisfy the Purchase Price in accordance
with Section 2.2. The transfer of possession of the Purchased Shares shall be
deemed to take effect as at the Effective Time on the Closing Date.
(a) At Closing, the Vendor shall deliver or cause to be delivered to the
Purchaser, unless otherwise waived by the Purchaser, the following in
form and substance satisfactory to the Purchaser and its counsel,
acting reasonably:
(i) share certificates representing the Purchased Shares duly
endorsed in blank for transfer, or accompanied by irrevocable
security transfer powers of attorney duly executed in blank,
in either case by the holders of record thereof, together with
evidence satisfactory to the Purchaser that the Purchaser or
its nominee(s) have been duly entered upon the books of the
Corporations as the holder of the Purchased Shares;
(ii) certified copies of (A) the charter documents and extracts
from the by-laws of each of the Vendor and the Corporations
relating to the execution of documents; (B) all resolutions of
the shareholders, the board of directors or any duly
authorized committee thereof, of each of the Vendor and the
Corporations approving the entering into of this Agreement and
the completion of all transactions contemplated hereunder; and
(C) all other instruments evidencing necessary corporate
action of each of the Vendor and the Corporations and of
Authorizations, if any, with respect to such matters;
(iii) certificates of the Secretary or an Assistant Secretary of
each of the Vendor and the Corporations certifying the names
and true signatures of its officers authorized to sign this
Agreement and the other instruments to be delivered hereunder;
(iv) a certificate of status, compliance, good standing or like
certificate with respect to each of the Vendor and the
Corporations issued by appropriate government officials of the
jurisdiction of its incorporation and, in the case of the
Corporations, of each jurisdiction in which each of the
Corporations carry on its Business as listed in Schedule 10;
<PAGE>
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(v) a favourable opinion or opinions of counsel to the Vendor and
the Corporations, and any other legal opinions as may be
required by or relied upon by counsel to the Vendor or
requested by the Purchaser, or its counsel, acting reasonably,
in connection with the operation of the Corporations and the
Business including such matters relating to, (A) any licence,
association or joint venture agreement or arrangement of the
Corporations with any Person or Governmental Entity, (B) any
interest of the Corporations in any real property or natural
resource rights in Colombia or Peru, and (C) any other matter
in connection with the Business which is properly the subject
matter of a legal opinion;
(vi) evidence that all necessary steps and proceedings as approved
by counsel for the Purchaser to permit all of the Purchased
Shares to be fully and regularly transferred to the Purchaser
or its nominee(s) have been taken;
(vii) duly executed resignation effective as at the Time of Closing
of each director and officer of the Corporations as the
Purchaser may specify;
(viii) a release in favour of the Corporations of each of the Vendor
and such officers and directors of the Corporations as the
Purchaser may specify;
(ix) all necessary assurances, transfers, assignments and consents,
including all necessary Consents and Authorizations, and any
other instruments necessary or reasonably required to
effectively carry out the intent of this Agreement and any
Ancillary Agreement and to transfer the Purchased Shares to
the Purchaser, free and clear of all Encumbrances, except as
may be otherwise provided herein;
(x) an opinion from Price Waterhouse, at the Purchaser's expense,
providing that, (A) the quantum of any Tax Pool Amount
available to the Colombian Subsidiary as of the fiscal year
ended December 31, 1996 shall, in any event, not be less than
$20,000,000 in Colombian Peso equivalent using the exchange
rate for the purchase of U.S. dollars using Colombian Pesos as
of the Closing; and (B) the Tax Pool Amount will be available
to the Colombian Subsidiary following the Closing;
(xi) a duly executed confidentiality agreement between the
Purchaser and the Vendor effective as at the Time of Closing;
(xii) a duly executed non-competition agreement effective as at the
Time of Closing of the Vendor and certain officers of the
Vendor as the Purchaser may specify.
(b) The Purchaser shall deliver or cause to be delivered to the Vendor,
unless otherwise waived by the Vendor, and the Corporations the
following in form and substance satisfactory to the Vendor acting
reasonably:
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(i) certified copies of (A) the charter documents and extracts
from the by-laws of the Purchaser relating to the execution of
documents; (B) all resolutions of the shareholders, the board
of directors or any duly authorized committee thereof, of the
Purchaser approving the entering into of this Agreement and
the completion of the transactions contemplated hereunder; and
(C) all other instruments evidencing necessary corporate
action of the Purchaser and of Authorizations, if any, with
respect to such matters;
(ii) certificates of the Secretary or an Assistant Secretary of the
Purchaser certifying the names and true signatures of its
officers authorized to sign this Agreement and the other
instruments to be delivered hereunder;
(iii) a certificate of status, compliance, good standing or like
certificate with respect to the Purchaser issued by
appropriate government officials of the jurisdiction of its
incorporation, together with a certificate that the Purchaser
is not on the list of defaulting reporting issuers pursuant to
the Securities Act (Ontario);
(iv) share certificates representing the MIP Shares, with the
legend on each MIP Share substantially in the form set out in
Schedule 23;
(v) the Exchange Rights Agreement dated as of the date hereof in
form agreed to by the Parties duly executed by the Purchaser;
(vi) the Continuing Corporate Guaranty dated as of the date hereof
in form agreed to by the Parties duly executed by the
Purchaser;
(vii) evidence that all necessary steps and proceedings, as approved
by counsel for the Vendor, to permit all of the MIP Shares to
be fully and regularly transferred to the Vendor or its
nominee(s) have been taken;
(viii) all necessary assurances, transfers, assignments and consents,
including all necessary Consents and Authorizations, and any
other instruments necessary or reasonably required to
effectively carry out the intent of this Agreement and any
Ancillary Agreement and to transfer the Common Shares to the
Vendor, free and clear of all Encumbrances, except as may be
otherwise provided herein; and
(ix) a favourable legal opinion or opinions from counsel to the
Purchaser as shall be agreed to by the Parties and their
counsel;
<PAGE>
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ARTICLE 6
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITIES AND SET-OFF
6.1 Survival of Representations and Warranties.
(a) The representations and warranties of the Vendor contained in this
Agreement or any Ancillary Agreement shall survive the Closing and,
notwithstanding such or any investigation made by or on behalf of the
Purchaser, shall continue in full force and effect for the benefit of
the Purchaser for a period of two (2) years from the Closing Date
(except any representation and warranty in connection with the Taxes of
the Corporations as provided in Subsection 6.2(e) below); and any Claim
in respect thereof shall be made in writing within such time period.
(b) The representations and warranties of the Purchaser contained in this
Agreement or in any Ancillary Agreement shall survive the Closing and,
notwithstanding such Closing or any investigation made by or on behalf
of any of the Vendor, shall continue in full force and effect for the
benefit of the Vendor for a period of two (2) years from the Closing
Date and any claim in respect thereof shall be made in writing within
such time period.
6.2 Indemnification in Favour of the Purchaser. Subject to Section 6.5, the
Vendor shall indemnify and save each of the Purchaser, and its shareholders,
directors, officers, employees, agents and representatives, (in respect of whom
the Purchaser hereby acts as agent and trustee with respect thereto) harmless of
and from any Claim or Loss suffered by, imposed upon or asserted against the
Purchaser as a result of, in respect of, connected with or arising out of, under
or pursuant to:
(a) any failure of the Vendor to perform or fulfil any covenant of the
Vendor under this Agreement or any Ancillary Agreement;
(b) subject to the limitation periods set forth in Section 6.1 and
Subsection 6.2(c) below, any breach or inaccuracy of any representation
or warranty given by the Vendor contained in this Agreement or in any
Ancillary Agreement; and
(c) for the maximum allowable time period prescribed under any applicable
Law in which the Corporations may be audited, (i) any breach or
inaccuracy of any representation or warranty given by the Vendor
contained in this Agreement or any Ancillary Agreement in connection
with the Taxes of the Corporations; or (ii) any contingent Taxes
assessed against the Corporations by any taxing authority in connection
with any reassessment of the Corporations for any period ending on or
prior to Closing.
<PAGE>
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6.3 Indemnification in Favour of the Vendor. Subject to Section 6.4, the
Purchaser shall indemnify and save each of the Vendor and its shareholders,
directors, officers, employees, agents and representatives (in respect of whom
the Vendor hereby acts as agent and trustee with respect thereto) harmless of
and from any Claim or Loss suffered by, imposed upon or asserted against the
Vendor as a result of, in respect of, connected with or arising out of, under or
pursuant to:
(a) any failure by the Purchaser to perform and fulfil any covenant of the
Purchaser under this Agreement or any Ancillary Agreement;
(b) subject to the limitation period set forth in Section 6.1 hereof, any
breach or inaccuracy of any representation or warranty given by the
Purchaser contained in this Agreement or in any Ancillary Agreement up
to a maximum sum of $2,000,000; and
(c) subject to Section 7.11 hereof, the performance guarantee provided by
the Vendor in connection with the Talara License Contract, provided
that the Vendor fully and completely complies with Section 7.11 herein
at all times following Closing. In the event the Purchaser sells or
otherwise transfers its controlling interest in the Talara License
Contract, such guarantee of the Vendor or its successors shall continue
and the Purchaser and the Purchaser's transferee shall indemnify the
Vendor and its successors as provided for herein.
6.4 Indemnification Proceedings.
(a) any Party seeking indemnification under this Article (the "indemnified
party") shall forthwith notify the Party against whom a Claim for
indemnification is sought hereunder (the "indemnifying party") in
writing, which notice shall specify, in reasonable detail, the nature
and estimated amount of the Claim. If a Claim by a third party is made
against an indemnified party, and if the indemnified party intends to
seek indemnity with respect thereto under this Article, the indemnified
party shall promptly (and in any case within thirty (30) days of such
Claim being made) notify the indemnifying party of such with reasonable
particulars. The indemnifying party shall have thirty (30) days after
receipt of such notice to undertake, conduct and control, through
counsel of its own choosing and at its expense, the settlement or
defence thereof, and the indemnified party shall cooperate with it in
connection therewith; except that with respect to settlements entered
into by the indemnifying party (i) the consent of the indemnified party
shall be required if the settlement provides for equitable relief
against the indemnified party, which consent shall not be unreasonably
withheld or delayed; and (ii) the indemnifying party shall obtain the
release of the indemnified party. If the indemnifying party undertakes,
conducts and controls the settlement or defence of such Claim (i) the
indemnifying party shall permit the indemnified party to participate in
(but not to dictate the terms of or veto, provided that the
indemnifying party has sufficient funds to indemnify the indemnified
party) such settlement or defence through counsel chosen by the
indemnified party, provided that the reasonable fees and expenses of
such counsel shall be borne by the indemnified party; and (ii) the
indemnifying party shall promptly reimburse the indemnified party for
the full amount of any loss resulting from any Claim and all related
expenses (other than the reasonable fees and expenses of counsel as
aforesaid) incurred by the indemnified party. The indemnified party
shall not pay or settle any Claim so long as the indemnifying party
<PAGE>
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is reasonably contesting any such claim in good faith on a timely
basis. Notwithstanding the two immediately preceding sentences, the
indemnified party shall have the right to pay or settle any such claim,
provided that in such event it shall waive any right to indemnity
therefor by the indemnifying party.
(b) with respect to third party Claims, if the indemnifying party does not
notify the indemnified party within thirty (30) days after the receipt
of the indemnified party's notice of a claim of indemnity hereunder
that it elects to undertake the defence thereof, the indemnified party
shall have the right, but not the obligation, to contest, settle or
compromise the Claim in the exercise of its reasonable judgment at the
expense of the indemnifying party.
(c) In the event of any Claim by a third party against an indemnified
party, the defence of which is being undertaken and controlled by the
indemnifying party, the indemnified party will use all reasonable
efforts to make available to the indemnifying party those employees
whose assistance, testimony or presence is necessary to assist the
indemnifying party in evaluating and in defending any such claims;
provided that the indemnifying party shall be responsible for the
expense associated with any employees made available by the indemnified
party to the indemnifying party hereunder, which expense shall be equal
to the amount of reasonable out of pocket expenses for such employees
assisting the indemnifying party and which expenses shall not exceed
the actual cost to the indemnified party associated with such
employees.
(d) With respect to third party Claims, the indemnified party shall make
available to the indemnifying party or its representatives on a timely
basis all documents, records and other materials in the possession of
the indemnified party, at the expense of the indemnifying party,
reasonably required by the indemnifying party for its use in defending
any claim and shall otherwise cooperate on a timely basis with the
indemnifying party in the defence of such Claim.
(e) With respect to any re-assessment for income, corporate, sales, excise,
or other tax or other liability enforceable by Encumbrance against the
property of the indemnified party, the indemnifying party's right to so
contest shall only apply after such payment of such re-assessment or
the provision of such security as is necessary to avoid an Encumbrance
being placed on the property of the indemnified party.
6.5 Limitation. The obligation of indemnification set out in Section 6.2 shall
be applicable only to the extent that any Claims made under it, in the
aggregate, exceed $50,000, in which event the aggregate liability of the
indemnifying parties shall be for the amount in excess of the $50,000, with the
maximum liability for indemnification thereunder being an amount equal to the
aggregate of the Performance Earn-Out, the Maximum Tax Pool Payment and the
principal amount of the Colombian Debenture, which amount will be paid or deemed
paid as prescribed in Section 6.7.
6.6 Exclusion of Other Remedies. No Party shall have the right to bring any
proceeding against any other Party for a breach of any representation, warranty,
covenant or agreement
<PAGE>
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contained in this Agreement, except for a proceeding brought in accordance with
the provisions of this Agreement. This provision is intended to preclude any
proceeding by any Party against any other Party based on a cause of action or
right, including any statutory right or other remedy whereof at law or in
equity, other than a cause of action in contract or tort for breach of a
representation, warranty, covenant or agreement contained in this Agreement.
6.7 Right of Set-Off. At anytime subsequent to the Closing, upon notice to the
Vendor specifying in reasonable detail the basis for such set-off, the Purchaser
will set-off any amount to which it may be entitled to indemnification under
this Agreement or any Ancillary Agreement, in the following order and priority:
(a) the Performance Earn-Out;
(b) the Tax Pool Amount; and
(c) the Colombian Debenture, as limited below; and
Any amount of set-off shall, upon such notice being given to the Vendor in
accordance with Section 9.1, be immediately and forthwith allocated, in the case
of a set-off against the Performance Earn-Out, a reduction in the Performance
Earn-Out Balance until it is zero, in the case of a set-off against the Tax Pool
Amount, a deemed Tax Pool Payment until the aggregate of all Tax Pool Payments
and deemed Tax Pool Payments equal the Maximum Tax Pool Payment and, in the case
of a set-off against the Colombian Debenture, a deemed redemption of a portion
of the Colombian Debenture having a principal amount equal to the amount to be
set-off until all of the principal amount of the Colombian Debenture is
redeemed. Notwithstanding the foregoing, in the event the Colombian Debenture is
pledged, sold or otherwise disposed of to a Person who is not an Affiliate of
the Vendor, no amount of the Colombian Debenture shall be subject to set-off
hereunder. Subject to Section 6.5, to the extent the Purchaser is entitled to
indemnification under this Agreement and the amount of such indemnification
exceeds the amount available for set-off above, the Purchaser may seek cash
indemnification from the Vendor for the amount of such excess on an unsecured
basis pursuant to Article 8 herein. Nothing contained herein shall restrict or
otherwise impair the Purchaser's right to specific performance and any other
equitable remedy available to it at law or in equity.
6.8 Tax Audit. The Vendor shall be entitled to direct and control any audit of
the Corporations by the Internal Revenue Service for any period ending on or
prior to Closing.
6.9 Compliance with Environmental Law. Notwithstanding Section 6.5 hereof and
the limitations contained therein, if in the aggregate, the payments incurred by
the Colombian Subsidiary after the date hereof and prior to the second
anniversary date hereof in respect of any work required to be done as set forth
in paragraph 2 of Schedule 12 hereof to bring the Assets of the Colombian
Subsidiary into compliance with any Environmental Law exceeds $69,000, 50% of
the amount of such excess shall be set-off against the Performance Earn-Out and
the Performance Earn-Out Balance shall be decreased accordingly and the
Purchaser shall bear the cost of the balance. Any amounts so awarded on or after
the second anniversary date hereof shall be totally borne by Purchaser and the
Corporations and not reimbursed by or set-off against amounts due the Vendor.
Furthermore, with respect to the Talara License Contract, Schedule
<PAGE>
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12 includes a list of items required to make the property referred in the Talara
License Contract in compliance with Peruvian Environmental Law. To the extent
the amount required to be expended and borne by the Peruvian Subsidiary exceeds
$212,000, 50% of the amount of such excess, up to a maximum of $325,000 shall be
paid by the Vendor to the Peruvian Subsidiary within 30 days of receipt of
evidence of such payment. Notwithstanding the above, in the event the aggregate
net revenue interest of the Peruvian Subsidiary, an Affiliate and any person
acquiring such an interest from the Peruvian Subsidiary or its Affiliate (to the
extent of the interest transferred, referred herein as "Transferees") increases
over the percentage owned at Closing, the percentage of the remaining excess
which Vendor shall bear shall be recomputed and equal the percentage of such
excess to be borne by Vendor immediately prior to such recomputation multiplied
by a fraction, the numerator of which shall be the aggregate net revenue
interest owned immediately prior to such computation by the Peruvian Subsidiary,
its Affiliates and Transferees thereof and the denominator of which shall be the
net revenue interest owned immediately thereafter by such Persons, but in no
event shall the Vendor bear more than 50% of such excess. In all events, the
Peruvian Subsidiary shall bear the first $232,000 of the amount required to make
the Talara License Contract in compliance with Peruvian Environmental Law.
ARTICLE 7
POST-CLOSING COVENANTS
7.1 Access to Books and Records. For a period of six (6) years from the Closing
Date or for such longer period as may be required by applicable Law, the
Purchaser covenants and agrees to retain all original accounting Books and
Records relating to, or for the period as set forth in Article 8 for the periods
specifically set out therein, as the case may be, to the Corporations for the
period prior to the Closing Date. So long as any such books and records are
retained by the Purchaser pursuant to this Agreement, the Vendor shall have the
reasonable right to inspect and to make copies (at its own expense) of the same
at any time upon reasonable request during normal business hours and upon
reasonable notice for any proper purpose and without undue interference to the
business operations of the Purchaser. The Purchaser shall have the right to have
its representatives present during any such investigations.
7.2 Further Assurances. From time to time subsequent to the Closing Date, each
Party shall at the request of any other Party execute and deliver such
additional conveyances, transfers and other assurances as may be reasonably
required to effectively carry out the intent of this Agreement and any Ancillary
Agreement and to transfer the Purchased Shares to the Purchaser.
7.3 Cooperation of the Vendor. From time to time subsequent to the Closing Date,
the Vendor shall, at the request and expense of the Purchaser, cooperate with
the Purchaser, (a) in any and all proceedings or applications for Consents and
Authorizations from any Governmental Entity, and in particular any Colombian or
any Peruvian Government Entity, including the execution or delivery of any
documents or the provision of any assistance necessary to ensure that the
Purchaser, or a designee of the Purchaser, becomes the legal operator of
Peruvian Property and becomes the authorized named party on the appropriate
licence agreement in connection therewith, as applicable; (b) in connection with
any legal proceeding or dispute with Rio Bravo; and (c) in connection with the
revocation of the letter of credit and the release of the restricted cash funds
in the form of a certificate of deposit to the Purchaser held by Banco De
<PAGE>
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Occidente Panama and Banco De Occidente Colombia respectively. The Purchaser and
Vendor agree to furnish or caused to be furnished to each other, upon request,
as promptly as practicable, such information and assistance relating to the
Corporations and filing of Tax Returns, the making of any election related to
Taxes, the preparation for any audit by a taxing authority, and the prosecution
or defense of any claim, suit or proceeding relating to any Tax Return. The
Corporations, the Vendor and the Purchaser shall cooperate with each other in
the conduct of any audit or other proceeding related to Taxes involving the
Corporations and each shall execute and deliver such powers of attorney and
other documents as are necessary to carry out the intent of this Section 7.3.
7.4 Common Shares. The Vendor and its Affiliates shall not sell, transfer or
otherwise dispose of any Common Shares, except in compliance with the following:
(a) No Common Shares shall be sold to any "U.S. Person" (as such term is
defined in Regulation S promulgated under the U.S. Securities Act of
1933, as amended), except in compliance with applicable U.S. federal
and state securities law. Subject to Subsections 7.4(b) to (f) below, a
sale of Common Shares on The Toronto Stock Exchange shall not be a
violation of this Subsection 7.4(a) ;
(b) No Common Shares shall be sold in Canada, including on The Toronto
Stock Exchange, or to any resident of Canada, until forty (40) days
after the Closing Date;
(c) The Vendor and its Affiliates shall not sell Common Shares into the
market on any trading day more than 10% of the total number of shares
of the Purchaser traded on The Toronto Stock Exchange on the preceding
twenty (20) trading days prior to such sale;
(d) Notwithstanding Subsection 7.4(c) above, the maximum total number of
Common Shares that may be sold into the market over any five (5)
consecutive trading days shall be 250,000 Common Shares;
(e) The Vendor and its Affiliates shall not sell, transfer or otherwise
dispose of Common Shares representing 5% of the then outstanding shares
of the Purchaser to any party or group of related parties without the
prior written consent of the Purchaser; and
(f) The Vendor and its Affiliates shall not sell the Common Shares short at
any time.
7.5 NASDAQ. For so long as the Vendor holds any Common Shares, the Purchaser
agrees that if it applies to NASDAQ to have its common shares quoted thereon,
the Purchaser shall register all the Common Shares if a registration statement
is required to be filed by applicable Law or by NASDAQ.
7.6 Employment. The Purchaser shall offer to employ Enrique Davila and Carlos
Carrion and provide all other employees of the Colombian Subsidiary at least six
(6) months of continued employment from the Closing Date.
7.7 Rio Bravo. Subsequent to the Time of Closing, regardless of whether Rio
Bravo is successful in its Claim against the Peruvian Subsidiary, the
Vendor shall assist the Purchaser in
<PAGE>
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ensuring that the interest of the Peruvian Subsidiary in the existing Talara
License Contract, the Talara Operating Agreement or any new joint venture or
operating agreement with Rio Bravo is maintained in connection with the Peruvian
Property and that any assignment or reassignment of rights of the Vendor to the
Peruvian Subsidiary is made by the Vendor to ensure freedom of access to the
Peruvian Property by the Peruvian Subsidiary to give effect to such agreement or
agreements and that the Vendor will assist in seeking any legal or equitable
remedies (including an application for an injunction) available against Rio
Bravo or any other Person or Governmental Entity in connection therewith to give
effect to this Agreement, the Talara License Contract, the Talara Operating
Agreement and transactions contemplated hereunder or thereunder.
7.8 Tax Election. The Vendor and the Purchaser agree to make an election under
Section 338(h)(10) of the Internal Revenue Code (and any corresponding elections
under state, local, or foreign tax law) (collectively, a "Section 338(h)(10)
Election") with respect to the purchase and sale of the stock of the
Corporations hereunder. The Vendor will pay any Taxes, including any liability
of the Corporations for Taxes resulting from the application to it of Treasury
Regulation ss.1.338(h)(10) - 1(f)(5), attributable to the making of the Section
338(h)(10) Election and will indemnify the Purchaser and Subsidiaries against
any adverse consequences arising out of any failure to pay such Taxes. The
Parties shall execute, and if required file, IRS Form 8023-8 and comply with
treasury regulation section 1.338(4). The Purchaser will agree with the
allocation made among the Assets of the Colombian Subsidiary for federal income
tax purposes. Notwithstanding the above, the Purchaser will pay to the Vendor
the lesser of $40,000 or the amount of the Alternative Minimum Tax attributable
solely to the election referred to above 10 days prior to the date the
Alternative Minimum Tax is required to be paid, provided the Purchaser has
received notice from the Vendor of the amount so payable at least 20 days prior
to the date such amount is required to be paid and the Vendor can substantiate
such amount to the reasonable satisfaction of the Purchaser.
7.9 Continued Cooperation. From time to time subsequent to the Closing Date, the
Purchaser and the Corporations shall, at the request and expense of the Vendor,
cooperate with the Vendor and its auditors in preparing all necessary financial
statements required to be completed by the Vendor.
7.10 Continued Listing. The Purchaser shall use its reasonable best efforts to
maintain the listing of its Common Shares for trading on The Toronto Stock
Exchange or other recognized stock exchange. The Purchaser shall further use its
best efforts to maintain its status as a "reporting issuer" and not be on the
list of defaulting reporting issuers pursuant to the Securities Act (Ontario).
7.11 Guarantee. Subsequent to the Closing, the Vendor shall not amend, modify,
revoke, terminate, cancel, withdraw or otherwise take any action whatsoever that
would or may, directly or indirectly, affect in any manner any term or condition
or the validity of its performance guarantee of the Talara License Contract
provided in the favour of Perupetro or which would affect the rights,
obligations, guarantees, commitments or privileges of the entities participating
thereof, without the prior written consent of the Purchaser. The Purchaser will,
as soon as reasonably practicable following Closing, use reasonable efforts to
remove the Vendor from such guarantee, provided however, in no event shall the
Purchaser be required to undertake or cause
<PAGE>
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to undertake any action which may jeopardize its rights and benefits under the
Talara License Contract.
7.12 Opinion for Transfer Agent. In the event that the registrar and transfer
agent of the Purchaser requires an opinion of counsel to the Purchaser in
connection with the issue of any Common Shares to the Vendor, the Purchaser
covenants and agrees to use its best efforts to cause its counsel to prepare and
deliver such opinion to its registrar and transfer agent, as soon as is
reasonably practicable after such request is received.
7.13 No Contrary Instructions. The Purchaser shall not provide, or cause to be
provided, at any time following Closing, any contrary instructions to the
Purchaser's registrar and transfer agent which will in any manner whatsoever
affect the transferability of the MIP Shares delivered, or to be delivered, to
the Vendor pursuant to this Agreement.
7.14 Legend. The Purchaser shall not, following Closing, require that a legend
be placed on any certificate(s) in respect of any Common Shares that may be
issued to the Vendor upon the exercise of its exchange right under the
provisions of the Colombian Debenture and the Exchange Rights Agreement, unless
required by applicable Law.
7.15 Toronto Stock Exchange. The Purchaser shall satisfy all conditions imposed
by The Toronto Stock Exchange in connection with the listing of the Common
Shares as soon as reasonably practicable after Closing in order to obtain final
approval of the listing of the MIP Common Shares,
7.16 Name Change. The Purchaser agrees to change the name of American
International Petroleum Corporation of Colombia as soon as reasonably
practicable after the date hereof, unless such name change would in any way
affect the ability of the Colombia Subsidiary to carry on its Business.
7.17 Accounting. Subsequent to Closing and until December 31, 1997, the
Purchaser will maintain in all material respects the accounting system of the
Corporations.
7.18 Transfer of Colombian Debentures. The Vendor agrees not to, directly or
indirectly, transfer, assign, pledge or otherwise dispose of or encumber the
portion of the Colombian Debenture held by it to a third party (including its
Affiliate) at such time, if ever, as the amount of any Claims to which the
Purchaser may be entitled to indemnification hereunder exceeds the excess of the
Performance Earn-Out Balance and the unpaid amount of the Maximum Tax Pool
Payment.
7.19 Report. Subsequent to Closing, the Vendor shall deliver to the Purchaser
forthwith upon receipt a copy of the actuarial report on the contingent
liability of the Pension Plan as disclosed in Schedule 17.
7.20 Right of First Refusal. Should Petroleros Del Norte or any other Person
exercise any right of first refusal or other preferential right under the Joint
Operating Agreement or any other Lease, such that such Person shall upon the
payment of any consideration be entitled to acquire the interest in such Lease,
the Vendor hereby grants to the Purchaser the right to act as its agent in
<PAGE>
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all matters relating thereto and agrees to fully cooperate with the Purchaser,
and shall pay to the Purchaser all amounts or other consideration received by
the Vendor in connection therewith and, in furtherance thereof, assigns to the
Purchaser the right to receive, and agrees at the request of the Purchaser to
direct any such Person to pay directly to the Purchaser, such consideration.
Should any such right be exercised by any Person, the Parties agree that the
Purchaser shall be entitled (in its sole discretion) to allocate the Purchase
Price among the Purchased Shares, solely for the purpose of determining the
price to be paid by such Person in exercising any such right.
ARTICLE 8
ARBITRATION
8.1 Best Endeavours to Settle Disputes. In the event of any dispute, claim,
question or difference arising out of or relating to this Agreement or any
breach hereof, the parties hereto shall use their best endeavours to settle such
dispute, claim, question or difference. To this effect, they shall consult and
negotiate with each other, in good faith and understanding of their mutual
interests, to reach a just and equitable solution satisfactory to all parties.
8.2 Arbitration. Except as is expressly provided in this Agreement, if the
Parties do not reach a solution pursuant to Section 8.1 within a period of
fifteen (15) Business Days, then upon written notice by any party to the others,
the dispute, claim, question or difference shall be finally settled by
arbitration in accordance with the provisions of the International Commercial
Arbitration Act (Ontario) and any amendments thereto, based upon the following:
(a) the arbitration tribunal shall consist of one arbitrator appointed by
mutual agreement of the Parties, or in the event of failure to agree
within ten (10) Business Days, any party may apply to a judge of the
Ontario Court (General Division), or other court of competent
jurisdiction, to appoint an arbitrator. The arbitrator shall be
qualified by education and training to pass upon the particular matter
to be decided;
(b) the arbitrator shall be instructed that time is of the essence in
proceeding with his determination of any dispute, claim, question or
difference and, in any event, the arbitration award must be rendered
within thirty (30) days of the submission of such dispute to
arbitration;
(c) the arbitration shall take place in Toronto, Ontario, unless otherwise
agreed to by the Parties hereto;
(d) the arbitration award shall be given in writing and shall be final and
binding on the Parties, not subject to any appeal, and shall deal with
the question of costs of arbitration and all matters related thereto;
and
(e) judgment upon the award rendered may be entered in any Court having
jurisdiction, or, application may be made to such Court for a judicial
recognition of the award or an order of enforcement thereof, as the
case may be.
<PAGE>
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ARTICLE 9
MISCELLANEOUS
9.1 Notices. Any notice, direction or other instrument required or permitted to
be given hereunder shall be in writing and given by delivering or sending it by
telecopy or other similar form of communication addressed:
(a) to the Purchaser at:
Mountbatten House
9 Westhill Street
P.O. Box N-968
Nassau, Bahamas
Attention: Mr. Luis V. Bacigalupo/Mr. Jeffrey M. Waterous
Telecopier: (242) 356-0201 / (242) 356-0507
<PAGE>
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together with a copy to:
Stikeman, Elliott
Suite 5300
Commerce Court West
Toronto, Ontario
M5L 1B9
Attention: Mr. Derek Linfield
Telecopier: (416) 947-0866
(b) to the Vendor or to each of the Corporations at:
444 Madison Avenue, 32nd Floor
New York, New York
10022
Attention: Dr. George N. Faris
Telecopier: (212) 688-6657
together with a copy to:
Snow Becker Krauss P.C.
605 3rd Avenue, 25th Floor
New York, New York
10158-0125
Attention: David Berkowitz, Esq.
Telecopier: (212) 949-7052
Any such notice, direction or other instrument given as aforesaid shall be
deemed to have been effectively given, if sent by telecopier or other similar
form of telecommunications on the next Business Day following such transmission
or, if delivered, to have been received on the date of such delivery. Any Party
may change its address for service from time to time by notice given in
accordance with the foregoing and any subsequent notice shall be sent to the
Party at its changed address.
9.2 Publicity. Save as required by Law or by any stock exchange, none of the
Parties shall issue any press release or make any other public statement or
announcement relating to or connected with or arising out of this Agreement or
the matters contained herein, without obtaining the prior written approval of
the other Parties to the contents and the manner of presentation and publication
thereof. If disclosure is required by Law or by any stock exchange, the
disclosing Party shall consult in advance with the other Parties and attempt in
good faith to reflect such other Parties' concerns in the required disclosure.
9.3 Time of the Essence. Time shall be of the essence of this Agreement.
<PAGE>
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9.4 Brokers. It is understood and agreed that no broker, agent, finder or other
intermediary acted for either the Vendor or the Corporations in connection with
the sale of the Purchased Shares and the Vendor and the Corporations shall
indemnify and save harmless the Purchaser from and against any Claims whatsoever
for any commission or other remuneration payable or alleged to be payable to any
broker, agent or other intermediary who purports to act or have acted for the
Vendor or the Corporations.
9.5 Third Party Beneficiaries. Except as set forth in the bracketed wording at
the commencement of Sections 6.2 and 6.3, each Party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person, other than the Parties hereto, and no Person, other than
the Parties hereto, shall be entitled to rely on the provisions hereof in any
action, suit, proceeding, hearing or other forum.
9.6 Expenses. Except as otherwise expressly provided herein, all costs and
expenses (including the fees and disbursements of legal counsel, investment
advisers, auditors and other advisors) incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the Party
incurring such expenses.
9.7 Enurement. This Agreement shall enure to the benefit of and be binding upon
the Parties, their successors and any permitted assigns.
9.8 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which, taken together,
shall constitute one and the same instrument.
9.9 Joint and Several Liability. In the event that there is no Closing, for any
reason whatsoever, and notwithstanding any other provision hereof, the
Corporations shall be jointly and severally liable with the Vendor, as a
principal and not as a surety, with respect to all of the representations,
warranties, covenants, indemnities and agreements of the Vendor.
9.10 Assignment. Except as provided in this Section 9.10, none of the rights or
obligations hereunder shall be assignable or transferable by any Party without
the prior written consent of the other Parties. The Purchaser shall be entitled,
upon giving notice to the Vendor at any time on or prior to the Closing Date, to
assign the benefits of this Agreement to any Affiliate of the Purchaser subject
to the following two conditions:
(a) the Purchaser's assignee shall become jointly and severally liable with
the Purchaser, as a principal and not as a surety, with respect to all
of the representations, warranties, covenants, indemnities and
agreements of the Purchaser; and
(b) such assignee shall execute an agreement confirming such assignment and
the assumption by the assignee of all obligations of the Purchaser
under this Agreement.
9.11 Non-Merger. Except as otherwise expressly provided in this Agreement, the
covenants, representations and warranties of the Parties contained in this
Agreement and the Ancillary Agreements shall not merge on and shall survive the
Closing and, notwithstanding such Closing, or any investigation made by or on
behalf of any Party, shall continue in full force and effect.
<PAGE>
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Closing shall not prejudice any right of one Party against any other Party in
respect of anything done or omitted hereunder or under any of the Ancillary
Agreements or in respect of any right to damages or other remedies.
IN WITNESS WHEREOF this Agreement has been executed by each of the
Parties as of the date first above written.
AMERICAN INTERNATIONAL PETROLEUM
CORPORATION
Per:________________________________________________c/s
Dr. George N. Faris
Chief Executive Officer and President
AMERICAN INTERNATIONAL PETROLEUM
CORPORATION OF COLOMBIA
Per:________________________________________________c/s
Dr. George N. Faris
Chief Executive Officer
PAN AMERICAN INTERNATIONAL PETROLEUM
CORPORATION
Per:________________________________________________c/s
Dr. George N. Faris
Chief Executive Officer
MERCANTILE INTERNATIONAL PETROLEUM INC.
Per:________________________________________________c/s
Jeffrey M. Waterous
Executive Chairman
Per:________________________________________________c/s
Luis V. Bacigalupo
Chief Executive Officer and President
EXHIBIT 99.2
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MUST BE HELD INDEFINITELY
UNLESS SO REGISTERED OR TRANSFERRED IN A TRANSACTION
EXEMPT FROM REGISTRATION.
EXCHANGEABLE SUBORDINATED DEBENTURE
$3,000,000 New York, New York
February 25 , 1997
FOR VALUE RECEIVED, the undersigned, AMERICAN INTERNATIONAL PETROLEUM
CORPORATION OF COLOMBIA , an Oklahoma Corporation (the "Company" or "Maker"),
promises to pay to the order of American International Petroleum Corporation, a
Nevada Corporation ("Payee"), its successors and assigns, at Payee's office at
444 Madison Avenue, New York, New York 10022, or such other place as the holder
may designate in writing from time to time, the principal sum of Three Million
and 00/xx Dollars ($3,000,000), in lawful money of the United States, together
with simple interest in the amount of 5% per annum of such principal sum.
Interest shall be payable in cash, quarterly in arrears beginning March 31,
1997. All outstanding principal and accrued and unpaid interest on this
Debenture shall be due and payable on February 25, 1999; provided, however, that
(i) the Payee may demand a partial payment in the principal amount of One
Million Five Hundred Thousand and 00/xx Dollars ($1,500,000), together with
interest accrued thereon on February 25, 1998 by giving at least thirty (30)
days notice prior thereto and the Company shall make such partial prepayment in
cash on February 25, 1998, or (ii) the Debenture may be exchanged for common
shares of Mercantile International Petroleum Inc. ("MIP Shares") at such earlier
date as provided herein.
Payee shall have the right to exchange all or portion of the Debenture
from time to time into MIP Shares at anytime commencing February 25, 1998 by
delivering the Debenture to Equity Transfer Services Inc., the registrar and
transfer agent of Mercantile International Petroleum Inc. ("Mercantile") (or any
successor transfer agent of Mercantile (the "Transfer Agent")) who shall deliver
to the holder of the Debenture (i) the number of MIP Shares equal to the
principal amount of Debenture being converted divided by $3.00, as adjusted for
any dilutive effect referred to in Paragraph 4 of Exchange Rights Agreement
dated February 25, 1997 between Mercantile and Mthe unpaint of the Debenture
being redeemed through the date of payment and (ii) a new Debenture, having
identical terms hereof, for the portion of the Debenture tendered which is not
converted as provided hereunder.
Mercantile shall have the right to cause an automatic exchange of all
or part of the Debenture at such time as the closing price of the MIP Shares
traded on The Toronto Stock Exchange (or such other Exchange which the MIP
Shares may be traded if not traded on The Toronto Stock Exchange) for each of
the twenty (20) trading days ending on the sending of the notice of such
conversion is equal to or above $3.50 per share and the average daily trading
volume for such period exceeded 50,000 Common Shares. Mercantile may exercise
such option by sending notice in writing to the holder of the Debenture. Such
holder will deliver to the Transfer Agent the Debenture and the Transfer Agent
shall deliver to the holder of the Debenture, the items referred to in (i) (ii)
and above (iii) above, as if Payee had exchanged the portion of the Debenture
being automatically converted pursuant to this paragraph.
This Debenture may not be prepaid, except as specifically provided
above, in whole or in part at any time.
This Debenture may be sold, pledged, assigned or otherwise disposed of
(whether voluntarily or involuntary), provided such disposal is exempt from
registration under United States federal and any applicable state securities
laws. The Company shall, without charge, execute and deliver a new Debenture in
the name of the assignee named in such instrument of assignment and this
<PAGE>
Debenture shall be promptly cancelled. Any Debentures issued upon the transfer
or exercise in part of this Debenture shall be numbered and shall be registered
in a Debenture Register of the Company as they are issued. The Company shall be
entitled to treat the registered holder of any Debenture on the Debenture
Register as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Debenture on the
part of any other person. A holder of a Debenture may also have this Debenture
reissued in denominations of not less than $100,000.
The Maker hereby agrees, and the holder of this Debenture by the
holder's acceptance hereof agrees, that the payment of the principal of and
interest on this Debenture is hereby expressly made subordinate and junior in
right of payment to the prior payment in full of all Senior Debt, Capitalized
Leases or Permitted Liens, (each as hereinafter defined) of the Maker. The
holder of this Debenture agrees, as part of such subordination, as follows:
(a) In the event of insolvency or bankruptcy proceedings, or
any receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Maker or to any of the property of the
Maker, or in the event of any proceedings for voluntary liquidation, dissolution
or other winding-up of the Maker, whether or not involving insolvency or
bankruptcy, then the holders of Senior Debt, Capitalized Leases and Permitted
Liens shall be entitled to receive payment in full of all principal of and
premium, if any, and interest on all Senior Debt, Capitalized Leases and
Permitted Liens before the holder of this Debenture shall be entitled to receive
any payment on account of principal or interest on this Debenture, and to that
end the holders of Senior Debt shall be entitled to receive for application in
payment thereof any payment or distribution of any kind or character, whether in
cash or property or securities, which may be payable or deliverable in any such
proceedings in respect of this Debenture.
(b) In the event that the holder of this Debenture shall have
received written notice to the effect that an event of default shall have
occurred on any Senior Debt, Capitalized Leases or Permitted Liens and be
continuing (under circumstances in which the provisions of the foregoing
paragraph (a) are not applicable), then, during the continuance of any such
event of default, all principal of and premium, if any, and interest on all
Senior Debt, Capitalized Leases or Permitted Liens outstanding at the time of
such notice shall first be paid in full, before any payment on account of
principal or interest is made upon this Debenture.
The provisions of this paragraph are for the purpose of defining the
relative rights of the holders of Senior Debt, Capitalized Leases or Permitted
Liens on the one hand, and the holder of this Debenture on the other hand,
against the Maker and its property; and nothing herein shall impair, as between
the Maker and the holder of this Debenture, the obligation of the Maker, which
is unconditional and absolute, to pay to the holder hereof the principal hereof
and the interest hereon in accordance with the terms and provisions hereof; nor
shall anything herein prevent the holder of this Debenture from exercising all
remedies othany, under this paragraph of holders of Senior Debt, Capitalized
Leases or Permitted Liens to receive cash, property, stock or obligations
otherwise payable or deliverable to the holder of this Debenture.
For the purpose of this Debenture:
(a) "Debt" of any corporation shall mean, at any date, all
indebtedness of such corporation which would, in accordance with generally
accepted accounting principles, be classified as indebtedness, whether funded or
current, but in any event including:
(i) all indebtedness guaranteed, directly or
indirectly, in any manner by such corporation or in effect guaranteed directly
or indirectly by such corporation through an agreement, contingent or otherwise,
to supply funds
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<PAGE>
to or in any other manner invest in the debtor, to purchase indebtedness or to
purchase goods, supplies or services for the purpose of enabling the debtor to
make payment of the indebtedness or to assure the owner of the indebtedness
against loss, or otherwise;
(ii) all indebtedness for the payment of purchase of
which such corporation has agreed, contingently or otherwise, to advance or
supply funds;
(ii) all indebtedness secured by any mortgage, lien,
pledge, charge or encumbrance of any kind upon property owned by such
corporation, even though such corporation has not assumed or become liable for
the payment of such indebtedness; and
(iv) all indebtedness of such corporation created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such corporation, even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession of such property; and
(b) "Senior Debt" shall mean the principal of and interest on
Debt outstanding for money borrow instruments or by a loan agreement or loan
agures, bonds, mortgages, deeds of trust or similar instruments (excluding any
of such Debt which by the terms of the instrument creating or evidencing the
same is subordinated to or pari passu with this Debenture).
(c) "Capitalized Lease" shall mean items of equipment or
machinery acquired by the Maker so long as the lender's security is limited to
such equipment or machinery, and any proceeds from the sale thereof.
(d) "Permitted Liens" shall mean (i) any lien securing a tax,
assessment or other governmental charge or levy or the claim of a materialman,
mechanic, carrier, warehouseman or landlord for labor, materials, supplies or
rentals incurred in the ordinary course of business; and (ii) any lien
constituting an encumbrance in the nature of zoning restrictions, easements and
rights or restrictions of record on the use of real property that does not
materially detract from the value of such property or impair the use thereof in
the business of the Maker.
Subject to the rights of the holder of the Senior Debt and as otherwise
expressly provided herein, Maker hereby waives demand, protest, presentment for
payment, notice of dishonor, notice of protest, diligence in bringing suit
against any party, and hereby consents that the time for payment of all or any
part of the principal amount, and of the interest thereon, may be extended from
time to time by Payee without notice, and that any such extension shall not
discharge or otherwise impair the obligations represented by this Debenture. The
foregoing waivers shall not be deemed to waive the requirement of any notice,
demand or cure periods expressly provided for in this Debenture.
THE COMPANY AND ANY HOLDER OF THIS DEBENTURE HEREBY WAIVES T IN
CONNECTION WITH OR IN ANY WAY RELATED TO THIS DEBENTURE OR THE ENFORCEMENT OF
ANY OF THE HOLDER'S RIGHTS AND REMEDIES. THE COMPANY AND, BY ITS ACCEPTANCE
HEREOF, EACH HOLDER OF THIS DEBENTURE, ACKNOWLEDGES THAT IT MAKES THIS WAIVER
KNOWINGLY, VOLUNTARILY AND ONLY AFTER THOROUGH CONSIDERATION OF THE
RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEY. NEITHER THE COMPANY NOR ANY
HOLDER OF THIS DEBENTURE HAS AGREED WITH OR REPRESENTED TO THE OTHER
All actions or proceedings with respect to this Agreement shall be
instituted exclusively in the courts of the State of New York, New York County
or the United States District Court sitting in New York, New York, and by
execution and delivery of this Agreement, both parties irrevocably and
unconditionally submit to the personal jurisdiction of each such court, and
irrevocably and unconditionally waive (X) any objection to the propriety of
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<PAGE>
jurisdiction, service of process or venue in any of such courts, (Y) any right
to a jury trial, and (Z) any claim that any action or proceeding brought in any
of such courts has been brought in an inconvenient forum.
The Company hereby irrevocably designates, appoints and empowers C T
Corporation Systems with offices on the date hereof at 1633 Broadway, N.Y., N.Y.
10019 as its designee, appointee and agent to receive, accept and acknowledge
for and on its behalf, and in respect of its property, service of any and all
legal process, summons, notices and documents which may be served in any action
or proceeding arising out of or related to this Debenture. If for any reason
such designee, appointee and agent shall cease to be available to act as such,
Issuer agrees to designate a new designee, appointee and agent in the State of
New York on the terms and for the purposes of this provision satisfactory to
Pledgee. The Company further irrevocably consents to service of process out of
court in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to the address for notice of the
Company below, such notice to become effective 30 days after such mailing.
Nothing herein shall affect the right of the Payee to serve process in any other
manner permitted by law or to commence legal proceedings or otherwise against
Issuer, as the case may be, in any other jurisdiction.
All demands and notices to be given hereunder shall be delivered
personally or sent by recognized national overnight courier; in the case of the
Company, addressed to its corporate office at Mountbattan House, 9 Westhill
Street, P.O. Box N-10543, Nassau, Bahamas Attention: Jeffrey Waterous, and in
the case of Payee, addressed to the address written above, in either case, until
a new address shall have been substituted by like notice.
This Debenture shall be governed by and construed in accordance with
the laws of the State of New York and shall be binding upon the successors and
assigns of the Maker and inure to the benefit of the Payee, its successors,
endorsees and assigns. If any term or provision of this Debenture shall be held
invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
IN WITNESS WHEREOF, the Company has caused this Debenture to be
executed on its behalf by its duly authorized officer on the day and year first
above written.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
OF COLOMBIA
By:
----------------------------------
Chief Financial Officer
Acknowledged as to exercise rights:
MERCANTILE INTERNATIONAL PETROLEUM INC.
By:
-----------------------------------
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EXHIBIT 99.3
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (the "Agreement") made as of this 25th day of
February, 1997 by and among AMERICAN INTERNATIONAL PETROLEUM CORP., a Nevada
corporation having offices at 444 Madison Avenue, New York, New York 10022
("Pledgor"), MERCANTILE INTERNATIONAL PETROLEUM INC. a Cayman Islands
Corporation having offices at Mountbattan House, 9 Westhill Street, Nassau,
Bahamas ("Issuer") and MG TRADE FINANCE CORP., a Delaware corporation having
offices at 520 Madison Avenue, New York, New York 10022 ("Pledgee").
WHEREAS, American International Refinery, Inc., a wholly-owned subsidiary of
Pledgor ("Borrower") has entered into a Loan and Security Agreement, dated
December 4, 1990, as subsequently amended, with Pledgee (the "Loan Agreement"),
whereby Pledgee agreed to provide a loan facility to Borrower, as a result of
which Borrower has incurred and will hereafter incur certain liabilities and
obligations to Pledgee; and
WHEREAS, Pledgor has agreed to guarantee Borrower's performance of its
obligations under the Loan Agreement pursuant to the terms of a Corporate
Continuing Guarantee dated December 4, 1990 (the "Guarantee"); and
WHEREAS, Pledger has agreed to secure the performance by Borrower of
its obligations under the Loan Agreement by pledging the stock of American
International Refinery, Inc., Pledgor's wholly-owned subsidiary, pursuant to the
terms of a Pledge Agreement dated December 4, 1990 (the "AIRI Pledge
Agreement"); and
WHEREAS, Pledgor has agreed to grant further security and assurance to
Pledgee in order to secure the performance by Borrower of such obligations and
to that effect pledge to Pledgee one million (1,000,000) shares of the common
stock of Issuer, whose common shares are listed on The Toronto Stock Exchange,
owned by Pledgor (the "Pledged Securities").
NOW, THEREFORE, in consideration of the foregoing and for $1.00 and
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties hereto mutually agree as follows:
1. Security Interest. As security for the Borrower's present and future
Obligations (as that term is defined in the Loan Agreement) to Pledgee under the
Loan Agreement, including any renewals or extensions thereof, and all of the
Pledgor's present and future duties and obligations to Pledgee hereunder,
Pledgor hereby delivers, pledges and assigns to Pledgee and creates in Pledgee a
first security interest in all of its right, title and interest in, to and under
all of the Pledged Securities, together with all rights and privileges of
Pledgor with respect thereto, all proceeds, income and profits thereof and all
property received in addition thereto, by reason thereof, in exchange thereof or
in substitution therefor (all such property of Pledgor being hereinafter
referred to as the "Collateral").
2. Dividends, Options or Other Adjustments. Prior to the full payment
and performance by the Borrower of its Obligations to Pledgee under the Loan
Agreement, but not longer than the period this Agreement is in effect, Pledgee
shall receive, as Collateral, any and all additional shares of stock or any
other property of any kind (other than cash) distributable on or by reason of
the Collateral pledged hereunder, whether in the form of or by way of warrants,
dividends, total or partial liquidation, conversion, exchange, prepayments or
redemptions (in whole or in part), or otherwise. If any additional shares of
capital stock, instruments, or other property against which a security interest
can only be perfected by possession by Pledgee, which are distributable on or by
reason of the Collateral pledged hereunder, shall come into the possession or
control of Pledgor, Pledgor shall hold such property in trust for Pledgee and
shall transfer and deliver the same to Pledgee within 5 days of Pledgor's
receipt thereof.
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<PAGE>
3. Delivery of Share Certificates; Stock Powers. All instruments and
share certificates representing the Collateral are being delivck powers duly
executed in blank, as appropriate. Pledgor shall promptly deliver to Pledgee, or
cause the Issuer or such other entity issuing Collateral to deliver directly to
Pledgee, share certificates or other documents representing Collateral acquired
or received after the date of this Agreement together with assignments thereof
and/or stock powers duly executed in blank, as appropriate. If at any time
Pledgee notifies Pledgor that additional stock powers endorsed in blank or
assignments are required, Pledgor shall promptly execute and deliver such stock
powers and or assignments as Pledgee may request.
4. Power of Attorney. Pledgor hereby constitutes and irrevocably
appoints Pledgee, with full power of substitution and revocation, as Pledgor's
true and lawful attorney-in-fact for the purpose of carrying out the provisions
of this Agreement upon the occurrence of an Event of Default and after the
applicable cure period described in Section 11 of the Loan Agreement and to the
full extent permitted by law to exercise all rights and remedies granted to
Pledgee hereunder, including to affix to certificates and documents representing
the Collateral the assignments or stock powers delivered with respect thereto,
to transfer or cause the transfer of the Collateral, or any part thereof on the
books of the corporation or other entity issuing the same, to the name of
Pledgee or Pledgee's nominee and thereafter to exercise as to such Collateral
all the rights, power and remedies of an owner. Pledgee shall act in good faith
in exercising the rights granted to it pursuant to this Section 4. The power of
attorney granted pursuant to this Agreement and all authority hereby conferred
is granted and conferred solely to protect Pledgee's interest in the Collateral
and shall not impose any duty upon Pledgee to exercise any such power. This
power of attorney shall be irrevocable as one coupled with an interest prior to
the satisfaction in full of all of Pledgor's and Borrower's Obligations to
Pledgee.
5. Inducing Representations.
(a) Pledgor represents and warrants to Pledgee that:
(i) It is the sole legal and beneficial owner of, and has good
and marketable title to, the Collateral, free and clear of all pledges, liens,
security interests and other encumbrances and restrictions, on the transfer and
assignment thereof, other than the security interest created by this Agreement
and the restrictions on transfer set forth in Section 11(i) of this Agreement,
and it has the unqualified right and authority to execute this Agreement and to
pledge the Collateral to Pledgee as provided for herein:
(ii) There are no outstanding options, warrants or other agreements
with respect to the Collateral;
(iii) (A) The Collateral is fully paid, validly issued and
non-assessable; (B) the holder or holders of such Collateral are not and will
not be subject to any personal liability as such holder; and (C) such Collateral
is not subject to any contractual restrictions to which Pledgor is a party,
other than the restriction on transfer set forth in Section 11(i) of this
Agreement, or any charter, by-law, statutory or other contractual restrictions,
governing the issuance, transfer, ownership or control of such Collateral,
except as any sale or transfer may be limited under the rules of the Toronto
Stock Exchange and under Canadian provincial and United States Federal or state
security laws;
(iv) Any consent, approval or authorization of or designation or
filing with any authority which is required in connection with the pledge and
security interest granted under this Agreement has been obtained or effected;
(v) The execution, delivery and performance of this
Agreement by Pledgor will not violate any provision of law, rule or regulation
or any order of any court or other governmental agency to which it is subject,
its Certificate
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<PAGE>
of Incorporation and By-Laws, any provision of any indenture, agreement or other
instrument to which it is a party or by which it or any of its properties or
assets are bound, or be in conflict with, result in a breach of, or constitute a
default under (with or without notice or lapse of time), any such indenture,
agreement or other instrument, or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of its Properties
or assets; and
(vi) It has deposited with or caused to be deposited with
Pledgee the Pledged Securities duly endorsed in blank or accompanied by an
assignment or assignments sufficient to transfer title thereto.
(vii) The Guarantee Agreement and the AIRI Pledge Agreement
are in full force and effect and will continue to be so, without amendment or
modification by virtue of the execution of this Agreement, the amendment to the
Loan Agreement of even date in the form attached hereto as Exhibit A, and all
the transactions described therein and related thereto.
(b) Issuer represents and warrants to Pledgee that
(i) (A) The Collateral is fully paid, validly issued and
non-assessable; (B) that holder or holders of such Collateral are not and will
not be subject to any personal liability as such holder; (C) there are no
outstanding options, warrants or other agreements with respect to the
Collateral; and (D) the Collateral is not subject to any contractual
restrictions to which the Issuer is a party, or any charter, by law, statutory
or other contractual restrictions, governing the issuance, transfer, ownership
or control of such Collateral, except as any sale or transfer may be limited
under Canadian, Federal or State security laws, or as set forth herein;
(ii) Any consent, approval or authorization of or designation
of filing with any authority which is required in connection with the pledge and
security interest granted under this Agreement has been obtained or effected;
(iii) The execution, delivery and performance of this
Agreement by Issuer will not violate any provision of law, rule or regulation or
any order of any court or other governmental agency to which it is subject, its
Certificate of Incorporation and By-Laws, any provision of any indenture,
agreement or other instrument to which it is a party or by which it or any of
its properties or assets are bound, or be in conflict with, result in a breach
of, or constitute a default under (with or without notice or lapse of time or
both), any such indenture, agreement or other instrument, or result in the
creation of imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of its properties or assets.
6. Obligations of Pledgor. Pledgor further represents, warrants and
covenants to Pledge that:
(a) It will not sell, transfer or convey any interest in, or
suffer or permit any lien or encumbrance to be created upon or with respect to,
any of the Collateral it purports to own (other than as created under this
Agreement) during the term of the pledge established hereby unless the net
proceeds of the aforementioned conveyance are paid to Pledgee in reduction of
Borrower's Obligation under the Loan Agreement;
(b) It will, at its own expense at any time and from time to
time at Pledgee's request, do, make procure, execute and deliver all acts,
things, writings, assurances and other documents as may be proposed by Pledgee
to further preserve, establish, demonstrate or enforce Pledgee's rights,
interests and remedies created by, provided in or emanating from this Agreement;
and
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<PAGE>
(c) It will not take any action or omit to take any action,
the effect of which is to prevent Pledgee from exercising, or to impair
Pledgee's ability to exercise, it rights under Section 11(a) of this Agreement.
7. Obligations of Pledgee. Pledgee represents, warrants and covenants
to Pledgor that, except as permitted by this Agreement, it will not sell,
transfer or convey any interest in, or suffer or permit any lien or encumbrance
to be created upon or with respect to, any of the Collateral, except that
Pledgee may assign the security interest granted hereunder.
ny action or omit to take any action, the effect of which is to prevent
Pledgee from exercising, or to impair Pledgee's ability to exercise, its rights
under Section 11(a) of this Agreement.
9. Rights of Pledgor.
So long as no Event of Default has occurred and is continuing
after the applicable cure period described in Section 11 of the Loan Agreement,
if any, and so long as Pledgee has not transferred the Collateral to its own
name:
(i) Pledgor shall be entitled to receive and retain any cash
dividends or cash interest payments paid on the Collateral;
and
(ii) Pledgor shall be entitled to vote or consent with respect
to the Collateral in any manner not inconsistent with this
Agreement or the Guarantee. Pledgor hereby grants to Pledgee
an irrevocable proxy to vote the Collateral, which proxy shall
be effective upon the occurrence and continuation of an Event
of Default and upon Pledgee transferring the Collateral to its
own name.
(iii) Pledgor shall have the right to demand from time to time
all or a portion of the Collateral be transferred on Pledgee's
behalf to brokers for sale and the application of the net
proceeds of such sale to repay Borrower's Obligations under
the Loan Agreement.
Upon the request of Pledgee, Pledgor agrees to deliver to Pledgee such
further evidence of such irrevocable proxy or such further irrevocable proxies
to vote the Collateral purported to be owned by Pledgor as Pledgee may request.
10. Rights of Pledgee. Pledgee may at any time and without notice,
discharge any taxes, liens, security interests or other encumbrances levied or
placed on the Collateral or pay for the maintenance and preservation of the
Collateral; the amount of such payments, plus any and all fees, costs and
expenses of Pledgee (including reasonable attorneys' fees and disbursements), in
connection therewith, shall, at Pledgee's option, be reimbursed by Pledgor on
demand with interest thereon at a rate equivalent to 3 percent (3%) above the
floating prime rate (or the "base rate" if there is no prime rate then in
effect) charged by The Chase Manhattan Bank, N.A., New York, New York.
11. Event of Default; Remedies.
(a) Pledgee may:
(i) At any time following the occurrence of an Event of Default
and prior to the cure thereof, cause the Collateral to be transferred to its
name or to the name of its nominee or nominees and thereafter exercise all the
rights of an owner of such Collateral,
(ii) At any time following the occurrence of an Event of
Default and prior to the cure thereof, subject to Section 11(i) below, sell the
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Collateral on such terms and in such manner as Pledgor desires in compliance
with the Uniform Commercial Code as in effect in the State of New York;
(iii) At any time following the occurrence and continuation of an
Event of Default and prior to the cure thereof, collect by legal proceedings or
otherwise all dividends, interest, principal payments, capital distributions and
other sums now or hereafter payable on account of said Collateral, and apply the
same to any of Pledgor's Obligations under the Loan Agreement, in such manner
and order as Pledgee may decide in its sole discretion; and
(iv) At any time following the occurrence of an Event of Default
and prior to the cure thereof, enter into any extension, subordination,
reorganization, deposit, merger, or consolidation agreement, or any other
agreement relating to or affecting the Collateral, and in connection therewith
deposit or surrender control of such Collateral thereunder, and accept other
property in exchange therefor and hold and apply such property or money so
received in accordance with the provisions hereof.
(b) All of the Pledgee's rights and remedies, including but
not limited to the foregoing, shall be cumulative and not exclusive and shall be
enforceable alternatively, successively or concurrently as Pledgee may deem
expedient.
(c) Pledgee may elect to obtain the advice of any investment
banking firm with respect to the method and manner of sale or other disposition
of any of the Collateral, the best price reasonably obtainable therefor, the
consideration of cash and/or credit terms, or any other details concerning such
sale or disposition. Pledgee, in its sole discretion, may elect to sell on such
credit terms which it deems reasonable. All payments received by Pledgee in
respect of a sale of Collateral shall be applied to the Borrower's Obligations
under the Loan Agreement in the manner determined by Pledgee in its sole
discretion, as and when such payments are received.
(d) Pledgor recognizes that Pledgee may be unable to effect a
public sale of all or a part of the Collateral by reason oSecurities Act of
Canada, Securities Act of 1933, as amended, and state securities laws, and may
be compelled to resort to private sales to a restricted group of purchasers who
will be obliged to agree, among other things, to acquire the Collateral for
their own account, for investment and not with a view for the distribution or
resale thereof. Pledgor acknowledges and agrees, subject to Section 11(i), that
Pledgee may sell the Collateral in one or more private sales in accordance with
the Uniform Commercial Code as enacted in New York and any other applicable law,
and that Pledgee has no obligation to delay the sale of any Collateral for the
period of time necessary to permit the registration of the Collateral for public
sale under the Act. Pledgor agrees that a private sale or sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
(e) If any consent, approval or authorization of any state, municipal
or other governmental department, agency or authority should be necessary to
effectuate any sale or other disposition of the Collateral, or any partial
disposition of the Collateral, Pledgor agrees to execute all such applications
and other instruments as may be required in connection with securing any such
consent, approval or authorization, and will otherwise use its best efforts to
secure the same. Pledgor further agrees to use its best efforts to secure such
sale or other disposition of the Collateral as Pledgee may deem necessary
pursuant to the terms of this Agreement.
(f) Upon any sale or other disposition pursuant to this Agreement,
Pledgee shall have the right to deliver, assign and transfer to the purchaser
thereof the Collateral so sold or disposed of. Each purchaser at any such sale
or other disposition (including Pledgee) shall hold the Collateral free from any
claim or right of any kind whatsoever, including any equity or right of
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<PAGE>
redemption of Pledgor. Pledgor specifically waives, to the extent permittedaw or
not prohibited by this Agreement, all rights of redemption, stay or appraisal
which it had or may have under any rule of law or statute now existing or
hereafter adopted.
(g) Pledgee shall not be obligated to make any sale or other
disposition, unless the terms thereof shall be satisfactory to it. Pledgee may,
without notice or publication, adjourn any private or public sale, and, upon
five (5) days' prior notice to Pledgor, hold such sale at any time or place to
which the same may be so adjourned. In case of any sale of all or any part of
the Collateral, on credit or future delivery, the Collateral so sold may be
retained by Pledgee until the selling price is paid by the purchaser thereof,
but Pledgee shall incur no liability in case of the failure of such purchaser to
take up and pay for the property so sold and, in case of any such failure, such
property may again be sold as herein provided.
(h) Subject to subsection 11(i) below, at any time after (i) Pledgor
breaches its representation, warranty and covenant under Section 6(c) of this
Agreement or (ii) the Issuer breaches its representations, warranties or
covenants under Section 7 of this Agreement, (either such event shall constitute
a "Further Default"), Pledgee may sell the Collateral in accordance with the
terms set forth herein or in accordance with the provisions of the Loan
Agreement respecting the disposition of Collateral as that term is defined
therein.
(i) The Pledgee shall sign an acknowledgment (the "Acknowledgment")
with Issuer that for so long as it holds the Pledged Securities, the sale of the
Pledged Securities are subject to the following restrictions:
(A) No Pledged Securities shall be sold to any "U.S. person" (as such term
is defined in Regulations S promulgated under the U.S. Securities Act
of 1933), except in compliance with applicable U.S. federal and state
securities law;
(B) No Pledged Securities shall be sold in Canada, including on The Toronto
Stock Exchange, or to any resident of Canada until forty (40) days
after the execution date of this Agreement, and, in any event, only in
compliance with applicable law;
(C) Pledgee shall not sell into the market on any trading day more than 10%
of the total number of shares of the Issuer traded on The Toronto Stock
Exchange on the preceding twenty (20) trading days prior to such sale;
(D) Notwithstanding (C) above, the maximum total number of Pledged
Securities that may be sold into the market by Pledgor and Pledgee over
any five (5) consecutive trading days shall be 250,000 shares of the
Common Shares of Issuer, with Pledgor agreeing to defer its sales of
Common Shares of Issuer to the extent Pledgee wishes to sell in order
not to violate this provision;
(E) Pledgee shall not sell, transfer or otherwise dispose of more than the
number of Pledged Securities representing 5% of the then outstanding
shares of the Issuer to any party or group of related parties without
the prior written consent of the Issuer; and
(F) Pledgee shall not short sell the shares of the Issuer at any time.
As used herein, "Event of Default" shall mean and include (i) the
occurrence of any Event of Default under the Loan Agreement or the Guarantee
(ii) any material misrepresentation by Pledgor or the Issuer in or with respect
to any provision of this Agreement, (iii) the failure of Pledgor or the Issuer
to perform any material obligation, or the breach of any material covenant,
under
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<PAGE>
this Agreement, or (iv) any attachment of the Collateral at any time pursuant to
any court order or other legal process.
12. Disposition of Proceeds. The proceeds of any sale or disposition of
all or any part of the Collateral shall be applied by Pledgee in the following
order:
(a) to the payment in full of the costs and expenses of such sale or
sales, collections, and the protection, declaration and enforcement of any
security interest granted hereunder including the reasonable compensation of
Pledgee's agents and attorneys; and
(b) to the payment to Pledgee of an amount equal to of the Borrower's
Obligations to Pledgee under the Loan Agreement; and
(c) to the payment to Pledgor of any surplus then
remaining from such proceeds, subject to the rights of any holder of a lien on
the Collateral of which Pledgee has actual notice.
13. Termination. This Pledge Agreement shall continue in full force and
effect until the earlier of the
(a) date on which all the Borrower's Obligations under the
Loan Agreement and Pledgor's obligations under this Agreement have been paid in
full and satisfied or
(b) the payment in full of the Issuer's Notes referred to in the
Loan Agreement, together with any accrued and unpaid interest and the
satisfaction of Pledgor's obligations hereunder.
14. Expenses of Pledgee. All expenses (including reasonable fees and
disbursements of counsel) incurred by Pledgee in connection with any actual or
attempted sale, exchange of, or any enforcer whether directly or as
attorney-in-fact pursuant to a power of attorney or other authorization herein
conferred, for the purpose of satisfaction of any of Borrower's Obligations
under the Loan Agreement or of any additional amounts owing by Pledgor or to
cover Pledgee's costs of acting against the Collateral, shall be deemed to be
part of Borrower's Obligations and Pledgee may apply the Collateral to payment
of or reimbursement of itself for such expenses.
15. General Provisions.
(a) Pledgee and its assigns shall have no obligation in
respect of the Collateral, except to use reasonable care in holding the
Collateral and to hold and dispose of the same in accordance with the terms of
this Agreement. Pledgee shall be deemed to have used reasonable care in holding
the Collateral if it exercises the same degree of care with respect to the
Collateral as it exercises with respect to its own property.
(b) The Issuer, on its own behalf and on behalf of its
successors and assigns, solely in its capacity as issuer of the Collateral,
hereby acknowledges Pledgee's security interest in the Collateral and further
agrees (i) to deliver to Pledgee any and all instruments and/or certificates
evidencing any right, option or warrant, and all new, additional or substituted
securities issued to Pledgor by virtue of its ownership of the Pledged
Securities or upon exercise by Pledgor of any option, warrant or right attached
to the Pledged Securities owned by Pledgor, and (ii) upon written notice by
Pledgee that an Event of Default has occurred and is continuing (which notice
shall be conclusive), to pay Pledgee any and all cash dividends which might be
declared and payable (including any unpaid dividend accrued prior to the date of
such notice) on such Pledged Securities. Any and all actions taken by the Issuer
pursuant to this paragraph (b) shall be deemed to have been taken upon the
irrevocable request and instructions of Pledgor, and are hereby confirm
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<PAGE>
(c) Any notice or other communication given hereunder shall be
in writing and sent by registered or certified mail, postage prepaid, or by
telecopy, as follows:
If to Pledgor:
American International Petroleum Corp.
444 Madison Avenue
New York, NY 10022
Attention: Dr. George N. Faris
Telecopier No. (212) 688-6057
If to Pledgee:
MG Trade Finance Corp.
520 Madison Avenue
New York, NY 10022
Attention: President
Telecopier (212) 223-0627
If to Issuer:
Mercantile International Petroleum, Inc.
Mountbattan House
9 Westhill Street
P.O. Box N-10543
Nassau, Bahamas
Attention: Jeffrey Waterous
Telecopier No. (242) 356-0201
If to the Custodian:
Duker Barrett Gravante & Markel LLP
1585 Broadway
New York, New York 10036
Attention: Kathleen M. Franklin, Esq./Michael Vogel, Esq.
Telecopier No. (212) 969-5650
Any party hereto may change its address for notice by giving notice thereof to
the other party in accordance with the provisions of this paragraph.
(d) No failure on the part of Pledgee to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by Pledgee of any
right, power or remedy hereunder preclude any other or future exercise thereof,
or the exercise of any other right, power or remedy. The remedies herein
provided are cumulative and are not exclusive of any remedies provided by law or
any other agreement. The representations, covenants and agreements of Pledgor
and the Issuer herein contained shall survive the date hereof. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and legal representatives. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
EXCEPT THAT ALL MATTERS INVOLVING SECURITY INTERESTS IN AND/OR LIENS ON
COLLATERAL LOCATED IN STATES OTHER THAN NEW YORK SHALL BE GOVERNED BY THE LAW OF
THE STATE IN WHICH THE SUBJECT COLLATERAL IS LOCATED.
(e) This Agreement and the other agreements to which it refers
constitute the complete agreement between the parties with respect to the
subject matter and may not be changed, modified, waived, amended or terminated
orally, but only by a writing signed by the party to be charged. There are no
agreements between the parties with respect to the subject matter which are not
in a writing signed by the party to be charged. This Agreement replaces any and
all proposals,
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<PAGE>
commitments and promises with respect to the subject matter, all of which are
merged herein and replaced hereby.
(f) The Pledged Securities, in form acceptable for transfer,
shall be held in the custody of Duker Barrett Gravante & Markel LLP (the
"Custodian"). Upon receipt by the Custodian of a certif Default has occurred or
that Pledgor has made a demand to liquidate a portion of the Pledged Securities
pursuant to Section 9(a)(iii) of this Agreement, the Custodian shall deliver the
Pledged Securities to Pledgee or to a broker, on Pledgee's behalf, pursuant to
Section 9(a)(iii) of this Agreement. Upon receipt by the Custodian of a
certificate signed by the Pledgee stating that the Borrower's and Pledgor's
Obligations to Pledgee, have been satisfied in full or this Agreement is
terminated, the Custodian shall deliver the Pledged Securities to the Pledgor.
The Custodian shall exercise reasonable care in the custody of the
Pledged Securities in its possession at any time, but shall be deemed to have
exercised reasonable care if the Pledged Securities are accorded treatment
substantially equal to that which the Custodian accords its own property (it
being understood that the Custodian shall have no responsibility for
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relevant the Pledged Securities and whether
or not the Custodian has or is deemed to have knowledge of such matters), unless
the Custodian is expressly directed to take such action upon written request of
Pledgee, but no failure to comply with any such request nor any omission to do
any such act requested by the Pledgee shall be deemed a failure to exercise
reasonable care, nor shall any failure of the Custodian to take necessary steps
to preserve rights against any parties with respect to the Pledged Securities in
its possession be deemed a failure to exercise reasonable care. The Custodian
shall not be liable for any mistake of fact or error of judgment, or for any
acts or omissions of any kind unless caused by its wilful misconduct or gross
negligence.
The Custodian may act in reliance upon any instrument or signature
believed to be genuine and may assume that any person purporting to give any
writing, notice, advice or instruction in connection with the provisions hereof
has been duly authorized to do so.
The Custodian does not have and will not have any interest in the
Pledged Securities, but is serving only as Custodian and having only possession
thereof. Upon delivery of the Pledged Securities to Pledgor or Pledgee pursuant
to this Paragraph 15(f), Custodian shall be fully released from all liability
and obligations with respect to the Pledged Securities.
Pledgee, Pledgor and Issuer (solely with respect to the Issuer, as to
events resulting from a breach of its representations heand hold harmless the
Custodian and its partners, employees and agents from and against any and all
claims, injuries, losses, damages, penalties, actions, judgments, suits,
liabilities, costs and expenses of whatever kind or nature (including, without
limitation, fees and disbursements of counsel) which may at any time be asserted
against, imposed upon or incurred by the Custodian or any of is partners,
employees or agents in any way relating to or arising out of or concerning
Custodian's duties or services hereunder. If any action, claim or proceeding
shall be brought or asserted against the Custodian or any of its partners,
employees or agents in respect of which indemnity may be sought from Pledgee,
Pledgor and/or Issuer (solely with respect to the Issuer, as to events resulting
from a breach of its representations hereunder) the Custodian or any such
partner, employee or agent shall have the right to employ counsel of its choice
in the defense of any such action, claim or proceeding and the fees and expenses
of such counsel shall be immediately paid by Pledgee, Pledgor and/or Issuer
(solely with respect to the Issuer, as to events resulting from a breach of its
representations hereunder) to the Custodian or such counsel upon the Custodian's
request.
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<PAGE>
The respective indemnities of the Pledgee, Pledgor and the Issuer set
forth in and made pursuant to this Agreement will remain in full force and
effect and will survive the termination of this Agreement.
(g)(i) All actions or proceedings with respect to this
Agreement shall be instituted exclusively in the courts of the State of New
York, New York County or the United States District Court sitting in New York,
New York, and by execution and delivery of this Agreement, all parties
irrevocably and unconditionally submit to the personal jurisdiction of each such
court, and irrevocably and unconditionally waive (X) any objection to the
propriety of jurisdiction, service of process or venue in any of such courts,
(Y) anyy claim that any action or proceeding brought in any of such courts has
been brought in an inconvenient forum.
(ii) The Issuer hereby irrevocably designates, appoints and
empowers C T Corporation Systems with offices on the date hereof at 1633
Broadway, N.Y., N.Y. 10019 as its designee, appointee and agent to receive,
accept and acknowledge for and on its behalf, and in respect of its property,
service of any and all legal process, summons, notices and documents which may
be served in any action or proceeding arising out of or related to this
Agreement. If for any reason such designee, appointee and agent shall cease to
be available to act as such, Issuer agrees to designate a new designee,
appointee and agent in the State of New York on the terms and for the purposes
of this provision satisfactory to Pledgee. Issuer further irrevocably consents
to service of process out of court in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
the address for notice of the Issuer herein, such notice to become effective 30
days after such mailing. Nothing herein shall affect the right of the Pledgee to
serve process in any other manner permitted by law or to commence legal
proceedings or otherwise against Issuer, as the case may be, in any other
jurisdiction.
(h) This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Capitalized terms used but not defined herein shall have the same
meaning as in the Loan Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the date first above written.
AMERICAN INTERNATIONAL PETROLEUM CORP.
By:___________________________________
Title:________________________________
MG TRADE FINANCE CORP.
By:___________________________________
Title:________________________________
MERCANTILE INTERNATIONAL PETROLEUM INC.
By:_____________________________
Title:___________________________
Acknowledged and Agreed to:
DUKER BARRETT GRAVANTE & MARKEL LLP
By:_______________________________
Title:____________________________
("Custodian")
