UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-14905
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 13-3130236
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
444 Madison Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 688-3333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.08 per share
Class A Warrants
(Title of Each Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of April 6, 1998 was approximately $187,000,000 (assuming
solely for purposes of this calculation that all directors and officers of the
Registrant are "affiliates").
The number of shares of Common Stock of the Registrant outstanding as of April
6, 1998 was 48,994,257.
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PART I
Item 1. BUSINESS
General
American International Petroleum Corporation ("AIPC" or the "Company"), was
organized on April 1, 1929 under the laws of the State of Nevada under the name
Pioneer Mines Operating Company. The Company's name was changed to its current
name in 1982. The Company implemented the production and processing of asphalt,
vacuum gas oil and other products at its subsidiary's Lake Charles, Louisiana
refinery the first quarter of 1998 utilizing low-cost, low-gravity, high-sulpher
crudes from Mexico and Venezuela and is engaged in oil and gas exploration and
development in western Kazkastan. The Company is also seeking other oil and gas
projects in the United States, Russia and Central Asia.
The Company's wholly-owned subsidiary, American International Refinery, Inc.
("AIRI") is the owner of a refinery in Lake Charles, Louisiana (the "Refinery").
A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation
tower (the "Crude Unit") was leased by AIRI to Gold Line Refining Ltd. ("Gold
Line"), an independent refiner, from 1990 to March 20, 1997 under a lease
agreement (the "Lease Agreement") between AIRI and Gold Line. See "Domestic
Operations - Refinery" below. The Company is now operating the Refinery with its
own personnel to produce asphalt and other products. See "Domestic Operations -
Refinery" below. The Company's wholly-owned subsidiary, American International
Petroleum Kazakstan ("AIPK") is the owner of a 70% working interest in a 20,000
square kilometer exploration block in western Kazakstan. See "International
Exploration and Development" below. 1229329 Ontario ("Ontario"), a wholly-owned
subsidiary of the Company organized under the laws of the Province of Ontario,
Canada, was created specifically to enable the Company to margin or sell in
Canada shares of common stock of Mercantile International Petroleum Inc.
("MIP"), which the Company received as partial proceeds from an asset sale,
which occurred on February 25, 1997 when the Company sold all of the issued and
outstanding shares of common stock of its wholly-owned oil and gas exploration
and production subsidiaries, American International Petroleum Corporation of
Colombia ("AIPCC") and Pan American International Petroleum Corporation
("PAIPC"), in an arms length transaction (the "MIP Transaction"). See
"International Exploration and Development - Sale of South American
Subsidiaries" below. In February 1998, the Company organized another
wholly-owned subsidiary, American Eurasia Petroleum Corporation ("AEPC"), to
conduct business in Russia and in Central Asia. The term the "Company" includes
AIPC, AIRI, AIPCC, PAIPC, AIPK, Ontario, and AEPC, unless the context otherwise
requires.
Prior to the MIP Transaction and the implementation of its Kazakstan operations,
the Company's principal oil and gas properties consisted of (i) between 40% and
80% of the working interest in all oil and/or gas wells drilled on approximately
33,000 acres in the Puli Anticline and the Toqui-Toqui fields, located in the
Middle Magdalena Region of Colombia, South America and (ii) 65% of the working
interest in approximately 27,000 acres of exploratory and development contract
rights in the Talara Basin in Peru, South America.
The discussions included herein contain forward-looking statements that involve
risks and uncertainties, including the Company's continuing losses, working
capital deficits, the marketability of the Company's securities obtained from
MIP in connection with the MIP Transaction, the ability to enter into profitable
contracts to utilize the Refinery, completion of construction projects and
financing of refinery operations, the timely development and financing of new
oil and gas projects, the impact of competitive products and pricing, and other
risks detailed from time to time in the Company's SEC reports.
Domestic Operations
Refinery
In July 1988, AIRI acquired the Refinery, which is located on 30 acres of land
bordering the Calcasieu River near Lake Charles, Louisiana. The Company also
owns 22 acres of vacant waterfront property adjacent to the Refinery and another
45 acres of vacant land across the highway from the Refinery. The river connects
with the Port of Lake Charles, the Lake Charles Ship Channel and the
Intercoastal Waterway. Most of the Refinery's feedstock and refined products are
handled through the Refinery's barge dock at the river.
The Company recommissioned and tested the Refinery during operations between
February and July 1989. During that time it processed up to 24,000 barrels of
oil per day. Numerous modifications were designed and implemented to bring the
Refinery into compliance with new and existing environmental regulations and to
facilitate production of higher value products. Completion of most environmental
compliance projects and a military specification jet fuel ("JP-4") upgrade
project at the Refinery occurred in 1990.
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The main unit of the Refinery is the Crude Unit, which is capable of producing
light naptha overhead and the following side cuts: heavy naptha, kerosene (for
jet fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special
#5 fuel oil. The Crude Unit is also suitable for adaptation to process sour
crude oil.
In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit
(the "VDU") which was dismantled and moved to the Refinery. Construction of the
VDU on the Refinery site was completed in 1993 and, for various economic
reasons, the VDU has been idle since then. However, the Company recently
completed the expansion of, and certain enhancements to the Crude Unit, VDU, and
other components of the Refinery to enable the Company to produce conventional
and polymerized asphalt, vacuum gas oil ("VGO"), diesel, and other products.
Total petroleum storage capacity at the Refinery is 725,000 barrels. Storage
tanks on the Refinery's land include 275,000 barrels of crude storage, 370,000
barrels of storage for finished product sales and 80,000 barrels of product
rundown storage. The Refinery also has 20,000 barrels of waste water storage
capacity.
The Crude Unit was leased by AIRI to Gold Line from 1990 to March 20, 1997 under
the Lease Agreement. The Lease Agreement was terminated because Gold Line was in
default under the terms thereof. The Company filed suit for damages and received
a judgment in its favor of $1.5 million. However, since Gold Line has filed for
protection under Chapter 11 of the Bankruptcy Code, and there are certain
secured creditors who have made significant claims against Gold Line, the total
of which claims may exceed the total value of Gold Line's assets, the
collectability of this judgment by the Company is uncertain.
With the recent termination of the Lease Agreement on March 20, 1997, the
Company has staffed and operates the Refinery with its own employees and all
operations are now under the direct control of its management. Although the
primary focus at the Refinery will be the production of conventional and
polymerized asphalt and VGO, it will also produce roofing flux and smaller
quantities of light-end products such as naphtha, fuel oil, diesel, and jet
kerosene. With the completion of the Refinery expansion, the Company now has a
basic foundation upon which to build its planned asphalt business.
In addition to the manufacturing and sale of asphalt, VGO, roofing flux, and
other products, the Company is capable of utilizing its facility as a toll
processing terminal to provide a service to blend and polymerize asphalt for
other companies. The Company's VGO can be sold to major gasoline refining
companies and other refiners, which are prevalent in the Gulf Coast and use VGO
as a feedstock for their catalytic cracking units. Although the Company has not
signed any long-term agreements to sell VGO, there is a continuous demand for
VGO, and the Company has received, and continues to receive, numerous inquiries
from local and out-of-state refiners interested in purchasing VGO from the
Refinery. Marketing of VGO and other non-asphalt products produced in the
Refinery (constituting approximately 40% of the Refinery's production) is to be
handled directly by Refinery personnel.
The Company's anticipated asphalt terminalling and marketing operations for
conventional and polymerized asphalt will initially be applicable only to the
local truck rack paving market within an approximate 100 mile radius of the
Refinery. This market segment represents approximately 25% of the total capacity
of the Refinery. All other asphalt manufacturing and marketing opportunities,
wholesale barge and rail car, or retail truck for roofing asphalts, industrial
grade asphalts, and all other conventional and polymerized asphalt products will
be developed by the Company beginning in 1998. The Company has engaged Materials
Resources, Inc. ("MRI") as exclusive sales representative to market the
Refinery's truck rack paving asphalt in Louisiana. MRI is an established
supplier of asphalt, emulsions and aggregates in Louisiana, Mississippi and east
Texas. In February 1998, the Company hired an asphalt sales manager for business
in the State of Texas.
Recent Developments
In February 1998, the construction necessary to expand and enhance the Refinery
was completed and the sale of asphalt commenced. The Company has not completed
negotiations of any feedstock crude oil supply agreements, but it is currently
in the midst of separate supply agreement negotiations with the Mexican and
Venezuelan governments and major oil companies for the upcoming processing
season.
ST. MARKS REFINERY
In March 1998, the Company signed an agreement, subject to certain conditions,
to purchase the 20,000 barrels per day St. Marks Refinery and product storage
terminal located on the St. Marks River near Tallahassee, Florida in a tax free
exchange of stock worth up to $4.5 million. If the Company decides not to
purchase the 55-acre facility, it has agreed to an annual evergreen lease of the
Refinery under specific terms and conditions.
The primary advantage to the Company of the St. Marks acquisition or lease, is
the immediate increase of its retail presence from two to five states along the
U.S. Gulf Coast, plus a 50% increase in storage tank capacity by adding 33 more
tanks totaling more than
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460,000 barrels to the Company assets. This transaction provides an opportunity
for the Company to double the retail sales capacity of petroleum products
manufactured at its Lake Charles, Louisiana Refinery through access to new
asphalt product markets plus jet fuel, diesel and industrial fuel oil sales in
Florida, Georgia and Alabama.
Refinery Financing Activities
Subsequent to the purchase of the Refinery, the Company entered into a series of
transactions with MG Trade Finance Corp. ("MGTF") to finance the upgrade and
operations of the Refinery. In 1990, AIRI entered into a loan and security
agreement (the "Loan Agreement") with MGTF whereby MGTF loaned AIRI $9,855,000
to (i) repay certain of AIRI's prior obligations; (ii) fund certain improvements
related to environmental regulations and production of J-4 jet fuel; and (iii)
provide working capital.
In order to secure AIRI's obligations under the Loan Agreement, AIRI granted
MGTF a first priority security interest in the Refinery and in substantially all
of the remainder of AIRI's assets. The Company also guaranteed AIRI's
obligations under the Loan Agreement and pledged to MGTF all of the capital
stock of AIRI. Pursuant to the Loan Agreement, the Company granted MGTF warrants
to purchase 516,667 shares (as adjusted) of the Company's common stock, par
value $.08, (the "Common Stock") at an exercise price of $7.50 per share,
exercisable at any time prior to June 30, 1994 (the "MGTF Warrants"). The
expiration dates of 246,667 of the MGTF Warrants were extended to June 30, 1997,
and the exercise price was adjusted to $15.63 per share of common stock.
In April 1993, the Company negotiated an amendment to the Loan Agreement whereby
MGTF reduced the balance of the loan by $750,000 through the exercise of 100,000
warrants to purchase common stock of the Company. Also, in consideration for
rescheduling the loan, MGTF received a fee of $100,000 and a warrant to acquire
100,000 shares of the Company's common stock at $16.88 per share. Such warrant
was exercisable at any time prior to June 30, 1997. In July 1995, MGTF released
all of its then-existing warrants for cancellation and received new warrants to
purchase 150,000 shares of the Company's common stock at $2.00 per share anytime
prior to March 31, 1998. These warrants were exercised by MGTF in October 1997.
As part of certain negotiations related to the MIP Transaction, the Company and
MGTF agreed to change the due date of the unpaid balance of the Loan Agreement
of $2,108,000 to September 30, 1997 from March 31, 1998. In October 1997, the
Company paid the total balance due on the Loan Agreement.
INTERNATIONAL EXPLORATION AND PRODUCTION
Generally, oil and gas exploration is extremely speculative, involving a high
degree of risk. Even if reserves are found as a result of drilling, profitable
production from reserves cannot be assured.
Recent Developments
ZAO NAFTA
On March 18, 1998, the Company signed an agreement with Zao Nafta ("ZN") a
Russian closed stock company (the "Option") in which the Company received a
90-day option to acquire a 75% working interest in a joint venture for the
development of 17 oil and gas licenses (the "Licenses") in the Samara and
Saratov regions of European Russia, covering approximately 877,000 acres.
The Russian government companies, who performed the initial exploration program
in these regions, estimated total aggregate proven recoverable reserves on the
Licenses to be approximately 35 million barrels of oil.
Should the Company decide to complete the transaction, pending confirmation of
proven reserves and modification of certain license conditions, the Company
would become Operator and would have complete control of all operations. It
would also be required to make a minimum investment during the first 24 months
of $25 million for the rework of 16 existing wells (which tested an aggregate
rate of 6,200 barrels of oil per day), construction of all necessary
infrastructure, seismic investigations, and processing and drilling of new
wells. ZN agreed to use its best efforts to have the minimum investment
requirement reduced by approximately 25% to $17.6 million, although such
reduction is not a requirement for completion of the transaction.
The Company agreed to pay $11 million for the 75% working interest, $4.7 million
in cash and stock and $6 million from 25% of its future net production,
including a refundable $300,000 cash payment for the option. After closing, the
Company intends to commence a $2 million rework program on the 16 existing
shut-in wells on the Samara license and place the wells in a productive mode of
operation as soon as practicable. These shut-in wells are located in a developed
area, with the necessary productive infrastructure in place to enable prompt
sale of oil production, if and when this occurs.
Sale of South American Subsidiaries
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On February 25, 1997, the Company 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") to MIP in an arms
length transaction.
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. The total aggregate purchase price payable by MIP for the Purchased
Shares was valued (giving account to the contingent portion thereof which,
pursuant to GAAP, was not recorded by the Company) 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 the
Company's 12% Secured Debentures due December 31, 1997, which were
secured by the Company'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 (the "MIP Shares").
(d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC
(the "Exchangeable Debenture"), 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 the Company
may demand payment on that date of $1.5 million of the principal
balance thereof.
(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 Accrued Tax Benefit Deductions, if any,
available to AIPCC on future tax filings in Colombia.
The Company utilized a substantial portion of the cash proceeds of the sale to
repay the outstanding balance to MGTF on its 12% Secured Debentures, due
December 31, 1997, to pay other debts, expand its refinery, and for general
corporate use.
Kazakstan Agreement
On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement with MED
Shipping and Trading S.A. ("MED"), a Liberian corporation with offices in
Frankfurt, Germany, to buy from MED, in exchange for a combination of cash and
stock, 70% of the stock of MED Shipping Usturt Petroleum Ltd. ("MSUP"), a
Kazakstan corporation which owns 100% of the working interest in a Kazakstan
Concession (the "License Area"). The Concession is located approximately 125
kilometers from Chevron's multi-billion-barrel Tengiz Oil field near the Caspian
Sea, and is bordered to the west by both Oryx/Exxon and Amoco licenses and to
the south by an ELF Acquitane license. Independent, preliminary, evaluation
indicates potential recoverable reserves from 8 structures in the Concession
area from Jurassic Age sandstones. Eight additional structures have been
identified but have not been evaluated.
The Company paid $100,000 in cash and 300,000 shares of its Common Stock to MED
in return for the option to acquire a 40% working interest in the License Area.
Further negotiations resulted in an increase in the working interest to 70%. As
consideration for its 70% interest in MSUP, the Company issued an additional
2,950,000 shares of its Common Stock, and warrants to purchase an aggregate of
500,000 shares of its Common Stock at an exercise price of $2.00 per share.
The definitive agreement under which MSUP is to explore and evaluate hydrocarbon
reserves in the License Area provides for the payment of a commercial bonus of
0.5% of reserve value, a subscription bonus of $975,000, and grants MSUP the
exclusive right to a production license upon commercial discovery. The term of
the license is five years and may be extended for an additional 4 years. The
five-year minimum work program required by the license calls for MSUP to acquire
and process 3,000 kilometers of new seismic data, reprocess 500 kilometers of
existing seismic data, and drill 6,000 linear meters. Initial production up to
650,000 barrels is exempt from royalty, which otherwise ranges between 6% and
26%, to be negotiated in conjunction with a production agreement with
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the government. Income tax has been set at 30% and social programs payments at
$200,000 annually during exploration. MSUP will be required to expend a minimum
of $14.75 million over five years, of which $6.3 million is required in the
initial three years. In addition, MSUP assumed an obligation to pay the
Kazakstan government three annual payments of $200,000 each, beginning in July
1998, for the purchase of existing seismic and geological data on the License
Area. AIPK recently contracted with two geophysical companies to acquire 2D
seismic data on the License Area. One geophysical company is to concentrate on
the Chikuduk, a 60 kilometer-long structure previously identified in the eastern
section of the License Area, and the other will focus on areas west of the
Chikuduk. The seismic is intended to assist in a determination of the
feasibility of further exploration and potential siting of future exploratory
drilling.
Other Financings
In March 1994, the Company completed an offering of rights to its shareholders.
Each right was exercised for $3.00, and the holder received two shares of common
stock and one redeemable warrant to acquire an additional share of common stock
at any time prior to March 1, 1996 at an exercise price of $4.00 per share. The
expiration date of these warrants was extended to April 9, 1998, but the
exercise price remained at $4.00 per share.
Since the MIP Transaction and the termination of its Lease Agreement with Gold
Line, the Company has had no revenues from operations. Although it has utilized
some of the proceeds from the MIP Transaction to fund the Refinery expansion and
start-up processes, its activities in Kazakstan and other operations, such
proceeds were inadequate to satisfy all of the Company's debt obligations and
capital requirements. Therefore, during 1997, the Company issued various
promissory notes, common stock, and convertible debentures in exchange for an
aggregate of approximately $20.5 million through certain private placement and
agreements, most of which were issued in reliance upon the safe harbor provided
by Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Act"). The Company utilized most of the cash proceeds from these private
placements to fund its operations and activities at the Refinery and in
Kazakstan, for payment of debt, and for general corporate purposes.
Competition
The geographic location of the Refinery in Lake Charles, La. gives the Company a
distinct freight advantage over other asphalt suppliers in the area. Most of the
Company's competition in its planned asphalt manufacturing business will come
from those refiners that do not have downstream processing choices such as the
Company's. The major competitor in the local truck rack market is a blending
plant operation over 75 miles away. The average distance from the Company's
refinery to the nearest competing truck rack asphalt producing refinery ranges
from 150 to over 200 miles away. The Company's major competitor for barge sales
is located over 400 miles farther away from the Company's major markets than the
Refinery. This distance equates to more than $1.30 per barrel freight advantage
to the Company into the same markets.
Due to highly volatile crude oil prices and environmental regulation, many small
oil refineries have ceased or curtailed production. The Company also believes,
although no assurance of this can be given, that the high costs of constructing
new refineries, as well as the cost of updating and modifying inactive existing
refineries will discourage new competition in the asphalt and refining
businesses.
The oil and gas industry, including oil refining, is highly competitive. The
Company is in competition with numerous major oil and gas companies and large
independent companies for prospects, skilled labor, drilling contracts,
equipment and product sales contracts. Many of these competitors have greater
resources than the Company's.
Revenues generated by the Company's oil and gas operations and the carrying
value of its oil and gas properties are highly dependent on the prices for oil
and natural gas. The price which the Company receives for the oil or natural gas
it may produce is dependent upon numerous factors beyond the control of the
Company's management, the exact effect of which cannot be predicted. These
factors include, but are not limited to, (i) the quantity and quality of the oil
or gas produced, (ii) the overall supply of domestic and foreign oil or gas from
currently producing and subsequently discovered fields, (iii) the extent of
importation of foreign oil or gas, (iv) the marketing and competitive position
of other fuels, including alternative fuels, as well as other sources of energy,
(v) the proximity, capacity and cost of oil or gas pipelines and other
facilities for the transportation of oil or gas, (vi) the regulation of
allowable production by governmental authorities, (vii) the regulations of the
Federal Energy Regulatory Commission governing the transportation and marketing
of oil and gas, and (viii) international political developments, including
nationalization of oil wells and political unrest or upheaval. All of the
aforementioned factors, coupled with the Company's ability or inability to
engage in effective marketing strategies, may affect the supply or demand for
the Company's oil, gas and other products and, thus, the price attainable
therefor.
Financial Information Relating to Foreign and Domestic Operations and Export
Sales
The table below sets forth, for each of the last three fiscal years, the amounts
of revenue, operating profit or loss and assets
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attributable to each of the Company's geographical areas, and the amount of its
export sales.
<TABLE>
<CAPTION>
Sales to unaffiliated customers: 1997 1996 1995
<S> <C> <C> <C>
United States $ 23,298 $2,596,917 $1,403,668
Colombia 292,947 1,508,260 1,214,213
Peru * * 166,069
Kazakstan - - -
Sales or transfers between geographic areas:
United States - - -
Colombia - - -
Peru - - -
Kazakstan - - -
Operating profit or (loss):
United States (1,165,890) 980,874 (518,462)
Colombia (170,424) 39,595 (299,188)
Peru * (200,000) 100,928
Kazakstan - - -
Identifiable assets:
United States 21,159,627 12,895,332 13,565,280
Colombia - 14,641,646 14,136,257
Peru - 4,860,559 4,247,975
Kazakstan 11,724,477 - -
Export sales: - - -
</TABLE>
*Information was not available due to dispute with partner, which dispute was
settled subsequent to the MIP Transaction. See Item 1 "Business - General".
Insurance; Environmental Regulations
The Company's operations are subject to all risks normally incident to (i) the
refining and manufacturing of petroleum products; and (ii) oil and gas
exploratory and drilling activities, including, but not limited to, blowouts,
extreme weather conditions, pollution and fires. Any of these occurrences could
result in damage to or destruction of oil and gas wells, related equipment and
production facilities and may otherwise inflict damage to persons and property.
The Company maintains comprehensive and general liability coverage, as is
customary in the oil and gas industry and coverage against customary risks,
although no assurance can be given that such coverage will be sufficient to
cover all risks, be adequate in amount, or that any damages suffered will not be
governed by exclusionary clauses, thereby rendering such coverage incomplete or
non-existent to protect the Company's interest in specific property. The Company
is not fully covered for damages incurred as a consequence of environmental
mishaps. The Company believes it is presently in compliance with government
regulations and follows safety procedures which meet or exceed industry
standards.
Marketing
After satisfactorily completing the qualification requirements and asphalt
facility inspection, the Company has received approval from the Louisiana
Department of Transportation ("LADOT") Materials Inspection Division to have its
paving asphalt products placed on the QPL-41 list of eligible suppliers. This
enables the Company to bid on state and federal highway projects in the State of
Louisiana and provides an asphalt quality assurance endorsement for non-state
and federal projects as well. The Company has begun an aggressive campaign to
secure asphalt supply sales agreements with Louisiana hot mix manufacturers both
at recent highway bid lettings and through private conventional paving projects.
In the Texas market, the Company has begun to expand its truck rack retail
asphalt marketing efforts with the recent hiring of an asphalt sales manager
with over 30 years experience in the Texas asphalt market. A recent inspection
by the Texas Department of Transportation ("TXDOT") materials division resulted
in an approval for the Company to bid on state and federal highway projects
throughout Texas.
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The Company has been very successful with its initial lettings in both Louisiana
and Texas and has already secured orders and sales agreements in excess of
several million dollars for its polymerized and conventional asphalt products.
In addition, the Company is investigating the possibility of establishing two
more truck rack retail locations outside the 100 mile radius of its current
facility. These market opportunities have the potential to increase the
Company's expansion into new profitable retail sales outlets at greater net-back
margins than can be achieved in the wholesale barge markets. The Company is
committed to continue an aggressive, expanding, retail market growth program
across the Gulf Coast and into other various profitable geographic areas.
Lease fees from Gold Line accounted for approximately 0%, 60% and 42% of the
Company's 1997, 1996 and 1995 revenues, respectively. On March 20, 1997, the
Company terminated the Lease Agreement with Gold Line.
Oil and Gas
Effective May 1, 1994, AIPCC entered into an agreement with Carbopetrol S.A. to
sell all of its crude oil produced in Colombia. This contract was a 6-month
renewable fixed-price sales contract for all crude oil produced by the Company
from the Toqui-Toqui field. Payments were made in Colombian Pesos adjusted for
expected exchange fluctuation. Prices were based on the price of local fuel oil
and had an average price, net of transportation costs, an average price to the
Company less transportation cost, of approximately $11.81 and $9.98 per barrel
of oil in each of 1997 and 1996, respectively. In Peru, PAIPC's contract with
PetroPeru provided for a flexible royalty rate based on the amount of production
and world basket price for this contract area providing a net sales price to
PAIPC of approximately 65% of the world basket price for the field, which, based
on an average gross price of $16.53 per barrel of oil in each of 1997 and 1996,
respectively, provided a net price to the Company of approximately $10.75 and
$10.75 per barrel of oil, respectively.
Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for
29%, 24%, and 39% of the Company's 1997, 1996 and 1995 revenues, respectively.
Sales to Ecopetrol accounted for approximately 11%, 9%, and 10% of the Company's
1997, 1996 and 1995 revenues, respectively.
A continuing market for any oil and gas that the Company may produce will depend
upon numerous factors, many beyond the control of the Company, and most of which
are not predictable. These factors include regulation of oil production, price
controls on petroleum and petroleum products, the amount of oil and gas
available for sale, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels, and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand.
Sources and Availability of Raw Materials
The Company plans to purchase all raw materials needed for its operations from
suppliers and manufacturers located throughout the United States and
internationally. The Company believes that these materials are in good supply
and are available from multiple sources.
Employees
As of April 1, 1998, the Company employed 73 persons on a full-time basis,
including 11 persons who are engaged in management, accounting and
administrative functions for AIPC and 60 who are employed by AIRI on a full-time
basis, including 10 persons who are engaged in management and administrative
functions, and 2 who are employed by AIPK in management and administrative
positions. The Company frequently engages the services of consultants that are
experts in various phases of the oil and gas industry, such as petroleum
engineers, refinery engineers, geologists and geophysicists. The Company
believes that relations with its employees are satisfactory.
Item 2. PROPERTIES
Office Facilities
The Company leases approximately 2,900 square feet of office space at 444
Madison Avenue, New York, N.Y. 10022. This space comprises the Company's
principal executive office. The space was leased effective November 1, 1994 for
a period of four years at a monthly rental rate of $7,325. In addition, the
Company leases approximately 3,400 square feet of office space in Houston, Texas
at a monthly rental of $3,607. This lease expires in November 30, 1998..
The Company also owns 87 acres of land in Lake Charles, Louisiana where the
Refinery is located. In addition to the structures and equipment comprising the
Refinery facility (See "Item 1 - Business - Domestic Operations - Refinery"),
the Refinery assets include a 4,400 square foot office building, a new 2,200
square foot asphalt plant office, and a state-of-the-art laboratory, and two
metal
8
<PAGE>
building structures serving as work shops, maintenance and storage facilities
with an aggregate square footage of approximately 4,300 square feet.
Oil and Gas Acreage and Wells
Gross acreage presented below represents the total acreage in which the Company
owned a working interest on December 31, 1997, and net acreage represents the
sum of the fractional working interests owned by the Company in such acreage.
The table below indicates the Company's developed and undeveloped acreage as of
December 31, 1997.
Gross Gross Net Net
Developed Undeveloped Developed Undeveloped
Acreage Acreage Acreage Acreage
Kazakstan - 4,734,097 - 3,313,868
The table below indicates the Company's gross and net oil and gas wells as of
December 31, 1997. Gross wells represents the total wells in which the Company
owned a working interest, and net wells represents the sum of the fractional
working interests owned by the Company in such wells.
Productive Wells
----------------
Total Oil Gas
----- --- ---
Gross Net Gross Net Gross Net
Kazakstan -- -- -- -- -- --
Oil and Gas Production
The table below indicates the Company's net oil and gas production, by country,
for each of the three years in the periods ended December 31, 1997, 1996, 1995,
along with the average sales prices for such production during these periods.
Production
----------
Oil (in Average Net Sales Gas Sales Price
Barrels) Price (per Barrel) (in mcf) (per mcf)
-------- ------------------ -------- ---------
1997-Colombia 18,625 $11.81 -- --
-Peru * * * *
-Kazakstan -- -- -- --
1996-Colombia 130,433 $10.46 -- --
-Peru * * -- --
1995-Colombia 137,821 $8.01 -- --
-Peru 17,794 9.29 -- --
Average foreign lifting costs in 1997, 1996 and 1995 were approximately $5.31,
$4.69 and $2.75 per equivalent barrel of oil, respectively.
*Information not available due to dispute with partner, which dispute was
resolved subsequent to the MIP Transaction.
Reserves
Huddleston & Co., Inc., petroleum and geological engineers, performed an
evaluation to estimate proved reserves and future net revenues from oil and gas
interests owned by AIPCC as of January 1, 1997. As of January 1, 1997, all of
the Company's proved reserves were located in Colombia. The report, dated
February 6, 1997, is summarized below. Future net revenues were calculated after
deducting applicable taxes and after deducting capital costs, transportation
costs and operating expenses, but before consideration of Federal income tax.
Future net revenues were discounted at a rate of ten percent to determine the
"present worth". The present worth was shown to indicate the effect of time on
the value of money and should not be construed as being the fair
9
<PAGE>
market value for the Company's properties. Estimates of future revenues did not
include any salvage value for lease and well equipment or the cost of abandoning
any properties.
Colombian Reserves
Future
Revenues
Net Oil Future Discounted
(Barrels) Net Gas (mmcf) Revenues at 10%
Proved Developed
Producing 917,522 1,121.1 $9,379,548 $5,899,502
Proved Developed
Non-Producing 31,199 5,200.0 4,070,584 2,274,369
Proved Undeveloped 3,061,698 8,358.3 28,474,585 14,183,770
--------- ------- ---------- ----------
TOTAL 4,010,419 14,679.4 $41,924,717 $22,357,641
========= ======== =========== ===========
Huddleston & Co., Inc. used the net market price, exclusive of transportation
cost, of $12.20 per average barrel of oil, $0.40 per MCF for Toqui gas and $1.00
per MCF for Puli gas in their report. The oil prices utilized were the prices
received by AIPCC as of December 31, 1996 for oil produced from AIPCC's
leaseholds. The gas prices utilized were based on the Ecopetrol spot price at
December 31, 1996. The prices were held constant throughout the report except
for where contracts provide for increases.
Operating costs for AIPCC's and PAIPC's leaseholds included direct leasehold
expenses only. Capital expenditures were included as required for new
development wells, developed non-producing wells and current wells requiring
restoration to operational status on the basis of prices supplied by the
Company.
The report indicates that the reserves were estimates only and should not be
construed as being exact quantities.
In evaluating the information at their disposal concerning the report,
Huddleston & Co. excluded from consideration all matters as to which legal or
accounting interpretation may be controlling. As in all aspects of oil and gas
evaluation, there are uncertainties inherent in the interpretation of
engineering data and such conclusions necessarily represent only informed
professional judgments.
The data used in the Huddleston & Co. estimates were obtained from the Company
and were assumed to be accurate by Huddleston & Co.. Basic geologic, engineering
and field performance data are now maintained on file by MIP.
Drilling
The following table sets forth the gross and net exploratory and development
wells which were completed, capped or abandoned in which the Company
participated during the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ------------------ -----------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
South America
Oil - - 1.00 1.00 2.00 2.00
Gas - - - - - -
Dry - - - - 1.00 1.00
- - ---- ----
TOTAL - - 1.00 1.00 3.00 3.00
Development Wells:
South America
Oil - - 1.00 .65 2.00 1.30
Gas - - - - - -
Dry - - - - - -
TOTAL - - 1.00 .65 2.00 1.30
------ ------ ---- --- ---- ----
TOTAL - - 2.00 1.65 5.00 4.30
====== ====== ==== ==== ==== ====
</TABLE>
Item 3. LEGAL PROCEEDINGS
Except as described below, there is no material litigation pending to which the
Company is a party or to which any of its properties is subject. Further, except
as described below, there are no proceedings known to be contemplated by United
States or foreign persons
10
<PAGE>
or governmental authorities relating to either the Company or its properties.
In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the
IRS was considering an assessment of excise taxes, penalties and interest of
approximately $3,500,000 related to the sale of fuel products during 1989. The
IRS claims that AIRI failed to comply with an administrative procedure that
required sellers and buyers in tax-free transactions to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
then existing requirements and that such sales were either tax-free or such
excise taxes were paid by the end-users of such products. AIRI offered to
negotiate a settlement of this matter with IRS Appeals since early 1993. Such
negotiations included face-to-face meetings, numerous phone calls and written
transmittals and several offers of settlement by both the Company and the IRS.
During these negotiations, the IRS Appeals officers offered to waive all of the
penalties and 75% of the amount of the proposed tax liability. However, AIRI
rejected this offer and requested the IRS' National Office to provide technical
advice to its Appeals officers. After numerous conferences and discussions with
the National Office in 1995, the National Office issued an adverse Technical
Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect
that AIRI should be liable for the tax on the sale of diesel fuel for the first
three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement. In November 1997, the Company reached an agreement (the "IRS
Agreement") with the IRS to settle this matter by agreeing to pay an aggregate
of $646,633 in tax, plus interest accrued for the applicable periods involved.
The method and timing of such payment is now being discussed with IRS
Collections in Houston, Texas. The Company's proposal calls for the payment of
the tax and interest over a period of approximately one year. In the IRS
Agreement, the IRS waived all penalties and 75% of the amount of the originally
proposed tax liability. The Company continues to maintain that it is not liable
for the excise taxes at issue, but agreed to settle the dispute at a
significantly lower amount of liability in order to bring this long-running
issue to conclusion.
In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1997 the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was placed into escrow in October 1997. The plaintiffs attorneys are
preparing the necessary release forms in order to disburse the funds, which
release is expected to be completed soon.
NESTE TRIFINERY V. AMERICAN INTERNATIONAL REFINERY, INC. ETC. CAUSE NO.
98-11453; IN THE 269TH JUDICIAL DISTRICT; IN AND FOR HARRIS COUNTY, TEXAS
Plaintiff, Neste Trifinery ("Neste"), has filed suit in a Harris County District
Court against the Company and its wholly-owned subsidiary, American
International Refinery, Inc. ("AIRI"). Neste has asserted claims for recovery of
compensatory and punitive damages based on the following theories of recovery;
(1) breach of contract, (2) disclosure of confidential information; and (3)
tortious interference with existing contractual relations. Generally, Neste has
alleged that in connection with the due diligence conducted by the Company and
AIRI of the business of Neste, the Company and AIRI had access to confidential
or trade secret information and that the Company and AIRI have exploited that
information, in breach of an executed Confidentiality Agreement, to the
detriment of Neste. Neste seeks the recovery of $20,000,000 in compensatory
damages and an undisclosed sum in connection with its claim for the recovery of
punitive damages.
In addition to seeking the recovery of compensatory and punitive damages, Neste
sought injunctive relief. Specifically, Neste sought to enjoin the Company and
AIRI form: (1) offering employment positions to the key employees of Neste; (2)
contacting the suppliers, joint venture partners and customers of Neste in the
pursuit of business opportunities; (3) interfering with the contractual
relationship existing between Neste and St. Marks Refinery, Inc.; and (4)
disclosing or using any confidential information obtained during the due
diligence process to the detriment of Neste. The Company and AIRI have asserted
to a general denial to the allegations asserted by Neste. The Company and AIRI
also moved the district court to refer the matter to arbitration, as provided
for in the Confidentiality Agreement, and to stay the pending litigation. On
March 27, 1998, the district court referred the matter to arbitration, as
requested by the Company and AIRI, and stayed litigation. At present, the
dispute existing between the Company, AIRI and Neste in Texas will be decided by
a panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes.
On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste. On March 10, 1998, Neste sued St. Marks Refinery,
Inc. in the United states District Court for the Northern District of Florida,
Case No. 4:98cv86-WS, and sought an injunction to prevent immediate termination
of its storage agreement. Following an evidentiary hearing, the District Judge
denied Neste's application for injunctive relief and adopted the recommendations
of the Magistrate, who found in part that Neste had failed to prove a
substantial likelihood of success on the merits. The District Court's order was
appealed by Neste to the United States Court of Appeals for he
11
<PAGE>
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. The federal court action remains pending, but Neste has agreed
to remove its product from the St. Marks facility by April 25, 1998. The Company
presently plans to deliver product to the St. Marks, Florida facility and begin
marketing operations during the last week of April, 1998.
The Company and AIRI are vigorously defending the Texas matter, and the
Company's counsel does not anticipate an unfavorable outcome, although a
definitive outcome is not yet determinable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and its Class A Warrants are traded on NASDAQ/NMS
under the symbols "AIPN" and "AIPNW", respectively (the Class A Warrants expired
on April 9, 1998). The following table sets forth, for the periods indicated,
the range of closing high and low bid prices of the Common Stock and the Class A
Warrants as reported by NASDAQ. These quotations represent prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
------------ ----------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
1998 First Quarter $4.91 $3.19 $2.19 $0.75
1997 First Quarter $0.73 $0.31 $0.22 $0.06
Second Quarter 0.69 0.41 0.66 0.06
Third Quarter 7.13 0.44 4.00 0.13
Fourth Quarter 6.50 3.19 3.75 1.31
1996 First Quarter $0.88 $0.50 $0.19 $0.13
Second Quarter 0.69 0.44 0.16 0.06
Third Quarter 0.59 0.38 0.16 0.06
Fourth Quarter 0.73 0.31 0.12 0.06
</TABLE>
At April 6, 1998, the Company had approximately 1,633 shareholders of record of
its Common Stock. The Company estimates that an additional 12,000 shareholders
hold Common Stock in street name.
Dividend Policy
The policy of the Board of Directors is to retain earnings to finance the
operations and development of the Company's business. Accordingly, the Company
has never paid cash dividends on its Common Stock, and no cash dividends are
contemplated to be paid in the foreseeable future.
Item 6. SELECTED FINANCIAL INFORMATION
The following selected financial data for each of the five years in the period
ended December 31, 1997 have been derived from the audited consolidated
financial statements for those respective years. The selected financial data
should be read in conjunction with the consolidated financial statements of the
Company and the related notes included elsewhere herein:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Condensed consolidated statement of operations:
<S> <C> <C> <C> <C> <C>
Revenues $ 827,964 $ 4,003,006 $ 2,811,308 $ 3,508,514 $ 3,990,156
Net loss(1) 17,953,621 (4,652,207) (4,338,322) (10,966,914) (14,139,737)
Net loss per share(2) (0.43) (0.16) (0.20) (0.65) (2.23)
At December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Condensed consolidated balance sheet:
Working capital $ (693,676) $(9,823,229) $(3,402,543) $ (28,462) $ (7,507,056)
Total assets 41,839,860 34,492,431 32,640,362 32,229,713 34,996,925
Total liabilities 9,335,479 13,164,713 11,349,670 10,255,687 18,878,148
Long-term debt -0- 6,766,592 7,302,671 7,770,171 12,034,691
Stockholders' equity 32,504,381 21,327,718 21,290,692 21,974,626 16,118,777
Cash Dividends declared -0- -0- -0- -0- -0-
-----------------------
</TABLE>
1) Net loss in 1996, 1994 and 1993 included a provision for the write
down of the carrying costs of oil and gas properties of $200,000,
$6,904,000 and $9,975,000, respectively.
2) Adjusted, as applicable, to give effect to the one-for-10 reverse
stock split effectuated by the Company on October 28, 1993.
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997, the Company had unrestricted cash of $3,721,000 and
$735,000 worth of marketable securities. During the year ended December 31,
1997, approximately $7,441,000 was used in operations. Net loss for the period
totaled $17,954,000 (including $12,775,000 in non-cash elements, primarily:
$774,000 in depletion and depreciation costs, $2,568,000 in certain bond and
loan costs, loss on marketable securities of $6,053,000, adjustment of restated
stock options of $745,000, adjusted loss on the sale of subsidiaries of
$564,000, and inputed interest expenses of $1,899,000 related to the discount of
certain convertible debentures. (See "Results of Operations-Interest Expense"
below). Approximately $2,028,000 was used during the period to increase current
assets other than cash, mostly for oil feedstock inventory, and approximately
$17,000 was used to decrease accounts payable and accrued liabilities.
Additional uses of funds during 1997 included additions to oil and gas
properties of $2,664,000 and additions to refinery property and equipment of
$5,582,000. Cash for operations during 1997 was provided, in part, by the
issuance of Common Stock and convertible debentures in an aggregate amount of
approximately $20,503,000, and from proceeds derived from the exercise of
warrants and options of $1,272,000.
During the years ended December 31, 1996 and December 31, 1995, the Company
generated net losses of $4,652,000 and $4,338,000, respectively. Cash flow
provided by and used in operations in 1996 and 1995, totaled $551,000 and
$274,000, respectively. Cash flow from operations was adjusted for depreciation,
depletion and amortization of $2,552,000 and $1,502,000 in 1996 and 1995,
respectively, and non-cash provisions for bad debts in 1996 and 1995 of $682,000
and $711,000, respectively. Additionally, $1,007,000 and $189,000 in 1996 and
1995, respectively, were invested in current assets other than cash. Accounts
payable increased by $2,352,000 and $1,985,000 in 1996 and 1995, respectively.
Additional uses of funds included investments in oil and gas properties during
1996 and 1995 of $1,590,000 and $3,194,000, respectively, net of certain
recoverable costs, and additions to refinery property and equipment of
$1,713,000 in 1996. Total cash used in operations and investment activity during
the years ended December 31, 1996 and 1995 was $2,763,000 and $3,481,000,
respectively. Cash was provided primarily from outside sources, including
$3,810,000 and $3,112,000 from the issuance of Common Stock and/or convertible
debentures during 1996 and 1995, respectively.
On February 25, 1997, the Company 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 (the "MIP Transaction") to Mercantile International Petroleum Inc.
("MIP"). 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. The total aggregate purchase price payable by MIP for the
Purchased Shares was valued, giving account to the contingent portion thereof,
which was not recorded by the Company pursuant to GAAP, 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 the Company's
12% Secured Debentures due December 31, 1997, which were secured by the
Company'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 (the "MIP Shares").
(d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the
"Exchangeable Debenture"), 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 the Company may demand payment on that
date of $1.5 million of the principal balance thereof.
(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
Accrued Tax Benefit Deductions available to AIPCC on future tax filings in
Colombia.
Since the MIP Transaction, the Company has sold approximately 1.4 million MIP
Shares for total net proceeds of approximately $2 million. These proceeds were
used primarily for working capital needs and payment of debt. In January 1998,
the Company exercised its right, pursuant to the Exchangeable Debenture, to
demand payment from MIP on February 25, 1998 of $1.5 million of the principal
balance thereof, which payment, along with accrued interest, was paid to the
Company by MIP in February 1998.
Since the closing of the MIP Transaction and the termination of its Lease
Agreement with Gold Line in the first quarter of 1997, the Company has had no
revenues from operations, until late in the first quarter of 1998 when it
implemented product sales at the Refinery. Although it has utilized some of the
proceeds from the MIP Transaction to fund the Refinery expansion and start-up
14
<PAGE>
processes, its activities in Kazakstan and other operations, such proceeds were
inadequate to satisfy all of the Company's debt obligations and capital
requirements. Therefore, during 1997, the Company issued various promissory
notes and convertible debentures in exchange for an aggregate of approximately
$20.5 million through certain private placement and agreements, most of which
were issued in reliance upon the safe harbor provided by Regulation S as
promulgated under the Act. In addition, the Company received approximately $1.3
million and $794,000 from the exercise of Company's warrants during 1997, and
during the first quarter of 1998, respectively. The Company utilized most of the
cash proceeds from these transactions to fund its operations and activities at
the Refinery and in Kazakstan, for payment of debt, and for general corporate
purposes.
The Company's recent agreement with the IRS (See "Item 3 - Legal Proceedings")
calls for the Company to pay $646,633 in excise taxes, plus interest occurred
for the applicable periods. The Company has submitted a proposal to the IRS
which would enable the Company to pay the tax and interest due over a period of
approximately one year; the tax would be paid in four equal quarterly
installments and the interest would be paid in a lump sum at the end of the
annual payment period. Should the Company utilize the entire proposed pay-off
period to pay the tax and interest, the total amount paid would be approximately
$1.5 million.
During the next twelve months, excluding its pending acquisitions in Florida and
Russia, discussed above, the Company expects to expend up to $25 million, of
which approximately $9 million is expected to be spent on costs associated with
its Kazakstan project, $12 million for debt payment and other corporate uses,
and the remainder for its refinery activities. However, if the Company obtains a
joint venture partner in Kazakstan, its capital expenditure requirements there
would be significantly less than $9 million during the next twelve months.
In February 1998, the construction necessary to expand and enhance the Refinery
was essentially completed and the Company began the processing of crude oils to
produce asphalt and other products. The Company was very successful with its
January and February 1998 bids in Texas and Louisiana in recent lettings for
asphalt. In essentially one month it secured several million dollars worth of
orders for polymerized and conventional asphalt products. Beginning in the
second quarter of 1998, it plans to process an average of approximately 10,000
barrels of crude oil feedstock per day.
The Company has warrants outstanding which, if exercised, would provide it with
approximately $14 million to fund its capital and other commitments. However,
there can be no assurance that a sufficient number of warrants will be exercised
to provide the Company with all of the capital it requires. In addition, the
Company is having discussions with various companies who have expressed an
interest in participating with the Company in its endeavors in Kazakstan and in
Louisiana.
In April 1998, the Company reached an Agreement with certain institutional
investors which will provide it with up to $52 million in private debt and
equity financing (the "Debt and Equity Financing") to be used by the Company on
an as needed basis over a two year period. Initial funding could start as early
as April 20, 1998, pending the execution of definitive documents scheduled for
April 15, 1998. Depending on its needs, the Company could use a portion or all
of the facility. The closing of the Debt and Equity Financing will ensure that
the Company has the capital necessary to fund its obligations and operations, at
least through the year ended December 31, 1999.
The Company plans to utilize its existing working capital and proceeds from the
exercise of warrants until the cash flows anticipated from its asphalt
operations in 1998 are sufficient in nature to satisfy its needs. In the event
the Debt and Equity Financing is not consummated, or a sufficient number of
warrants are not exercised, or if the Company is unable to obtain sufficient
alternative financing, or if its asphalt operations are less successful than
anticipated, certain projects may be delayed or canceled.
Impact of Changing Prices
The Company's revenues, its ability to repay indebtedness and the carrying value
of its oil and gas properties owned are affected from time to time by changes in
oil and gas prices. Oil and natural gas prices are subject to substantial
seasonal, political and other fluctuations that are beyond the ability of the
Company to control. Since crude oil prices are an important determining factor
in the carrying value of oil and gas assets, significant reductions in the price
of crude oil could require non-cash write-downs of the carrying value of those
assets.
Results of Operations
The following table highlights the results of operations for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Exploration and Production Activity:
Colombia Properties(1):
15
<PAGE>
<CAPTION>
Revenue - Oil Sales (000's) $261 $1,365 $1,104
Lease Operating Expenses (000's) $99 $612 $364
Production Volume - Barrels 18,625 130,433 137,821
Average Price per Bbl $14.01 $10.46 $8.01
Production Cost per Bbl $5.31 $4.69 $2.65
DD&A per Bbl (2) $3.77 $3.77 $3.86
Peru Properties (3)(4):
Revenue - Oil Sales (000's) - - $166
Lease Operating Expenses (000's) - - $65
Production Volume - Bbls - - 17,794
Average Price per Bbl - - $9.29
Production Cost per Bbl - - $3.66
DD&A per Bbl - - -
Refinery Operations(5):
Refinery Lease Fees (000's) - $2,468 $1,185
Average Daily Throughput (Bbls) - 13,138 8,116
Average Throughput Fee - $.50 $0.40
----------------------
</TABLE>
(1) Reflects activity through the closing of the MIP Transaction on February
25, 1997.
(2) Excludes provision for reduction of oil and gas properties of $200,000 in
1996.
(3) Information for 1996 was not available due to a dispute with a joint
venture partner.
(4) No DD&A was calculated since all properties and related capital
expenditures in Peru were considered as unevaluated and therefore were
excluded from the DD&A calculation in each of 1997, 1996 and 1995.
(5) Earned lease fees of $442,714 in 1997 were not recorded as revenues due to
circumstances surrounding the cancellation of the Lease Agreement. See
"Business - Domestic Operations - Lease Agreement".
Refinery Operations
For the Year Ended December 31, 1997 compared to the Year Ended December 31,
1996
The Company leased the Refinery to Gold Line from 1990 until March 20, 1997 when
the Company terminated the Lease Agreement. As lessee, Gold Line was responsible
for all operating costs of the refinery. The Company charged Gold Line a fee for
each barrel of feedstock processed at the Refinery. The fee during 1995 was
$0.40 per barrel of throughput, which increased to $0.50 per barrel on January
1, 1996 and continued at this level until the Lease was terminated.
During the short period of time in which Gold Line operated the Refinery in
1997, it processed approximately 885,000 barrels of product, creating a
liability of approximately $443,000 in lease fees due to the Company. Because of
previous non payment of lease fees and other items of default under the terms of
the Lease Agreement, Gold Line was evicted from the Refinery premises on March
20, 1997, and subsequently filed for protection under Chapter 11 of the
Bankruptcy Code. See "Business - Domestic Operations - Refinery". Due to these
circumstances no refinery lease fee revenues were recorded for 1997.
For the Year Ended December 31, 1996 compared to the Year Ended December 31,
1995
Refinery lease fee revenue increased by approximately 108% in 1996 to $2,468,000
compared to $1,185,000 in 1995. The increase was due to the increase in the
throughput processing fee from $0.40 to $0.50 per barrel processed and in the
increase in its throughput barrels by 62% during 1996, primarily due to Gold
Line having its feedstock financing in place throughout 1996 compared to being
shutdown for the first quarter of 1995 due to a lack of financing.
Oil and Gas Production Activity
For the Year ended December 31, 1997 compared to the Year Ended December 31,
1996
The results of operations for Colombia and Peru for 1997 reflect results for the
period through February 25, 1997, the date of the sale of the Colombia and Peru
subsidiaries, compared to twelve full months of operations in 1996.
For the Year ended December 31, 1996 compared to the Year ended December 31,
1995.
Oil production in 1996 decreased to 130,433 barrels of oil from 155,615 in 1995,
a 16%
16
<PAGE>
decrease. Approximately 11% of the 16% decrease was attributed to the lack
of any production from the Peru properties during 1996. Average oil prices, net
of transportation, increased, however, by 25% or $1.97 per barrel to $9.98 in
1996, as compared to $8.01 in 1995 due to renegotiated oil sales contracts and
higher oil prices in 1996. The increase in oil prices during 1996 more than
offset the decline in oil production for period, resulting in a 7% increase in
oil revenues in 1996 compared to 1995.
Production costs had a net increase of $181,000 or 42% in 1996 compared to 1995.
Transportation costs of $63,000 accounted for 17% of the increase in 1996.
During 1996, an increase in G&A overhead allocation of $107,000 to production
costs accounted for 29% of the increase. This increase in overhead allocation is
directly related to a corresponding decrease in total G&A expenses.
Other Income
For the Year ended December 31, 1997 compared to the Year Ended December 31,
1996
Other income increased during 1997 to approximately $567,000 from $171,000 in
1996, due primarily to a $446,000 increase in interest income in 1997 to
$465,000, compared to $19,000 in 1996. This improvement is attributable to an
increase in funds on deposit during 1997 compared to 1996 and to an accretion of
interest on notes receivable of $168,000 during 1997. An additional increase of
approximately $50,000 was attributable to a non-cash income item as a result of
a negotiated reduction in certain accounts payable. These increases were
partially offset by decreases of approximately $102,000 in foreign exchange rate
gains and other income in Colombia and Peru in 1997 compared to 1996.
For the Year ended December 31, 1996 compared to the Year Ended December 31,
1995
Other income decreased by approximately $185,000 (52%) during 1996 to $171,000
compared to $356,000 in 1995. This was due primarily to a decrease in interest
income of 92% to $19,000, compared to $228,000 in 1995, related to a decrease in
funds on deposit during 1996, and to the Company not recognizing $108,000 of
interest income during 1996, related to notes due from Gold Line.
General and Administrative
For the Year ended December 31, 1997 compared to the Year ended December 31,
1996
Total General and Administrative expenses (G&A) increased during 1997 by
approximately $1,551,000 or 50% compared to 1996, primarily due to non-cash
charges of $745,000 from the extension of expiration dates on certain
outstanding employee stock options and $225,000 for stock options issued for
investor relations costs. A non-recurring $695,000 payroll expense to partially
compensate key employees whose salaries had remained unchanged for the past five
years was also incurred. Property insurance and property taxes increased by
$123,000 and $167,000, respectively, which costs were previously paid by Gold
Line prior to its eviction from the Refinery in March 1997. Legal fees increased
by approximately $87,000, primarily related to certain legal matters involving
Gold Line during the year. During the expansion of the Company's Refinery ,
which commenced during 1996, approximately $622,000 of G&A expenses were
capitalized to the project in 1997, compared to $275,000 capitalized in 1996.
For the Year ended December 31, 1996 compared to the Year ended December 31,
1995
Total General & Administrative Expenses ("G&A") decreased during 1996 by
$496,000 or 14% compared to 1995. There was an additional $400,000 increase in
1996 in the provision for excise tax compared to the $250,000 provision charged
in 1995. Decreases in other G&A expenses during 1996 compared to 1995 were:
decrease in payroll expense of $95,000, decrease in professional and consulting
fees of $93,000, decrease in insurance costs of $56,000, and an increase in the
capitalized and reimbursed G&A expenses of $137,000. During the expansion of the
Company's Refinery , approximately $275,000 of G&A expenses were capitalized.
Depreciation, Depletion and Amortization
For the Year ended December 31, 1997 compared to the Year ended December 31,
1996
Depreciation, Depletion, and Amortization declined approximately $491,000 during
1997 compared to 1996, which was directly related to the sale of all of the
Company's oil and gas subsidiaries on February 25, 1997.
For the Year ended December 31, 1996 compared to the Year ended December 31,
1995
Depreciation, Depletion, and Amortization declined slightly during 1996 as
compared to 1995, primarily due to a slight decrease in oil production during
1996 versus 1995.
17
<PAGE>
Interest
For the Year ended December 31, 1997 compared to the Year ended December 31,
1996
Interest expense increased by $3,846,000 in 1997 compared to 1996, due primarily
to $1,899,000 in imputed interest, recorded for discounted convertible
debentures, discussed below, and a $2,964,000 increase in bond costs expensed in
1997.
Interest expense of $1,899,000 and $1,216,000 for 1997 and 1996, respectively,
was related to the presumed incremental yield the investor may derive from the
discounted conversion rate of such instruments issued by the Company during
these years. Management believes that the related amount of interest recorded by
the Company is not necessarily the true cost to the Company of the instruments
it issued and that it may be reasonable to conclude that the fair value of the
Common Stock into which these securities may be converted was less than such
stock's quoted market price at the date the convertible securities were issued
(considering factors such as the period for which sale of the stock is
restricted, which in certain cases was as long as six months, large block
factors, lack of a sufficiently-active market into which the stock can be
quickly sold, time value, etc.). However, generally accepted accounting
principles require that an "intrinsic value" of the conversion feature at the
date of issuance should be accounted for and that such incremental yield should
be measured based on the stock's quoted market price at the date of issuance,
regardless if such yield is assured.
The Company expenses and also capitalizes certain other costs associated with
the offering and sale of debentures. Capitalized costs are amortized as interest
expense over the life of the related debt instrument. These costs include the
accounting for Common Stock warrants issued with and related to certain
convertible debentures, commissions paid, and certain legal expenses. Sales of
debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As
a result, debenture costs incurred and amortized in 1997 increased by $2,964,282
to $3,253,035, compared to a total of $289,000 in 1996.
For the Year Ended December 31, 1996 compared to the Year ended December 31,
1995
Interest expense increased by $1,781,000 in 1996 compared to 1995, due primarily
to $1.2 million in imputed interest recorded for discounted convertible
debentures and to $450,000 in interest expense related to a pending Excise Tax
dispute with the IRS.
Debenture costs incurred and amortized in 1996 increased by $183,000 to $289,000
as compared to 1995. These costs were related to debentures outstanding at
December 31, 1995.
Realized and Unrealized Loss on Marketable Securities
As partial proceeds from the MIP Transaction, the Company received approximately
4.4 million shares of MIP common stock valued at $2.00 per share. However, since
the closing, the market value of MIP's shares have declined to $0.56 per share
at December 31, 1997. The Company sold and disposed of approximately 1,441,000
shares of the MIP shares during 1997 for proceeds of approximately $1,979,000.
The Company has recorded an aggregate net realized and unrealized loss of
$6,053,298 as of December 31, 1997.
Loss on Sale of Assets
The Company recorded an aggregate $564,000 loss on the sale of two of its'
wholly-owned subsidiaries which includes the current discount to fair value of
the $3 million Exchangeable Debenture and the $1.4 million performance earn-out,
both received in the MIP Transaction.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 follows Item 14 of this
Report and is hereby incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the Company's executive
officers and directors.
Year First
Name Age Position(s) Became a Director
---- --- ----------- -----------------
George N. Faris 57 Chairman of the Board and 1981
Chief Executive Officer
William R. Smart 77 Director 1987
Daniel Y. Kim 73 Director 1987
Donald G. Rynne 75 Director 1992
- ---------------------------
Biographical Information
Dr. George N. Faris has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since 1981. Dr. Faris was the founder of ICAT,
an international engineering and construction company, and served as its
President from ICAT's inception in 1972 until October 1985. Prior to 1972, Dr.
Faris was the President and Chairman of the Board of Directors of Donbar
Development Corporation, a company engaged in the patent development of rotary
heat exchangers, devices which exchange heat from medium to medium and on which
Dr. Faris was granted a number of patents. Dr. Faris received a Ph.D. in
Mechanical Engineering from Purdue University in 1968.
Mr. William R. Smart has served as a member of the Company's Board of Directors
since June 1987. Since November 1, 1983, Mr. Smart has been Senior Vice
President of Cambridge Strategic Management Group, a management consulting
firm.. Mr. Smart was Chairman of the Board of Directors of Electronic
Associates, Inc., a manufacturer of electronic equipment, from May 1984 until
May 1992. He has served on the Board of Directors of Apollo Computer Company and
Executone Information Systems, Inc. Mr. Smart is presently a director of
National Datacomputer Company and Hollingsworth and Voss Company. Mr. Smart
received a B.S. degree in Electrical Engineering from Princeton University in
1941.
Dr. Daniel Y. Kim has served as a member of the Company's Board of Directors
since July 1987. Dr. Kim is a Registered Professional Geophysicist in California
and Colorado. From 1981 until 1984, Dr. Kim was President and Chief Executive
Officer of Kim Tech, Inc., a research and development company. In 1984, Kim
Tech, Inc. was merged into Bolt Industries, a public company engaged in the
manufacture of air guns and auxiliary equipment used to generate shock waves in
seismic exploration for oil, gas and minerals. Dr. Kim has been a director of
Bolt Industries since 1984. From 1977 to 1980, Dr. Kim was Chief Consulting
Geophysicist for Standard Oil Company of Indiana. Dr. Kim received a B.S. degree
in Geophysics and a Ph.D. degree in Geophysics from the University of Utah in
1951 and 1955, respectively.
Mr. Donald G. Rynne has served as a member of the Company's Board of Directors
since September 1992. Mr. Rynne has been Chairman of the Board of Directors of
Donald G. Rynne & Co., Inc., a privately owned company engaged in international
consulting and trading, since founding that company in 1956. Mr. Rynne is
involved in international maritime trading and consulting, dealing primarily in
the Middle East in hydrocarbon products and capital equipment. Mr. Rynne
received a B.A. degree from Columbia University in 1949.
The business background of each executive officer of the Company, to the extent
not set forth above, is described below.
Mr. Denis J. Fitzpatrick, 53, joined the Company in August 1994 as Vice
President, Secretary and Chief Financial Officer. During the previous five
years, Mr. Fitzpatrick was the Chief Financial Officer of Nahama & Weagant
Energy Company, a publicly traded independent exploration and production
company. Mr. Fitzpatrick has held various accounting and financial management
positions during his 24 years in the oil and gas industry. He has also served as
a Director or Officer of the Council of Petroleum Accountants Society; served on
the Tax Committee of the American Petroleum Institute and as a member of the
American Management Association. Mr. Fitzpatrick received a B.S. degree in
Accounting from the University of Southern California in 1974.
19
<PAGE>
Mr. William L. Tracy, 50, has been employed by the Company since February 1992
and has been Treasurer and Controller of the Company since August 1993. From May
1989 until February 1992, Mr. Tracy was self-employed as an energy consultant
with the Commonwealth of Kentucky. From June 1985 until May 1989, Mr. Tracy
served as President of City Gas and Transmission Corp., a public oil and gas
production and refining company. He received his BBA from Bellarmine College in
Louisville, Kentucky in 1974.
The Company's executive officers are appointed annually by the Board to serve
until their successors are duly elected and qualified.
Item 11. EXECUTIVE COMPENSATION
The following table discloses compensation for services rendered by the
Company's Chief Executive Officer and all other executive officers of the
Company whose compensation exceeded $100,000 in 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation 0ptions(#) Compensation
- ----------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
George N. Faris 1997 $ 312,000 $257,000$ $ 7,200(3) $ 750,000 $193,000(1)
Chairman of the 1996 292,000 15,000 9,600(3) 1,202,500(4) 422,000(5)
Board and Chief 1995 240,000 - 45,000(2) 202,500 -
Executive Officer
Denis J. Fitzpatrick 1997 $ 118,000 $102,000$ - $ 125,000 $ 25,000(8)
Secretary, Vice 1996 105,000 5,000 15,000(6) 120,000(4) -
President and Chief 1995 105,000 - $18,000(6)(7) 20,000 -
Financial Officer
William L. Tracy 1997 $ 88,000 $62,000 75,000 $ 23,000(8)
Treasurer and 1996 (9) - - - -
Controller 1995 (9) - - - -
Kenneth N. Durham 1997 (10) - - - -
President and Chief 1996 (10) - - - -
Operating Officer 1995 $145,000(10) - - - -
</TABLE>
(1) Includes deferred salary payment of $109,000 and income tax reimbursement
of $84,000.
(2) $35,500 of this amount constituted forgiveness of interest on a debt owed
to the Company, the principal of which was repaid to the Company; the
remaining $9,600 was paid as a vehicle allowance.
(3) Vehicle allowance.
(4) The number of options shown for 1995 was issued in substitution for
previously outstanding options and re-issued in 1996. The exercise price
is now $.50 per share. See Ten Year Option Repricings table below.
(5) On October 13, 1995, the Company and Dr. Faris executed an amendment to
Dr. Faris' employment agreement, pursuant to which Dr. Faris relinquished
certain rights in exchange for 900,000 shares of Common Stock. See
"Employment Contract" below.
(6) Mr. Fitzpatrick is reimbursed up to $15,000 per year in living expenses
incurred while working in the New York office.
(7) Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a
signing bonus, which shares were issued in 1995.
(8) Deferred salary payment.
(9) Mr. Tracy's compensation was less than $100,000 in each of 1996 and 1995.
(10) Mr. Durham resigned from employment with the Company effective on
November 3, 1995.
20
<PAGE>
STOCK OPTION PLANS
The Company has established a 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan was approved by the Board of Directors on November 8, 1995 and by the
Company's shareholders on July 11, 1996. The 1995 Plan is administered by the
Board of Directors of the Company or a Committee designated by them. Under the
1995 Plan employees, including officers and managerial or supervising personnel,
are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem
with stock appreciation rights ("SAR's"), and employees, Directors, contractors
and consultants are eligible to receive non-qualified stock options ("NQSO's")
or NQSO's in tandem with SAR's. Options may be granted under the 1995 Plan to
purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted
under the 1995 Plan terminates or expires without having been exercised in full,
the unexercised shares subject to that option will be available for a further
grant of options under the 1995 Plan. Options may not be transferred other than
by will or the laws of descent and distribution and, during the lifetime of the
optionee, may be exercised only by the optionee.
Options may not be granted under the 1995 Plan after November 7, 2005. The
exercise price of the options granted under the 1995 Plan cannot be less than
the fair market value of the shares of Common Stock on the date the option is
granted. ISO's granted to shareholders owning 10% or more of the outstanding
voting power of the Company must be exercised at a price equal to at least 110%
of the fair market value of the shares of Common Stock on the date of grant. The
aggregate fair market value of Common Stock, as determined at the time of the
grant with respect to which ISO's are exercisable for the first time by any
employee during any calendar year, shall not exceed $100,000. Any additional
Common Stock as to which options become exercisable for the first time during
any such year are treated as NQSO's. The total number of options granted under
the 1995 Plan, as of March 31, 1998 was 3,333,750, which included 302,500
repriced options granted in substitution for options previously held.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to certain
executive officers during the year ended December 31, 1997, exercise information
and potential realizable value.
<TABLE>
<CAPTION>
Individual Grants
----------------- Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($)
---- ---------- ----------- ----------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
George Faris 750,000 45% $1.05 12/31/02 $ -0- $ -0-
Denis Fitzpatrick 125,000 8% $1.05 12/31/02 $ -0- $ -0-
William L. Tracy 75,000 5% $1.05 12/31/02 $ -0- $ -0-
</TABLE>
AGGREGATE OPTION EXERCISES IN 1997 AND OPTION VALUES AT DECEMBER 31, 1997
The table below includes the number of shares covered by both exercisable and
non-exercisable stock options owned by certain executive officers as of December
31, 1997. Also reported are the values for "in-the-money" options which
represent the positive spread between exercise price of any such existing stock
options and the year-end price.
<TABLE>
<CAPTION>
Shares
------
Acquired or Value Number of Unexercised Value of Unexercised
Name Exercised Realized Options at Year End In-the-money Options
- ---- --------- -------- ------------------- --------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George N. Faris -- -- 1,764,000 187,500 $4,771,495 $436,875
Denis J. Fitzpatrick -- -- 202,500 42,500 $537,825 $99,025
William L. Tracy -- -- 101,000 25,000 $263,380 $59,415
</TABLE>
21
<PAGE>
EMPLOYMENT CONTRACT
Effective May 1, 1989, the Company entered into an employment agreement with
George N. Faris at an annual salary of $200,000, which agreement is renewed
annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year.
In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In
February 1996, Dr. Faris' salary was reinstated to $300,000 per year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was an officer or employee of the
Company or of any of its subsidiaries during the prior year or was formerly an
officer of the Company or any of its subsidiaries. During the last fiscal year,
none of the executive officers of the Company has served on the Board or
Compensation Committee of any other entity whose officers served either on the
Board of Directors of the Company or on the Compensation Committee of the
Company.
Item 12. SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of the Record Date,
regarding the beneficial ownership of Common Stock of (i) each person known by
the Company to be the beneficial owner of more than 5% of the Common Stock; (ii)
each Director; (iii) each executive officer named in the Summary Compensation
Table below; and (iv) all Directors and executive officers as a group.
Name and Address Amount and Nature of Percent
of Beneficial Holder(1) Beneficial Ownership of Class
George N. Faris 3,370,000(2) 6.6%
Daniel Y. Kim 163,500(3) *
Donald G. Rynne 756,122(4) 1.5%
William R. Smart 302,594(5) *
Denis J. Fitzpatrick 202,500(6) *
William L. Tracy 121,240(7) *
All officers and Directors
as a group (consisting of
6 persons) 4,915,956(8) 9.1%
* Less than 1% of class
(1) All officers and Directors have an address c/o the Company, 444 Madison
Avenue, Suite 3203, New York, NY 10022.
(2) Includes 1,764,500 shares of common stock issuable upon the exercise of
stock options owned by Dr. Faris. Excludes 187,500 unexercisable
options.
(3) Includes 155,500 shares of common stock issuable upon the exercise of
stock options owned by Dr. Kim. Excludes 50,000 unexercisable options.
(4) Includes 160,000 shares of common stock issuable upon the exercise of
stock options and warrants to purchase 89,260 shares of common stock
owned by Mr. Rynne. Excludes 50,000 unexercisable options.
(5) Includes 192,000 shares of common stock issuable upon the exercise of
stock options and warrants to purchase 19,986 shares of common stock
owned by Mr. Smart. Excludes 50,000 unexercisable options.
(6) Includes 202,500 shares of common stock issuable upon the exercise of
stock options owned by Mr. Fitzpatrick. Excludes 42,500 unexercisable
options.
22
<PAGE>
(7) Includes 101,000 shares of common stock issuable upon the exercise of
stock options owned by Mr. Tracy. Excludes 25,000 unexercisable
options.
(8) Includes all of the shares of common stock issuable upon the exercise
of options and warrants described in Notes (2) through (7) above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Such reporting persons are required by regulation to furnish the Company with
copies of all Section 16(a) reports that they file.
Based solely on its review of the copies of such reports received by it,
or written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that, during the period from
January 1, 1997 through December 31, 1997, all filing requirements applicable to
its officers, Directors and greater than 10 percent beneficial owners were
complied with, except that
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1997, Dr. George Faris and Mr. Donald Rynne purchased certain
convertible debentures (the "Debentures") of the Company, originally issued in
August 1996, for their face values of $225,000 and $75,000, respectively, from a
foreign investor and subsequently converted the Debentures, pursuant to the
original terms thereof, for 895,349 shares and 298,342 shares of Common Stock,
respectively, which shares are still held by Dr. Faris and Mr. Rynne.
In July 1997, the Company's Chairman and CEO, Dr. George Faris, loaned
the Company $500,000 on an interest-free basis, which loan was repaid in full by
the Company in August 1997.
In April 1997, the Company issued as a bonus, 25,000 shares of Common
Stock to each of Dr. Faris, Mr. Fitzpatrick, Mr. Tracy, and Mr. Lorrie Olivier,
a Vice President of the Company. Such issuance is subject to ratification by the
Shareholders at the Company's Annual Meeting. Absent such ratification, 75% of
such shares will be returned to the Company.
23
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report
(1) Financial Statements. Page No.
Reports of Independent Accountants F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-3
Consolidated Statement of Operations
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Changes in
Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Supplementary Oil and Gas Information F-8 -
(2) Financial Statement Schedules.
None.
(3) EXHIBITS.
2.1 Share Purchase Agreement dated February 25, 1997, among Registrant and
AIPCC, PAIPC and MIP. (8)
3.1 Restated Articles of Incorporation of the Registrant. (6)
3.2 By-laws of the Registrant, as amended. (11)
4.1 Form of Class A Warrant. (3)
4.2 1995 Stock Option Plan and Form of related Option Agreements of the
Registrant. (5)
4.3 Form of 8% Convertible Subordinated Debentures due August 1, 1999. (9)
4.4 Form of Subscription Agreement used in connection with the offering of
the Registrants' debentures referenced in Exhibit 4.3. (9)
4.5 Form of Warrant to purchase shares of the Registrants' Common Stock
issued in connection with the offering of the Registrants' debentures
referenced in Exhibit 4.3. (9)
4.6 Form of Registration Agreement used in connection with the offering of
the Registrants' debentures referenced in Exhibit 4.3. (9)
4.7 Form of 14% convertible Notes due October 15, 1999. (10)
4.8 Form of Subscription Agreement used in connection with the offering of
the Registrants' debentures referenced in Exhibit 4.7. (10)
4.9 Form of Warrant to purchase shares of the Registrants' common Stock
issued in connection with the offering of the Registrants' debentures
referenced in Exhibit 4.7. (10)
4.10 Form of Registration Rights Agreement used in connection with the
offering of the Registrants' debentures referenced in Exhibit 4.7.
(10)
24
<PAGE>
4.11 Form of Subscription Agreement used in connection with the repayment
of debt to a foreign individual. (10)
4.12 Form of Subscription Agreement used in connection with the
Registrant's purchase of a 70% interest of MED Shipping Usturt
Petroleum Company Ltd.(10)
4.13 Form of Warrant to purchase shares of the Registrant's common Stock
issued in connection with the purchase referenced in Exhibit 4.12.
(10)
4.14 1998 Stock Option Plan of the Registrant.
4.15 1998 Stock Award Plan of the Registrant.
10.1 Employment Agreement dated May 1, 1989 by and between George N. Faris
and the Registrant. (1)
10.2 Amendment #1 to Employment Agreement, dated October 13, 1995, between
George N. Faris and the Registrant. (6)
10.3 Registration Rights Agreement dated July 11, 1996 between George N.
Faris and the Registrant. (6)
10.4 $3 million Exchangeable Debenture, granted by AIPCC to the Registrant
due February 25, 1999. (8)
10.5 Agreement dated April 22, 1997 between the Registrant and MED Shipping
and Trading S.A. used in connection with the Registrant's purchase of
a 70% interest of MED Shipping Usturt Petroleum Company Ltd. (10)
10.6 Amendment dated May 9, 1997 to the Agreement attached hereto as
Exhibit 10.5. (10)
16.1 Letter dated August 19, 1996 regarding change in certifying
accountant. (6)
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
- -----------------------------------------------------
(1) Incorporated herein by reference to the Registration Statement on Form S-1
declared effective on February 13, 1990.
(2) Incorporated herein by reference to the Registrant's form 8-K, dated
December 4, 1990.
(3) Incorporated herein by reference to the Registration Statement on Form S-3,
declared effective January 15, 1998.
(4) Incorporated herein by reference to Amendment #19 to Schedule 13D of George
N. Faris for October 13, 1995.
(5) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(6) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996
(7) Incorporated herein by reference to the Registrant's Form 8-K dated August
19, 1996.
(8) Incorporated herein by reference to the Registrant's Form 8-K dated March
12, 1997.
(9) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(10) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(11) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
None.
25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders American International Petroleum
Corporation
We have audited the accompanying consolidated balance sheets of American
International Petroleum Corporation and Subsidiaries as of December 31, 1997 and
1996, and related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American International Petroleum Corporation and Subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The Company reported a net loss of approximately $18.0 million during 1997, of
which approximately $12.5 million represented non-operating or non-cash items,
and has commitments to fund the operations of its Kazakstan subsidiary (see Note
10) and has convertible debentures totaling $10,000,000 (see Note 6), which may
or may not be converted to common stock, that mature in October 1998. The
Company had virtually no revenue-generating operating activities during 1997 and
does not, as of December 31, 1997, have the resources to fulfill these
commitments. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are discussed in Note 2 to the financial statements.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Houston, Texas
March 17,1998
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of American International Petroleum
Corporation
In our opinion, based upon our audit and the report of other auditors,
the consolidated financial statements for 1995 listed in the Index appearing
under Items 14(a)(1) on page 24 present fairly, in all material respects, the
Results of Operations and Cash Flows of American International Petroleum
Corporation and its subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements for the year ended December
31, 1995 of American International Petroleum Corporation of Colombia
(AIPC-Colombia), a wholly-owned subsidiary, which statements were prepared in
accordance with generally accepted accounting principles in Colombia and which
statements reflect total revenues of $1,214,213 for the year ended December 31,
1995. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for AIPC-Colombia, is based solely on the report of the
other auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts (including the conversion of the financial
statements of AIPC- Colombia to generally accepted accounting principles in the
United States) and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 2 and 11 to
the financial statements, the Company has suffered recurring losses from
operations, has a working capital deficiency and is in the process of trying to
resolve certain contingencies, all of which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Houston, Texas
April 9, 1996
F-2
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---- ----
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,721,350 $ 11,058
Cash - restricted - 161,022
Marketable securities, at market 735,958 -
Accounts and notes receivable, net 1,831,008 1,073,140
Inventory 755,720 459,961
Deferred financing costs 353,490 125,353
Prepaid expenses 1,244,277 712,751
----------------- ----------------
Total current assets 8,641,803 2,543,285
----------------- ----------------
Property, plant and equipment:
Unevaluated oil and gas property 11,724,477 5,648,630
Oil and gas properties - 32,506,656
Refinery property and equipment 22,816,897 17,235,183
Other 216,803 499,971
----------------- ----------------
34,758,177 55,890,440
Less - accumulated depreciation, depletion
and amortization and impairments (3,894,015) (23,959,191)
----------------- ----------------
Total property, plant and equipment 30,864,162 31,931,249
Notes receiviable, less current portion 2,333,895 -
Other long-term assets, net - 17,897
----------------- ----------------
Total assets $ 41,839,860 $ 34,492,431
================= ================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ - $ 237,162
Current portion of long-term debt 6,075,931 5,968,393
Accounts payable 1,452,642 3,636,765
Accrued liabilities 1,806,906 2,524,194
----------------- ----------------
Total current liabilities 9,335,479 12,366,514
Long-term debt - 798,199
----------------- ----------------
Total liabilities 9,335,479 13,164,713
----------------- ----------------
Stockholders' equity:
Preferred stock, par value $0.01, 7,000,000 shares
authorized, none issued
Common stock, par value $.08, 100,000,000 shares authorized, 48,436,576 shares
issued and outstanding at December 31, 1997 and 34,458,921 shares at
December 31, 1996 3,874,926 2,756,714
Additional paid-in capital 106,689,337 78,677,265
Stock purchase warrants 1,297,754 1,297,754
Accumulated deficit (79,357,636) (61,404,015)
----------------- ----------------
Total stockholders' equity 32,504,381 21,327,718
----------------- ----------------
Commitments and contingent liabilities (Note 10) - -
----------------- ----------------
Total liabilities and stockholders' equity $ 41,839,860 $ 34,492,431
================= ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas production and
pipeline fees $ 260,579 $ 1,364,581 $ 1,270,164
Refinery lease fees - 2,467,606 1,184,864
Other 567,385 170,819 356,280
-------------------- ---------------- -------------------
Total revenues 827,964 4,003,006 2,811,308
-------------------- ---------------- -------------------
Expenses:
Operating 98,766 613,336 432,440
General and administrative 4,627,598 3,076,357 3,572,337
Depreciation, depletion and
amortization 774,264 1,265,230 1,396,423
Interest 6,663,992 2,818,218 1,037,308
Realized and unrealized loss on marketable securities 6,053,298 - -
Loss on sale of subsidiaries 563,667 - -
Provison for bad debts - 682,072 711,122
Write-down of oil and gas properties - 200,000 -
-------------------- ---------------- -------------------
Total expenses 18,781,585 8,655,213 7,149,630
-------------------- ---------------- -------------------
Net loss $(17,953,621) $(4,652,207) $ (4,338,322)
==================== ================ ===================
Net loss per share of common stock $ (0.43) $ (0.16) $ (0.20)
==================== ================ ===================
Weighted-average number of shares
of common stock outstanding 41,309,102 29,598,832 21,746,719
==================== ================ ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (17,953,621) $ (4,652,207) $ (4,338,322)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation, depletion, amortization and accretion of
discount on debt 5,125,934 2,551,504 1,502,435
Accretion of premium on notes receivable (167,167) - -
Write-down of oil and gas properties - 200,000 -
Provision for bad debts - 682,072 711,122
Realized and unrealized loss on marketable securities 6,053,298 - -
Loss on sale of subsidiaries 563,667 - -
Issuance of stock for compensation expense 40,000 424,063 55,814
Forgiveness of debt (50,342) - -
Employee stock based compensation 744,700 - -
Stock based compensation for services 247,607 - -
Changes in assets and liabilities:
Accounts and notes receivable 57,835 (681,659) (537,569)
Inventory (698,746) 44,992 446,519
Prepaid and other (1,387,484) (370,274) (98,359)
Accounts payable and accrued liabilities (16,688) 2,352,361 1,984,574
---------------- ---------------- -----------------
Net cash provided by (used in) operating activities (7,441,007) 550,852 (273,786)
---------------- ---------------- -----------------
Cash flows from investing activities:
Additions to oil and gas properties (2,663,694) (1,590,165) (3,194,454)
Additions to refinery property and equipment (5,581,714) (1,713,188) 14,284
Proceeds from sales of marketable securities 1,979,494 - -
Proceeds from sale of subsidiaries 1,764,548 - -
Other (94,191) (10,176) (26,753)
---------------- ---------------- -----------------
Net cash used in investing activities (4,595,557) (3,313,529) (3,206,923)
---------------- ---------------- -----------------
Cash flows from financing activities:
Cash - restricted, loan collateral - 65,201 (11,593)
Net increase (decrease) in notes payable (237,162) 170,403 66,759
Repayments of long-term debt (5,791,420) (1,434,278) (467,500)
Proceeds from issuance of common stock and
warrants, net 447,810 745,302 3,111,858
Proceeds from exercise of stock warrants
and options 1,272,333 - 32
Proceeds from issuance of debentures, net 20,055,295 3,064,889 -
---------------- ---------------- -----------------
Net cash provided by financing activities 15,746,856 2,611,517 2,699,556
---------------- ---------------- -----------------
Net increase (decrease) in cash and
cash equivalents 3,710,292 (151,160) (781,153)
Cash and cash equivalents at beginning of year 11,058 162,218 943,371
---------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 3,721,350 $ 11,058 $ 162,218
================ ================ =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<TABLE>
<CAPTION>
Additional Stock
Common stock paid-in purchase
--------------
Shares Amount capital warrants
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 34,458,921 $ 2,756,714 $ 78,677,265 $ 1,297,754
Conversions of debentures 7,246,882 579,751 8,763,271 -
Issuance of stock in lieu of current
liabilities 243,459 19,477 214,082 -
Issuance of stock for compensation 100,000 8,000 32,000 -
Issuance of stock for services 260,000 20,800 226,807 -
Issuance of stock - Reg S Offering 1,635,593 130,847 314,465 -
Issuance of stock for oil and gas properties - Reg S Offering 3,250,000 260,000 8,275,938 -
Issuance of stock warrants for oil and gas properties - - 718,750 -
Issuance of stock warrants - - 6,264,411 -
Options and warrants exercised 1,241,721 99,337 694,189 -
Imputed interest on debentures
convertible at a discount to market - - 1,763,459 -
Compensatory stock options - - 744,700 -
Net loss for the year - - - -
-------------- -------------- ---------------- ----------------
Balance, December 31, 1997 $ 48,436,576 $ 3,874,926 $ 106,689,337 $ 1,297,754
============== ============== ================ ================
<CAPTION>
Accumulated
deficit Total
----------------- ---------------
<S> <C> <C>
Balance, January 1, 1997 $ (61,404,015) $ 21,327,718
Conversions of debentures - 9,343,022
Issuance of stock in lieu of current
liabilities - 233,559
Issuance of stock for compensation - 40,000
Issuance of stock for services - 247,607
Issuance of stock - Reg S Offering - 445,312
Issuance of stock for oil and gas properties - Reg S Offering - 8,535,938
Issuance of stock warrants for oil and gas properties - 718,750
Issuance of stock warrants - 6,264,411
Options and warrants exercised - 793,526
Imputed interest on debentures
convertible at a discount to market - 1,763,459
Compensatory stock options - 744,700
Net loss for the year (17,953,621) (17,953,621)
----------------- ---------------
Balance, December 31, 1997 $ (79,357,636) $ 32,504,381
================= ===============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<TABLE>
<CAPTION>
Additional Stock
Common stock paid-in purchase
--------------
Shares Amount capital warrants
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754
Conversions of Debentures 6,535,122 522,810 1,477,190 -
Issuance of stock in lieu of current
liabilities 479,540 38,363 130,539 -
Issuance of stock for compensation 905,000 72,400 351,663 -
Issuance of stock - Regulation S Offering 1,833,333 146,667 598,635 -
Imputed interest on debentures
convertible at a discount to market - - 1,350,966 -
Net loss for the year - - - -
-------------- -------------- ----------------------------------
Balance, December 31, 1996 $ 34,458,921 $ 2,756,714 $ 78,677,265 $ 1,297,754
============== ============== =============== ===============
<CAPTION>
Accumulated
deficit Total
---------------- ----------------
<S> <C> <C>
Balance, January 1, 1996 $ (56,751,808) $ 21,290,692
Conversions of Debentures - 2,000,000
Issuance of stock in lieu of current
liabilities - 168,902
Issuance of stock for compensation - 424,063
Issuance of stock - Regulation S Offering - 745,302
Imputed interest on debentures
convertible at a discount to market - 1,350,966
Net loss for the year (4,652,207) (4,652,207)
---------------- ----------------
Balance, December 31, 1996 $ (61,404,015) $ 21,327,718
================
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Common stock Additional Stock receivable
------------ paid-in purchase for issuance
Shares Amount capital warrants of stock
--------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 19,099,048 $ 1,527,924 $ 71,595,370 $ 1,297,754 $ (32,936)
Warrants exercised 8 1 31 - -
Issuance of stock in lieu of current -
liabilities 728,205 58,256 430,994 - -
Issuance of stock for compensation 10,000 800 19,512 - 32,936
Issuance of stock - Reg S Offering 4,868,665 389,493 2,722,365 - -
Net loss for the year - - - - -
--------------- -------------------------------------------------------------
Balance, December 31, 1995 $ 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754 $ -
=============== ============= ============== ============= ==============
<CAPTION>
Accumulated
deficit Total
----------------- ---------------
<S> <C> <C>
Balance, January 1, 1995 $ (52,413,486) $ 21,974,626
Warrants exercised - 32
Issuance of stock in lieu of current
liabilities - 489,250
Issuance of stock for compensation - 53,248
Issuance of stock - Reg S Offering - 3,111,858
Net loss for the year (4,338,322) (4,338,322)
----------------- ---------------
Balance, December 31, 1995 $ (56,751,808) $ 21,290,692
================= ===============
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
American International Petroleum Corporation (the "Company") was incorporated in
the State of Nevada and, through its wholly-owned subsidiaries, is the owner of
a refinery in Lake Charles, Louisiana and a 70% working interest in an oil and
gas concession in Kazakstan. The Company is also seeking domestic and
international oil and gas properties and projects.
Sale of Subsidiaries
On February 25, 1997, the Company sold all of the issued and outstanding common
stock of two of its wholly-owned subsidiaries, American International Petroleum
Corporation of Colombia ("AIPCC") and Pan American Petroleum Corporation
("PAIPC") to Mercantile International Petroleum Inc. ("MIP"). Consequently, all
references to these subsidiaries herein are presented in the past tense.
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. 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 the company's 12%
Secured Debentures due December 31, 1997, which were secured by the Company'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 (the "MIP Shares") with a
trading price of approximately $2.00 per share on the date the parties agreed in
principle to the sale, (d) a two-year $3 million 5% exchangeable subordinated
debenture of AIPCC (the "Exchangeable Debenture"), 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, (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 Accrued Tax Benefit Deductions, if any, available to AIPCC on future
tax filings in Colombia
Principles of consolidation
The consolidated financial statements of the Company include the accounts of the
Company and its wholly-owned subsidiaries, American International Refinery, Inc.
("AIRI"), American International Petroleum Kazakstan ("AIPK"), AIPCC and PAIPC.
Intercompany balances and transactions are eliminated in consolidation.
Cash and cash equivalents
All liquid short-term instruments purchased with original maturity dates of
three months or less are considered cash equivalents. Restricted cash represents
cash utilized as collateral for the Company's borrowings in Colombia and
drilling commitments in Peru.
Marketable Securities
Marketable securities classified as available-for-sale are stated at market
value, with unrealized gains and losses reported as a separate component of
stockholders' equity, net of deferred income taxes. If a decline in market value
is determined to be other than temporary, any such loss is charged to earnings.
Trading securities are stated at fair value, with unrealized gains and losses
recognized in earnings. The Company records the purchases and sales of
marketable securities and records realized gains and losses on the trade date.
Realized gains or losses on the sale of securities are recognized on the
specific identification method.
F-9
<PAGE>
The Company held 2,943,818 shares of MIP at December 31, 1997. During the year
the Company sold or dispersed 1,440,557 shares for net cash proceeds of
$1,979,494. The gross losses on shares disposed of was $901,616. The unrealized
loss on shares available for sale at December 31, 1997 was $5,151,682. There
were no gains on sale of any of the MIP stock. The MIP stock was deemed impaired
at December 31, 1997 and the carrying value was reduced from a carrying value of
$1,648,542 to $735,958. The impairment is reflected in the gross unrealized loss
on marketable securities in the accompanying Statement of Operations.
Inventory
Inventory consists of crude oil and asphalt feedstock and oil and gas equipment.
Crude oil and asphalt feedstocks are stated at the lower of cost or market value
by using the first-in, first-out method. Oil and gas equipment is stated at the
lower of average cost or market.
Property, plant and equipment
Oil and gas properties
The Company follows the full cost method of accounting for exploration and
development of oil and gas reserves, whereby all costs incurred in acquiring,
exploring and developing properties are capitalized, including estimates of
abandonment costs, net of estimated equipment salvage costs. Individual
countries are designated as separate cost centers. All capitalized costs plus
the undiscounted future development costs of proved reserves are depleted using
the unit-of-production method based on total proved reserves applicable to each
country. Under the full cost method of accounting, unevaluated property costs
are not amortized. A gain or loss is recognized on sales of oil and gas
properties only when the sale involves significant reserves. Costs related to
acquisition, holding and initial exploration of concessions in countries with no
proved reserves are initially capitalized and periodically evaluated for
impairment.
Costs not subject to amortization:
The following table summarizes the categories of cost which comprise the amount
of unproved properties not subject to amortization.
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Colombia:
<S> <C> <C> <C>
Acquisition costs $ - $1,101,277 $1,101,277
Exploration costs - - -
----------------- ---------------- ----------------
- 1,101,277 1,101,277
Peru:
Exploration costs - 4,457,964 3,832,041
Kazakstan:
Acquisition Cost 11,724,477 - -
Other
Acquisition cost - 89,389 65,506
------------------ ---------------- ----------------
$11,724,477 $5,648,630 $4,998,824
=========== ========== ==========
</TABLE>
Acquisition costs of unproved properties not subject to amortization at December
31, 1997, 1996 and 1995, respectively, consists mainly of lease acquisition
costs related to unproved areas. On February 25, 1997 the Company sold all of
its wholly owned subsidiaries operating in Columbia and Peru. The period in
which the amortization cost of the Kazakstan properties will commence is subject
to the results of the Company's exploration program which will begin in 1999.
F-10
<PAGE>
Certain geological and general and administrative costs are capitalized into the
cost pools of the country cost centers. Such costs include certain salaries and
benefits, office facilities, equipment and insurance. Capitalized general and
administrative costs are directly related to the Company's exploration and
development activities in Colombia and Peru and totaled $48,404, $331,355 and
$472,606 for the years ended December 31, 1997, 1996 and 1995, respectively.
The net capitalized costs of oil and gas properties for each cost center, less
related deferred income taxes, are expensed to the extent they exceed the sum of
(i) the estimated future net revenues from the properties, discounted at 10%,
(ii) unevaluated costs not being amortized; and (iii) the lower of cost or
estimated fair value of unproved properties being amortized; less (iv) income
tax effects related to differences between the financial statement basis and tax
basis of oil and gas properties. The independent reservoir engineer's report of
Estimated Future Reserves and Revenues is based on information available "as of"
the date of such Report. Upward or downward revisions to the estimated value and
volume of oil and gas reserves may occur based on circumstances occurring, and
information obtained, subsequent to the date of the engineer's report. (See
"Supplementary Oil and Gas Information for the Years Ended December 31, 1997,
1996 and 1995 - Oil and Gas Reserves.
The portion of the Company's oil and gas properties held in AIPCC and PAIPC,
were reduced as of December 31, 1997, to the amount realized from the sale of
AIPCC and PAIPC on February 25, 1997, resulting in an impairment loss of
$200,000 during 1996.
Property and equipment - other than oil and gas properties
Property and equipment are carried at cost and included interest on funds
borrowed to finance construction. Capitalized interest was $341,000 and $43,427
in 1997 and 1996, respectively. Depreciation and amortization are calculated
under the straight-line method over the anticipated useful lives of the assets
which range from 5 to 25 years. Major additions are capitalized. Expenditures
for repairs and maintenance are charged against earnings. Depreciation,
depletion and amortization expense on property and equipment were $774,264,
$1,265,230 and $1,396,423 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the Company's Refinery was undergoing
modifications to its processing system and was not operational.
Earnings per share
Earnings per share of common stock are based on the weighted-average number of
shares outstanding. Common stock equivalents are not presented because they are
anti-dilutive. The FASB issued Statement of Financial Accounting Standards No.
128, entitled Earnings Per Share, during February 1997. The new statement, which
is effective for financial statements issued after December 31, 1997, including
interim periods, establishes standards for computing and presenting earnings per
share. The new statement requires retroactive restatement of all prior-period
earnings per share data presented. The new statement did not have a material
impact upon previously presented earnings per share information. Earnings per
share in the accompanying statements of operations were determined in accordance
with SFAS 128.
Foreign currency
Foreign currency transaction gains and losses are included in the consolidated
statement of operations. The Company does not engage in hedging transactions to
reduce the risk of foreign currency exchange rate fluctuations and has not
experienced significant gains or losses related to such events. The Company
anticipates little, if any, currency and exchange risks during the initial three
to five years of its operations in Kazakstan. Any revenues generated from
Kazakstan during this period are planned to be reinvested in the Company's
projects in Kazakstan. Subsequently, the Company will be exposed to the currency
and exchange risks which typically present themselves in the Confederate of
Independent States ("CIS") countries. The Company collected sales of oil and gas
in Colombia and Peru in local currency and utilized those receipts for local
operations. Periodically, funds were transferred from U.S. accounts to Columbia
or Peru and converted into pesos or soles, respectively, when local currency was
insufficient to meet obligations payable in local currency. Foreign exchange
losses in 1997 were $75,878. Foreign exchange gains were $63,763 and $12,544 in
1996 and 1995, respectively.
Deferred charges
The Company capitalizes certain costs, primarily commissions and legal fees,
associated with the offering and sale of debentures. Such costs are amortized as
interest expense over the life of the related debt instrument. Sales of
debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As
a result, debenture costs incurred and amortized in 1997 increased by $2,964,282
to $3,253,035, compared to a total of $289,000 in 1996.
F-11
<PAGE>
Stock-based compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" defines a fair value based method of accounting for an
employee stock option or similar equity instrument or plan. However, SFAS No.
123 allows an entity to continue to measure compensation costs for these plans
using the current method of accounting. The Company has elected to account for
employee stock compensation plans as provided under APB 25.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the related reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Management believes
that the estimates are reasonable.
The Company's financial statements are based on a number of significant
estimates including the valuation of unevaluated oil and gas properties and oil
and gas reserve quantities which are the basis for the calculation of
depreciation, deletion, and impairment of oil and gas properties. The Company's
reserve estimates are determined by an independent petroleum engineering firm.
However, management emphasizes that reserve estimates are inherently imprecise
and that estimates of more recent discoveries and reserves associated with
non-producing properties are more imprecise than those for producing properties
with long production histories.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
New Accounting Standards
On March 31, 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of". SFAS No. 121 addresses the accounting for the impairment of long-lived
assets, identified intangibles and goodwill related to those assets and requires
that the carrying amount of impaired assets be reduced to fair value. The
Company adopted SFAS No. 121 in the fourth quarter of 1995 and determined that
it has no effect on the financial statements for the years ended December 31,
1997, 1996 and 1995.
The FASB also issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
The FASB issued Statement of Financial Accounting Standards No. 128, entitled
Earnings Per Share, during February 1997. The new statement, which is effective
for financial statements issued after December 15, 1997, including interim
periods, establishes standards for computing and presenting earnings per share.
The new statement requires retroactive restatement of all prior-period earnings
per share data presented. Earnings per share in the accompanying Statements of
Operations were determined in accordance with SFAS 128.
F-12
<PAGE>
NOTE 2 - MANAGEMENT PLANS
The Company reported a net loss of approximately $18.0 million during 1997, of
which approximately $12.5 million represented non-operating or non-cash items,
and has commitments to fund the operations of its Kazakstan subsidiary (see Note
10) and has convertible debentures totaling $10,000 (see Note 6), which may or
may not be converted to common stock, that mature in October 1998. The Company
had virtually no revenue-generating operating activities during 1997 and does
not, as of December 31, 1997, have the resources to fulfill these commitments.
Management of the Company has been seeking sources of capital to enable to fund
its operating activities and to fulfill these and other commitments which may
arise in 1998 and beyond, and on April 7, 1998, signed an agreement with certain
institutional investors which provides for up to $52 million in private debt and
equity financing to be utilized by the Company on an as needed-basis over a two
year period. Initial funding is scheduled for April 20, 1998, pending completion
and execution of definitive documents.
Management believes that this private financing will be sufficient in nature to
provide the necessary capital to fund its commitments during at least the next
two years. In the event this financing does not occur, and the Company is unable
to access adequate sources of capital, its plans and operations during 1998
would be substantial curtailed.
NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE:
Accounts and notes receivable are shown below:
December 31,
-----------------------------
1997 1996
Accounts receivable - trade $1,020,145 $1,942,946
Note receivable - Gold Line (See Note 8) 900,732 900,732
Current portion - Note receivable - MIP 1,537,808 -
Other 293,200 150,980
----------- ------------
3,751,885 2,994,658
Less - allowance for doubtful accounts (1,920,877) (1,921,518)
----------- -----------
$1,831,008 $1,073,140
========== ==========
NOTE 4 - OTHER LONG-TERM ASSETS:
Other long-term assets consist of the following:
December 31,
----------------------------
1997 1996
Notes receivable - MIP (See Note 1),
net of discount of $284,634 $ 3,871,703 $ -
Unamortized bond issue cost - 17,897
------------ ----------
Less - current portion - MIP (1,537,808) -
------------ ----------
$ 2,333,895 $ 17,897
=========== ===========
F-13
<PAGE>
NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
December 31,
--------------------------------
1997 1996
Accrued payroll $ 63,068 $ 266,429
Accrued interest 47,206 282,076
Corporate taxes 99,484 330,024
Excise taxes 1,376,170 1,100,000
Property taxes - 219,345
Other 220,978 326,320
------------ ------------
$1,806,906 $2,524,194
========== ==========
NOTE 6 - SHORT TERM DEBT
December 31,
--------------------------------
1997 1996
14% - 10,000,000 Unsecured convertible
debenture net of unamortized discount of
$3,924,069 - due October 15, 1998,
effective interest rate - 51%* $6,075,931 $ -
*Convertible after April 15, 1998 into the Company's common stock at the lesser
of $6.25, 85% of market, or the lowest average market price for any five
consecutive trading days following April 15, 1998.
NOTE 7 - LONG-TERM DEBT:
December 31,
----------------------
1997 1996
---- ----
Note payable to MG Trade
Finance Corporation $ - $ 2,108,393
8% - $100,000 Convertible debentures -
due February 14, 1997,
effective interest rate - 8% - 100,000
9% - $150,000 Convertible Debentures -
due December 9, 2000
effective interest rate - 17.3% - 124,445
10% - $391,629 Convertible Debentures -
due April 1, 1998
effective interest rate - 34.7% - 293,040
12% Secured Debentures -
due December 31, 1997,
effective interest rate - 12%
25% of original principal due on
December 31, 1996 - 3,510,000
12.5% - $426,000 Convertible Debentures -
due January 2, 1998
effective interest rate - 49.2 to 51.7% - 380,714
F-14
<PAGE>
Senior Convertible Subordinated
Debentures due February 1, 1997,
interest ranges from 8.5-10.5%
per annum, payable quarterly,
convertible into common shares at
$50.00 per share. - 250,000
------------- ------------
- 6,766,592
Less - Current portion - 5,968,393
-------------- -----------
$ - $ 798,199
============= ==========
The effective interest rate as stated for each of the debt instruments above
does not necessarily reflect the actual cash cost to the Company for that
specific debt instrument. The effective interest rate reflects presumed
incremental yield the holder of the debt instrument may derive from the
discounted conversion rate of such instrument and the fair value of warrants
issued to debt holders. During 1997, the Company sold convertible debentures
totaling $20,537,000, of which $9,343,000 were converted into the Company's
common stock at discounts to market ranging from 15% to 51%.
Note payable to MG Trade Finance Corporation
On December 4, 1990, AIRI entered into a loan and security agreement (the "Loan
Agreement") with MG Trade Finance Corp. ("MGTF"). Pursuant to the Loan
Agreement, MGTF loaned AIRI $9,855,392. As collateral for the borrowings,
substantially all of the assets of AIRI were pledged, payment was guaranteed by
the Company and the Company pledged 100% of the common stock of AIRI. In order
to induce MGTF to enter into the Loan Agreement, the Company granted MGTF
warrants to purchase 516,667 shares of the Company's $0.08 par value common
stock at $7.50 per share, exercisable at any time prior to June 30, 1994. Such
warrants outstanding at December 31, 1993 were adjusted to an exercise price of
$1.25 based on an anti-dilutive provision in the warrant agreements. In July
1995, all warrants previously held by MGTF were returned to the Company and
canceled and 150,000 new warrants were issued at an exercise price of $2.00 per
share of common stock, which warrants were exercised in October 1997. As part of
certain negotiations related to the MIP Transaction, the Company agreed to
pledge 1,000,000 shares of MIP common stock (partial consideration the Company
received in the MIP Transaction) as additional collateral for the Loan Agreement
and change the due date of the unpaid balance of the Loan Agreement of
$2,108,000 to September 30, 1997 from March 31, 1998, which balance was repaid
in full by the Company on October 1, 1997.
NOTE 8 - REFINERY LEASE:
In October 1990, the Company leased its refinery to Gold Line. All amounts owed
to AIRI by Gold Line on October 1, 1992 were restructured to a note totaling
$1,244,192, due on September 30, 1995 bearing interest at prime plus 2%. The
note was to be retired in monthly installments equal to 10% of Gold Line's
monthly operating cash flow, if such operating cash flow was positive. No
amounts were collected pursuant to the provision and the note was fully reserved
for during 1992. No interest was accrued with respect to this note.
On March 22, 1995, the term of the lease was extended through March 31, 1998. In
consideration for extending the lease, Gold Line executed a $1,801,464
promissory note (which amount includes the $1,244,192 note referred to above and
certain trade receivables owed the Company by Gold Line of $506,332 at December
31, 1994) payable in installments of principal and interest through June 15,
1997. The promissory note bears interest at prime plus 1%. The Company
established a reserve for doubtful accounts of $1,921,518 and $2,039,041 at
December 31, 1996 and 1995, respectively. In February, 1996, in order to enhance
the business strength of the lessee of its Refinery and to assist it in securing
a new government contract, the Company agreed to reduce the fully reserved
principal balance of its note receivable from the lessee to $900,732 from
$1,801,464.
During the third and fourth quarters of 1996, Gold Line began to fall behind in
their monthly lease fee payments to AIRI, even though it was processing an
average in excess of 400,000 barrels of feedstock per month during these
periods. On February 3, 1997, the Company delivered a Default Notice to Gold
Line informing Gold Line of various items of default under the Lease Agreement,
including non-payment of lease fees totaling approximately $567,000 and 1996
real estate taxes of approximately $208,000.
F-15
<PAGE>
Subsequent Notices of Default were also delivered to Gold Line covering
additional items of default, including an additional $287,000 in unpaid lease
fees and $29,000 of unpaid insurance premiums (which premiums were paid by
AIRI). On February 18, 1997, the Company delivered a Termination Notice and
Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave
written notice to Gold Line to vacate the leased premises five days from the
date the Notice was delivered. Gold Line did not comply with the Company's
Notice to Vacate, so on February 26, 1997 the Company filed suit against Gold
Line. On March 20, 1997, the court terminated the Lease Agreement and ordered
Gold Line to vacate the refinery premises within 24 hours of the Order, with
which Gold Line complied.
In light of the events which occurred after December 31, 1996, the Company
reserved all lease fees due from Gold Line as of December 31, 1996 and did not
record earned lease fees of $443,000 during 1997. See Note 10 - "Commitments and
Contingent Liabilities - Gold Line Defaults".
NOTE 9 - STOCK OPTIONS AND WARRANTS:
Outstanding warrants and options
At December 31, 1997, 1996 and 1995, the following warrants and options for the
purchase of common stock of the Company were outstanding, which are exercisable
upon demand any time prior to the expiration date.
Number of Shares Underlying
Options and Warrants
at December 31,
Exercise Expiration
1997 1996 1995 Price Date
---- ---- ---- ----- ----
- - 66,715 $32.500 February 26, 1996 (2)
- - 7,988 $15.000 March 10, 1996 (2)
- - 1,500 $36.250 April 1, 1996 (2)
- - 3,000 $30.000 August 28, 1996 (2)
- 5,957,347 5,957,347 $4.000 March 1, 1997 (3)
- 20,000 20,000 $30.625 July 14, 1997
- - 282,500 $1.000 December 31, 1997 (1) (2)
- 282,500 - $0.50 December 31, 1997 (1) (2)
5,957,207 - - $4.000 March 1, 1998 (3)
- 150,000 150,000 $2.000 March 31, 1998
- - 20,000 $1.000 August 3, 1998 (1) (2)
- 20,000 - $0.500 August 3, 1998 (1) (2)
100,000 - - $0.487 January 31, 1999(4)
22,681 - - $2.131 July 22, 1999(4)
960,000 - - $2.713 August 6, 1999(4)
1,500,000 - - $6.250 October 9, 1999(4)
- 1,550,000 - $0.500 October 21, 1999 (1) (2)
1,852,500 - - $0.500 December 31, 1999 (1)
50,000 50,000 - $0.500 November 1, 2000 (1)
61,547 - - $0.469 July 15, 2001(4)
100,000 - - $1.000 July 15, 2001(4)
10,500 10,500 - $0.475 July 16, 2001(4)
8,333 8,333 - $0.415 August 19, 2001(4)
16,667 16,667 - $0.413 August 20, 2001(4)
18,519 18,519 - $0.406 October 31, 2001(4)
20,000 - - $0.500 November 11, 2001(4)
10,000 - - $0.500 November 12, 2001(4)
F-16
<PAGE>
30,000 - - $0.398 April 1, 2002(4)
60,000 - - $0.398 June 6, 2002(4)
200,000 - - $2.000 July 30, 2002(4)
197,500 - - $6.250 October 14, 2002(4)
10,000 - - $0.500 November 5, 2002(4)
100,000 - - $4.28 December 1, 2002(1)
1,518,750 - - $1.050 December 31, 2002 (1)
--------- --------- ---------
12,804,204 8,083,866 6,509,050
========== ========= =========
(1) Represents options held by employees and directors of the Company.
The exercise price and expiration date of such options reflects the
adjustments approved by the Company's Board of Directors.
(2) These options and warrants were canceled or expired, as applicable,
in 1996 or 1995 as indicated in the table.
(3) Class A Warrants. In February 1998 the expiration date of these
warrants was extended to April 9, 1998, and all unexercised warrants
expired on that date.
(4) Other non-employee warrants.
Stock option plans
1995 Plan
Under the Company's 1995 Stock Option Plan (the "1995 Plan"), the Company's
employees, Directors, independent contractors, and consultants are eligible to
receive options to purchase shares of the Company's common stock. The Plan
allows the Company to grant incentive stock options ("ISOs"), nonqualified stock
options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation rights
("SARs"; collectively "Options"). A maximum of 3,500,000 shares may be issued
and no options may be granted after ten years from the date the 1995 Plan is
adopted, or the date the Plan is approved by the stockholders of the Company,
whichever is earlier. The exercise price of the Options cannot be less than the
fair market value of the shares of common stock on the date the Option is
granted. Options granted to individuals owning 10% or more of the outstanding
voting power of the Company must be exercisable at a price equal to 110% of the
fair market value on the date of the grant.
Activity in the 1995 Stock Option Plan for the years ended December 31, 1996 and
1997 was as follows:
Weighted Average
Number of Exercise Price
Shares Per Share
----------- ----------------
Outstanding, December 31, 1995 305,500 $1.28
Canceled (302,500) $1.00
Granted 1,902,500 $0.50
Expired (3,000) $30.00
Outstanding, December 31, 1996 1,902,500 $0.50
Canceled (1,852,500) $0.50
Granted 3,471,250 $0.84
Expired - -
Outstanding December 31, 1997 3,521,250 $0.83
F-17
<PAGE>
As of December 31, 1997, options to acquire 2,773,333 shares of the Company's
common stock with exercise prices ranging from $0.50 to $1.05, were fully vested
and exercisable at a weighted average exercise price of $0.67 per share. The
remaining 747,917 options, with exercise prices ranging from $0.50 to $4.28,
having a weighted average exercise price of $1.51 per share, will vest through
2002.
If not previously exercised, options outstanding at December 31, 1997, will
expire as follows: 1,852,500 options expire on December 31, 1999; 50,000 options
expire on November 1, 2000; 1,518,750 options expire on December 31, 2002; and
100,000 options expire on December 1, 2002. The weighted average grant date fair
value of the options issued during 1997 and the weighted average exercise price
of those options amounted to $1.04 and $0.85, respectively. The weighted average
grant date fair value of the options issued during 1996 and the weighted average
exercise price of those options amounted to $0.34 and $0.50, respectively.
During 1997, 1,852,500 options were granted whose exercise price was less than
the stock price on grant date. These options were existing options issued in
prior years and whose expiration date was extended in 1997 to December 31, 1999.
The option exercise price was not changed during 1997. Under generally accepted
accounting practices, the extension of these expiration dates constitutes a new
issue of options. New issues in 1997 of 1,618,750 options were granted with
exercise prices greater than the stock price on grant date.
During 1996, all options granted, 1,902,500, were granted with exercise prices
greater than the stock price on grant date.
The fair value of each option grant was estimated on the date of grant using the
Black-Schools option pricing model with the following assumptions: risk- free
rates of 5.9% to 6.1%; volatility of 113.6%, no assumed dividend yield; and
expected lives of one to five years.
The 1995 Plan was submitted to and approved by the Company's stockholders at its
annual meeting in 1996.
In October 1995, the Financial Accounting Standards Board issued a new statement
titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on fair value. Fair value is generally determined under an option pricing
model using the criteria set forth in SFAS 123.
The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation expense for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts indicated
below:
1996 1997
---- ----
Net loss As reported $(4,652,207) $(17,953,621)
Pro forma (4,851,124) (19,325,148)
Net loss per common share As reported (0.16) (0.43)
Pro forma (0.16) (0.47)
Options which were issued to employees during previous fiscal years at an
exercise price of $4.00 per share were revalued at $1.00 per share during 1995.
During 1996 the exercise price of these options was reduced to $0.50 per share.
During 1997, the expiration date of these options was extended from December 31,
1997 until December 31, 1999. In accordance with SFAS 123 the revaluation and/or
the extension of the expiration dates of the options constitutes a new issuance
of options. Accordingly, compensation expense of $174,020 was reflected in the
pro forma amounts for 1995 for those options revalued in 1995. No expense was
reflected in the 1996 pro forma amounts because the value of the options had
declined. In 1997, $744,000 was charged to compensation expense and is reflected
in the net loss as reported.
F-18
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES:
IRS Excise Tax Claim
In May 1992, AIRI was notified by the Internal Revenue Service ("IRS") that the
IRS was considering an assessment of excise taxes, penalties and interest of
approximately $3,500,000 related to the sale of fuel products during 1989. The
IRS claims that AIRI failed to comply with an administrative procedure that
required sellers, and buyers in tax-free transactions, to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
existing requirements and such sales were either tax-free or such excise taxes
were paid by the end-users of such products.
AIRI has offered to negotiate a settlement of this matter with IRS Appeals since
early 1993. Such negotiations included face-to-face meetings, numerous phone
calls and written transmittals and several offers of settlement by both the
Company and the IRS. During these negotiations, the IRS Appeals officers offered
to waive all of the penalties and 75% of the amount of the proposed tax
liability. However, AIRI rejected this offer and requested the IRS' National
Office provide technical advice to its Appeals officers. After numerous
conferences and discussions with the National Office in 1995, the National
Office issued an adverse Technical Advice Memorandum ("TAM") to the effect that
AIRI should be liable for the tax on the sale of diesel fuel for the first three
quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement.
In November 1997, the Company reached an agreement with the IRS (the "IRS
Agreement") to settle this matter by paying an aggregate of $646,633 in tax,
plus interest accrued for the applicable period involved. The IRS has agreed to
a payment plan that calls for payment of the tax and interest over a period of
approximately one year. In the IRS Agreement, the IRS waived all penalties and
75% of the amount of the originally proposed tax liability.
The Company accrues an estimated loss from a loss contingency when a liability
has been incurred and the amount of such loss can be reasonably estimated. Such
accruals are based on developments to date and the Company's estimate of the
liability. Based on the status of ongoing discussions with the IRS during 1996
and 1997, the Company determined that it needed to increase the allowance for
this contingency from $250,000 (recorded in 1995) to $1.1 million and $1.4
million as of the years ended 1996 and 1997, respectively.
Environmental lawsuit
On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1998 the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was placed into escrow in October 1998. The plaintiffs attorneys are
preparing the necessary release forms in order to disburse the funds, which
release is expected to be completed during the first quarter of 1998.
Employment agreements
The Company has an employment agreement with its chief executive officer under
which the officer receives a base salary of $300,000 annually.
Gold Line Defaults
During the third and fourth quarters of 1996, Gold Line defaulted on their
obligations to pay lease fees, insurance premiums, property taxes and other
items to AIRI under the terms of the Lease Agreement totaling an aggregate of
$567,000. In addition, Gold Line paid no lease fees to AIRI during the first
quarter of 1997. On February 18, 1997, AIRI filed suit against Gold Line for
termination of the Lease Agreement and damages including unpaid processing fees,
real-estate taxes, insurance premium and other items which may be due under the
terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and
after the demand to vacate was not met,
F-19
<PAGE>
a pleading to evict Gold Line was filed as an incident to the original suit.
After a hearing on March 20, 1997, the court granted the eviction and Gold Line
vacated the Refinery premises. The Company filed suit for damages and received a
judgment in its favor of $1.5 million. However, since Gold Line has filed for
protection under Chapter 11 of the Bankruptcy Code, and there are certain
secured creditors who have made significant claims against Gold Line, the total
of which claims may exceed the total value of Gold Line's assets, the
collectibility of this judgment by the Company is uncertain. The Company has
provided an allowance during 1996 of $682,000, which fully reserves all amounts
due AIRI from Gold Line as of December 31, 1997.
Lease commitments
The Company leases office space under various operating leases which all expire
in 1998. Future minimum payments under these operating leases are $112,032 as of
December 31, 1997.
Minimum lease payments have not been reduced by minimum sublease rentals due in
the future under noncancelable subleases. The composition of total rental
expense for all operating leases was as follows:
1997 1996 1995
---- ---- ----
Minimum rentals $158,313 $307,912 $297,502
Less - sublease rentals (21,740) (130,437) (114,213)
---------- ---------- -----------
Total $136,573 $177,475 $183,289
======== ========= ==========
Other Contingencies
In addition to certain matters described above, the Company and its subsidiaries
are party to various legal proceedings, including environmental matters.
Although the ultimate disposition of these proceedings is not presently
determinable, in the opinion of the Company, any liability that might ensue
would not be material in relation to the consolidated financial position or
results of operations of the Company.
Transfer of Funds - U.S. and Foreign
The Company currently operates in the Republic of Kazakstan and there are no
restrictions on the transfer of funds into and out of the country between the
Company's U.S. and foreign branch of its subsidiary, AIPK.
Neste Trifinery V. American International Refinery, Inc. Etc. Cause No.
98-11453; in the 269th Judicial District; in and For Harris County, Texas
Plaintiff, Neste Trifinery, has filed suit in a Harris County District Court
against the Company and its wholly-owned subsidiary, American International
Refinery, Inc. ("AIRI"). Neste Trifinery has asserted claims for recovery of
compensatory and punitive damages based on the following theories of recovery;
(1) breach of contract, (2) disclosure of confidential information; and (3)
tortious interference with existing contractual relations. Generally, Neste
Trifinery has alleged that in connection with the due diligence conducted by the
Company and AIRI of the business of Neste Trifinery, the Company and AIRI had
access to confidential or trade secret information and that the Company and AIRI
have exploited that information, in breach of an executed Confidentiality
Agreement, to the detriment of Neste Trifinery. Neste Trifinery seeks the
recovery of $20,000,000 in compensatory damages and an undisclosed sum in
connection with its claim for the recovery of punitive damages.
In addition to seeking the recovery of compensatory and punitive damages, Neste
Trifinery sought injunctive relief. Specifically, Neste Trifinery sought to
enjoin the Company and AIRI from: (1) offering employment positions to the key
employees of Neste Trifinery; (2) contacting the suppliers, joint venture
partners and customers of Neste Trifinery in the pursuit of business
opportunities; (3) interfering with the contractual relationship existing
between Neste Trifinery and St. Marks Refinery, Inc.; and (4) disclosing or
using any confidential information obtained during the due diligence process to
the detriment of Neste Trifinery. The Company and AIRI have asserted to a
general denial to the allegations asserted by Neste Trifinery. The Company and
AIRI also moved the district court to refer the matter to arbitration, as
provided for in the Confidentiality Agreement, and to stay the pending
litigation. On March
F-20
<PAGE>
27, 1998, the district court referred the matter to arbitration, as requested by
the Company and AIRI, and stayed litigation. At present, the dispute existing
between the Company, AIRI and Neste Trifinery in Texas will be decided by a
panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes.
The Company and AIRI are vigorously defending the Texas matter, and the
Company's counsel does not anticipate an unfavorable outcome, although a
definitive outcome is not yet determinable.
On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks
Refinery, Inc. in the United states District Court for the Northern District of
Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate
termination of its storage agreement. Following an evidentiary hearing, the
District Judge denied Neste's application for injunctive relief and adopted the
recommendations of the Magistrate, who found in part that Neste had failed to
prove a substantial likelihood of success on the merits. The District Court's
order was appealed by Neste to the United States Court of Appeals for he
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. The federal court action remains pending, but Neste has agreed
to remove its product from the St. Marks facility by April 25, 1998. The Company
presently plans to deliver product to the St. Marks, Florida facility and begin
marketing operations during the last week of April, 1998
Kazakstan
On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement with Med
Shipping and Trading S.A. ("MED"), a Liberian corporation to buy from MED, in
exchange for a combination of cash and stock, a 70% working interest in a
Kazakstan concession. As part of the acquisition, the Company is required to
perform certain minimum work programs over the next five years which consists of
the acquisition and processing of 3,000 kilometers of new seismic data,
reprocessing 500 kilometers of existing seismic data, and drill 6,000 linear
meters. In addition, the Company assumed an obligation to pay the Kazakstan
Government three annual payments of $200,000 each beginning July 1998 for the
purchase of existing seismic and geological data on the Kazakstan concession.
The Company has also entered into a consulting agreement with certain MSUP joint
venture partners. The consulting agreement requires monthly payments of $12,500
through July 31, 1998 and $23,000 monthly through April 22, 2000.
Year 2000 Issues
The Company is evaluating the potential impact of the nearly universal practice
in the computer industry of using two digits rather than four to designate the
calendar year, leading to incorrect results when computer software performs
arithmetic operations, comparisons or date field sorting involving years later
than 1999. Management believes that in light of the limited nature of the
computer software used by the Company and the limited scope of its electronic
interaction with other entities, issues relating to modification or replacement
of existing systems will not have a material effect on the operations or
financial condition of the Company. Although the Company is not aware of any
circumstances in which the failure of a supplier or customer to deal
successfully with such issues would have a material impact, there can be no
assurance that such will be the case.
NOTE 11 - INCOME TAXES:
The Company uses the asset and liability approach for financial accounting and
reporting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized.
The Company reported a loss from operations during 1995, 1996, and 1997 and has
a net operating loss carryforward from prior years' operations. Accordingly, no
income tax provision has been provided in the accompanying statement of
operations. The Company has available unused tax net operating loss
carryforwards of approximately $58,000,000 which expire in years 1997 through
2009. Due to a change in control, as defined in Section 382 of the Internal
Revenue Code, which occurred in 1994, the Company's utilizable tax operating
loss carryforwards to offset future income have been restricted. These
restrictions will limit the Company's future use of its loss carryforwards. The
amount of the Company's net operating loss available at the end of 1997 is
approximately $26,900,000.
F-21
<PAGE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
<S> <C> <C>
1997 1996
---- ----
Deferred taxes:
Net operating loss carryforwards $ 10,088,000 $ 6,942,000
Unrealized loss on marketable securities 1,932,000 -
Allowance for doubtful accounts 720,000 721,000
Accrued liabilities 13,000 -
Depreciation, depletion, amortization and impairment (1,603,000) (984,000)
---------------- -------------
Net deferred tax asset 11,150,000 6,679,000
--------------- -------------
Valuation allowance $(11,150,000) $(6,679,000)
============== ===========
</TABLE>
The valuation allowance relates to the uncertainty as to the future utilization
of net operating loss carryforwards. The increase in the valuation allowance
during 1997 primarily reflects the increase in the Company's net operating loss
carryforwards during the year.
NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable and notes receivable.
Trade accounts receivable and notes receivable were $293,260 and $3,871,703 at
December 31, 1997, respectively. Refinery processing fees were earned through
lease of the Company's refinery to Gold Line. Trade accounts receivable and
notes receivable from Gold Line aggregated $1,920,877 at December 31, 1997, net
of reserves for uncollectible amounts of $1,920,877. The Company's ability to
collect outstanding amounts from Gold Line and restrictions thereon were subject
to agreements between MGTF, Gold Line, NationsBank (a Gold Line creditor), and
the Company (Notes 2 and 8). The Company has filed suit as discussed previously
in Note 10 to collect certain reserved amounts from Goldline.
The estimated fair value of the Company's financial instruments is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
value value value value
---------- ---------- ---------- ----------
MIP Notes Receivable $3,871,703 $3,871,703 - -
MIP Marketable Securities $ 735,958 $ 735,958 - -
Short-term debt $6,075,931 $6,075,931 $6,766,592 $6,766,592
</TABLE>
For investments, fair value equals quoted market price. Fair value of fixed-
rate long-term debt and notes receivable are determined by reference to rates
currently available for debt with similar terms and remaining maturities. As of
December 31, 1997, 100% of the Company's long-term debt matures during 1998. As
a result, the Company believes the carrying value of its long-term debt,
approximates fair value. The reported amounts of financial instruments such as
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of their short-term maturities. The MIP notes
receivable were recorded at a discount to yield a fair market interest rate. The
Company believes the effective interest rate on the MIP notes approximates
market rates at December 31, 1997.
F-22
<PAGE>
NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION:
The Company's operations involve a single industry segment, the exploration,
development, production, refining and marketing of oil and natural gas. Its
principal oil and gas activities are concentrated in foreign countries.
Operating in foreign countries subjects the Company to inherent risks such as a
loss of revenues, property and equipment from such hazards as exploration,
nationalization, war and other political risks, risks of increases of taxes and
governmental royalties, renegotiation of contracts with government entities and
changes in laws and policies governing operations of foreign- based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, production and refining of oil and gas, including blowouts,
pollution and acts of nature that could result in damage to oil and gas wells,
production facilities or formations. In addition, oil and gas prices have
fluctuated substantially in recent years as a result of events which were
outside of the Company's control.
The Company periodically maintains cash balance in financial institutions which
exceed the FDIC limit. Management does not believe any significant credit risk
exists with respect to these balances.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Geographic Segment
------------------
<S> <C> <C> <C> <C> <C>
Consolidated
1997 United States Columbia Peru Kazakstan Total
- ---- ------------- ----------- ------- --------- ----------
Sales and other
operating revene $ 23,298 $ 292,947 $ - $ - $ 316,245
Interest income and other
corporate revenues 511,719
----------
Total revenue $ 827,964
Costs and operating
expense 1,189,188 463,371 $ - $ - 1,652,559
------------- ------------ ----------- ---------- -----------
Operating profit (loss) $ (1,165,890) $(170,424) $ - $ - $ 824,595)
============ ========== =========== ========== =========
General corporate expense 10,465,064
Interest expense 6,663,992
Net loss $(17,953,651)
=============
Identifiable assets
at December 31, 1997 $ 21,159,627 $ - $ - $11,724,477 $ 32,884,104
----------- -------------- -------------- -----------
Corporate assets 8,955,756
---------
Total assets at
December 31, 1997 $ 41,839.860
=============
F-23
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Depreciation, depletion
and amortization rate
per equivalent barrel
of oil $ - $ 3.77 $ - $ - $ 3.77
============ =========== ============ ============ =================
Capital Expenditures,
net of cost recoveries $ 5.606,031 $ - $ - $11,724,477 $ 17,330,508
============ ========== ============ =========== ============
Geographic Segment
------------------
Consolidated
1996 United States Colombia Peru Kazakstan Total
- ---- ------------- -------- ------- ----------
Sales and other
operating revenue $2,596,917 $1,508,260 $ - $ - $ 4,105,177
Interest income and other
corporate revenues 5,337
------------
Total revenue 4,110,514
Costs and operating
expense 1,616,043 1,468,665 200,000 $ - 3,284,708
----------- --------- ------------ ------------ ------------
Operating profit (loss) $ 980,874 $ 39,595 $(200,000) $ - 825,806
============ ============= ========= ===========
General corporate expense 2,659,795
Interest expense 2,818,218
-----------
Net loss $ (4,652,207)
============
Identifiable assets
at December 31, 1996 $12,895,332 $14,641,646 $4,860,559 $ - $ 32,397,537
=========== =========== ========== ============
Corporate assets 2,094,894
-----------
Total assets at
December 31, 1996 $34,492,431
===========
Depreciation, depletion
and amortization rate
per equivalent barrel
of oil $ - $ 3.77 $ - $ - $ 3.77
------------ ------------- -------------- --------------- =================
Capital Expenditures,
net of cost recoveries $ 1,713,188 $ 719,954 $ 825,923 $ - $ 3,259,065
========== ======== ========== ============== =============
F-24
<PAGE>
<CAPTION>
Geographic Segment
------------------ Consolidated
1995 United States Colombia Peru Kazakstan Total
- ---- ------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenue $ 1,403,668 $ 1,214,213 $ 166,069 $ - $ 2,783,950
Interest income and other
corporate revenues 27,358
-----------
Total revenue 2,811,308
Costs and operating
expense 1,922,130 1,513,401 65,141 $ - 3,500,672
------------- ------------- ------------- -------------- -----------
Operating profit (loss) $ (518,462) $ (299,188) $ 100,928 $ - $ (689,364)
============ ============ =========== ============== ==============
General corporate expense 2,611,650
Interest expense 1,037,308
Net loss $ (4,338,322)
===========
Identifiable assets
at December 31, 1995 $13,565,280 $ 14,136,257 $4,247,975 $ - $ 31,949,512
=========== =========== ========== =============
Corporate assets 690,850
-----------
Total assets at
December 31, 1995 $32,640,362
===========
Depreciation, depletion
and amortization rate
per equivalent barrel
of oil $ - $ 3.86 $ - $ - $3.86
============ ============ ============== ============ =============
Capital Expenditures,
net of cost recoveries $ 400,368 $ 1,265,989 $1,528,095 $ - $ 3,194,452
============ ============ ========== ============ ============
</TABLE>
NOTE 14 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
AND DISCLOSURES OF CASH FLOW INFORMATION:
The Company has issued shares of common stock and common stock warrants in the
acquisitions and conversions of the following noncash transactions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Conversion of debentures $9,343,022 $2,000,000 $ -
Stock issued in lieu of current liabilities 233,559 168,902 489,250
Issuance of warrants related to convertible debentures 6,264,411 - -
Issuance of stock - unearned compensation - 424,063 20,312
F-25
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Issuance of stock - compensation 40,000 - -
Issuance of stock - services 247,607 - -
Issuance of stock and warrants - for oil and gas properties 9,254,688 - -
</TABLE>
Cash paid for interest, net of amounts capitalized, was $765,312, $808,477, and
$964,609, during 1997, 1996, and 1995, respectively.
Cash paid for corporate franchise taxes was $70,003, $114,128, and $52,050,
during 1997, 1996 and 1995, respectively.
NOTE 15 - SUBSEQUENT EVENTS:
Regulation S Offerings
In 1998, the Company received aggregate net proceeds of $794,000 from the
exercise of warrants to acquire shares of common stock (see Note 9). The
exercise price of these warrants ranged from $.40 to $2.00 per share.
Class A Warrants
At December 31, 1997 the Company had 5,957,207 Class A Warrants that had an
expiration date of March 1, 1998. On February 13, 1998 the Company extended the
expiration date of these Warrants until April 9, 1998. Although the Company has
preliminary indication that approximately 55,000 Warrants have been exercised
through this date, the Company has not received a final accounting from its
Depositary Agent of the total number of Warrants that may have been exercised as
of the expiration date.
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying unaudited oil and gas disclosures are presented as
supplementary information in accordance with Statement No. 69 of the Financial
Accounting Standards Board.
F-26
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES
SUPPLEMENTARY OIL AND GAS INFORMATION
(UNAUDITED)
Capitalized costs relating to oil and gas activities and costs incurred in oil
and gas property acquisition, exploration and development activities for each
year are shown below:
<TABLE>
<CAPTION>
CAPITALIZED COSTS
Colombia Peru
-------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Unevaluated property not
subject to amortization $ - $ 1,101,277 $ 1,101,277 $ - $4,457,964 $3,382,041
Proved and unproved
properties - 31,924,991 31,225,040 - 200,000 -
Accumulated deprecia-
tion, depletion and
amortization - 19,870,122 19,364,606 - 200,000 -
-------------------------------- -----------------------------------
Net Capitalized costs $ - $13,166,146 $12,951,711 $ - $4,457,964 $3,832,041
================================ ===================================
<CAPTION>
Kazakstan/Other Total
----------------------------------- --------------------------------------
1997(1) 1996(2) 1995(2) 1997 1996 1995
------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Unevaluated property not
subject to amortization $11,724,477 $ 89,389 $ 65,506 $11,724,477 $5,648,630 $ 4,998,824
Proved and unproved
properties - 371,665 351,257 - 32,506,656 31,566,297
Accumulated deprecia-
tion, depletion and
amortization - 371,655 65,506 - 17,713,499 16,849,258
----------------------------------- --------------------------------------
Net Capitalized costs$ $11,724,477 $ 89,389 $ 65,506 $11,724,477 $17,713,499 $16,849,258
=================================== ======================================
<CAPTION>
Costs incurred in oil and gas property acquisition, exploration and development activities
Columbia Peru
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property acquisition
costs - proved and
unproved properties $ - $ - $ - $ - $ - $ -
Exploration Costs - - 744,549 - - -
Development costs - 719,954 527,595 - - -
Results of operations for oil and gas producing activities
Oil and gas sales $ 292,947 $ 1,364,581 $1,104,095 $ - $ - $ 166,069
------------------------------------ ---------------------------------------
Lease operating costs 98,766 611,857 363,680 - - 65,141
Depreciation, depletion
and amortization 70,216 491,732 531,989 - - -
Provision for reduction
of oil and gas properties - - - - 200,000 65,141
------------------------------------ ------------------------------------------
1 05,982 1,103,589 895,589 - 200,000 -
------------------------------------ -----------------------------------------
Income (loss) before
tax provision 186,965 260,992 208,506 - (200,000) 100,928
Provision (benefit) for
income tax - - - - - -
------------------------------------------ ---------------------------------------
Results of operations $ 186,965 $ 260,992 $208,506 $ - $ (200,000) $ 100,928
======================================= ========================================
<CAPTION>
Kazakstan/Other Total
------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property acquisition
costs - proved and
unproved properties $11,724,477 $ - $ - $11,724,477 $ - $ -
Exploration Costs - - - - - 744,549
Development costs - - - - 719,954 527,595
Results of operations for oil and gas producing activities
Oil and gas sales $ - $ - $ - $ 292,947 $1,364,581 $ 1,270,164
------------------------------------- ---------------------------------------------
Lease operating costs - - - 98,766 611,857 428,741
Depreciation, depletion
and amortization - - 351,257 70,216 491,732 883,246
Provision for reduction
of oil and gas properties - - 351,257 - 1,303,589 1,311,987
-------------------------------------- --------------------------------------------
- - 351,257 105,482 1,303,589 1,311,987
-------------------------------------- ---------------------------------------------
Income (loss) before
tax provision - - (351,257) 186,955 60,992 (41,823)
Provision (benefit) for
income tax - - - - - -
------------------------------------- -----------------------------------------
Results of operations $ - $ - $(351,257) $ 186,965 60,992 $ (41,823)
====================================== =========================================
</TABLE>
Unevaluated property not subject to amortization reflected in 1997 includes
Kazakstan properties only.
Unevaluated property not subject to amortization and proved and unproved
properties reflected in 1996 were non-Kazakstan oil and gas projects, which have
been fully amortized and retired as of December 31, 1997.
F-27
<PAGE>
OIL AND GAS RESERVES:
Oil and gas proved reserves cannot be measured exactly. Reserve estimates are
based on many factors related to reservoir performance which require evaluation
by the engineers interpreting the available data, as well as price and other
economic factors. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.
The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil,
condensate, natural gas liquids and natural gas and changes in such quantities
at December 31, 1997, 1996 and 1997. Net proved reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserve volumes that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion.
<TABLE>
<CAPTION>
United States Colombia Total
-------------------- ------------------------------ ------------------------------
Oil Gas Oil Gas Oil Gas
BBLS MCF BBLS MCF BBLS MCF
---------- -------- ---------------- ------------ ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1995estimates - - 1,166,258 - 1,166,258 -
Extensions, discoveries
and other additions - - 302,836 3,061,200 302,836 3,061,200
Production - - (137,821) - (137,821) -
---------------- -------------- --------------- -------------
December 31, 1995 - - 4,106,480 11,381,400 4,106,480 11,381,400
Revisions of
previous estimates - - 34,372 3,298,000 34,372 3,298,000
Extensions, discoveries
and other additions - - - - - -
Production - - (130,433) - (130,433) -
------------- -------------- --------------- -------------
December 31, 1996 - - 4,010,419 14,679,400 4,010,419 14,679,400
Revisions of
previous estimates - - - - - -
Extensions, discoveries
and other additions - - - - - -
Sales of reserves - - (3,892,146) (14,679,400) (3,892,146) (12,679,400)
Production - - (118,273 - (118,273 -
---------- -------- ---------------- ------------ ------------------ --------------
December 31, 1997 - - - - - -
=========== =========== ================ ============= ================== ==============
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
United States Colombia Total
-------------------- ------------------------ -----------------------
Oil Gas Oil Gas Oil Gas
BBLS MCF BBLS MCF BBLS MCF
<S> <C> <C> <C> <C> <C> <C> <C>
Net proved developed reserves
January 1, 1995 - - 899,971 4,160,200 899,971 4,160,200
December 31, 1995 - - 1,012,896 5,100,000 1,012,896 5,100,000
December 31, 1996 - - 948,721 6,321,100 948,721 6,321,000
December 31, 1997 - - - - - -
</TABLE>
Changes to reserves in 1997 reflect the sale of the Colombia subsidiary as of
February 25, 1997.
Revisions to reserves in 1996 reflect an increase in gas reserves due to the
Company's gas field development program and anticipated recompletion of Puli No.
3.
Revisions to crude oil reserves in 1995 reflect the increased working interest
participation of the Company in the proved undeveloped reserves due to
nonparticipation of the other joint venture partners.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW:
The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with Statement of Financial Accounting Standards No. 69. Accordingly, future
cash inflows were determined by applying year-end oil and gas prices to the
Company's estimated share of the future production from proved oil and gas
reserves. Future production and development costs were computed by applying
year-end costs to future years. Future income taxes were derived by applying
year-end statutory tax rates to the estimated net future cash flows. A
prescribed 10% discount factor was applied to the future net cash flows.
In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
<TABLE>
<CAPTION>
Colombia
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ - $61,173,696 $46,433,879
Future development costs - (12,170,000) (10,780,000)
Future production costs - (8,012,891) (9,409,442)
Future income tax expenses - - -
---------- ---------------- ------------
Future net cash flows - 40,990,805 26,244,437
Annual discount 10% rate - (19,088,789) (13,885,290)
---------- ------------ ------------
Standardized measure discounted future
net cash flows $ - $21,902,016 $12,359,147
========== =========== ===========
</TABLE>
As previously discussed, the Colombia subsidiary was sold on February 25, 1997.
Future cash flows in 1996 increased as a result of the increased selling price
of oil in the world market in 1996 and also as a result of the upward revision
in estimated future recoverable equivalent barrels of oil by approximately
585,000 BOE.
F-29
<PAGE>
Estimated future income taxes were eliminated in 1995 and 1996 because estimated
future tax deductions related to oil and gas properties exceeded estimated
future net revenues based on oil and gas prices and related costs at December
31, 1995 and 1996.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The aggregate change in the standardized measure of discounted future net cash
flows was a decrease of $21,902,016 in 1997 and an increase of $9,542,869 and
$2,288,243 in 1996 and 1995, respectively. The principal sources of change were
as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning of year $ 21,902,016 $12,359,147 $10,070,904
Sales and transfer of oil and gas produced,
net of production costs (161,813) (752,724) (740,495)
Net changes in prices and production costs - 6,764,808 135,987
Extensions, discoveries, additions and
improved recovery, less related costs - - 660,594
Net change due to sales of minerals in place (21,740,203) - -
Previously estimated development costs
incurred during the year - 719,954 527,595
Changes in estimated future
development costs - (973,650) (2,032,144)
Revisions of previous reserve
quantity estimates - 1,460,849 3,783,148
Changes in timing and other - 1,087,717 (1,053,532)
Accretion of discount - 1,235,915 1007,090
---------- --------- ---------
End of year $ - $21,902,016 $12,359,147
============ =========== ===========
</TABLE>
F-30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
Dated: April 15, 1998
By: /s/ Denis J. Fitzpatrick
Denis J. Fitzpatrick
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
By: /s/ George N. Faris Date: April 15, 1998
George N. Faris, Chairman
of the Board of Directors
and Chief Executive Officer
By: /s/ Denis J. Fitzpatrick Date: April 15, 1998
Denis J. Fitzpatrick
Vice President, Secretary,
Principal Financial and
Accounting Officer
By: /s/ Donald G. Rynne Date: April 15, 1998
Donald G. Rynne, Director
By: /s/ Daniel Y. Kim Date: April 15, 1998
Daniel Y. Kim, Director
By: /s/ William R. Smart Date: April 15, 1998
William R. Smart, Director
Exhibit Index
Exhibit
Number Description
4.14 1998 Stock Option Plan of the Registrant
4.15 1998 Stock Award Plan of the Registrant
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
Exhibit 4.14
1998 Stock Option Plan
The Board of Directors has deemed that it is in the best interests of
the Company to establish the 1998 Plan so as to provide employees of the Company
and its subsidiaries, as well as Directors, independent contractors and
consultants of the Company and/or its subsidiaries an opportunity to acquire a
proprietary interest in the Company by means of grants of options to purchase
Common Stock in order to provide a closer identification of their interests with
those of the Company and its shareholders. The Company currently employs 73
persons and has 3 outside directors.
It is the opinion of the Board of Directors that by providing the
employees, Directors, independent contractors and consultants of the Company and
its subsidiaries the opportunity to acquire an equity investment in the Company,
the 1998 Plan will maintain and strengthen their desire to remain with the
Company, stimulate their efforts on the Company's behalf, and also attract other
qualified personnel to become employed by or otherwise become associated with
the Company. The 1998 Plan was adopted by the Company's Board of Directors on
April 2, 1998. As of April 12, 1998, no options have been granted pursuant to
the 1998 Plan. The closing market price of the Common Stock, as reported by
Nasdaq on April 2, 1998 was $3.81 per share. The Board of Directors has directed
that the shares underlying the 1998 Plan be registered pursuant to the
Securities Act of 1933, and the Company intends to take steps to file a
Registration Statement on Form S-8 to register such shares promptly after
approval of this Proposal 3.
The following discussion summarizes certain provisions of the 1998 Plan,
which is qualified in its entirety by reference to the text of the Plan, copies
of which are available for examination at the Securities and Exchange Commission
and at the principal office of the Company, 444 Madison Avenue, New York, NY
10022.
The 1998 Plan allows the Company to grant incentive stock options
("ISOs"), as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to
qualify under Section 422(b) of the Code, and ISOs or NQSOs in tandem with Stock
Appreciation Rights ("SARs"). ISOs, NQSOs and SARs are referred to collectively
herein as "Options."
Options granted under the 1998 Plan prior to the approval of the 1998 Plan
by the Company's shareholders are conditioned upon approval of the 1998 Plan by
such shareholders on or before June 29, 1998. If such approval is not obtained
by such date, such Options shall become null and void, and the 1998 Plan shall
terminate.
ELIGIBILITY FOR PARTICIPATION
The 1998 Plan provides that ISOs or ISOs in tandem with SARs may be
granted to employees of the Company and its subsidiaries, including officers and
Directors who are also employees and that NQSOs or NQSOs in tandem with SARs may
be granted to employees of the Company and its subsidiaries, Directors,
independent contractors, consultants and other individuals who are
<PAGE>
not employees of, but are involved in the continuing development and success of,
the Company and its subsidiaries ("Participants").
ADMINISTRATION
The 1998 Plan is administered by the Board of Directors and/or a stock
option committee of the Board of Directors (the "Committee"). The Board of
Directors and/or the Committee will, among other things, select the optionees,
determine the number of shares to be subject to each Option and determine the
vesting period, option period and option price. In making such determinations,
there will be taken into account the nature of the services rendered by
Participants, their present and potential contributions to the success of the
Company, and such other relevant factors as the Board and/or the Committee in
its discretion shall deem relevant.
TERMS OF OPTIONS
The terms of Options granted under the 1998 Plan are to be determined by
the Board of Directors and/or the Committee. Each Option is to be evidenced by a
stock option agreement between the Company and the Participant to whom such
Option is granted and is subject to the following additional terms and
conditions:
(a) Exercise of the Option: The Board of Directors and/or the
Committee will determine the time periods during which Options granted under the
1998 Plan may be exercised. An Option must be granted within 10 years from the
date the 1998 Plan was adopted. The 1998 Plan is deemed adopted on April 2,
1998. Options may be exercisable in whole or in part at any time during the
period but may not have an expiration date later than 10 years from the date of
grant. ISOs or ISOs in tandem with SARs granted to holders of more than 10% of
the Common Stock, however, may not have a term of more than 5 years. An Option
is exercised by giving written notice of exercise to the Company specifying the
number of full shares of Common Stock to be purchased and tendering payment of
the purchase price to the Company in cash or certified check, or if permitted by
the instrument of grant with respect to ISOs or ISOs granted in tandem with SARs
and at any time as permitted by the Board of Directors or the Committee with
respect to other Options, by delivering a promissory note or exchanging shares
of Common Stock owned by the Participant, or by a combination of cash,
promissory notes and/or shares of Common Stock, or, in the sole discretion of
the Board or the Committee, by another medium of payment. The ability to pay the
option exercise price in shares of Common Stock may enable a Participant to
engage in a series of successive stock-for-stock exercises of an Option and
thereby fully exercise an Option with little or no cash investment. Officers and
Directors who receive grants of SARs may exercise them at any time after 6
months from the date of grant, but generally may only exercise them within the
period of 10 business days following publication of the Company's quarterly
financial information.
(b) Option Price: In no event may the option price of the shares
subject to an ISO or a SAR issued in tandem with an ISO be less than the fair
market value of the Common Stock on the date of grant. The Board of Directors
and/or the Committee may set the price of an NQSO or an NQSO granted in tandem
with a SAR without any limitation. Fair market value in the case of ISOs
1
<PAGE>
shall be the closing price of the Common Stock on its principal market on the
date of grant, if the Common Stock is traded on an exchange, or the average of
the closing bid and asked prices, if it is traded over-the-counter. ISOs or ISOs
in tandem with SARs granted to holders of more than 10% of the Common Stock are
subject to the additional restriction that the option price must be at least
110% of the fair market value of the Common Stock on the date of grant.
(c) Vesting: The Board of Directors and/or the Committee, will
determine the time or times the Options become exercisable. However, the 1998
Plan provides that, with respect to holders of more than 10% of the Common
Stock, such Options must become first fully exercisable not later than 5 years
from the date of grant, and no less than 20% of the Option must become
exercisable in each of the first 5 years of the Option until fully exercisable.
(d) Termination of Employment; Disability; Death: If the
employment of a Participant under the 1998 Plan is terminated for any reason
(other than because of death, disability, voluntary termination or for cause),
his ISOs and SARs issued in tandem with ISOs shall expire and no longer be
exercisable 3 months after such termination, but in no event later than the
expiration date of the Options, and his other Options shall terminate as
determined under the option agreement, but not later than the expiration date.
In the event a Participant's employment is terminated voluntarily or for cause,
his Options shall immediately expire.
In the event a Participant dies while in the employ of the Company
or its subsidiaries or within 3 months thereafter, his Options may be exercised
by a legatee or legatees of such Options under such Participant's last will or
by his personal representatives or distributees within a period determined by
the Board or the Committee of at least 6 months after his death, but in no event
later than the expiration date of the Options.
A Participant's employment with the Company or a subsidiary will
not be considered to be terminated for purposes of the 1998 Plan while the
Participant is not active due to a disability; provided, that an ISO may only be
exercised within 6 months after the Participant's employment would be considered
terminated because of such disability under applicable Sections of the Code,
except as determined by the Board of Directors or the Committee, but in no event
later than the expiration date of the Option.
Under the 1998 Plan, Participants on military or sick leave, or on
any other bona fide leave of absence, are to be considered as remaining in the
employ of the Company or its subsidiaries for 90 days or such longer period as
is guaranteed either by contract or statute.
(e) Nontransferability of Options; No Liens: An Option is
nontransferable and non-assignable by the Participant, other than by will or the
laws of descent and distribution and is exercisable during the Participant's
lifetime only by the Participant.
(f) Maximum Number of ISOs or SARs in Tandem with ISOs which may
Be Issued: No employee may receive a grant of ISOs or SARs in tandem with ISOs
if the aggregate fair market value of all ISOs and SARs in tandem with ISOs
2
<PAGE>
granted to him under the 1998 Plan and any other qualified incentive stock
option plan of the Company exceeds $100,000, as determined at the date of grant.
Any options granted in excess of the $100,000 limit are deemed to be NQSOs under
the 1998 Plan.
The option agreement may contain such other terms, provisions and
conditions not inconsistent with the 1998 Plan as may be determined by the Board
of Directors and/or the Committee.
TERMINATION; AMENDMENT OR DISCONTINUANCE
The 1998 Plan (but not Options previously granted under the 1998 Plan)
shall terminate 10 years from the date of its adoption by the Board of
Directors. No Option will be granted from the 1998 Plan after termination of the
such plan.
The Board of Directors of the Company may terminate the 1998 Plan at any
time prior to its expiration date, or from time to time make such modifications
or amendments of the 1998 Plan as it deems advisable. However, the Board may
not, without the approval of holders of a majority of the outstanding shares of
the Company, except under conditions described under "Adjustments Upon Changes
in Common Stock," increase the maximum number of shares as to which Options may
be granted under the 1998 Plan, or materially change the standards of
eligibility under the 1998 Plan.
No termination, modification or amendment of the 1998 Plan may adversely
affect the terms of any outstanding Options without the consent of the holders
of such Options.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK
In the event that the number of outstanding shares of Common Stock of the
Company is changed by reason of recapitalization, reclassification, stock split,
stock dividend, combination, exchange of shares or the like, or as a result of a
merger, consolidation or reorganization involving the Company or its
subsidiaries, the Board of Directors will make an appropriate adjustment in the
aggregate number of shares of Common Stock available under the 1998 Plan, in the
number of shares of Common Stock issuable upon the exercise of then outstanding
Options and in the exercise prices of such Options. Any adjustment in the number
of shares will apply proportionately only to the unexercised portion of Options.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal Federal income
tax consequences of the Options and is based on existing Federal law, which is
subject to change, in some cases retroactively. This discussion is also
qualified by the particular circumstances of individual Participants, which may
substantially alter or modify the Federal income tax consequences herein
discussed.
Generally, under present law, when an Option qualifies as an ISO under
Section 422 of the Code, (i) an employee will not realize taxable income either
upon the grant or the exercise of the Option, (ii) the amount by which
3
<PAGE>
the fair market value of the shares acquired by the exercise of the Option at
the time of exercise exceeds the option price is included in alternative minimum
taxable income for purposes of determining the employee's alternative minimum
tax, (iii) any gain or loss (the difference between the net proceeds received
upon the disposition of the shares and the option price paid therefor), upon a
qualifying disposition of the shares acquired by the exercise of the Option will
be treated as capital gain or loss if the stock qualifies as a capital asset in
the hands of the employee, and (iv) no deduction will be allowed to the Company
for Federal income tax purposes in connection with the grant or exercise of an
ISO or a qualifying disposition of the shares. A disposition by an employee of
shares acquired upon exercise of an ISO will constitute a qualifying disposition
if it occurs more than 2 years after the grant of the Option and one year after
the issuance of the shares to the employee. If such shares are disposed of by
the employee before the expiration of those time limits, the transfer would be a
"disqualifying disposition" and the employee, in general, will recognize
ordinary income (and the Company will receive an equivalent deduction) equal to
the lesser of (i) the aggregate fair market value of the shares as of the date
of exercise less the option price, or (ii) the amount realized on the
disqualifying disposition less the option price. Ordinary income from a
disqualifying disposition will constitute compensation for which withholding may
be required under Federal and state law. The maximum rate of tax on ordinary
income is greater than the rate of tax on long-term capital gains.
In the case of an NQSO granted under the 1998 Plan, no income generally is
recognized by the Participant at the time of the grant of the Option assuming
such NQSO does not have a readily ascertainable fair market value. The
Participant generally will recognize ordinary income when the NQSO is exercised
equal to the aggregate fair market value of the shares acquired less the option
price. Withholding may be required, and the Company will receive an equivalent
deduction, subject to excessive employee remuneration provisions of Section 162
(m) of the Code. Section 162 (m) generally disallows a deduction for employee
remuneration paid by a company in any taxable year to an executive officer in
excess of $1,000,000 (unless such compensation is considered performance based
compensation). For purposes of determining remuneration paid, the excess of the
fair market value of the Common Stock upon exercise of an NQSO over the exercise
price is considered remuneration paid in the year of exercise unless the income
is considered performance-based compensation. One of the requirements to qualify
as performance-based compensation is that the 1998 Plan set forth the maximum
number of Options to which a Participant may be entitled. The 1998 Plan does not
contain such a provision. Therefore, the NQSOs granted under the 1998 Plan will
not be considered performance-based compensation for purposes of Section 162(m).
Shares acquired upon exercise of an NQSO will have a tax basis equal to
their fair market value on the exercise date or other relevant date on which
ordinary income is recognized and the holding period for the shares generally
will begin on the date of the exercise or such other relevant date. Upon
subsequent disposition of the shares, the participant will recognize capital
gain or loss if the stock is a capital asset in his hands. Provided the shares
are held by the Participant for more than one year prior to disposition, such
gain or loss will be long-term capital gain or loss. As set forth above, the
maximum rate of tax on ordinary income is currently greater than the maximum
rate of tax on long-term capital gains. To the extent a
<PAGE>
Participant recognizes a capital loss, such loss generally may offset capital
gains and $3,000 of ordinary income. Any excess capital loss is carried forward
indefinitely.
The grant of an SAR is generally not a taxable event for the optionee. Upon
the exercise of an SAR the optionee will recognize ordinary income in an amount
equal to the amount of cash and the fair market value of any Common Stock
received upon such exercise, and the Company will be entitled to a deduction
equal to the same amount.
Notwithstanding the above, if the sale of any shares received upon the
exercise of an NQSO or a SAR in tandem with an NQSO would be subject to Section
16(b) of the Securities Exchange Act of 1934, recognition of ordinary income
attributable to such shares received will be deferred until the date such sale
would not give rise to a Section 16(b) action. However, such shares will be
valued at the fair market value at such later time, unless the optionee has made
an election under Section 83(b) of the Code within 30 days after the date of
exercise to recognize ordinary income as of the date of exercise based on the
fair market value at the date of exercise.
The foregoing discussion is only a brief summary of the applicable Federal
income tax laws as in effect on this date and should not be relied upon as being
a complete statement. The Federal tax laws are complex, and they are subject to
legislative changes and new or revised judicial or administrative
interpretations at any time. In addition to the Federal income tax consequences
described herein, a Participant may also be subject to state and/or local income
tax consequences in the jurisdiction in which the grantee works and/or resides.
EXHIBIT 4.15
1998 STOCK AWARD PLAN
1. Purpose of the Plan. The AMERICAN INTERNATIONAL PETROLEUM CORPORATION
1998 Stock Award Plan (the "Plan") is intended to attract, retain, motivate and
reward employees and officers of, and consultants to, AMERICAN INTERNATIONAL
PETROLEUM CORPORATION (the "Company") and its Affiliates who are and will be
contributing to the success of the business; to provide competitive incentive
compensation opportunities; and to further opportunities for stock ownership by
such employees, officers, and consultants in order to increase their proprietary
interest in the Company. Affiliates shall mean any corporation or other business
organization in which the Company owns, directly or indirectly, 50% or more of
the voting stock or capital at the time of granting of such award. Accordingly,
the Company may from time to time, grant to selected employees, officers and
consultants ("participants") awards ("awards") of shares of Common stock of the
Company $.08 par value ("Stock"), together with, to the extent determined by the
Company in its sole discretion at the time of the grant of the award,
reimbursement by the Company of amounts payable by the recipient of the award as
a consequence of any such award ("Cash Amount") subject to the terms and
conditions hereinafter provided.
2. Administration of the Plan. The Plan shall be administered by the Board
of Directors of the Company as such Board of Directors may be composed from time
to time and/or by a Stock Grant Committee or Compensation Committee (the
"Committee") which shall be comprised of solely of at least two Outside
Directors (as such term is defined in regulations promulgated from time to time
with respect to Section 162(m)(4)(C)(i) of the Code) appointed by such Board of
Directors of the Company. As and to the extent authorized by the Board of
Directors of the Company, the Committee may exercise the power and authority
vested in the Board of Directors under the Plan. The Board of Directors or the
Committee to the extent authorized by the Board of Directors, is authorized to
interpret the Plan and may from time to time adopt such rules and regulations
for carrying out the Plan as it deems appropriate, including rules and
regulations to comply with the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934 and Section 162(m) of the Code. Decisions of the Board of
Directors and/or the Committee in connection with the administration of the Plan
shall be final, conclusive, and binding upon all parties including the Company,
stockholders, employees and consultants.
In addition to such other rights of indemnification as they have as
Directors or as members of the Committee, the members of the Board of Directors
and the Committee shall be indemnified by the Company against reasonable
expenses (including, without limitation, attorneys' fees) actually and necessary
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal, to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection with the
Plan or any awards granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved to the extent required
by and in the manner provided by the Certificate of Incorporation and Bylaws of
the Company relating to indemnification of directors) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Director or Committee member or members did not act in good
faith and in a manner he, she
1
<PAGE>
or they reasonably believed to be in or not opposed to the best interest of the
Company.
Subject to the terms, provisions, and conditions of the Plan as set
forth herein, the Board of Directors and the Committee, to the extent authorized
by the Board of Directors, shall have sole discretion and authority:
(a) to select the employees, officers, and consultants to be awarded
Stock (it being understood that more than one award may be
granted to the same person);
(b) to determine the number of shares to be awarded to each recipient
and whether or not to grant any Cash Amount which may be granted
in tandem therewith;
(c) to determine the time or times when the awards may be granted;
and
(d) to prescribe the form of stock legend for the certificates of
shares of Stock or other instruments, if any, evidencing any
awards granted under this Plan.
3. Stock Subject to the Plan. The aggregate number of shares of Stock which
may be awarded under the Plan shall not exceed 500,000 shares of Stock of the
Company. In the event that the outstanding shares of Common Stock are hereafter
changed by reason of recapitalization, reclassification, stock split-up,
combination or exchange of shares of Common Stock or like, or by the issuance of
dividends payable in shares of Common Stock, an appropriate adjustment shall be
made by the Board of Directors, as determined by the Board of Directors and/or
the committee, in the aggregate number of shares of Common Stock available under
the Plan. Shares to be awarded under the Plan shall be made available, at the
discretion of the committee, either from the authorized but unissued shares of
Stock of the Company or from shares of Stock reacquired by the Company,
including shares purchased in the open market.
4. Eligibility. Stock shall be awarded only to employees of and consultants
to the Company (the term "employees" shall include officers as well as other key
employees of the Company, and shall include directors who are also key employees
of the Company).
5. Awards and Certificates. (a) Each recipient shall be issued a
certificate in respect of shares of Stock awarded under the Plan. Each
certificate shall be registered in the name of the participant, and shall bear
an appropriate restrictive legend on its face, which legend shall be subject to
removal pursuant to an effective registration statement or an opinion of counsel
satisfactory to the Company that such registration is not required. The Company
may register, on behalf of the recipients, shares issued pursuant to the Plan.
Notwithstanding anything contained herein to the contrary, no recipient shall be
entitled to more than 50,000 shares of Common Stock issuable pursuant to awards
under the Plan.
(b) The Board of Directors or Committee may, in its sole discretion,
grant to a recipient of an award, a cash amount not to exceed the federal, state
and local taxes the recipient must pay as a result of the fair market value of
the award being included in income for federal, state and local; income tax
purposes. The grant of a Cash Amount to one recipient shall in no
2
<PAGE>
way require the Board of Directors or the Committee to grant a Cash Amount to
any other recipient of an award.
6. Termination and Amendment. The Committee may amend, suspend, or
terminate the Plan at any time provided that no such modification without the
approval of stockholders shall:
(a) increase the maximum number of shares of Stock which are available
for awards under the Plan;
(b) extend the period during which awards may be granted under the Plan
beyond April 2, 2008; or
(c) impair the rights of any recipient under any award.
7. Miscellaneous
(a) Nothing in the Plan shall require the Company to issue or transfer
any shares pursuant to an award if such issuance or transfer would, in the
opinion of the Committee, constitute or result in a violation of any applicable
statute or regulation of any jurisdiction relating to the disposition of
securities.
(b) Notwithstanding any other provision of the Plan, the Committee may
at any time make or provide for such adjustment to the Plan, to the number of
shares available thereunder, or to any awards of Stock as it shall deem
appropriate, to prevent dilution or enlargement of rights, including adjustments
in the event of changes in the number of outstanding shares of Stock by reason
of stock dividends or distributions, stock splits or other combinations or
subdivisions of stock, recapitalization, issuances by reclassification, mergers,
consolidations, combinations or exchanges of shares separations,
reorganizations, liquidations, or other similar corporate changes. Any such
determination by the Committee shall be conclusive.
(c) No employee, consultant or other person shall have any claim or
right to be granted shares of Stock under the Plan, and neither the Plan nor any
action taken thereunder shall be construed as giving any participant, recipient,
employee, consultant or other person any right to be retained in the employ of
or by the Company and/or an Affiliate.
(d) A recipient who receives an award shall have rights as a share
owner with respect to the stock covered by such award to receive dividends in
cash or other property or other distributions or rights in respect of such stock
and to vote the Stock as the record owner thereof.
(e) Income realized as a result of an award of stock shall not be
included in the recipient's earnings for the purpose of any benefit plan in
which the recipient may be enrolled or for which the recipient may become
eligible unless otherwise specifically provided for in such plan.
(f) If and when a recipient is required to pay the Company an amount
required to be withheld under an federal, state or local income tax laws in
connection with an award of stock under the Plan, the Committee may, in its sole
discretion and subject to such rules as it may adopt, permit the participant to
satisfy the obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock having a fair market value
3
<PAGE>
equal to the amount required to be withheld. The election to have shares
withheld must be made on or before the date the amount of tax to be withheld is
determined.
(g) The Plan and all determinations made and actions taken pursuant
thereto shall be governed by the laws of the State of Nevada and construed in
accordance therewith.
8. Effective Date and Term of the Plan. The effective date of the Plan
shall be April 2, 1998, subject to approval by the stockholders of the Company
at the 1998 Annual Meeting of Stockholders. Notwithstanding the foregoing,
awards of Stock may be made by the Committee as provided herein, subject to such
subsequent stockholder approval. No awards of stock may be made under the Plan
after April 2, 2008.
Exhibit 21.1
Subsidiaries of the Registrant
American International Refinery, Inc.
State of Incorporation - Louisiana
American International Petroleum Kazakstan
State of Incorporation - Nevada
American Eurasia Petroleum Corporation
State of Incorporation - Nevada
1229329 Ontario Limited
Province of Incorporation - Ontario
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,721,350
<SECURITIES> 735,958
<RECEIVABLES> 3,751,885
<ALLOWANCES> 1,920,877
<INVENTORY> 755,720
<CURRENT-ASSETS> 8,641,803
<PP&E> 34,758,177
<DEPRECIATION> 3,894,015
<TOTAL-ASSETS> 41,839,860
<CURRENT-LIABILITIES> 9,335,479
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0
0
<COMMON> 3,874,926
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<TOTAL-LIABILITY-AND-EQUITY> 41,839,860
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<INCOME-PRETAX> (17,953,621)
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