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, 1999
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)
2950 North Loop West, Houston, Texas 77092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 802-0087
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
(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 March 21, 2000 was approximately $102 million (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 March
21, 2000 was 106,871,202.
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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 of asphalt, vacuum gas oil
and other products at its subsidiary's Lake Charles, Louisiana refinery in 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 Kazakhstan. The Company is also seeking other oil and gas projects in
selected other countries.
The Company's wholly-owned subsidiaries, American International Refinery, Inc.
("AIRI") and St. Mark's Refinery Inc. ("St. Marks) own refineries in Lake
Charles, Louisiana (the "Refinery") and in St. Marks, Florida, respectively. A
certain portion of the Refinery, a 30,000 barrel-per-day crude distillation
tower (the "Crude Unit" or "ADU") 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. The Company has
recently agreed to lease its Crude Unit to another party. See "Domestic
Operations - Refinery - Recent Developments" below. The Company is now blending
asphalt products at the Refinery. The Company has utilized St. Marks since its
purchase in 1998, only as a distribution center for its asphalt products. The
refinery at St. Marks has been idle and the Company has no current plans to
implement refinery operations there. See "Domestic Operations - Refinery" below.
The Company's wholly-owned subsidiary, American International Petroleum
Kazakhstan ("AIPK") is the owner of a 100% working interest in a 264,000 acre
gas concession in Kazakhstan called Shagryly- Shomyshty (the "Shagryly" or
"License 1551") and a 70% working interest in a 20,000 square kilometer
exploration block in western Kazakhstan ("License 953"). See "International
Exploration and Development" 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. In July 1998, the Company organized American International
Marine, Inc. ("AIM") to conduct barging and transportation of its own and
others' refined products. In August 1998, it organized American International
Petroleum Corporation Holding Inc. ("AIPC Holding") to hold 25% of the
outstanding shares of Zao Nafta, a Russian closed-stock company, which it
received as a default payment in 1999. See "International Exploration and
Development - Zao Nafta Acquisition" below. AIM and AIPC Holding are also
wholly-owned subsidiaries of the Company. The term the "Company" includes AIPC,
AIRI, AIPK, AEPC, AIM, AIPC Holding, and St. Marks unless the context otherwise
requires.
Some of the information in this document, and in those incorporated by reference
herein, may contain forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "believe", "intend", "anticipate", "estimate", "continue", or similar
words. These statements discuss future expectations, estimate the happening of
future events or the Company's financial condition or state other
"forward-looking" information. When considering such forward-looking statements,
one should keep in mind the risk factors and other cautionary statements in this
document and in those incorporated by reference herein, including the Company's
continued losses, occasional working capital deficits, the ability to enter into
various contracts to operate the Refinery and to sell products therefrom,
completion of any necessary financing requirements, the impact of competitive
pricing , and other risks detailed from time to time in the Company's SEC
reports. Such risk factors could cause the Company's actual results to differ
materially from those contained in any forward-looking statement.
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 25 acres of vacant waterfront property adjacent to the Refinery and another
45 acres of vacant land across the highway from the Refinery. The Calcasieu
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.
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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.
The main unit of the Refinery is the Crude Unit, which is capable of producing
light naphtha and the following side cuts: heavy naphtha, 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 partially utilized by Gold
Line. For various economic reasons, the VDU was idle until mid-1998 when the
Company 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 750,000 barrels. Storage
tanks on the Refinery's land include 275,000 barrels of crude storage, 395,000
barrels of storage for finished product sales and 80,000 barrels of product
rundown storage.
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. With the termination of the Lease Agreement in
March 1997, the Company has staffed the Refinery with its own employees and all
operations are now under the direct control of its management.
St. Marks Refinery
In November 1998, the Company purchased 100% of St. Marks Refinery Inc., a
20,000 barrels per day refinery and product storage terminal located on the St.
Marks River near Tallahassee, Florida for 1.5 million shares of the Company's
common stock. Because of the high price of crude oil feedstock during 1999, St.
Marks has remained idle during most of 1999.
American International Marine, Inc.
Also during 1998, the Company formed a new subsidiary, American International
Marine, Inc. ("AIM"), which acquired a 1,750 ton , 27,000 barrel capacity
asphalt barge (the "Barge") primarily to shuttle asphalt between the Refinery
and the asphalt terminal at St. Marks and to transport refined products for
third parties. The Company has utilized the Barge during 1999 to transport its
own feedstocks and products.
Recent Developments
In February 2000, the Company entered into agreements with Maretech Corporation
to process condensate crude oil through the ADU using AIRI personnel to operate
the daily processing functions. Maretech plans to process condensate crude oil
that produces naphtha and gas oil to be marketed as feedstocks and diesel and
JP8 to be marketed as finished products. (See "Management's Discussion and
Analysis - Liquidity and Capital Resources").
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.
Kazakhstan Agreements
License 953
In May 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakhstan ("AIPK"), entered into an agreement (the
"Kazakhstan Agreement")with MED Shipping and Trading S.A. ("MED"), a Liberian
corporation with offices in Frankfurt,
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Germany, to buy from MED, 70% of the stock of MED Shipping Usturt Petroleum Ltd.
("MSUP"), a Kazakhstan corporation which owns 100% of the working interest in a
Kazakhstan oil and gas concession (the "Concession" or "License Area"). The
Concession is located approximately 125 kilometers from Chevron's
multi-billion-barrel Tengiz Oil field near the Caspian Sea in the North Usturt
Basin.
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 a minimum of 6,000 linear meters of exploratory
drilling. 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 the government. Income tax has been set at 30% and
social programs payments at $200,000 annually during exploration. The social
program contribution required in the Kazakhstan Agreement is not specific as to
any one program. This contribution concept is common to most contracts and the
amount is determined at the time of negotiating the respective contracts on a
case by case basis. The Company has completed acquisition of 13,500 kilometers
of new 2D seismic data and reprocessed about 1,200 kilometers of vintage 2D
seismic data over the License Area. The Company drilled one of the gas bearing
Eocene structures in December 1998 and a second Eocene prospect in October 1999.
Additional flow testing on the 1998 well was conducted in 1999, but only
non-commercial rates of gas were measured. The 1999 well was evaluated using
electric logging techniques and determined non-commercial. At the time the
concession was acquired, a preliminary evaluation indicated potential
recoverable reserves from 12 structures of possible oil bearing Jurassic Age
sandstones and 8 structures of gas bearing Eocene Age sandstones. As a result of
further study of data acquired over the course of the last two years, and the
drilling results stated above, the Company's prior assessment of reserve
potential of the evaluated structures has been significantly reduced. Because
License 953 is known to contain other geological structures with unevaluated
geological potential, the Company fully intends to have the required minimum
work program completed in accordance with its contract. However, the Company is
evaluating various available options with regard to completing the License
obligations under reduced-exposure arrangements.
License 1551
In February 1999, the Company was officially notified by the Kazakhstan
government's State Investment Committee that it had won the tender for the
Shagyrly-Shomyshty gas field, ("Shagyrlyyl"), in western Kazakhstan. Fifty-eight
of the sixty-nine gas wells drilled to delineate the 200,000 acre gas field were
tested to have commercial gas by the regional development authorities. The
Company entered into a license agreement in 1999 with the Kazakhstan government
for 100% ownership of the Shagyrly, a 30-year agreement with effect from August
31, 1999. The Company's drilling and production development plan involves
developing and maintaining daily gas production at 200 MMSCFD (5.7 MCMPD) from
the "fairway," the most productive part of the field. Facility start-up and
natural gas sales are anticipated to commence late in 2001, provided adequate
financing can be obtained.
The plan development provides for the initial drilling of approximately 100
horizontal wells, each with a horizontal extension of 1500 feet. Analysis of
wells tested to date indicate that individual horizontally drilled wells could
achieve an average production rate exceeding 6 MMSCFD.
The ultimate field development proposal involves use of modular, movable
production process/compression centers. Such facilities are planned to be in
service in late 2001 and 50 MMCFD modules would be relocated upon depletion of
the reserves at their initial location which are designed to filter, dehydrate,
compress, and deliver a total of approximately 200 MMSCFD.
Ryder Scott Company, L.P., a Houston-based petroleum consulting firm, reviewed
the Company's horizontal drilling and reservoir development studies
demonstrating significant recoverable gas reserves at Shagyrly and issued an
opinion letter stating that they are in general agreement with the estimates and
that the reserves were prepared in accordance with standard industry procedures.
The Company's studies included horizontal well recovery analyses for drainage of
reservoir areas in the 640-1280 acre range, revised operational plans for
horizontal drilling, and detailed analyses of prior gas well completions in the
License 1551 area. A pilot development drilling program is tentatively scheduled
for the summer of 2000 to verify the horizontal drilling application. . These
reserves would have been classified as proven undeveloped ("PUD") had a gas
sales contract been in place. A gas sales agreement is currently being
negotiated with Gasprom and is expected to be consummated during the second
quarter of 2000. Upon consummation, the Company expects to have proved gas
reserves in the "fairway" and add more PUD's upon the successful implementation,
if any, of the horizontal pilot program.
The Company's strategy includes developing shallow gas reserves in Shagyrly and
diversified pursuit of field development opportunities in other selected
countries and basins where perceived geological and political risks
areacceptable.
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Zao Nafta Acquisition
On March 18, 1998, the Company signed an agreement (the "Option") with Zao Nafta
("ZN") a Russian closed stock company 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 (a "closed stock company"
is a company which has its equity ownership measured in registered shares. The
shares are not publicly traded or readily available for sale to another party
without first offering other shareholders proportional participation in the
purchase of the shares to be sold). During its due diligence process, the
Company was unable to reach an agreement with the owner of ZN over who would
control and manage development of the acquired fields. As a result, the Company
informed the owner that it would not pursue the purchase and requested a refund
of $300,000 deposit called for in the Option. When the refund was not paid by
the owner, the Company exercised its right under the Option to demand 25% of the
outstanding shares of ZN (the "ZN Shares") from the owner. The ZN Shares may be
sold or traded in private commercial transactions, as they are not listed or
traded on any organized exchange. The shares are in the process of being
delivered to the Company's counsel in Russia and will be held by AIPC Holding
until a decision is made on how or if to proceed. The Company continues to
consider various alternatives including the sale or barter of the ZN Shares to
acquire petroleum interests in the Samara region of Russia.
Recent Developments
In January 2000, the Company reached an agreement with Mercantile International
Petroleum, Inc. ("MIP") the purchaser of its South American oil and gas
properties in February 1997, whereby MIP agreed to repay approximately $2.9
million in indebtedness to the Company by means of a secured 11.5% convertible
debenture, payable to the Company in monthly installments (See "Management's
Discussion and Analysis - Liquidity and Capital Resources").
Competition
The Company has been approached by severalcompanies during 1999 to process crude
oil at the Refinery. However, the lack of a favorable "crack spread" during most
of the year caused hesitancy on the part of the customers. Later in 1999, the
industry experienced "backwardation" causing great risk for processors.
Backwardation is a term used when the current price is very high and the price
for subsequent months are lower. Most recently there has been a drawback on
crude pricing coupled with a reasonable crack spread therefore, AIRI is seeing
renewed interest in processing through the VDU.
During 1999, most State Departments of Transportation converted to Strategic
Highway Research Program (SHRP) performance graded (PG) asphalt specifications.
Therefore, the number of asphalt competitors continues to decline. In the past
year, several major oil companies have announced mergers and formed joint
operation spin-off companies in a move to consolidate resources, reduce
redundant operation, and increase efficiency. This has resulted in a
supply/demand shift that is favorable to the Company's business. As a
consequence of these consolidations, the number of major oil company asphalt
refiner/suppliers has been reduced by almost 60% over the past two years.
The geographic location of the Refinery in Lake Charles, Louisiana 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 who do not have downstream processing options such
as residual coking capacity. 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 is over 150 miles away. The Company's major competitor for barge sales
is located over 400 miles farther away from the Company's major market than the
Refinery. This distance equates to more than a $1.30 per barrel freight
advantage to the Company into the same markets.
Exxon announced during 1999 that the strategic decision had been made to
withdraw from the Texas asphalt market based in Baytown (Houston), Texas. It has
built a coker unit to convert asphalt to gasoline and heating oil. Exxon has
been one of AIRI's major competitors in eastern Texas over the past several
years. A major consolidation involving Marathon Petroleum and Ashland Oil during
1999 has created the largest downstream asphalt marketing company in the United
States. Marathon Ashland Petroleum (MAP) recently upgraded their Garyville (New
Orleans), Louisiana asphalt rack at great expense and has subsequently become
very competitive in eastern Louisiana and western Mississippi. Another
consolidation involving American Petrofina (Fina) Ultramar Diamond Shamrock
(UDS) and Total has produced a combined UDS and Total asphalt business while
Fina has remained independent to date. This consolidation may have long-term
implications for AIRI's growth into Western Texas.
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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 of 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 for those products.
The Shagryl development has the usual geological, mechanical and competitive
risks associated with development of oil and gas reservoirs, and in addition,
bears additional risk unique to its location in a former Soviet Union republic.
The gas production from the field will be transferred to markets in Western
Europe via a Russian-owned Gazprom line. Therefore the project bears political
risks of both Russia and Kazakhstan, as well as market risks as Europe enters a
deregulated environment. Cost of transportation as well as cost of equipment and
drilling and completion services, are subject to escalation if oil and gas
development activity escalate.
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 attributable to each of the
Company's geographical areas, and the amount of its export sales.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $ 8,137,867 $ 11,394,009 $ 23,298
Colombia(1) -- -- 292,947
Peru(1) -- -- *
Kazakhstan -- -- --
Sales or transfers between geographic areas:
United States -- -- --
Colombia(1) -- -- --
Peru(1) -- -- --
Kazakhstan -- -- --
Operating profit or (loss):
United States $ (4,978,963) $ (2,820,758) $ (1,165,890)
Colombia(1) -- -- (170,424)
Peru(1) -- -- *
Kazakhstan -- -- --
Identifiable assets:
United States $ 33,877,437 $ 35,234,530 $ 21,159,627
Colombia(1) -- -- --
Peru(1) -- -- --
Kazakhstan $ 32,162,385 $ 22,677,073 $ 11,724,477
</TABLE>
Export sales:
(1) These properties were sold in February 1997.
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*Information was not available due to dispute with partner, which dispute was
settled subsequent to the sale of these properties in February 1997.
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.
Extensive national and/or local environmental laws and regulations in both the
United States and Kazakhstan affect nearly all of the operations of the Company.
These laws and regulations set various standards regulating certain aspects of
health and environmental quality, provide for penalties and other liabilities
for the violation of such standards and establish in certain circumstances
obligations to remediate current and former facilities and off-site locations.
There can be no assurance that the Company will not incur substantial financial
obligations in connection with environmental compliance.
The Company is occasionally subject to nonrecurring environmental costs. The
annual cost incurred in connection with these assessments varies from year to
year, depending upon the Company's activities in that year. The costs of such
environmental impact assessments were not material in 1999, and are not expected
to be material in future years, however, there can be no assurance these costs
will not be material. The Company is not aware of any other anticipated
nonrecurring environmental costs.
Kazakhstan has comprehensive environmental laws and regulations and has adopted
the environmental standards set out by the World Bank organizations. Enforcement
is administered through the Kazakhstan Ministry of Environment and related local
state agencies. The Company's operations require a comprehensive environmental
permit for all drilling and exploration activities.
The Company has no currently outstanding or anticipated reclamation issues in
the United State or abroad.
Marketing
After satisfactorily completing the qualification requirements and asphalt
facility inspection, the Company has received approval from the Louisiana
Department of Transportation Materials Inspection Division ("LADOT") 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 maintains an aggressive posture in its
efforts to secure asphalt supply sales agreements with Louisiana hot mix
manufacturers both at highway bid lettings and through private conventional
paving projects.
In July of 1999, the Company received full accreditation certification for its
asphalt quality control and testing program from the American Association of
State Highway and Transportation officials (AASHTO). This was followed in
November, 1999, by the awarding of the Louisiana approved supplier certification
by the Louisiana Department of Transportation and Development, for the Company
to self-certify its own asphalt products. The Company is the first and, to date,
the only asphalt supplier in Louisiana to achieve this level of proficiency.
Total asphalt sales for 1999 were 63,910 tons with income from sales of
$7,645,948 for an average price per ton of $119.64. Sales to Louisiana customers
made up approximately 80 percent of the total, while sales to Texas customers
accounted for the remainder. Approximately 60% of the Company's asphalt sales
volumes in 1999 were higher-margin polymer modified products and about 40% were
conventional.
The rapid escalation of crude oil prices, combined with a very slow reacting
asphalt retail rack market in the southeast during 1999, created an unprofitable
economic scenario for sales out of St. Marks in 1999. Consequently, in a move to
control overhead and manufacturing costs, the Company temporarily suspended
operations at St. Marks. The Company has mitigated this problem in the future by
including escalation clauses in all of its new asphalt sales agreements which
allows the Company to increase its contract sales price by 5% per quarter
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if feedstock prices increase to certain levels. The Company continually monitors
the market conditions in the region and should general industry conditions
change in future months, the Company will reconsider asphalt operations at St.
Marks. In addition, the Company continues to investigate the possibility of
establishing more truck rack retail locations outside the immediate area 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. As of March 2000, the
Company continues to be successful at the state highway lettings and has already
accumulated a firm backlog of orders and sales agreements in excess of $10.5
million for its polymerized and conventional asphalt products, compared to
approximately $6.5 million at the same date last year. The Transportation and
Equity Act for the 21st Century ("TEA-21") authorizes $173 billion over six
years (1998-2003) for construction and maintenance of federal highways. The
six-state Gulf Coast market where the Company sells its conventional and
polymerized asphalt products has been allocated more than $32 billion in federal
funding under TEA-21, a 61% increase over the previous highway spending program.
TEA-21 is expected to provide a significant increase in the overall demand for
asphalt in the Company's markets. In addition, matching state DOT highway funds
could increase the total spending for highway construction by another 10% - 50%.
The Company is committed to continue an aggressive, expanding, retail market
growth program across the Gulf Coast and into other various profitable
geographic areas.
James Corporation, Davison Petroleum Products, R.E. Heidt Construction and O.S.
Johnson accounted for 16%, 15%, 13% and 10% of the Company's sales during 1999,
respectively.
Oil and Gas
In May 1994, AIPCC entered into an agreement with Carbopetrol S.A. to sell all
of its crude oil produced in Colombia. 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, of
approximately $11.81 per barrel of oil in 1997. 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 1997, which provided a
net price to the Company of approximately $10.75 per barrel of oil. Sales of the
Company's crude oil to Carbopetrol S.A. in Colombia accounted for 29% of the
Company's 1997 revenues. Sales to Ecopetrol accounted for approximately 11% of
the Company's 1997 revenues. The Company had no sales in 1999 and 1998 in
Colombia because it sold its assets in Colombia and Peru in February 1997 to
Mercantile International Petroleum Inc. ("MIP") (the "S.A. Sale").
The Company is currently engaged in negotiations with Gazprom, the Russian gas
transport company, for the transportation and sale of its anticipated Shagryly
gas production. It is anticipated that a U.S. Dollar or Eurodollar backed
contract will be concludedduring the second quarter of 2000.
Sources and Availability of Raw Materials
AIRI requires sour asphaltic crudes and/or performance grade asphalts as a
feedstock to produce its asphalt, which are generally in available supply within
the western hemisphere. However, fast-rising crude oil prices and slower-rising
product prices dramatically reduced the "crack spread", starting in the first
quarter of 1999 and continuing throughout the year. Consumption of light
products such as gasoline and distillates remained relatively static while rack
prices for asphalt products lagged crude prices in spite of reduced production.
Competitive realities forced AIRI to maintain the refinery in a "warm" condition
to enable it to operate on short notice. Because of the high price of crude oil
during 1999, AIRI switched from processing Mexican crude oil as an asphalt
feedstock to purchasing wholesale asphalt for blending and polymer enhancement.
Primary sources of feedstock include Mexico, Venezuela, Colombia, Ecuador,
Canada, and the wholesale asphalt markets in the U.S. "Roofer's flux" crudes can
be sourced from Saudi Arabia, Oman, U.S. Gulf off-shore, Texas and Louisiana
sweet lights. Many crudes can be blended into the primary base crudes. AIRI
personnel have the experience and ability to source the necessary feedstocks.
Employees
As of March 31, 2000, the Company employed 60 persons on a full-time basis,
including 12 persons who are engaged in management, accounting and
administrative functions for AIPC and 37 who are employed by AIRI on a full-time
basis, including 16 persons who are engaged in management and administrative
functions, and 6 persons who are employed by AIPK in management and
administrative
8
<PAGE>
positions. Two persons are employed by St. Marks, none of which are in
management and administration. The Company frequently engages the services of
consultants who are experts in various phases of the oil and gas industry, such
as petroleum engineers, refinery engineers, geologists and geophysicists. The
Company has no collective bargaining agreements and believes that relations with
its employees are satisfactory.
Item 2. PROPERTIES
Office Facilities
The Company leases approximately 4,800 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 for a period of seven years at
a monthly rental rate of $19,600 and expires on December 31, 2005. The Company
has recently agreed to sublet 2/3 of its space to another Company for $152,472
per year through the end of its lease in New York. In addition, the Company
leases approximately 10,500 square feet of office space in Houston, Texas at a
monthly rental of $17,929. This lease expires on December 12, 2003.
The Company also owns 90 acres of vacant 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 an approximately 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 building structures serving as work
shops, maintenance and storage facilities with an aggregate square footage of
approximately 4,300 square feet. The Company also owns approximately 68 acres of
vacant land adjacent to the St. Marks Refinery in Florida.
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, 1999, 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, 1999.
<TABLE>
<CAPTION>
Gross Gross Net Net
Developed Undeveloped Developed Undeveloped
Acreage Acreage Acreage Acreage
------- ------- ------- -------
<S> <C> <C> <C> <C>
Kazakhstan
License 953 -- 4,734,097 -- 3,313,868
License 1551 263,853 4,997,950 263,853 3,577,721
</TABLE>
The table below indicates the Company's gross and net oil and gas wells as of
December 31, 1999. 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
----------------
<TABLE>
<CAPTION>
Total Oil Gas
----- --- ---
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Kazakhstan -- -- -- -- -- --
</TABLE>
9
<PAGE>
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, 1999, 1998, and
1997, 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)
-------- ------------------ -------- ---------
1999 -Kazakhstan -- $ -- -- $ --
-Colombia(1) -- -- -- --
-Peru(1) -- -- -- --
1998 -Kazakhstan -- $ -- -- $ --
-Colombia(1) -- -- -- --
-Peru(1) * * * *
1997-Kazakhstan -- $ -- -- $ --
Colombia(1) 18,625 11.81 -- --
Peru(1) * * -- --
Average foreign lifting cost in 1997 was approximately $5.31 per equivalent
barrel of oil. The Company incurred no lifting costs in 1998 and 1999 due to the
S.A. Sale.
(1) These properties were sold in February 1997.
*Information not available due to dispute with partner, which dispute was
resolved subsequent to the S.A. Sale.
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 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.
<TABLE>
<CAPTION>
Colombian Reserves
------------------
Future
Revenues
Net Oil Future Discounted
(Barrels) Net Gas (mmcf) Revenues at 10%
--------- -------------- -------- ------
<S> <C> <C> <C> <C>
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
========= ======== =========== ===========
</TABLE>
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.
10
<PAGE>
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 Mercantile
International Petroleum Inc., who purchased these properties from the Company in
February 1997.
Drilling
The Company sold all of its oil and gas producing properties in February 1997,
as previously discussed, and has not yet implemented production operations in
Kazakhstan, therefore it had no exploration or development wells during the
current year. 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>
1999 1998 1997
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Kazakhstan
Oil -- -- -- -- -- --
Gas -- -- -- -- -- --
Dry 2 1.4 -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL 2 1.4 -- -- --
Development Wells:
Kazakhstan -- -- -- -- -- --
South America -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL 2 1.4 -- -- -- --
===== ===== ===== ===== ===== =====
</TABLE>
Item 3. LEGAL PROCEEDINGS
In 1998, Neste Trifinery ("Trifinery"), filed suit in a Harris County District
Court against the Company and its wholly-owned subsidiary, American
International Refinery, Inc. ("AIRI") (Neste Trifinery v. American International
Refinery, Inc. Etc. Case No. 98-11453; in the 269th Judicial District; in and
For Harris County, Texas). 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)
tortuous interference with existing contractual relations. Generally, Trifinery
has alleged that in connection with the due diligence conducted by the Company
and AIRI of the business of 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 Trifinery. 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,
Trifinery sought injunctive relief. Specifically, Trifinery sought to enjoin the
Company and AIRI from: (1) offering employment positions to the key employees of
Trifinery; (2) contacting the suppliers, joint venture partners and customers of
Trifinery in the pursuit of business opportunities; (3) interfering with the
contractual relationship existing between Trifinery and St. Marks Refinery,
Inc.; and (4) disclosing or using any confidential information obtained during
the due diligence process to the detriment of Trifinery. The Company and AIRI
have asserted to a general denial to the allegations asserted by 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 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 Trifinery in Texas
will be decided by a panel of three arbitration judges under the American
Arbitration Association rules for commercial disputes. Two arbitrators
11
<PAGE>
have been identified by the parties and the third is in the process of being
chosen. The Company and AIRI are vigorously defending this matter and the
Company's counsel anticipates a favorable 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 is traded on NASDAQ/NMS under the symbol "AIPN". The
following table sets forth, for the periods indicated, the range of closing high
and low bid prices of the Common Stock and the as reported by NASDAQ.
Common Stock
------------
High Bid Low Bid
-------- -------
1999 First Quarter $1.067 $.978
Second Quarter 1.072 .951
Third Quarter 1.008 .920
Fourth Quarter .649 .539
1998 First Quarter $4.91 $3.19
Second Quarter 4.34 1.53
Third Quarter 1.94 0.94
Fourth Quarter 2.50 0.69
At March 21, 2000, the Company had approximately 1,726 shareholders of record of
its Common Stock. The Company estimates that an additional 18,000 shareholders
hold Common Stock in street name.
During the fourth quarter 1999, the Company issued an aggregate of 13,521,285
shares of Common Stock upon conversion of, and in payment of accrued interest,
on its convertible debentures. The issuance of those shares were exempt from the
Registration requirements of the Securities Act under Sections 3(a)(9) and 4(2),
respectively of the Securities Act.
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, 1999 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,
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Condensed consolidated statement of operations:
Revenues $ 8,352,038 $ 11,854,606 $ 827,964 $ 4,003,006 $ 2,811,308
Net loss(1) (14,917,868) (9,103,113) (17,953,621) (4,652,207) (4,338,322)
Net loss per share - basic and diluted (0.20) (0.17) (0.43) (0.16) (0.20)
<CAPTION>
At December 31,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Condensed consolidated balance sheet:
Working capital (deficit) $ (5,004,658) $ (4,596,152) $ (693,676) $ (9,823,229) $ (3,402,543)
Total assets 69,658,269 60,861,334 41,839,860 34,492,431 32,640,362
Total current liabilities 8,903,689 7,914,250 9,335,479 13,164,713 11,349,670
Long-term debt 11,984,592 6,110,961 -0- 6,766,592 7,302,671
Stockholders' equity 48,464,032 46,530,167 32,504,381 21,327,718 21,290,692
Cash Dividends declared -0- -0- -0- -0- -0-
</TABLE>
1) Net loss in 1996 included a provision for the write down of the carrying
costs of oil and gas properties of $200,000.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
13
<PAGE>
Results of Operations
The following table highlights the results of operations for the years ended
December 31, 1999, 1998 and 1997.
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Refinery Processing Operations:
Refinery product revenues (000's) $8,138 $11,394 --
Product Costs (000's) $5,944 $8,194 --
Operating Costs (000's) $2,727 $3,087
Exploration and Production Activity:
Colombia Properties(1):
Revenue - Oil Sales (000's) -- -- $261
Lease Operating Expenses (000's) -- -- $99
Production Volume - Barrels -- -- 318,625
Average Price per Bbl -- -- $14.01
Production Cost per Bbl -- -- $5.31
DD&A per Bbl (2) -- -- $3.77
Peru Properties:
Revenue - Oil Sales (000's) -- -- --
Lease Operating Expenses (000's) -- -- --
Production Volume - Bbls -- -- --
Average Price per Bbl -- -- --
Production Cost per Bbl -- -- --
DD&A per Bbl -- -- --
Refinery Operations:
Refinery Lease Fees (000's) -- -- --
Average Daily Throughput (Bbls) -- -- --
Average Throughput Fee -- -- --
- ----------
(1) Reflects activity through the closing of the S.A. Sale.
(2) Excludes provision for reduction of oil and gas properties of $200,000 in
1996.
Refinery Operations
For the Year Ended December 31, 1999 compared to the Year Ended December 31,
1998
During 1999, the Company generated revenues of approximately $7,621,000 in
asphalt sales from its Lake Charles facility and approximately $513,000 from
sales of certain light-end and other products, compared to approximately
$5,965,000 and $3,357,000, respectively, generated in 1998. Although the
Company's asphalt volumes were up only approximately 10% over last year,
revenues were up approximately 28%, primarily due to a greater demand for the
higher priced, higher grades of polymer asphalt by its customers. However,
polymerized asphalts only accounted for approximately 60% of the Company's
asphalt sales volumes in 1999. Most of its sales backlog was incurred late in
1998 and in early 1999 when crude oil and asphalt sales prices were much lower.
Consequently, the Company was committed to selling low-priced conventional
asphalts at a loss or at break-even throughout most of 1999 and early 2000.
Asphalt prices, particularly polymerized asphalts, have begun to rise in
response to high crude oil prices incurred in 1999 and early 2000, therefore the
Company expects its asphalt margins to improve in 2000 as compared to 1999, when
only 60% of its asphalt sales volumes were polymerized asphalts and asphalt
prices were significantly lower. In addition, the Company has implemented the
use of escalation provisions in its asphalt sales contracts, which enable it to
increase contracted sales price by 5% per quarter if its feedstock prices rise
to certain levels. This should mitigate the problem the Company incurred in 1999
by committing to long-term supply contracts at fixed
14
<PAGE>
prices. The Company's sales prices on its retail asphalt ranged from
approximately $78 to $162 a ton. Due to the significant increases in world oil
prices that occurred throughout 1999, it was not economically feasible for the
Company to purchase and process crude oil through its crude unit to manufacture
asphalt as it had done in 1998. Because of this, the light-ends and other
products provided though this process were significantly decreased in 1999 and
was the primary reason for the decrease in light-end and other product sales in
1999 compared to 1998. The Company purchased general grade asphalt on the spot
market to blend and supply various grades of asphalt to its Louisiana and Texas
customers. Operating and inventory costs attributed to the related revenues for
1999 were approximately $8,486,000, compared to approximately $9,500,000 of
operating and inventory costs in 1998. The relatively high operating and
inventory costs during the year are partially attributable to the increase in
the world oil prices and the non-availability of certain types of crude oil
during the year, the related increase in asphalt feed stock prices that the
Company had to incur for its asphalt, and to an increase in operating costs to
maintain the refinery during this period. Even though the Company has not
operated the crude unit since January of 1999, it has had to maintain the unit
in a state of readiness and thus has incurred additional operating overhead
costs attributed to maintaining the unit. Some of these overhead costs were
incurred in preparing the crude unit and related equipment to process products
for a third party with which the Company has entered into an agreement. (See
Item 7. "Management's Discussion - Liquidity and Capital Resources"). This will
not preclude the Company from operating its vacuum unit or its asphalt blending
business. Additionally, costs, and likewise, revenues and margins, will vary
depending upon a number of factors, including but not limited to feedstock type
and prices, and from the Company's product mix, which are determined over time
as the Company's markets are developed and redefined in the different areas it
services.
The Company's terminal in St. Marks Florida was not operational during 1999 and
had no revenues but incurred approximately $96,000 of maintenance and security
costs during the year, compared to revenues of approximately $2,000,000 and
related costs of approximately $1,800,000 in 1998. Due to the increased costs
and the subsequent decrease in supply of product brought on by the increase in
world oil prices, the Company determined it to be more economically feasible to
direct its sales efforts and strategy to the high demand, high quality and high
margin asphalt in the Louisiana and Texas markets rather than shipping lower
margin conventional asphalt for sale into the St. Marks, Florida market.
For the Year Ended December 31, 1998 compared to the Year Ended December 31,
1997
During 1997, the Company commenced expansion of the Refinery and conversion of
the crude unit to a heavy crude processing unit to enable the manufacture of
asphalt and other products. During 1998 the Company undertook extensive testing
of its refinery equipment and processing capabilities. The Refinery did
extensive process sampling with various types of crude oils in an effort to
determine the most economical and technically acceptable crude feedstock to
develop and produce the basic asphalt material to be used in developing the
specialty asphalts the asphalt road construction industry will require, and in
some areas is currently requiring, to be used. As a result of the Refinery's
testing activity in 1998, it manufactured products which generated revenues of
approximately $6 million dollars from asphalt products and approximately $3.4
million dollars from certain light-end and other products. The Company's sales
prices on its retail asphalt ranged from $75 to $187 a ton. The Company incurred
approximately $6.8 million in product costs related to those revenues and
approximately $2.7 in operating costs during this extensive testing period
throughout 1998. Because of very low operating levels during most of 1998 and
redundant processing and blending of feedstock and asphalt during the testing
process, the Company's margins were severely distorted and were not indicative
of margins expected during normal operating conditions. Costs, and likewise,
revenues and margins, will vary depending upon a number of factors, including
but not limited to feedstock prices, and from the Company's product mix, which
will be determined over time as the Company's markets are further developed.
The Refinery's terminal operations in St. Marks, Florida, which commenced in
June 1998, had revenues of approximately $2 million dollars from sales of
asphalt and costs of sales of approximately $1.8 million related to those sales
during 1998.
Oil and Gas Production Activity
For the Year Ended December 31, 1999 compared to the Year ended December 31,
1998
The Company had no oil and gas production activity during the year ended
December 31, 1999
For the Year Ended December 31, 1998 compared to the Year Ended December 31,
1997
The Company had no oil and gas production activity during the year ended
December 31, 1998.
The oil and gas production revenues reflected are the results of operations for
Colombia and Peru for 1997 and reflect results for the period through February
25, 1997, the date of the sale of the Colombia and Peru subsidiaries.
15
<PAGE>
Other Income
For the Year Ended December 31, 1999 compared to the Year Ended December 31,
1998.
Other income decreased during 1999 by approximately $246,000 to $214,000
compared to 1998, primarily from a $251,000 decrease in interest income due to
decrease in funds on deposit in 1999 compared to those on deposit in 1998.
For the Year Ended December 31, 1998 compared to the Year Ended December 31,
1997.
Other income decreased during 1998 by approximately $107,000 to $461,000
compared to 1997, primarily from a $63,000 decrease in interest income due to
reduced funds on deposit in 1998 compared to those on deposit in 1997. An
additional decrease of approximately $50,000 in 1998 compared to 1997 was
attributable to a one-time $50,000 non-cash reduction of an accounts payable
item recorded as income in 1997.
General and Administrative
For the Year ended December 31, 1999 compared to the Year ended December 31,
1998
Total General and Administrative expenses ("G&A") increased by approximately
$693,000, or 12%, in 1999 compared to 1998. The acquisition of the St. Marks
refinery at the end of 1998 accounted for an increase of approximately $180,000
of G&A related to payroll and insurance costs. Other payroll and employee
related costs increased approximately $285,000. Insurance cost increased
approximately $183,000 in 1999 compared to 1998 due to additional coverage on
new additions to the refinery at end of 1998. Rents increased approximately
$281,000 in 1999 compared to 1998. The Company has entered into a agreement to
sublease out part of it's available office space which will be effective during
the second quarter 2000, and will effectively reduce the Company's current rent
expense by approximately $161,000 a year. The Company did not capitalize any G&A
during 1999, compared to approximately $578,000 capitalized in 1998.
For the Year ended December 31, 1998 compared to the Year ended December 31,
1997
Total G&A increased by approximately $469,870, or 10%, in 1998 compared to 1997.
The Company incurred approximately $1.4 million in additional G&A during 1998,
principally due to increased activity at the Refinery, which were offset by an
aggregate of approximately $1.0 million in reduced G&A resulting from a
reduction of $279,000 related to the sale of its Colombia and Peru oil and gas
operations in 1997 and a non-cash charge of $745,000 in 1997 in connection with
the issuance of stock options. In addition, legal expenses decreased by
approximately $90,000 due primarily to the settlement of the IRS Excise tax case
and an environmental lawsuit. Due to the increased activity at the refinery,
payroll and related employee expenses increased by approximately $434,000 and
general insurance costs increased by approximately $86,000 due to increased
coverage of the Refinery equipment and liability. General office administrative
expenses increased by $80,000 due to the increased sales and operations at the
refinery. Additional costs of approximately $70,000 were incurred in upgrading
computers systems due in part to Year 2000 compliance considerations. Investor
relations increased in 1998 by approximately $111,000 compared to 1997 and
professional consulting fees increased by approximately $500,000. The Company
capitalized approximately $578,000 of G&A in 1998 compared to approximately
$622,000 in 1997 in connection with the Refinery expansion.
Depreciation, Depletion and Amortization
For the Year ended December 31, 1999 compared to the Year ended December 31,
1998
Depreciation, Depletion and Amortization ("DDA") increased approximately
$918,000 in 1999 compared to the same period in 1998. DDA in 1999 reflects the
increased depreciation of the Company's $18.6 million dollar asphalt and related
equipment construction project at its refinery that commenced in 1996 and was
completed in December of 1998. This new addition doubled the book value of the
refinery and accounts for the 100% increase in DDA. In addition, the Company
commenced depreciating the St Marks facility and its marine equipment during the
first quarter of 1999.
For the Year ended December 31, 1998 compared to the Year ended December 31,
1997
Depreciation, Depletion and Amortization ("DDA") increased approximately $39,000
in 1998 compared to the same period in 1997. The
16
<PAGE>
increase in 1998 of $124,000, due to an increase in refinery depreciable assets
during 1998, was offset by a decrease in 1998 of depreciation and depletion
attributable to the Colombia and Peru operations that were sold in 1997.
Interest
Imputed interest of approximately $3,044,000, $6,042,000, and $1,899,000 in
1999, 1998,and 1997, respectively, was related to the presumed incremental yield
the investor may derive from the discounted conversion rate of debt 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 requires that the "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
For the Year ended December 31, 1999 compared to the Year ended December 31,
1998
Interest expense for 1999 was $6,500,579, net of capitalized interest of
$547,786, compared to interest expense of $1,912,949, net of capitalized
interest of $7,055,340 in 1998. The Company incurred approximately $1,898,000 of
interest on debentures and short-term notes outstanding during the year,
expensed non-cash imputed interest, as discussed above, of approximately
$2,882,000, interest on trade notes of approximately $638,000, approximately
$1,619,000 of non-cash interest related to amortized bond costs.
For the Year ended December 31, 1998 compared to the Year ended December 31,
1997
Interest expense for 1998 was $1,912,949, net of capitalized interest of
$7,055,340, compared to an interest expense of $6,663,992, net of capitalized
interest of $340,988 in 1997. The Company incurred approximately $1,670,000 of
interest on debentures outstanding during the year. The Company also incurred
approximately $2,118,000 of imputed interest costs on the sale of its $12
million debentures in April 1998 and amortized an additional $3,924,000 related
to the conversion of debentures held at December 31, 1997. The Company
capitalized interest expense of $7,055,000 incurred in connection with its oil
and gas and refinery projects during 1998.
Realized and Unrealized Loss on Marketable Securities
The Company neither held nor sold any Marketable Securities during 1999.
As partial proceeds from the S.A. Sale, the Company received approximately $4.4
million shares of MIP common stock valued at $2.00 per share. However, during
1997 and 1998, the market value of MIP's shares declined significantly. During
1997, the Company sold and disposed of approximately 1,441,000 shares of the MIP
shares for proceeds of approximately $1,979,000 and recorded an aggregate net
realized and unrealized loss of $6,053,000 for the year ended December 31, 1997.
During 1998 the Company sold all of its remaining MIP shares for proceeds of
approximately $377,000 and recorded an aggregate net realized loss of
approximately $369,000.
Loss on Sale of Assets
The Company recorded an aggregate $564,000 loss in 1997 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 S.A. Sale.
Liquidity and Capital Resources
During the year ended December 31, 1999, the Company used a net amount of
approximately $7,306,000 for operations, which reflects approximately $6,320,000
in non-cash provisions, including depreciation, depletion and amortization of
$5,717,000. Approximately $832,000 was provided during the period to decrease
product and feedstock inventory and $459,000 was provided by an increase in
accounts payable and accrued liabilities and in current assets other than cash.
Additional uses of funds during 1999 included additions to oil and gas
properties and Refinery property and equipment of $5,980,000 and $801,000,
respectively. Cash for operations was provided, in part, by proceeds from the
exercise of certain warrants and options and the sale of marketable securities
of
17
<PAGE>
$769,000, and from proceeds from long and short-term debt of approximately
$19,216,000. At December 31, 1999, the Company had negative working capital of
approximately $5.0 million dollars.
During 1999, the Company issued an aggregate of $17,250,000 principal amount of
5% and 6% convertible debentures. As of March 21, 2000, only approximately $6.8
million remained outstanding. The proceeds derived from these private placements
were utilized to fund the Company's projects in Kazakhstan, expand the Refinery,
repay debt, and for working capital purposes.
Also during 1999, the Company borrowed an aggregate of approximately $10 million
for feedstock purchases and expansion at the Refinery, funding certain
expenditures in Kazakhstan, and for working capital purposes. The Company
utilized its inventory, receivables , St Marks and its adjacent real estate as
collateral. Of this amount, approximately $3.8 million remained outstanding as
of December 31, 1999.
The Company plans to begin its Shagryly gas field development in the summer of
2000. The initial phase of the development will cost approximately $4.5 million
and is expected to be funded from the proceeds derived from the sale of a
portion of Shagryly and from financing to be provided by the purchaser, which
financing is expected to also be provided to fund the Company's remaining
interest in the project subsequent to the sale. The total development costs for
the project is estimated at approximately $160 million to $180 million. The
Company is also having discussions with other financing entities, suppliers and
export credit agencies regarding project financing for the development of
Shagryly. However, the Company's strategy is to sell a minimum of 50% of
Shagryly prior to commencing the main phase of development. If the Company is
unable to sell a portion of Shagryly, the development could be delayed until
adequate financing is appropriated.
The Company met its minimum work and monetary obligations on its License 953 in
Kazakhstan during 1999. Its year 2000 obligation amounts to approximately $1.7
million, which it expects to fund with proceeds derived from the partial sale of
Shagryly and/or from supplemental financing. The Company has no current plans to
spend any additional amounts on License 953 during the year 2000.
As mentioned above, the Company is currently engaged in negotiations with
Gasprom, the Russian gas transport company, for the transportation and sale of
its anticipated Shagryly gas production. The Company expects that a U.S. Dollar
or Eurodollar-based gas sales and transportation contract will concluded in the
second quarter of 2000. In the event the contract is consummated, the Company
expects to have a significant amount of proved gas reserves, which it could
utilize as a borrowing base for various Company capital requirements, including
the development of the Shagryly gas field. It has also been having discussions
with the drilling subsidiary of Gasprom regarding a drilling contract to develop
the Shagryly gas field.
In February 1999, Mercantile International Petroleum, Inc. ("MIP") failed to pay
the $1.6 million outstanding balance due to the Company of the 5% convertible
debenture it issued to the Company as partial payment for the purchase of the
Company's oil and gas properties in Columbia and Peru, South America in February
1997. In January 2000, the parties reached an agreement (the "MIP Agreement"),
whereby MIP acknowledged its indebtedness to the Company in the amount of
$1,581,000 for the outstanding balance of the 5% convertible debenture and an
additional amount of $1,306,258 in connection with the "earnout provision" of
the original purchase agreement. MIP also agreed to repay the aggregate debt due
to the Company of $2,887,508 by issuing a new 11.5% convertible debenture to the
Company, which is secured by MIP's Colombian oil production. Beginning in
February 2000, MIP agreed to pay monthly to the Company the greater of $70,000
or 80% of its Colombian subsidiary's net income during the calendar year 2000.
Thereafter, MIP will pay monthly the greater of $80,000 or 80% of the
subsidiary's net income until the debt is retired. The unpaid portion of the
debt is convertible into MIP common stock at the option of the Company, at any
time at $1.50 per share.
MIP also agreed to issue the Company warrants entitling it at any time prior to
December 31, 2002 to purchase an aggregate of 2,347,000 common shares of MIP:
(i) during the year 2000, at the greater of $.25 per share or the weighted
average trading price for the first 10 days after MIP's shares resume
trading (MIP was delisted from the Toronto Exchange in 1999), to a
maximum of $.50;
(ii) during the year 2001, at $1.00 per share; and
(iii) during the year 2002, at $1.50 per share.
A dedicated bank account has been set up in Bogota, Columbia for deposit of oil
sales proceeds and disbursement of payments due to the Company pursuant to the
MIP Agreement. The Company has received the initial monthly payment and expects
no interruption in the future.
18
<PAGE>
In February 2000, AIRI entered into lease and service agreements (the "Maretech
Agreements") with Maretech Corporation ("Maretech"), an independent refinery
whereby Maretech will lease AIRI's ADU and process condensate crude oil
utilizing AIRI's personnel to operate the daily processing functions. Maretech
plans to produce naphtha and gas oil to be sold as feedstocks and diesel and JP8
to be marketed as finished products. The term of the Maretech Agreements is one
year renewable at the contract anniversary date. Maretech has the right to
terminate the Maretech Agreement if its operation is unprofitable over any
30-day period. Maretech will pay AIRI $.20 per barrel of feedstock run through
the ADU as a lease fee, which lease fees shall not be lower that $45,000 per
month. In addition, Maretech will pay all expenses directly associated with the
operation of the ADU including, but not limited to, wages, office expense,
normal maintenance, property taxes, utilities, fuel, chemicals, and insurance.
All payments will be made directly to each vendor by Maretech for services and
materials. The Agreement also calls for AIRI to receive 25% of Maretech's
profits from the operations.
Maretech has obtained financing guarantees for its feedstock supplies from a
large financial institution and has also provided AIRI with an Irrevocable
Letter of Credit in the amount of $400,000 to protect AIRI in the event of a
default by Maretech.
Since the Maretech Agreements only involve the ADU (although there is some
shared usage of other AIRI facilities provided for in the Maretech Agreements,
such as the dock facilities), AIRI will still operate its asphalt processing
facilities. As of March 21, 2000, AIRI had approximately $10.5 million in firm
backlog of orders and sales agreements, of which approximately 95% is for
higher-margin polymerized asphalt products. Asphalt prices, particularly
polymerized asphalts, have begun to rise in response to high crude oil prices
incurred in 1999 and early 2000, therefore the Company expects its asphalt
margins to improve in 2000 as compared to 1999, when only 60% of its asphalt
sales volumes were polymerized asphalts and asphalt prices were significantly
lower. In addition, the Company has implemented the use of escalation clauses in
its asphalt sales contracts, which enable it to increase its contracted sales
price by 5% per quarter if its feedstock prices rise to certain levels. This
should mitigate the problem the Company incurred in 1999 by committing to
long-term supply contracts at fixed prices.
As long as crude oil prices continue at current high levels, AIRI plans to
purchase wholesale asphalts to utilize as feedstock for blending and polymer
enhancement. The Company's strategy is to sell only higher-margin polymerized
asphalt products, which asphalts are expected approximate 95% of its asphalt
sales during 2000. The Company has a $2 million credit facility for its
feedstock purchases, which it has utilized since June 1999.
The combination of the proceeds to be derived from the MIP Agreement, the
Maretech Agreements and the Company's asphalt operations are expected to provide
sufficient cash flows to support all of the Company's domestic operations
through the year 2000 and beyond.
The Company plans to repay the outstanding aggregate balance of its Bridge Loans
(approximately $4.35 million) with the proceeds expected from the sale of a
portion of its License 1551. It is also seeking other sources of capital for the
repayment of this debt as well as its outstanding 5% Convertible Debentures.
If the Company is unable to obtain the necessary working capital from the
Refinery, St. Marks, AIM, the sale of a portion of License 1551, or from one or
more joint venture partners in Kazakhstan to support its operations during 2000,
or obtain the necessary financing to adequately supplement or provide all of its
funding needs, its ability to continue operations could be materially and
adversely effected.
Y2K Issues
The Company evaluated 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. As of March 31, 2000, the Company had not
encountered any negative effects relating to the Year 2000 issues, either
internally or with any of its vendors or suppliers.
Market Risk
The Company is exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and foreign currency
exchange rate fluctuations. The Company does not employ risk management
strategies, such as derivatives or various interest rate and currency swaps, to
mitigate these risks.
19
<PAGE>
Foreign Exchange Risk
The Company is subject to risk from changes in foreign exchange rates for its
international operations which uses a foreign currency as their functional
currency and are translated to U.S. dollars. The Company has not experienced any
significant gains or losses from such events.
Interest Rate Risk
The Company is exposed to interest rate risk from its various financing
activities. The following table provides information, by maturity date, about
the Company's interest rate sensitive financial instruments, which are fixed
rate debt obligations. The fair value of financial instruments closely
approximates the carrying values of the instruments due to the short-term or
recent issuance of such instruments.
Total
Recorded Fair
2000 2004 Amount Value
---- ---- -------- -----
Debt: $3,853,480 $12,621,250 $16,474,730 $16,474,730
11.3% 27.5%
A 10% increase in interest rates would decrease the Company's cash flow by
approximately $1,650,000 and would decrease the fair value of the Company's debt
instruments.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<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
Became a Director
Name Age Position(s) or Officer
---- --- ----------- -----------------
George N. Faris 59 Chairman of the Board 1981
Joe Michael McKinney 60 Chief Executive Officer 1999
William R. Smart 79 Director 1987
Daniel Y. Kim 75 Director 1987
Donald G. Rynne 77 Director 1992
John H. Kelly 60 Director 1999
Denis J. Fitzpatrick 55 Vice President, Secretary and 1994
Chief Financial Officer
William L. Tracy 52 Treasurer and Controller 1992
- ----------
Biographical Information
Dr. George N. Faris has served as Chairman of the Board of Directors of the
Company since 1981 He served as Chief Executive Officer from 1981 to December
1999 . 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. Joe Michael McKinney joined the Company in July 1999 as Chief Operating
Officer and was appointed Chief Executive Officer and a Director of the Company
in December 1999. Mr. McKinney was Vice President and General Manager of all
domestic onshore operations at Union Texas Petroleum from 1987 until 1991. He
was Senior Vice President of International Operations at Enron Oil & Gas
Corporation from 1991-1993 and was promoted to President and Chief Operating
Officer responsible for all exploration and development activies outside of
North America from 1994 until 1996. From 1996 until 1999, Mr. McKinney was
employed by Wind Walker Consulting as a petroleum management and business
consultant to companies in the energy field. Mr. McKinney is a registered
Professional Engineer and is a member of the Society of Petroleum Engineers and
the Association of International Petroleum Negotiators. He received his B.S.
degree in Mechanical Engineering from Texas Tech University in 1962.
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
21
<PAGE>
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.
Ambassador John H. Kelly has served as a member of the Company's Board of
Directors since December 1999. Ambassador Kelly was Assistant Secretary of State
for South Asian and Near Eastern affairs from 1989 to 1991 and is currently
Ambassador in Residence at the Center for International Strategy, Technology,
and Policy at the Sam Nunn School of International Affairs at Georgia Tech in
Atlanta. Ambassador Kelly is a career diplomat and was four times Deputy
Assistant Secretary of State as well as Ambassador to Finland and Lebanon. He
attended Emory University and the Armed Forces Staff College. He has been a
frequent commentator for "Meet the Press", the "Today Show", and on CNN, C-Span
BBC, and other media.
The business background of each executive officer of the Company, to the extent
not set forth above, is described below.
Mr. Denis J. Fitzpatrick 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.
Mr. William L. Tracy 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 1999, 1998 and 1997.
<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 1999 $335,769 $ 41,250 $ -- 500,000 $ --
Chairman of the 1998 330,000 120,000 -- 1,000,000(1) --
Board 1997 312,000 257,000 7,200(2) 750,000 193,000(3)
Joe Mike McKinney 1999 $118,461 $5,625 $2,500(2) 700,000 $ 2,500(2)
Chief Executive Officer 1998 -- (6) -- -- --
1997 -- (6) -- -- --
Denis J. Fitzpatrick 1999 $135,769 $ 15,000 $ -- 100,000 $ --
Secretary, Vice 1998 140,000 31,250 -- 170,000(4) --
President and Chief 1997 118,000 102,000 -- 125,000 25,000(5)
Financial Officer
William L. Tracy 1999 $100,000 $ 10,006 $ -- 75,000 $ --
Treasurer and 1998 100,000 13,500 -- 106,000(7) --
Controller 1997 88,000 62,000 -- 75,000 23,000(5)
</TABLE>
22
<PAGE>
(1) Includes 420,000 regular options which vest 25% per year beginning December
31, 1998 and 580,000 contingent options which will vest only if the
Company's common stock trades at $5.00 per share for 15 consecutive days at
any time before December 31, 1999.
(2) Vehicle allowance.
(3) Includes deferred salary payment of $109,000 and income tax reimbursement
of $84,000.
(4) Includes 70,000 regular options which vest 25% per year beginning December
31, 1998 and 100,000 contingent options which will vest only if the
Company's common stock trades at $5.00 per share for 15 consecutive days at
any time before December 31, 1999.
(5) Deferred salary payment.
(6) Mr. McKinney was hired in July 1999. He was granted 200,000 options as a
signing bonus.
(7) Includes 56,000 regular options which vest 25% per year beginning December
31, 1998 and 50,000 contingent options which will vest only if the
Company's common stock trades at $5.00 per share for 15 consecutive days at
any time before December 31, 1999.
Note: The contingent options terminated, since the Company's common stock did
not trade at $5.00 per share for 15 consecutive days prior to December 31,
1999.
STOCK OPTION PLAN
The Company has established a 1998 Stock Option Plan (the "1998 Plan"). The 1998
Plan was approved by the Board of Directors on May 29, 1998 and by the Company's
shareholders on June 29, 1998. The 1998 Plan is administered by the Board of
Directors of the Company or a Committee designated by them. Under the 1998 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 1998 Plan to
purchase an aggregate of 5,000,000 shares of Common Stock. If an option granted
under the 1998 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 1998 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 1998 Plan after May 29, 2008. The exercise
price of the options granted under the 1998 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 $100,000. Any additional Common Stock as to
which options become exercisable for the first time during any such year are
treated as NQSO's. The total number of options granted under the 1998 Plan, as
of March 21, 1999 was 4,249,275 of which 1,260,000 were conditional options
which expired and were placed back in the 1998 Plan for future issuance.
23
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to certain
executive officers during the year ended December 31, 1999, exercise information
and potential realizable value.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to for Option Term
Options Employees in Exercise Expiration ---------------------
Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($)
---- ---------- ----------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
George Faris 500,000 24% $0.825 03/30/04 $ -0- $ -0-
Joe Michael McKinney 200,000 10% $ 1.24 07/21/04 $ -0- $ -0-
250,000 12% $ 0.50 12/31/04 $ -0- $ -0-
250,000 12% $ 1.00 12/31/04 $ -0- $ -0-
Denis Fitzpatrick 100,000 5% $0.825 03/30/04 $ -0- $ -0-
William L. Tracy 75,000 4% $0.825 03/30/04 $ -0- $ -0-
</TABLE>
AGGREGATE OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
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, 1999. 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 on 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 -- -- 2,308,334 564,166 $75,156 $ --
Denis J. Fitzpatrick 120,000 146,227 226,666 68,334 $ -- $ --
Joe Michael McKinney -- -- 125,000 575,000 $ 3,906 $ 11,719
William L. Tracy 51,000 82,988 153,000 53,000 $ -- $ --
</TABLE>
EMPLOYMENT CONTRACTS
Effective July 21, 1999 the Company entered into a one (1) year employment
agreement with Joe Michael McKinney to serve as President of the Company at an
annual salary of $300,000, 25,000 shares of the Company's stock, and five (5)
year options to purchase 200,000 shares of Company stock with an exercise price
equal to 110% of the market price on July 21, 1999 and vest over a three (3)
year period. On November 18, 1999 Mr. McKinney's employment agreement was
amended to a three (3) year agreement, with successive one (1) year renewals, to
serve as the Company's Chief Executive Officer and President at an annual
salary, effective January 1, 2000, of $350,000 with additional five (5) year
options to purchase 500,000 shares of Company stock at exercise prices of $0.50
to $1.00 and vesting over a two year period. The agreement also provides for, a)
a severance payment for termination without cause equal to one month of salary
for each full year of prior employment with the Company, and b) a change in
control payment in the amount equal to 2.99 times annual base salary in effect
immediately prior to termination as a result of a change in control of the
Company.
24
<PAGE>
Simultaneously with the appointment of Mr. McKinney to the position of Chief
Executive Officer and President on November 18, 1999, the Company's existing
employment agreement with Dr. George N. Faris was amended to provide for Dr.
Faris to continue to serve as Chairman of the Board of the Company for an
initial term of three years at an annual salary of $250,000, and if the initial
term is not extended by in writing by both parties, the Company agrees to retain
Dr. Faris, at his discretion, as a consultant for a period of two calendar years
ending December 31, 2004 at an annual salary equal to 50% of his annual base
salary at December 31, 2002. The agreement also provides for, a) a severance
payment equal to one month's salary for each full year of employment beginning
January 1, 1995, based on base salary at December 31, 1999 and b) a change in
control payment equal to 2.99 times the greater of (i) $350,000 or (ii) his base
salary in effect on date of termination as a result of a change in control of
the Company.
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 March 21, 2000,
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 3,826,944(2) 3.5%
Joe Michael McKinney 72,833(3) *
Daniel Y. Kim 223,378(4) *
Donald G. Rynne 729,092 *
William R. Smart 250,012 *
John Kelly 52,000(5) *
Denis J. Fitzpatrick 122,187(6) *
William L. Tracy 137,571(7) *
All officers and Directors
as a group (consisting of
8 persons) 5,414,017(8) 4.8%
The Palladin Group, L.P. 11,766,627(9) 9.9%
195 Maplewood Avenue
Maplewood, NJ 07040
- ----------
* Less than 1% of class
(1) All officers and Directors have an address c/o the Company, 444 Madison
Avenue, New York, NY 10022.
25
<PAGE>
(2) Includes 770,834 shares of common stock issuable upon the exercise of stock
options owned by Dr. Faris. Excludes 376,667 options not exercisable within
60 days.
(3) Excludes 575,000 stock options owned by Mr. McKinney, which are not
exercisable within 60 days.
(4) Includes 205,500 shares of common stock issuable upon the exercise of stock
options owned by Dr. Kim.
(5) Includes 50,000 shares of common stock issuable upon the exercise of stock
options of common stock owned by Ambassador Kelly. Excludes 50,000 option
not exercisable within 60 days.
(6) Includes 34,667 shares of common stock issuable upon the exercise of stock
options owned by Mr. Fitzpatrick. Excludes 68,333 options not exercisable
within 60 days.
(7) Includes 28,000 shares of common stock issuable upon the exercise of stock
options owned by Mr. Tracy. Excludes 53,000 options not exercisable within
60 days.
(8) Includes all of the shares of common stock issuable upon the exercise of
options described in Notes (2) through (7) above.
(9) The Palladin Group, L.P. serves as investment advisor to Hallifax Fund,
L.P. ("Hallifax"), the registered owners of the Company's 5% Convertible
Secured Debenture (the "5% Debenture") and warrants to purchase Common
Stock, and has been granted investment discretion over the securities of
the Company owned by this fund. In this capacity, The Palladin Group, L.P.
may be deemed to have voting and dispositive power over such securities.
Mr. Jeffrey Devers is the principal officer of The Palladin Group. The
terms of the 5% Debenture and warrants provide that the number of shares
that the registered owners may acquire upon conversion or exercise may not
exceed that number that would render Hallifax Fund, L.P. as the beneficial
owner of more than 9.99% of the then outstanding shares of Common Stock.
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, 1999 through December 31, 1999, all filing requirements applicable to
its officers, Directors and greater than 10 percent beneficial owners were
complied with.
26
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999 the Company's Chairman and CEO, Dr. George Faris, loaned the Company
an aggregate of $500,000 at an annual interest rate of 10% per annum. The
Company repaid $765,000 ($265,000 of a remaining balance from 1998 and the
$500,000 balance from 1999) in the second quarter of 1999.
Also during 1999, Mr. Donald Rynne, a current member of the Company's Board of
Directors, loaned the Company an aggregate of $140,000 at an annual interest
rate of 10% per annum. The Company repaid the entire amount during the second
quarter of 1999.
27
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) Documents Filed as Part of the Report
(1) Financial Statements. Page No.
Reports of Independent Accountants F-1
Consolidated Balance Sheets(2)
December 31, 1999 and 1998 F-2
Consolidated Statement of Operations
Years Ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in
Stockholders' Equity - Years Ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-8
Supplementary Oil and Gas Information F-27
(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)
28
<PAGE>
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)
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.(14)
4.15 1998 Stock Award Plan of the Registrant.(14)
4.16 14% Convertible Note due April 21, 2000 (12)
4.17 Securities Purchase Agreement dated April 21, 2000 (12)
4.18 Agreement and First Amendment dated April 21, 1998 to the Securities
Purchase Agreement dated October 9, 1997. (12)
4.19 Form of Warrant issued pursuant to the Securities Purchase and Equity
Agreements associated with Exhibits 4.17 and 4.20 (12)
4.20 Equity Financing Agreement dated April 21, 1998. (12)
4.21 Registration Rights Agreement dated April 21, 1998. (12)
4.22 Letter Agreement dated June 26, 1998 between the Registrant and certain
investors. (13)
4.23 Convertible Debenture Purchase Agreement dated February 18, 1999. (2)
4.24 Form of 5% Convertible Secured Debenture dated February 18, 1999. (2)
4.25 Form of Warrant issued pursuant to Convertible Secured Debenture dated
February 11, 1999. (2)
4.26 Form of Registration Rights Agreement dated February 18, 1999. (2)
4.27 Form of Mortgage and Security Agreement issued pursuant to the
Convertible Secured Debentures dated February 11, 1999. (2)
4.28 Form of 6% Convertible Debenture Purchase Agreement dated August 19,
1999. (15)
4.29 Form of 6% Convertible Secured Debenture issued in connection with the
6% Convertible Debentures referenced in Exhibit 4.28 (15)
4.30 Form of Warrant issued in connection with the 6% Convertible Debentures
referenced in Exhibit 4.28. (15)
4.31 Form of Registration Rights Agreement issued in connection with the 6%
Convertible Debentures in Exhibit 4.28. (15)
4.32 Form of Security Agreement issued in connection with the 6% Convertible
Debentures in Exhibit 4.28. (15)
4.33 Form of Securities Purchase Agreement dated December 1, 1999 by and
among the Registrant and GCA Investment Fund Limited.
29
<PAGE>
4.34 Form of Mortgage and Security Agreement between St. Marks Refinery, Inc.
and GCA Strategic Investment Fund.
4.35 Form of Warrant issued in connection with the Securities Purchase
Agreement referenced in Exhibit 4.33.
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 May 1, 1989, 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)
10.7 Consulting Agreement dated December 2, 1998. (15)
10.8 Amendement #2 to Employment Agreement dated May 1, 1989 by and between
Registrant and George N. Faris.
10.9 Employment Agreement dated July 21, 1999 by and between the Registrant
and Joe Michael McKinney.
10.10 Amendment #1 to Employment Agreement dated July 21, 1999 by and between
the Registrant and Joe Michael McKinney.
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 March
1, 1999, as amended April 26, 1999.
(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-QA for the quarter ended June 30, 1997.
(10) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-QA for the quarter ended September 30, 1997.
(11) Incorporated herein by reference to the Registrant's Annual Report on Form
10-KA for the year ended December 31, 1997.
(12) Incorporated by reference to the Registrants' Quarterly Report on Form
10-Q-A for the quarter ended March 31, 1998
30
<PAGE>
(13) Incorporated by reference to the Registrants' Quarterly Report on Form
10-Q-A for the quarter ended June 30, 1998
(14) Incorporated by reference to the Registrants' Report on Form S-8 dated
January 4, 1999.
(15) Incorporated by reference to the Registrants' Report on Form 8-K dated
September 9, 1999.
(b) Reports on Form 8-K
None.
31
<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, 1999 and
1998, and related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 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,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The Company reported a net loss of approximately $14.9 million during 1999, of
which approximately $6.3 million represented non-cash items and has a working
capital deficit of approximately $5.0 million at December 31, 1999. The Company
had limited revenue generating operating activities during 1999 and does not, as
of December 31, 1999, have the resources to fulfill its operating and capital
commitments. The Company's refinery facility suspended operations in late 1999
and is not expected to resume operation before the second quarter of 2000. These
matters raise a 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. As of December 31, 1999, the Company has
costs capitalized in the accompanying balance sheet of approximately $31,600,000
relating to unevaluated oil and properties in Kazakhstan. At the present time,
the Company has no commercially feasible means of transporting any oil and gas
production it may produce from the Kazakhstan properties. The Company will
require a substantial amount of additional capital expenditures to recover its
investment in the oil and gas concession. At the present time, the Company does
not have the resources to develop these properties and to meet the minimum work
program required.
HEIN + ASSOCIATES, LLP
Houston, Texas
March 30, 2000
F-1
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,753,707 $ 376,745
Accounts and notes receivable, net 497,553 548,442
Inventory 723,088 1,554,694
Deferred financing costs 130,727 8,563
Prepaid expenses 793,956 829,654
------------- -------------
Total current assets 3,899,031 3,318,098
------------- -------------
Property, plant and equipment:
Unevaluated oil and gas property 31,556,376 23,438,886
Refinery property and equipment 37,999,682 36,935,705
Other 1,005,886 626,910
------------- -------------
70,561,944 61,001,501
Less - accumulated depreciation, depletion,
and amortization (6,470,672) (4,707,103)
------------- -------------
Net property, plant and equipment 64,091,272 56,294,398
Notes receiviable, less current portion 1,252,696 1,118,200
Other long-term assets, net 415,270 130,638
------------- -------------
Total assets $ 69,658,269 $ 60,861,334
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debentures $ 2,223,500 $ --
Notes payable - trade 1,736,831 1,725,350
Notes payable - officers -- 266,850
Accounts payable 3,641,886 4,081,557
Accrued liabilities 1,301,472 1,840,493
------------- -------------
Total current liabilities 8,903,689 7,914,250
Long-term debt 11,984,592 6,110,961
------------- -------------
Total liabilities 20,888,281 14,025,211
------------- -------------
Commitments and contingent liabilities (Note 10) -- --
Minority Interest Liability 305,956 305,956
Stockholders' equity:
Preferred stock, par value $0.01, 7,000,000 shares
authorized, none issued
Common stock, par value $.08, 200,000,000 shares
authorized, 91,282,773 and 65,992,328 shares issued
outstanding at December 31, 1999 and December 31, 1998,
respectively 7,302,621 5,279,385
Additional paid-in capital 145,605,966 129,711,531
Common stock held in escrow as collateral (1,065,938) --
Accumulated deficit (103,378,617) (88,460,749)
------------- -------------
Total stockholders' equity 48,464,032 46,530,167
------------- -------------
Total liabilities and stockholders' equity $ 69,658,269 $ 60,861,334
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated fnancial statements.
F-2
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas production and
pipeline fees $ -- $ -- $ 260,579
Refinery operating revenues 8,137,867 11,394,009 --
Other 214,171 460,597 567,385
------------ ------------ ------------
Total revenues 8,352,038 11,854,606 827,964
------------ ------------ ------------
Expenses:
Lease operating -- -- 98,766
Costs of goods sold - refinery 8,670,760 11,281,139 --
General and administrative 6,367,857 5,097,468 4,627,598
Depreciation, depletion and
amortization 1,730,710 813,088 774,264
Interest 6,500,579 1,912,949 6,663,992
Realized and unrealized loss on marketable securities -- 359,325 6,053,298
Loss on sale of subsidiaries -- -- 563,667
Provison for bad debts -- 1,493,750 --
------------ ------------ ------------
Total expenses 23,269,906 20,957,719 18,781,585
------------ ------------ ------------
Net loss $(14,917,868) $ (9,103,113) $(17,953,621)
============ ============ ============
Net loss per share of common stock - basic and diluted $ (0.20) $ (0.17) $ (0.43)
============ ============ ============
Weighted-average number of shares
of common stock outstanding 72,855,230 53,741,498 41,309,102
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,917,868) $ (9,103,113) $(17,953,621)
Adjustments to reconcile net loss to net
cash (used) by operating activities:
Depreciation, depletion, amortization and accretion of
discount on debt 5,716,550 2,472,751 5,125,934
Accretion of premium on notes receivable (50,604) (208,886) (167,167)
Provision for bad debts -- 1,493,750 --
Realized and unrealized loss on marketable securities -- 359,325 6,053,298
Loss on sale of subsidiaries -- -- 563,667
Issuance of stock for compensation expense 186,233 196,900 40,000
Forgiveness of debt -- -- (50,342)
Compensatory stock options -- -- 744,700
Issuance of stock and options for services 468,220 255,814 247,607
Changes in assets and liabilities:
Accounts and notes receivable 50,889 1,313,816 57,835
Inventory 831,606 (798,974) (698,746)
Prepaid and other (86,466) 426,060 (1,387,484)
Accounts payable and accrued liabilities 495,021 2,968,458 (16,688)
------------ ------------ ------------
Net cash (used in) operating activities (7,306,419) (624,099) (7,441,007)
------------ ------------ ------------
Cash flows from investing activities:
Additions to oil and gas properties (5,980,341) (8,512,328) (2,663,694)
Additions to refinery property and equipment (800,974) (8,578,049) (5,581,714)
Proceeds from sales of marketable securities -- 376,633 1,979,494
Proceeds from sale of subsidiaries -- -- 1,764,548
Additions to other long term assets (752,988) (592,444) (94,191)
------------ ------------ ------------
Net cash used in investing activities (7,534,303) (17,306,188) (4,595,557)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in short-term debt 2,500,000 -- --
Net increase (decrease) in notes payable 11,481 1,725,350 (237,162)
Increase (decrease) in notes payable - officers (266,850) 266,850 --
Repayments of long-term debt (3,500,000) -- (5,791,420)
Proceeds from issuance of common stock and
warrants, net -- -- 447,810
Proceeds from exercise of stock warrants
and options 768,877 738,482 1,272,333
Proceeds from issuance of debentures, net 16,704,176 11,855,000 20,055,295
------------ ------------ ------------
Net cash provided by financing activities 16,217,684 14,585,682 15,746,856
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,376,962 (3,344,605) 3,710,292
Cash and cash equivalents at beginning of year 376,745 3,721,350 11,058
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,753,707 $ 376,745 $ 3,721,350
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common stock paid-in Common Stock Accumulated
Shares Amount capital Held In Escrow deficit
---------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 65,992,328 $ 5,279,385 $ 129,711,531 -- $ (88,460,749)
Conversions of debentures 17,574,305 1,405,944 6,196,429 -- --
Issuance of stock in lieu of current
liabilities 1,798,968 143,917 1,329,796 -- --
Issuance of stock for compensation 223,919 17,914 168,319 -- --
Issuance of stock and options for services 425,000 34,000 434,220 -- --
Issuance of stock for property and equipment 2,090,000 167,200 1,685,166 -- --
Issuance of stock options and warrants -- -- 1,455,835 -- --
Options and warrants exercised 1,283,253 102,661 666,216 -- --
Imputed interest on debentures
convertible at a discount to market -- -- 3,044,116 -- --
Issuance of stock for collateral on debt 1,895,000 151,600 914,338 (1,065,938) --
Net loss for the year -- -- -- -- (14,917,868)
---------- ------------- ------------- ---------- -------------
Balance, December 31, 1999 91,282,773 $ 7,302,621 $ 145,605,966 (1,065,938) $(103,378,617)
========== ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Total
-------------
<S> <C>
Balance, January 1, 1999 $ 46,530,167
Conversions of debentures 7,602,373
Issuance of stock in lieu of current
liabilities 1,473,713
Issuance of stock for compensation 186,233
Issuance of stock and options for services 468,220
Issuance of stock for property and equipment 1,852,366
Issuance of stock options and warrants 1,455,835
Options and warrants exercised 768,877
Imputed interest on debentures
convertible at a discount to market 3,044,116
Issuance of stock for collateral on debt
Net loss for the year (14,917,868)
-------------
Balance, December 31, 1999 $ 48,464,032
=============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated
Shares Amount capital deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 48,436,576 $ 3,874,926 $107,987,091 $(79,357,636) $ 32,504,381
Conversions of Debentures 13,794,032 1,103,521 14,422,859 -- 15,526,380
Issuance of stock in lieu of current
liabilities 1,506,347 120,508 1,549,209 -- 1,669,717
Issuance of stock for compensation 50,000 4,000 192,900 -- 196,900
Issuance of stock and options for services 100,000 8,000 247,814 -- 255,814
Issuance of stock for refinery property and
equipment - Regulation S Offering 1,500,000 120,000 1,567,500 -- 1,687,500
Issuance of stock options and warrants -- -- 936,459 -- 936,459
Options and warrants exercised 605,373 48,430 690,052 -- 738,482
Imputed interest on debentures
convertible at a discount to market -- -- 2,117,647 -- 2,117,647
Net loss for the year -- -- -- (9,103,113) (9,103,113)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 65,992,328 $ 5,279,385 $129,711,531 $(88,460,749) $ 46,530,167
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated
Shares Amount capital deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 34,458,921 $ 2,756,714 $ 79,975,019 $(61,404,015) $ 21,327,718
Conversions of debentures 7,246,882 579,751 8,763,271 -- 9,343,022
Issuance of stock in lieu of current
liabilities 243,459 19,477 214,082 -- 233,559
Issuance of stock for compensation 100,000 8,000 32,000 -- 40,000
Issuance of stock for services 260,000 20,800 226,807 -- 247,607
Issuance of stock - Reg S Offering 1,635,593 130,847 314,465 -- 445,312
Issuance of stock for oil and
gas properties - Reg S Offering 3,250,000 260,000 8,275,938 -- 8,535,938
Issuance of stock warrants for oil and
gas properties -- -- 718,750 -- 718,750
Issuance of stock warrants -- -- 6,264,411 -- 6,264,411
Options and warrants exercised 1,241,721 99,337 694,189 -- 793,526
Imputed interest on debentures
convertible at a discount to market -- -- 1,763,459 -- 1,763,459
Compensatory stock options -- -- 744,700 -- 744,700
Net loss for the year -- -- -- (17,953,621) (17,953,621)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 48,436,576 $ 3,874,926 $107,987,091 $(79,357,636) $ 32,504,381
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<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, which processes and sells asphalt into
the Gulf Coast asphalt market and has the capability to refine other crude oil
products, such as vacuum gas oil, naptha and diesel, a refinery and terminal in
St. Marks, Florida, which it utilizes as a distribution facility to market some
of its asphalt, a 26,000 barrel asphalt transport barge, a 100% working interest
in a gas concession and a 70% working interest in an oil and gas concession in
Kazakhstan. 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). In January 1998, the Company demanded payment of $1.5
million in principal, which was received by the Company in February 1998.
The purchase price included an aggregate of approximately $2.5 million in
payments from MIP in connection with MIP's future potential tax savings in
Colombia and $3 million of long and short-term notes at face value (not
discounted to present value). Taking into consideration the $2.5 million tax
payments, which were not recorded because of their contingent nature, and the
discounted portion of the notes of approximately $452,000, the Company recorded
an aggregate loss of approximately $564,000 on the sale of the subsidiaries.
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 Marine, Inc. ("AIM"), St. Marks Refinery, Inc.
("SMR") American International Petroleum Kazakhstan ("AIPK"), American Eurasia
Petroleum Corporation ("AEPC"), American International Petroleum Corporation
Holding, Inc. ("AIPC Holdings), AIPCC and PAIPC.
Intercompany balances and transactions are eliminated in consolidation.
Cash and cash equivalents
All liquid short-term instruments purchased with original maturities of three
months or less are considered cash equivalents
F-8
<PAGE>
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.
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 realized losses on shares disposed of during 1997 was $901,616.
The unrealized loss on shares available for sale at December 31, 1997 was
$5,151,682. The MIP stock was deemed permanently impaired at December 31, 1997
and the unrealized loss at that date was recognized as a loss during 1997. The
impairment is reflected in realized and unrealized loss on marketable securities
in the accompanying Statement of Operations. During 1998, the Company sold all
its remaining shares of MIP for net cash proceeds of $376,633, recording a
realized loss of $359,325.
Inventory
Inventory consists of crude oil and asphalt feedstock. Crude oil and asphalt
feedstocks are stated at the lower of cost or market value by using the
first-in, first-out method.
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. No costs related to
production, general corporate overhead, or similar activities have been
capitalized. 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.
December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
Kazakhstan:
Acquisition Cost $11,724,477 $11,724,477 $11,724,477
Exploration Cost 19,072,440 10,748,427 --
Other
Acquisition cost 759,459 965,982 --
----------- ----------- -----------
$31,556,376 $23,438,886 $11,724,477
=========== =========== ===========
Acquisition costs of unproved properties not subject to amortization at December
31, 1999 1998 and 1997, respectively, consists mainly of lease acquisition costs
related to unproved areas. The period in which the amortization cost of the
Kazakhstan properties will commence is subject to the results of the Company's
exploration program, which began in 1999. 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 geological and general and administrative
costs for Kazakhstan and the Other category totaled $8,117,490, $11,164,180 and
$2,437,289 for 1999, 1998 and 1997, respectively.
F-9
<PAGE>
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, 1999,
1998 and 1997 - Oil and Gas Reserves.
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 $547,786, $7,055,340,
and $341,000 in 1999, 1998 and 1997, 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
$1,730,710, $813,088, and $774,264 for the years ended December 31, 1999, 1998
and 1997, respectively.
Revenue recognition
Oil and gas production revenues are recognized at the time and point of sale
after the product has been extracted from the ground. Pipeline fees are
recognized at the time and point of expulsion of the product from the pipeline.
Refinery revenues are recognized upon delivery.
Discounts and premiums
Discounts and premiums on accounts and notes receivables and notes payable are
amortized as interest expense or income over the life of the instrument on the
interest method.
Earnings per share
Earnings per share of common stock are based on the weighted-average number of
shares outstanding. Basic and diluted earnings per share were the same for all
years presented. Options to purchase 13,202,753 and 7,100,681 shares of common
stock at various prices were outstanding during 1999 and 1998, respectively, but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
For the Year Ended December 31, 1999
------------------------------------
Net Income(Loss) Weighted Average Per Share
(Numerator) Shares Amount
----------- ------ ------
Basic EPS:
Loss available to $(14,917,868) 72,855,230 $(0.20)
Common Shareholders
Effect of Dilutive Securities
Warrants and Options (1)(2) -- -- --
------------ ------------ ------
Diluted EPS:
Loss available to $(14,917,868) 72,855,230 $(0.20)
Common Shareholders
(1) The effect of these shares in the Dilutive EPS were not reflected on the
face of the Statement of Operations as they were anti-dilutive in accordance
with paragraph 13, of SFAS 128.
(2) Options and warrants to purchase 13,202,753 shares of common stock at
various prices were outstanding at December 31, 1999, but were not included in
the computation of diluted EPS because the exercise price was greater than the
average market price of the common shares or the options were not vested at
December 31, 1999.
F-10
<PAGE>
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 functional
currency of the AIPK subsidiary is U.S. dollars, as the Company negotiates all
transactions based upon U.S. dollar-equivalents and the Company is providing all
of the funding requirements of AIPK. The Company anticipates little, if any,
currency and exchange risks during the initial three to five years of its
operations in Kazakhstan due to the Company negotiating all transactions in U.S.
dollars. Any revenues generated from Kazakhstan during this period are planned
to be reinvested in the Company's projects in Kazakhstan. 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.
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 at face value were $23,375,000, $12,000,000, and
$20,537,000 in 1999, 1998, and 1997, respectively. Debenture costs of
$1,618,415, $1,126,930, and $3,253,035 were amortized in the years 1999, 1998
and 1997, respectively.
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
under APB 25. The Company has elected to account for employee stock compensation
plans as provided under APB 25 and to adopt the disclosure provisions of SFAS
123.
Fair Value of Financial Instruments
The fair value of financial instruments, primarily accounts receivable, accounts
payable and notes payable and debentures, closely approximate the carrying
values of the instruments due to the short-term maturities or recent issuance of
such instruments.
Comprehensive Income (Loss)
Comprehensive income is defined as all changes in stockholders' equity,
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets and
liabilities that are reported directly in equity such as translation adjustments
on investments in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal to its net
income (loss) for all periods presented in these financial statements.
Long Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
The Company has not identified any impairment loss during 1999, 1998 and 1997.
F-11
<PAGE>
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 which are the basis for the calculation of impairment of oil
and gas properties. Because estimates of fair value of unevaluated oil and gas
properties are inherently imprecise, it is reasonably probable that the
estimates of fair value associated with the concession in Kazakhstan will
materially change during the next year.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Accounting for 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.
NOTE 2 - MANAGEMENT PLANS
The Company reported a net loss of approximately $14.9 million during 1999, of
which approximately $6.3 million represented non-cash items, and has commitments
to fund the operations of its Kazakhstan subsidiary (see Note 10), $4.2 million
of non-convertible secured debt, and has convertible debentures totaling
approximately $12.6 million (see Note 6 and 7), which may or may not be
converted to common stock, that mature in 2004. As of December 31, 1999; the
Company had 4.6 million of negative working capital. The Company intends to be
very conservative with its spending overseas during 2000. As of March 2000, the
Company's existing working capital was insufficient to provide all the funds it
requires to complete its minimum work program in Kazakhstan during 2000.
However, in the past, the Company has negotiated reductions and deferrals of its
minimum requirements in Kazakhstan and believes that, if necessary, it can do so
again. The Company's reservoir development studies, which have been verified by
Ryder Scott Company L.P., a Houston-based petroleum consulting firm, indicate
the presence of a significant amount of recoverable gas reserves at the
Company's License 1551. The Company is currently negotiating with two separate
large Russian/American oil and gas companies regarding a sale of up to 75% of
its ownership interest in License 1551, and one of these companies has also
expressed an interest in providing development financing to the Company in
addition to a purchase of a partial interest. In addition, the Company expects
to sign a gas sales agreement in the second quarter of 2000 with Gazprom, which
will allow the Company to classify the gas reserves as proved reserves, thereby
potentially providing it with a borrowing base (the "Borrowing Base") for
development and working capital. The proceeds derived from the sale of a portion
of License 1551 and/or the Borrowing Base should provide the Company with the
necessary capital to fund its obligations during 2000 and beyond.
The Company recently signed an agreement with Maretech Corporation to lease its
crude unit at Lake Charles. The agreement is expected to provide the Company
with sufficient working capital to fund most of its domestic operations overhead
during the year 2000 and beyond. This agreement will also enable the Company to
continue its asphalt operations. As of March 21, 2000, the Company has a backlog
of asphalt sales of approximately $10.5 million, which are primarily
higher-margin polymer-enhanced products. Management of the Company has also been
seeking sources of capital to enable the Company to supplement its operating
activities and to fulfill commitments which may arise in 2000 and beyond.
Maretech may cancel the agreement should they be unable to operate profitably
and in certain other circumstances provided in the lease agreement.
As operations at the Refinery expand during 2000, the Company plans, to the
extent possible, to prudently obtain bank or other conventional, non-equity
financing to replace its existing convertible debt and provide the supplemental
funds necessary to support its operations and minimum work program in
Kazakhstan. If the Company is unable to derive the necessary working capital
from the Refinery, St. Marks, AIM, the sale of a portion of its License 1551
properties, or from a joint venture partner in Kazakhstan to support its
operations during 2000, or obtain the necessary financing to adequately
supplement or provide all of its funding needs, its ability to continue
operations could be materially and adversely effected. As a result, there is
substantial doubt about the Company's ability to continue as a going concern.
F-12
<PAGE>
NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE:
Accounts and notes receivable are shown below:
December 31,
----------------------------
1999 1998
---- ----
Accounts receivable - trade $ 377,125 $ 1,499,651
Note receivable - Gold Line (See Note 8) -- 900,732
Current portion - Note receivable - MIP 1,493,750 1,515,750
Other 120,428 46,936
----------- -----------
1,991,303 3,963,069
Less - allowance for doubtful accounts (1,493,950) (3,414,627)
----------- -----------
$ 497,553 $ 548,442
=========== ===========
NOTE 4 - OTHER LONG-TERM ASSETS:
Other long-term assets consist of the following:
December 31,
-----------------------
1999 1998
---- ----
Note receivable - MIP (See Note 1), net of
discount of $18,651 and $69,255, respectively $1,252,696 $1,118,200
========== ==========
NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
December 31,
-------------------------------
1999 1998
---- ----
Accrued payroll $ 15,935 $ 35,756
Accrued interest 499,666 47,206
Corporate taxes 116,608 171,768
Excise taxes -- 1,246,684
Property taxes 176,591 175,000
Sales Taxes 56,913 107,135
Other 435,758 56,944
---------- ----------
$1,301,472 $1,840,493
========== ==========
NOTE 6 - SHORT TERM DEBT
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
13% - $2,500,000 secured Bridge Note, net of unamortized
discount of $276,000 - due June 1, 2000, collateralized
by the shares of the St. Marks subsidiary and certain
St. Marks real estate, effective interest rate - 13% $2,223,500 $ --
10% - $265,000 unsecured demand note due to officers -
includes interest of $1,850 due at December 31, 1998 -- 266,850
Trade notes payable - various notes due from one
month to twelve months - interest ranges from 8.5%
to 14.5%, includes $106,851 of interest due at
December 31, 1999 - collateralized by accounts
receivable, inventory, and certain fixed assets 1,736,831 1,725,350
---------- ----------
$3,960,331 $1,992,200
========== ==========
</TABLE>
F-13
<PAGE>
NOTE 7 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
14% - $12,000,000 unsecured convertible debenture, due
April 21, 2000, net of unamortized financing cost of $362,659,
Effective interest rate - 40% (1) $ -- $ 6,110,961
5% - $10,000,000 secured convertible debenture, due
February 18, 2004, net of unamortized financing cost
of $437,050, collateralized by the Lake Charles facility,
effective interest rate - 28% (2) 8,734,200 --
6% - $7,250,000 secured convertible debenture, due
August 18, 2004, net of unamortized financing cost
of $199,608, collateralized by the fixed assets at the
St. Marks facility, effective interest rate - 26% (2) $ 3,250,392 --
----------- -----------
$11,984,592 $ 6,110,961
=========== ===========
</TABLE>
(1) Convertible into the Company's common stock at the average of the lowest
five (5) consecutive daily weighted average sales prices of the common stock as
reported by Bloomberg, LP for the forty (40) trading days ending on the day
prior to the date of conversion.
(2) Convertible into the Company's common stock at the average of the lowest
five (3) consecutive daily weighted average sales prices of the common stock as
reported by Bloomberg, LP for the forty (20) trading days ending on the day
prior to the date of conversion.
The effective interest rate as stated for debt instruments 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 1999,
the Company sold convertible debentures totaling $17,250,000. During 1999,
$7,602,373 of convertible debentures were converted into the Company's common
stock at discounts to market of 15%.
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 at December 31, 1996.
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. 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.
F-14
<PAGE>
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, 1999, 1998 and 1997, 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
1999 1998 1997 Price Date
---- ---- ---- ----- ----
-- -- 5,957,207 $4.000 March 1, 1998 (3)(2)
-- -- 100,000 $0.487 January 31, 1999(4)(2)
-- 22,681 22,681 $2.131 July 22, 1999(4)(2)
-- 864,000 960,000 $2.713 August 6, 1999(4)(2)
-- 200,000 -- $2.000 August 24, 1999(4)(2)
-- 1,500,000 -- $2.000 October 9, 1999(1)(2)
-- -- 1,500,000 $6.250 October 9, 1999(4)(2)
-- 1,781,000 1,852,500 $0.500 December 31, 1999(1)(2)
-- 1,210,000 -- $2.000 December 31, 1999(1)(2)
1,358,000 -- -- $0.5000 July 31, 2000(1)
50,000 50,000 50,000 $0.5000 November 1, 2000(1)
-- -- 61,547 $0.469 July 15, 2001(4)(2)
-- -- 100,000 $1.000 July 15, 2001(4)(2)
-- -- 10,500 $0.475 July 16, 2001(4)(2)
-- -- 8,333 $0.415 August 19, 2001(4)(2)
16,667 16,667 16,667 $0.413 August 20, 2001(4)
8,420 8,420 18,519 $0.406 October 31, 2001(4)
-- -- 10,000 $0.500 November 11, 2001(4)(2)
-- -- 20,000 $0.500 November 12, 2001(4)(2)
-- -- 30,000 $0.398 April 1, 2002(4)(2)
-- 60,000 60,000 $0.398 June 6, 2002(4)
200,000 200,000 200,000 $2.000 July 30, 2002(4)
64,000 -- -- $1.200 October 6, 2002(4)
1,500,000 -- -- $2.000 October 9, 2002(1)
-- 197,500 -- $3.000 October 14, 2002(4)(2)
-- -- 197,500 $6.250 October 14, 2002(4)(2)
-- -- 10,000 $0.500 November 5, 2002(4)(2)
100,000 100,000 -- $2.000 December 1, 2002(1)
1,400,000 1,500,000 1,518,750 $1.050 December 31, 2002(1)(2)
-- -- 100,000 $4.280 December 31, 2002(1)(2)
1,400,000 1,400,000 -- $2.000 April 21, 2003(4)
-- 118,500 -- $2.000 April 21, 2003(4)(2)
-- 100,000 -- $2.600 April 21, 2003(4)(2)
-- 25,000 -- $3.000 April 21, 2003(4)(2)
1,595,978 -- -- $2.000 April 22, 2003(4)
15,000 15,000 -- $1.375 June 29, 2003(1)(2)
782,000 782,000 -- $2.000 June 29, 2003(1)
F-15
<PAGE>
197,500 -- -- $1.200 October 14, 2003(4)
2,000,000 -- -- $2.562 February 18, 2004 (4)
1,342,275 -- -- $0.825 March 30, 2004(1)
118,500 -- -- $1.200 April 21, 2004(4)
200,000 -- -- $1.238 July 21, 2004 (1)
712,500 -- -- $1.450 August 18, 2004(4)
100,000 -- -- $1.000 September 30, 2004(4)
50,000 -- -- $1.500 September 30, 2004(4)
50,000 -- -- $0.750 October 19, 2004(4)
375,000 -- -- $0.800 November 2, 2004(4)
400,000 -- -- $0.900 December 1, 2004(4)
250,000 -- -- $0.500 December 31, 2004(1)
250,000 -- -- $1.000 December 31, 2004(1)
50,000 -- -- $0.800 July 14, 2005(4)
300,000 -- -- $0.800 August 18, 2005(4)
- ---------- ---------- ----------
14,885,840 10,150,768 12,804,204
========== ========== ==========
(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 1997
or 1998 as indicated in the table.
(3) Class A Warrants;
(4) Other non-employee warrants.
Stock option plans
1995 Plan
The Company 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 tandemwith 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 December 31, 1999 was 3,333,750.
F-16
<PAGE>
1998 Plan
Under the Company's 1998 Stock Option Plan (the "1998 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 5,000,000 shares may be issued
and no options may be granted after ten years from the date the 1998 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. The 1998 Plan was submitted to and
approved by the Company's stockholders at its annual meeting in 1998.
Activity in the 1995 and 1998 Stock Option Plans for the years ended December
31, 1997, 1998 and 1999 was as follows:
Weighted Average
Number of Exercise Price
Shares Per Share
------ ---------
Outstanding, January 1, 1997 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
Canceled (68,750) $.074
Granted 2,007,000 $2.00
Exercised (21,500) $.050
---------
Outstanding December 31, 1998 5,438,000 $1.23
Granted 2,242,275 $0.95
Exercised (523,000) $0.61
Expired (1,410,000) $2.00
---------
Outstanding December 31, 1999 5,747,275 $0.99
=========
As of December 31, 1999, options to acquire 4,093,850 shares of the Company's
common stock with exercise prices ranging from $0.50 to $2.00, were fully vested
and exercisable at a weighted average exercise price of $0.92 per share. The
remaining 1,653,425 options, with exercise prices ranging from $0.825 to $2.00,
having a weighted average exercise price of $1.15 per share, will vest through
2004.
If not previously exercised, options outstanding at December 31, 1999, will
expire as follows: 1,358,000 options expire on July 31,2000; 50,000 options
expire on November 1, 2000; 100,000 expire on December 1, 2002; 1,400,000
options expire on December 31, 2002; 797,000 options expire on June 29, 2003;
1,342,275 options expire on March 30, 2004; 200,000 options expire on July 21,
2004; and 500,000 options expire on December 31, 2004. The weighted average
grant date fair value of the options issued during 1997 and the weighted average
exercise price of those options amounted to $0.75 and $0.85, respectively. The
weighted average grant date fair value of the options issued during 1998 and the
weighted average exercise price of those options amounted to $0.68 and $2.00,
respectively. The weighted average grant date fair value of the options issued
during 1999 and the weighted averaged exercise price of those options amounted
to $0.75 and $0.95, respectively.
The options to acquire 2,242,275 of common stock issued during 1999 were granted
with exercise prices greater than the stock price on the grant date.
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.
F-17
<PAGE>
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 price 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss As reported $(14,917,868) $ (9,103,113) $(17,953,621)
Pro forma (16,314,519) (10,545,636) (19,325,148)
Net loss per common share As reported $ (0.20) $ (0.17) $ (0.43)
Pro forma (0.22) (0.20) (0.47)
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk- free
rates of 4.5% to 6.1%; volatility ranging from 96.01% to 105.51%, no assumed
dividend yield; and expected lives of 1.5 months to 3 years.
During 1997, the expiration date of certain options were 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. In 1997, $744,000 was charged to compensation expense and
is reflected in the net loss as reported.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES:
IRS Excise Tax Claim
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 claimed 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 1998, the Company reached a final 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. 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 February 1999, the Company paid all amounts due to the
IRS on this matter, which totaled approximately $1.3 million.
Environmental Lawsuit
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,
F-18
<PAGE>
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 and paid in 1998. This matter was fully and finally
settled during the first quarter of 1998 and all claims were dismissed with
prejudice as to all defendants, which included the Company and AIRI.
Employment agreements
The Company has employment agreements with its Chairman and its Chief Executive
Officer under which these officers receive an annual base salary of $250,000 and
$350,000, respectively.
Transfer of Funds - U.S. and Foreign
The Company currently operates in the Republic of Kazakhstan 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.
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, 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.
Lease commitments
The Company leases office space under two operating leases which expire in 2003
and 2006. Future minimum annual payments under these operating leases are
$459,000, $464,000, $474,000, $479,000 and $268,800 for 2000, 2001, 2002,
2003and 2004, respectively, and $268,800 thereafter.
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:
1999 1998 1997
---- ---- ----
Minimum rentals $ 431,242 $ 150,530 $ 158,313
Less - sublease rentals -- -- (21,740)
--------- --------- ---------
Total rent expense $ 431,242 $ 150,530 $ 136,573
========= ========= =========
Other Contingencies
In addition to certain matters described above, the Company and its subsidiaries
are party to various legal proceedings. 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.
F-19
<PAGE>
Trifinery V. American International Refinery, Inc. Etc. Cause No. 98-11453; in
the 269th Judicial District; in and For Harris County, Texas Plaintiff,
Trifinery, has filed suit in a Harris County District Court against the Company
and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI").
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) tortuous interference with
existing contractual relations. Generally, Trifinery has alleged that in
connection with the due diligence conducted by the Company and AIRI of the
business of 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 Trifinery. 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,
Trifinery sought injunctive relief. Specifically, Trifinery sought to enjoin the
Company and AIRI from: (1) offering employment positions to the key employees of
Trifinery; (2) contacting the suppliers, joint venture partners and customers of
Trifinery in the pursuit of business opportunities; (3) interfering with the
contractual relationship existing between Trifinery and St. Marks Refinery,
Inc.; and (4) disclosing or using any confidential information obtained during
the due diligence process to the detriment of Trifinery. The Company and AIRI
have asserted to a general denial to the allegations asserted by 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 27, 1999, 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 Trifinery in Texas
will be decided by a panel of three arbitration judges under the American
Arbitration Association rules for commercial disputes. Two arbitrators have been
identified by the parties and the third is in the process of being chosen. The
Company and AIRI are vigorously defending this matter and the Company's counsel
anticipates a favorable 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 Trifinery. On March 10, 1998, Trifinery 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 Trifinery's application for injunctive relief and adopted
the recommendations of the Magistrate, who found in part that Trifinery had
failed to prove a substantial likelihood of success on the merits. The District
Court's order was appealed by Trifinery to the United States Court of Appeals
for the Eleventh Circuit, but the Appellate Court denied Trifinery's motion for
injunction pending appeal. On appeal, the federal court found in favor of
Trifinery and issued a judgement related thereto for $175,000, which was paid by
the Company on behalf of St. Marks in March 1999. However, DSE, Inc. has agreed
to reimburse the Company $75,000 of the $175,000, pursuant to DSE, Inc.'s
indemnification of the Company included in the Stock Purchase Agreement under
which the Company purchased St. Marks. The remaining $100,000 was capitalized as
acquisition cost of the St. Marks Refinery.
Kazakhstan
On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakhstan ("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
Kazakhstan concession. As part of the acquisition, the Company is required to
perform certain minimum work programs over a five year period which consists of
the acquisition and processing of 3,000 kilometers of new seismic data,
reprocessing 500 kilometers of existing seismic data, and a minimum of 6,000
linear meters of exploratory drilling. In addition, the Company assumed an
obligation to pay the Kazakhstan Government three annual payments of $200,000
each beginning July 1998 for the purchase of existing seismic and geological
data on the Kazakhstan concession. The total cost remaining for this minimum
program is $5.6 million before the end of 2001.
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.
F-20
<PAGE>
Year 2000 Issues
The Company evaluated 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. As of March 31, 2000, the Company had not
encountered any negative effects relating to the Year 2000 issues, either
internally or with any of its vendors or suppliers.
NOTE 11 - INCOME TAXES:
The Company reported a loss from operations during 1997, 1998, and 1999 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 $52,000,000 which expire in years 2000 through
2019. Due to a change in control, as defined in Section 382 of the Internal
Revenue Code ("382"), which occurred in 1994 and 1998, 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 components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred taxes:
Net operating loss carryforwards 19,745,000 $ 14,807,000
Allowance for doubtful accounts 1,300,000 1,300,000
Depreciation, depletion, amortization and impairment (1,951,000) (1,650,000)
------------ ------------
Net deferred tax asset 19,094,000 14,457,000
------------ ------------
Valuation allowance $(19,094,000) $(14,457,000)
============ ============
</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 1999 of approximately $4,637,000 primarily reflects the increase in the
Company's net operating loss carryforwards during the year.
A reconciliation of the provision for income taxes to the statutory United
States tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1999 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax benefit computed at statutory rate $ (5,072,000) $ (3,095,000) $ (6,104,000)
Other, net 435,000 (212,000) 1,633,000
Increase in valuation allowance $ (4,637,000) $ (3,307,000) $ (4,471,000)
------------ ------------ ------------
Actual provision $ -- $ -- $ --
============ ============ ============
</TABLE>
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
and marketable securities. For investments, fair value equals quoted market
price. Trade accounts receivable outstanding at December 31, 1999 have been
collected in the normal course of business. An MIP note receivable of $1,493,750
received in the sale of the Colombia and Peru properties, as previously
discussed, was due during 1998 and in default and has been fully reserved at
December 31, 1999. An additional MIP note receivable of $1,252,696 also received
in the sale mentioned above and due in 2000 is payable out of production from
the Colombia properties. This note is carried at full value at December 31, 1999
and the Company has no reason to believe that it will not collect this
receivable. Fair value of fixed-rate long-term debt and notes receivable are
determined by
F-21
<PAGE>
reference to rates currently available for debt with similar terms and remaining
maturities. The Company believes the carrying value of its short-term and
long-term debt approximates fair value. The reported amounts of financial
instruments such as cash equivalents, accounts receivable, accounts payable,
short-term debt, 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, 1999.
Four of the Company's asphalt customers account for an aggregate of 54% of the
Company's sales in 1999. The Company has the ability to draw on it's customer's
posted performance bonds and personal guarantees to collect any past due
accounts.
The estimated fair value of the Company's financial instruments is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
MIP Notes Receivable $ 1,252,696 $ 1,252,696 $ 1,118,200 $ 1,118,200
Short-term debt $ 3,960,331 $ 3,960,331 $ 1,992,200 $ 1,992,200
Long-term debt $11,984,592 $11,984,592 $ 6,110,961 $ 6,110,961
</TABLE>
NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION:
The Company has had three reportable segments which are primarily in the
business of oil and natural gas, exploration, development, and production and
the refining and marketing of petroleum products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performances based on profit and loss
before income and expense items incidental to their respective operations. The
Company's reportable segments are managed separately because of their geographic
locations. Financial information by operating segment is presented below:
F-22
<PAGE>
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Geographic Segment
---------------------------------- Consolidated
1999 United States Colombia Kazakhstan Total
- ---- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Sales and other
operating revenue $ 8,137,867 $ -- $ -- $ 8,137,867
Interest income and other
corporate revenues 214,171
------------ ------------- ------------- ------------
Total revenue $ 8,137,867 -- -- 8,352,038
-------------
Costs and operating
expense 13,116,830 -- $ -- 13,116,830
------------ ------------- ------------- ------------
Operating profit (loss) $ (4,978,963) $ -- $ -- $ (4,764,792)
============ ============= ============
General corporate expense 3,652,497
Interest expense 6,500,579
------------
Net loss $(14,917,868)
============
Identifiable assets
at December 31, 1999 $ 33,877,437 $ -- $ 32,162,385 $ 66,039,822
============ ============= ============= ============
Corporate assets 3,618,447
------------
Total assets at
December 31, 1999 $ 69,658,269
============
Depreciation, depletion
and amortization $ 1,730,710 $ -- $ -- $ 1,730,710
------------ ------------- ------------- ============
Capital Expenditures,
net of cost recoveries $ 1,062,053 $ -- $ 8,498,390 $ 9,560,443
============ ============= ============= ============
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
Geographic Segment
------------------
Consolidated
1998 United States Colombia Kazakhstan Total
- ---- ------------- -------- ---------- -----
<S> <C> <C> <C> <C>
Sales and other
Refinery operating revenue(1) $ 11,394,009 $ -- $ -- $ 11,394,009
Interest income and other
corporate revenues 460,597
------------ -------- ------------ ------------
Total revenue 11,394,009 -- -- 11,854,606
Refinery costs and operating
expense 14,214,767 -- $ -- 14,214,767
------------ ------- ------------ ------------
Operating profit (loss) $ (2,820,758) $ -- $ -- $ (2,360,061)
============ ======= ============
General corporate expense 4,830,003
Interest expense 1,912,949
------------
Net loss $ (9,103,113)
============
Identifiable assets
at December 31, 1998 $ 35,234,530 $ -- $ 22,677,073 $ 57,911,603
============ ======= ============ ============
Corporate assets $ 2,949,731
------------
Total assets at
December 31, 1998 $ 60,861,334
============
Depreciation, depletion
and amortization $ 813,088 $ -- $ -- $ 813,088
============ ======= ============ ============
Capital Expenditures,
net of cost recoveries $ 15,494,897 $ -- $ 10,748,427 $ 26,243,324
============ ======= ============ ============
</TABLE>
(1) Refinery sales to Conoco accounted for 19% of the Company's sales during
the year.
F-24
<PAGE>
<TABLE>
<CAPTION>
Geographic Segment
------------------
Consolidated
1997 United States Columbia Kazakhstan Total
- ---- ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Sales and other
operating revenue $ 23,298 $ 292,947 $ -- $ 316,245
Interest income and other
corporate revenues 511,719
------------ ------------ ------------ ------------
Total revenue 23,298 292,947 -- $ 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
============
Depreciation, depletion
and amortization $ 704,048 $ 70,216 $ -- $ 774,264
============ ============ ============ ============
Capital Expenditures,
net of cost recoveries $ 5,606,031 $ -- $ 11,724,477 $ 17,330,508
============ ============ ============ ============
</TABLE>
F-25
<PAGE>
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Conversion of debentures $ 7,602,373 $15,526,380 $ 9,343,022
Stock issued in lieu of current liabilities 1,473,713 1,669,717 233,559
Issuance of warrants related to convertible debentures 1,584,106 936,459 6,264,411
Issuance of stock - unearned compensation -- 196,900 --
Issuance of stock - compensation -- -- 40,000
Issuance of stock - services 654,453 128,125 247,607
Issuance of stock and warrants - for oil and gas properties 1,852,366 -- 9,254,688
Issuance of stock- for refinery and equipment -- 1,687,500 --
Issuance of stock for collateral on debt $ 1,065,938 -- --
</TABLE>
Cash paid for interest, net of amounts capitalized, was $1,943,124, $62,532, and
$765,312, during 1999, 1998, and 1997, respectively. Cash paid for corporate
franchise taxes was $94,506, $60,078, and $70,003, during 1999, 1998 and 1997,
respectively.
Interest capitalized was $547,786; $7,055,340; $340,966 during the years ended
December 31, 1999, 1998, 1997, respectively.
NOTE 15 - SUBSEQUENT EVENTS:
Financing
In February 2000, the Company sold a $2,500,000 Bridge Note in a private
placement to a single investor. The note is a 13% six-month note due June 1,
2000. The proceeds of the sale were used for working capital.
NOTE 16 - EMPLOYEE BENEFITS:
During the fourth quarter of 1997 the Company established a defined contribution
401(k) Plan for its employees. The plan provides participants a mechanism for
making contributions for retirement savings. Each employee may contribute
certain amounts of eligible compensation. In July 1998, the Company amended the
plan to include a Company matching contribution provision. The plan allows for
the Company to match employee contributions into the plan at the rate of $0.50
for each $1.00 contributed by the employee, with a Company matching contribution
limited to a maximum of 5% of the employee salary. To be eligible for the
Company matching program, employees must be employed by the Company for 90 days.
Employer contributions vest evenly over three years from the employee's
anniversary date. The Company had contributions for the year ended December 31,
1999 totaling approximately $61,500.
F-26
<PAGE>
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
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-27
<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:
CAPITALIZED COSTS
<TABLE>
<CAPTION>
Colombia Kazakhstan
--------------------------------------- ---------------------------------------
1999 1998 1997 1999(1) 1998(1) 1997(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Unevaluated property not
subject to amortization $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477
Proved and unproved
properties -- -- -- -- -- --
Accumulated deprecia-
tion, depletion and
amortization -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net Capitalized costs $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477
=========== =========== =========== =========== =========== ===========
Costs incurred in oil and gas
property acquisition,
exploration and
development activities
Property acquisition $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477
costs - proved and
unproved properties
Exploration Costs -- -- -- -- -- --
Development costs -- -- -- -- -- --
Results of operations for oil
and gas producing activities
Oil and gas sales $ -- $ -- $ 292,947 $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------- -----------
Lease operating costs -- -- 98,766 -- -- --
Depreciation, depletion
and amortization -- -- 70,216 -- -- --
Provision for reduction
of oil and gas properties -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
-- -- 168,982 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
tax provision -- -- 123,965 -- -- --
Provision (benefit) for
income tax -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Results of operations $ -- $ -- $ 123,965 -- -- --
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Unevaluated property not
subject to amortization $31,556,376 $23,438,886 $11,724,477
Proved and unproved
properties -- -- --
Accumulated deprecia-
tion, depletion and
amortization -- -- --
----------- ----------- -----------
Net Capitalized costs $31,556,376 $23,438,886 $11,724,477
=========== =========== ===========
Costs incurred in oil and gas
property acquisition,
exploration and
development activities
Property acquisition $31,556,376 $23,438,886 $11,724,477
costs - proved and
unproved properties
Exploration Costs -- -- --
Development costs -- -- --
Results of operations for oil
and gas producing activities
Oil and gas sales $ -- $ -- $ 292,947
----------- ----------- -----------
Lease operating costs -- -- 98,766
Depreciation, depletion
and amortization -- -- 70,216
Provision for reduction
of oil and gas properties -- -- --
----------- ----------- -----------
-- -- 168,982
----------- ----------- -----------
Income (loss) before
tax provision -- -- 123,965
Provision (benefit) for
income tax -- -- --
----------- ----------- -----------
Results of operations -- -- $ 123,965
=========== =========== ===========
</TABLE>
(1) Unevaluated property not subject to amortization reflected in 1999 and 1998
includes Kazakhstan properties and non-Kazakhstan oil and gas properties.
(2) Unevaluated property not subject to amortization reflected in 1997
includes Kazakhstan properties only.
F-28
<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, 1999, 1998 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, 1997 -- -- 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) (14,679,400)
Production -- -- (118,273) -- (118,273) --
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1997 -- -- -- -- -- --
Revisions of
previous estimates -- -- -- -- -- --
Extensions, discoveries
and other additions -- -- -- -- -- --
Sales of reserves -- -- -- -- -- --
Production -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1998 -- -- -- -- -- --
Revisions of
previous estimates -- -- -- -- -- --
Extensions, discoveries
and other additions -- -- -- -- -- --
Sales of reserves -- -- -- -- -- --
Production -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1999 -- -- -- -- -- --
=========== =========== =========== =========== =========== ===========
</TABLE>
<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>
Net proved developed reserves
January 1, 1997 -- -- 948,721 6,321,100 948,721 6,321,000
December 31, 1997 -- -- -- -- -- --
December 31, 1998 -- -- -- -- -- --
December 31, 1999 -- -- -- -- -- --
</TABLE>
Changes to reserves in 1997 reflect the sale of the Colombia subsidiary as of
February 25, 1997.
F-29
<PAGE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The aggregate change in the standardized measure of discounted future net cash
flows was $0 in 1999 and 1998 and a decrease of $21,902,016 in 1997. The
principal sources of change were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Beginning of year $ -- $ -- $ 21,902,016
Sales and transfer of oil and gas produced,
net of production costs -- -- (161,813)
Net changes in prices and production costs -- -- --
Extensions, discoveries, additions and
improved recovery, less related costs -- -- --
Net change due to sales of minerals in place -- -- (21,740,203)
Previously estimated development costs
incurred during the year -- -- --
Changes in estimated future
development costs -- -- --
Revisions of previous reserve
quantity estimates -- -- --
Changes in timing and other -- -- --
Accretion of discount -- -- --
------------- ------------- ------------
End of year $ -- $ -- $ --
============= ============= ============
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
Stockholders and Board of Directors
American International Petroleum Corporation
New York, New York
We have audited the consolidated financial statements of American International
Petroleum Corporation and its subsidiaries as of December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999. Our
audits for such years also included the financial statement schedule of American
International Petroleum Corporation and its subsidiaries, listed in Item 14-2,
for each of the years in the three-year period ended December 31, 1999. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to report on this schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
HEIN + ASSOCIATES
Houston, Texas
March 30, 2000
F-31
<PAGE>
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged Deductions:
Beginning of to Costs and Accounts Written off
Description Year Expenses Against Allowance Balance at End of Year
<S> <C> <C> <C> <C>
December 31, 1997
Allowance for Doubtful Accounts $1,921 $ -- $ -- $1,921
December 31, 1998
Allowance for Doubtful Accounts $1,921 $1,494 $ -- $3,415
December 31, 1999
Allowance for Doubtful Accounts $3,415 $ -- $1,921 $1,494
</TABLE>
F-32
<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 amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
Dated: April 14, 2000
By: /s/ Denis J. Fitzpatrick
-----------------------------------
Denis J. Fitzpatrick
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the report has been signed below by the following persons in the
capacities and on the dates indicated:
By: /s/ George N. Faris Date: April 14, 2000
George N. Faris, Chairman
of the Board of Directors
By: /s/ Joe Michael McKinney Date: April 14, 2000
Chief Executive Officer
By: /s/ Denis J. Fitzpatrick Date: April 14, 2000
Denis J. Fitzpatrick
Vice President, Secretary,
Principal Financial and
Accounting Officer
By: /s/ Donald G. Rynne Date: April 14, 2000
Donald G. Rynne, Director
By: /s/ Daniel Y. Kim Date: April 14, 2000
Daniel Y. Kim, Director
By: /s/ William R. Smart Date: April 14, 2000
William R. Smart, Director
By: /s/ John H. Kelly Date: April 14, 2000
John H. Kelly, Director
F-33
<PAGE>
Exhibit Index
Exhibit
Number Description
- ------ -----------
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
F-34
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is made as of December 1, 1999,
by and between American International Petroleum Corporation., a Nevada
corporation ("AIPC") and St. Marks Refinery, Inc., a Florida corporation ("St.
Marks") (AIPC and St. Marks are collectively referred to as the "Debtors"), and
__________________________ ("Secured Party").
1. Definitions.
(a) Certain Defined Terms. The following terms, as used herein, have the
meanings set forth below:
"Accounts" means all of the following: (a) accounts receivable, contract
rights, book debts, notes, drafts and other obligations and indebtedness arising
from the sale, lease or exchange of goods or other property and/or the
performance of services; (b) rights in, to and under all purchase orders for
goods, services or other property; (c) rights to any goods, services or other
property represented by any of the foregoing (including returned or repossessed
goods and unpaid sellers' rights of rescission, replevin, reclamation and rights
to stoppage in transit); (d) monies due to or to become due under all contracts
for the sale, lease or exchange of goods or other property and/or the
performance of services (whether or not yet earned by performance); and (e)
Proceeds of any of the foregoing and all collateral security and guaranties of
any kind given by any Person with respect to any of the foregoing.
"Collateral" has the meaning assigned to that term in Section 3.
"Documents" means all "documents" (as defined in the UCC) or other receipts
covering, evidencing or representing goods.
"Equipment" means all "equipment" (as defined in the UCC), including,
without limitation, all machinery, motor vehicles, trucks, trailers, vessels,
aircraft and rolling stock and all parts thereof and all additions and
accessions thereto and replacements therefor.
"Event of Default" has the meaning assigned to that term in Section 9.
"Fixtures" means all plant fixtures, business fixtures, other fixtures and
storage office facilities and all additions and accessions thereto and
replacements therefor.
"General Intangibles" means all "general intangibles" (as defined in the
UCC), including, without limitation: (a) all agreements, leases, licenses and
contracts to which Debtor is or may become a party; (b) all obligations or
indebtedness owing to Debtor (other than Accounts) from whatever source arising;
(c) all tax refunds; (d) all intellectual property; (e) all choses in action and
causes of action; and (f) all trade secrets and other confidential information
relating to the business of Debtor.
"Instruments" means all "instruments," "chattel paper" or "letters of
credit" (each as defined in the UCC) including, but not limited to, promissory
notes, drafts, bills of exchange and trade acceptances.
"Inventory" means all "inventory" (as defined in the UCC), including,
without limitation, finished goods, raw materials, work in process and other
materials and supplies (including packaging and shipping materials) used or
consumed in the manufacture or production thereof and returned and repossessed
goods.
"Investment Property" means all "investment property" (as defined in the
UCC), including certificated and uncertificated securities, security
entitlements, securities accounts, commodity contracts and commodity accounts
(each as defined in the UCC).
<PAGE>
Note - means that certain Bridge Note of even date herewith, in the
original principal amount of $2,500,000, made and executed by AIPC and issued to
Secured Party, and all amendments and supplements thereto, restatements thereof
and renewals, extensions, restructuring and refinancings thereof.
Person - means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts or other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
Proceeds - means all proceeds of, and all other profits, rentals or
receipts, in whatever form, arising from the collection, sale, lease, exchange,
assignment, licensing or other disposition of, or realization upon, any
Collateral including, without limitation, all claims against third parties for
loss of, damage to or destruction of, or for proceeds payable under, or unearned
premiums with respect to, policies of insurance with respect to any Collateral,
and any condemnation or requisition payments with respect to any Collateral, in
each case whether now existing or hereafter arising.
Secured Obligations - has the meaning assigned to that term in Section 4.
Security Interests - means the security interests granted pursuant to
Section 3, as well as all other security interests created or assigned as
additional security for the Secured Obligations pursuant to the provisions of
this Agreement.
Securities Purchase Agreement - means that certain Securities Purchase
Agreement of even date herewith, by and between Debtors and Secured Party.
UCC - means the Uniform Commercial Code as in effect on the date hereof in
the State of New York, provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
Security Interest in any Collateral or the availability of any remedy hereunder
is governed by the Uniform Commercial Code as in effect on or after the date
hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such perfection or effect of perfection or non-perfection or availability of
such remedy.
2. Other Definition Provisions. References to "Sections", "subsections",
"Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and
Schedules, respectively, of this Agreement unless otherwise specifically
provided. Any of the terms defined in Section 1(a) may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference. All references to statutes and related regulations shall include
(unless otherwise specifically provided herein) any amendments of same and any
successor statutes and regulations.
3. Grant of Security Interests
In order to secure the payment and performance of the Secured Obligations
in accordance with the terms thereof, Debtors hereby grant to Secured Party a
continuing security interest in and to all right, title and interest of Debtors
in the collateral (and any Proceeds therefrom) described on Exhibit A hereto,
whether now owned or existing or hereafter acquired or arising (all being
collectively referred to as the "Collateral").
4. Security for Obligations
This Agreement secures the payment and performance of the Securities
Purchase Agreement and the Note, and all renewals, extensions, restructuring and
refinancings thereof (the "Secured Obligations").
5. Representations and Warranties. Debtors represent and warrant as
follows:
(a) Binding Obligation. This Agreement is the legally valid and binding
obligation of Debtors, enforceable against Debtors in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, or similar laws or equitable principles relating to or limiting
creditor's rights generally.
2
<PAGE>
(b) Ownership of Collateral. Debtors own the Collateral free and clear of any
lien, security interest or encumbrance. No effective financing statement or
other form of lien notice covering all or any part of the Collateral is on file
in any recording office.
(c) Office Locations; Debtors Names.
(i) As of the date hereof, the chief place of business, the chief
executive office and the office where each of the Debtors keeps its
books and records is located at the place specified on Schedule
5(d)(i) hereto. Except as set forth on Schedule 5(d)(i), Debtors have
not maintained any other address at any time during the five years
preceding the date hereof.
(ii) Debtors do not do business nor, as of the date hereof, has it
done business during the past five years under any corporate name,
trade name or fictitious business name except for Debtors' corporate
name set forth above and except as disclosed on Schedule 5(d)(ii)
hereto.
(d) Perfection. This Agreement, together with the UCC filings referenced
herein, and delivery of the Collateral to Secured Party as of the Closing (as
such term is defined in the Securities Purchase Agreement) create to secure the
Secured Obligations a valid, perfected and first priority security interest in
the Collateral, and all filings and other actions necessary or desirable to
perfect and protect such security interest have been duly taken. Debtors hereby
agree to deliver the Collateral to Secured Party as of the Closing.
(e) Governmental Authorizations; Consents. No authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body or consent of any other Person is required either (i) for the
grant by Debtors of the Security Interests granted hereby or for the execution,
delivery or performance of this Agreement by Debtors or (ii) for the perfection
of or the exercise by Secured Party of its rights and remedies hereunder (except
as may have been taken by or at the direction of Debtors or Secured Party) other
than the filing of financing statements in connection with the perfection of the
Security Interests.
(f) Value of Collateral. The aggregate value of the collateral as of the
date hereof is equal to not less than $2,500,000 and the value of the Debenture
described in Exhibit A has an outstanding principal amount as of the date hereof
of $1,500,000.00.
(g) Accurate Information. All information heretofore, herein or hereafter
supplied to Secured Party by or on behalf of Debtors with respect to the
Collateral is and will be accurate and complete in all material respects.
6. Further Assurances; Covenants
(a) Other Documents and Actions. Debtors will, from time to time, at their
expense, promptly execute and deliver all further instruments and documents and
take all further action that may be necessary or desirable, or that Secured
Party may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable Secured Party to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral. Without limiting the generality of the foregoing, Debtors will: (i)
execute and file such financing or continuation statements, or amendments
thereto, and such other instruments or notices, as may be necessary or
desirable, or as Secured Party may reasonably request, in order to perfect and
preserve the security interests granted or purported to be granted hereby; (ii)
at any reasonable time, upon demand by Secured Party exhibit the Collateral to
allow inspection of the Collateral by Secured Party or persons designated by
Secured Party; and (iii) upon Secured Party's request, appear in and defend any
action or proceeding that may affect Debtors' title to or Secured Party's
security interest in the Collateral.
(b) Secured Party Authorized. Debtors hereby authorize Secured Party to
file one or more financing or continuation statements, and amendments thereto,
relating to all or any part of the Collateral without the signatures of Debtors
where permitted by law.
3
<PAGE>
(c) Corporate or Name Change. Debtors will notify Secured Party promptly in
writing at least 30 days prior to (a) any change in Debtors' name and (b)
Debtors' commencing the use of any trade name, assumed name or fictitious name.
(d) Business Locations. Debtors shall give Secured Party thirty (30) days'
prior written notice of any change in its chief place of business or of any new
location of business or any new location for any of the Collateral. With respect
to any new location (which in any event shall be within the continental United
States), Debtors shall execute such documents and take such actions as Secured
Party reasonably deems necessary to perfect and protect the Security Interests.
(e) Bailees. No Collateral shall at any time be in the possession or
control of any warehouseman, bailee or Debtors' agents or processors without
Secured Party's prior written consent and unless Secured Party, if Secured Party
has so requested, has received warehouse receipts or bailee letters reasonably
satisfactory to Secured Party prior to the commencement of such storage. Debtors
shall, upon the request of Secured Party, notify any such warehouseman, bailee,
agent or processor of the Security Interests.
(f) Insurance. Debtors shall maintain insurance with respect to the
Collateral of types and in amounts that are customary for similarly situated
businesses. Debtors hereby direct all insurers under such policies of insurance
with respect to its assets to pay all material proceeds of such insurance
policies to Secured Party.
(g) Taxes and Claims. Debtors will pay (i) all taxes, assessments and other
governmental charges imposed upon the Collateral before any penalty accrues
thereon and (ii) all claims (including claims for labor, services, materials and
supplies) for sums that have become due and payable and that by law have or may
become a lien upon any of the Collateral before any penalty or fine is incurred
with respect thereto; provided that no such tax, charge or claim need be paid if
a Debtors are contesting same in good faith by appropriate proceedings promptly
instituted and diligently conducted and if Debtors have established such reserve
or other appropriate provision, if any, as shall be required in conformity with
generally accepted accounting principles consistently applied.
(h) Collateral Description. Debtors will furnish to Secured Party, from
time to time, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Secured
Party may reasonably request, all in reasonable detail.
(i) Use of Collateral; Renegotiation of Terms of Debenture. Debtors will
not use or permit any Collateral to be used unlawfully or in violation of any
provision of this Agreement or any applicable statue, regulation or ordinance or
any policy of insurance covering any of the Collateral. Notwithstanding the
foregoing, Secured Party hereby agrees to permit Debtors to renegotiate the
terms or form of the $3,000,000 Principal Amount 5% Exchangeable Subordinated
Debenture described on Exhibit A hereto, which Debenture constitutes a portion
of the Collateral; provided, however, the Debenture as so amended shall not have
a value of less than $1.5 million principal amount and shall have terms and
conditions no less favorable than those presently existing.
(j) Records of Collateral. Debtors shall keep full and accurate books and
records relating to the Collateral and shall stamp or otherwise mark such books
and records in such manner as Secured Party may reasonably request indicating
that the Collateral is subject to the Security Interests.
(k) Other Information. Debtors will, promptly upon request, provide to
Secured Party all information and evidence it may reasonably request concerning
the Collateral to enable Secured Party to enforce the provisions of this
Agreement.
7. Secured Party Appointed Attorney-in-Fact. Debtors hereby irrevocably
appoint Secured Party as its attorney-in-fact, with full authority in the place
and stead of Debtors and in the name of Debtors, Secured Party or otherwise,
from time to time in Secured Party's discretion to take any action and to
execute any instrument that Secured Party may deem necessary or advisable after
the occurrence and during the continuation of an Event of Default to accomplish
the purposes of this Agreement, including, without limitation:
4
<PAGE>
(a) to obtain and adjust insurance required to be paid to Secured Party;
(b) to ask, demand, collect, sue for, recover, compound, receive and give
acquittance and receipts for monies due and to become due under or in respect of
any of the Collateral;
(c) to file any claims or take any action or institute any proceedings that
Secured Party may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce the rights of Secured Party with respect to
any of the Collateral;
(d) to pay or discharge taxes or liens, levied or placed upon or threatened
against the Collateral, the legality or validity thereof and the amounts
necessary to discharge the same to be determined by Secured Party in its sole
discretion, and such payments made by Secured Party to become obligations of
Debtors, due and payable immediately without demand and secured by the Security
Interests; and
(e) generally to sell, transfer, pledge, make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as though
Secured Party were the absolute owner thereof for all purposes, and to do, at
Secured Party's option and Debtors' expense, at any time or from time to time,
all acts and things that Secured Party deems necessary to protect, preserve or
realize upon the Collateral.
Neither Secured Party nor any Person designated by Secured Party shall be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law other than as a result of Secured Party's or such Person's gross
negligence or wilful misconduct. This power, being coupled with an interest, is
irrevocable so long as this Agreement shall remain in force.
8. Transfers and Other Liens
Debtors shall not without Secured Party's prior written consent:
(a) Sell, assign (by operation of law or otherwise) or otherwise
dispose of, or grant any option with respect to, any of the Collateral.
(b) Create or suffer to exist any lien, security interest or other
charge or encumbrance upon or with respect to any of the Collateral to
secure indebtedness of any Person except for the security interest created
by this Agreement.
9. Events of Default.
The occurrence of any one or more of the following events shall constitute
an Event of Default by Debtors under this Agreement:
(a) General Default. AIPC shall fail to observe or perform any
covenant, obligation, term or condition contained in the Securities
Purchase Agreement, the Note, the Mortgage and Security Agreement by and
between St. Marks and Secured Party of even date herewith (the "Mortgage")
or this Agreement.
(b) Nonpayment. AIPC shall fail to pay any principal, interest or
other amount owing under the Note or Securities Purchase Agreement when and
as the same shall be due and payable.
(c) Material Misrepresentations. Any representation or warranty set
forth herein shall prove to be false in any material respect.
(d) Going Concern. Debtors shall terminate their corporate existence
or shall cease to operate as a going concern.
(e) Judgments. A judgment shall be entered against either Debtor or a
warrant of execution or similar process shall be issued or levied against
its property and within thirty (30) days after such judgment, warrant or
process shall not have been paid in full or proper appeal of the same made.
5
<PAGE>
(f) Debtors Relief - Voluntary. Debtors shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment
of a trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, or shall consent to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action to authorize any of the foregoing.
(g) Debtors Relief - Involuntary. Any involuntary case or other
proceeding shall be commenced against Debtors seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of thirty (30) days; or an order for relief shall be
entered against Debtors under the federal bankruptcy laws as now or
hereafter in effect.
(h) Other. The occurrence any "Event of Default" as that term is
defined in Securities Purchase Agreement or Mortgage.
10. Remedies
(a) If any Event of Default shall have occurred and be continuing, Secured
Party may declare the entire outstanding principal amount of the Note
immediately due and payable, provided that upon the occurrence of any Event of
Default set forth in Section 9(f) or 9(g), the outstanding principal amount of
the Note shall become automatically due and payable, without any notice, demand
or other action on the part of Secured Party.
(b) If any Event of Default shall have occurred and be continuing, Secured
Party may exercise in respect of the Collateral, in addition to all other rights
and remedies provided for herein or otherwise available to it, all the rights
and remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral) and also may: (i) require Debtors to, and
Debtors hereby agree that it will, at its expense and upon request of Secured
Party forthwith, assemble all or part of the Collateral as directed by Secured
Party and make it available to Secured Party at a place to be designated by
Secured Party which is reasonably convenient to both parties; (ii) without
notice or demand or legal process, enter upon any premises of Debtors and take
possession of the Collateral; (iii) without notice except as specified below,
sell the Collateral or any part thereof in one or more parcels at public or
private sale, at any of Secured Party's offices or elsewhere, at such time or
times, for cash, on credit or for future delivery, and at such price or prices
and upon such other terms as Secured Party may deem commercially reasonable;
(iv) notify the obligors on any Accounts or Instruments to make payments
thereunder directly to Secured Party; and (v) without notice to Debtors, renew,
modify or extend any of the Accounts and Instruments or grant waivers or
indulgences with respect thereto or accept partial payment thereof, or
substitute any obligor thereon, in any manner as Secured Party may deem
advisable, without affecting or diminishing Debtors' continuing obligations
hereunder. Debtors agree that, to the extent notice of sale shall be required by
law, at least ten days' notice to Debtors of the time and place of any public
sale or the time after which any private sale is to be made shall constitute
reasonable notification. At any sale of the Collateral, if permitted by law,
Secured Party may bid (which bid may be, in whole or in part, in the form of
cancellation of indebtedness) for the purchase of the Collateral or any portion
thereof for the account of Secured Party. Secured Party shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given.
Secured Party may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned. To
the extent permitted by law, Debtors hereby specifically waive all rights of
redemption, stay or appraisal which it has or may have under any law now
existing or hereafter enacted.
(c) Upon the occurrence of an Event of Default hereunder, Secured Party
shall have the right to enter upon the premises of Debtors where the Collateral
is located (or is believed to be located) without any obligation to pay rent to
Debtors, or any other place or places where the Collateral is believed to be
located and kept, to render the Collateral useable or saleable, to remove the
Collateral therefrom to the premises of Secured Party or any agent of Secured
Party for such time as Secured Party may desire in order to effectively collect
or liquidate the
6
<PAGE>
Collateral, and/or to require Debtors to assemble the Collateral and make it
available to Secured Party at a place or places to be designated by Secured
Party. Upon the occurrence of an Event of Default hereunder, Secured Party shall
have the right to take possession of Debtors' original books and records, to
obtain access to Debtors' data processing equipment, computer hardware and
software relating to the Collateral and to use all of the foregoing and the
information contained therein in any manner Secured Party deems appropriate; and
Secured Party shall have the right to notify postal authorities to change the
address for delivery of Debtors' mail to an address designated by Secured Party
and to receive, open and dispose of all mail addressed to Debtors.
11. Limitation on Duty of Secured Party with Respect to Collateral. Beyond
the safe custody thereof, Secured Party shall have no duty with respect to any
Collateral in its possession or control (or in the possession or control of any
agent or bailee) or with respect to any income thereon or the preservation of
rights against prior parties or any other rights pertaining thereto. Secured
Party shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which it accords its own property. Secured
Party shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of the act or
omission of any warehouseman, carrier, forwarding agency, consignee or other
agent or bailee selected by Secured Party in good faith.
12. Application of Proceeds. Upon the occurrence and during the continuance
of an Event of Default, the proceeds of any sale of, or other realization upon,
all or any part of the Collateral shall be applied: first, to all fees, costs
and expenses incurred by Secured Party with respect to the Collateral; and
second, to the Secured Obligations. Secured Party shall pay over to Debtors any
surplus and Debtors shall remain liable for any deficiency.
13. Expenses. Debtors agree to pay all insurance expenses and all expenses
of protecting, storing, warehousing, appraising, insuring, handling, maintaining
and shipping the Collateral, all costs, fees and expenses of perfecting and
maintaining the Security Interests, and any and all excise, property, sales and
use taxes imposed by any state, federal or local authority on any of the
Collateral, or with respect to periodic appraisals and inspections of the
Collateral, or with respect to the sale or other disposition thereof. If Debtors
fail promptly to pay any portion of the above expenses when due or to perform
any other obligation of Debtors under this Agreement, Secured Party may, at its
option, but shall not be required to, pay or perform the same, and Debtors agree
to reimburse Secured Party therefor on demand. All sums so paid or incurred by
Secured Party for any of the foregoing, any and all other sums for which Debtors
may become liable hereunder and all costs and expenses (including attorneys'
fees, legal expenses and court costs) incurred by Secured Party in enforcing or
protecting the Security Interests or any of their rights or remedies under this
Agreement shall be payable on demand, shall constitute Secured Obligations,
shall bear interest until paid at the rate provided in the Note and shall be
secured by the Collateral.
14. Termination of Security Interests; Release of Collateral. Upon payment
in full of all Secured Obligations, the Security Interests shall terminate and
all rights to the Collateral shall revert to Debtors. Upon such termination of
the Security Interests or release of any Collateral, Secured Party will, at the
expense of Debtors, execute and deliver to Debtors such documents as Debtors
shall reasonably request to evidence the termination of the Security Interests
or the release of such Collateral, as the case may be.
15. Notices. Each notice, communication and delivery under this Agreement:
(a) shall be made in writing signed by the party giving it; (b) shall specify
the section of this Agreement pursuant to which given; (c) shall either be
delivered in person or by telecopier, a nationally recognized next business day
courier service or Express Mail; (d) unless delivered in person, shall be given
to the address specified below; (e) shall be deemed to be given (i) if delivered
in person, on the date delivered, (ii) if sent by telecopier, on the date of
telephonic confirmation of receipt, (iii) if sent by a nationally recognized
next business day courier service with all costs paid, on the next business day
after it is delivered to such courier, or (iv) if sent by Express Mail (with
postage and other fees paid), on the next business day after it is mailed. Such
notice shall not be effective unless copies are provided contemporaneously as
specified below, but neither the manner nor the time of giving notice to those
to whom copies are to be given (which need not be the same as the addressee)
shall control the date notice is given or received. The addresses and
requirements for copies are as follows:
7
<PAGE>
If to AIPC:
American International Petroleum Corporation
444 Madison Avenue
New York, New York 10022
Telecopier No. (212)688-6657
Confirmation No. (212)688-3333
Attention: Denis Fitzpatrick, Chief Financial Officer
8
<PAGE>
If to St. Marks:
St. Marks Refinery, Inc.
5201 Westshore Boulevard
Tampa, Florida 33611-5699
Telecopier No. ________________
Confirmation No. _______________
Attention: Denis Fitzpatrick
If to Secured Party:
with a copy to:
16. Waivers, Non-Exclusive Remedies, Severability. Except as otherwise
expressly set forth in any particular provision of this Agreement, any consent
or approval required or permitted by this Agreement to be given by Secured Party
may be given, and any term of this Agreement or of any other instrument related
hereto or mentioned herein may be amended, and the performance or observance by
Debtors of any term of this Agreement, the Securities Purchase Agreement or the
Note may be waived (either generally or in a particular instance and either
retroactively or prospectively) with, but only with, the written specific
consent of Secured Party. No waiver shall extend to or affect any obligation not
expressly waived or impair any right consequent thereon. No course of dealing or
delay or omission on the part of Secured Party in exercising any right shall
operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or
demand upon Debtors shall entitle Debtors to other or further notice or demand
in similar or other circumstances. The rights in this Agreement, the Securities
Purchase Agreement and the Note are cumulative and are not exclusive of any
other remedies provided by law. The invalidity, illegality or unenforceability
of any provision in or obligation under this Agreement shall not affect or
impair the validity, legality or enforceability of the remaining provisions or
obligations under this Agreement.
17. Successors and Assigns. This Agreement is for the benefit of Secured
Party and its successors and assigns, and in the event of an assignment of all
or any of the Secured Obligations, the rights hereunder, to the extent
applicable to the Secured Obligations so assigned, may be transferred with such
Secured Obligations. This Agreement shall be binding on Debtors and their
successors and assigns, provided that Debtors shall not assign this Agreement
without Secured Party's prior written consent.
18. Changes in Writing. No amendment, modification, termination or waiver
of any provision of this Agreement or consent to any departure by Debtors
therefrom, shall in any event be effective without the written concurrence of
Secured Party and Debtors.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
20. Headings. Cross reference pages and headings contained herein are for
convenience of reference only, do not constitute a part of this Agreement, and
shall not be deemed to limit or affect any of the provisions hereof.
21. Counterparts. This Agreement may be executed by each party upon a
separate copy, and in such case one counterpart of this Agreement shall consist
of enough of such copies to reflect the signatures of all of the parties. This
Agreement may be executed in two or more counterparts, each of which shall be an
original, and each of which shall constitute one and the same agreement. Any
party may deliver an executed copy of this Agreement and of any documents
contemplated hereby by facsimile transmission to another party and such delivery
shall have the same force and effect as any other delivery of a manually signed
copy of this Agreement or of such other documents.
9
<PAGE>
DULY EXECUTED and delivered by the parties on the date first written above.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
ST. MARKS REFINERY, INC.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
10
<PAGE>
EXHIBIT A
COLLATERAL
1. Two thousand five hundred shares of St. Marks Refinery, Inc., a Florida
corporation ("St. Marks") evidenced by Stock Certificate No. 2, such shares
being the only outstanding shares of St. Marks.
2. The $_________________ Principal Amount 5% Exchangeable Subordinated
Debenture made by American International Petroleum Corporation of Columbia
payable to AIPC and dated February 25, 1997.
11
<PAGE>
SCHEDULE 5(d)(i)
12
<PAGE>
SCHEDULE 5.2(d)(ii)
13
Exhibit 4.35
EXHIBIT B
FORM OF COMMON STOCK PURCHASE WARRANT
<PAGE>
THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING
THIS COMMON STOCK PURCHASE WARRANT, AGREES FOR THE BENEFIT OF THE COMPANY THAT
SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE
COMPANY, (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS. IN ADDITION, A SECURITIES PURCHASE AGREEMENT ("PURCHASE
AGREEMENT"), DATED THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL
AGREEMENTS AMONG THE PARTIES, INCLUDING, WITHOUT LIMITATION, PROVISIONS WHICH
LIMIT THE EXERCISE RIGHTS OF THE HOLDER AND SPECIFY MANDATORY REDEMPTION
OBLIGATIONS OF THE COMPANY.
---------------------------------------
COMMON STOCK PURCHASE WARRANT
- --------------------------------------------------------------------------------
Number of shares: Holder:
Strike Price: US$
Expiration: December 1, 2004
For identification only.
The governing terms of this Warrant are set forth below.
- --------------------------------------------------------------------------------
American International Petroleum Corporation, a Nevada corporation (the
"Company"), hereby certifies that, for value received, ________________________
or assigns, is entitled, subject to the terms set forth below, to purchase from
the Company at any time or from time to time after the date hereof and prior to
the fifth anniversary hereof (the "Exercise Period"), at the Purchase Price
hereinafter set forth, _______________ (_________) shares of the fully paid and
nonassessable shares of Common Stock of the Company. The number and character of
such shares of Common Stock and the Purchase Price are subject to adjustment as
provided herein.
The purchase price per share of Common Stock issuable upon exercise of this
Warrant (the "Purchase Price") shall initially be equal to USD$0.________;
provided, however, that the Purchase Price shall be adjusted from time to time
as provided herein.
<PAGE>
Capitalized terms used herein not otherwise defined shall have the meanings
ascribed thereto in the Purchase Agreement. As used herein the following terms,
unless the context otherwise requires, have the following respective meanings:
(a) The term "Company" shall include American International Petroleum
Corporation and any corporation that shall succeed or assume the
obligations of such corporation hereunder.
(b) The term "Common Stock" includes (a) the Company's common stock,
par value $0.08 per share, (b) any other capital stock of any class or
classes (however designated) of the Company, authorized on or after such
date, the Holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on
any shares entitled to preference, and the Holders of which shall
ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even though the right
so to vote has been suspended by the happening of such a contingency) and
(c) any other securities into which or for which any of the securities
described in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate
or otherwise) that the Holder of this warrant at any time shall be entitled
to receive, or shall have received, on the exercise of this Warrant, in
lieu of or in addition to Common Stock, or that at any time shall be
issuable or shall have been issued in exchange for or in replacement of
Common Stock or Other Securities pursuant to Section 4 or otherwise.
1. Exercise of Warrant.
1.1 Method of Exercise.
(a) This warrant may be exercised in whole or in part (but not as to a
fractional share of Common Stock), at any time and from time to time during
the Exercise Period by the Holder hereof by delivery of a notice of
exercise (a "Notice of Exercise") substantially in the form attached hereto
as Exhibit A via facsimile to the Company. Promptly thereafter the Holder
shall surrender this Warrant to the Company at its principal office,
accompanied by payment of the Purchase Price multiplied by the number of
shares of Common Stock for which this Warrant is being exercised (the
"Exercise Price"). Payment of the Exercise Price shall be made, at the
option of the Holder, (i) by check or bank draft payable to the order of
the Company, (ii) by wire transfer to the account of the Company, (iii) in
shares of Common Stock having a Market Value on the Exercise Date (as
hereinafter defined) equal to the aggregate Exercise Price or (iv) by
presentation and surrender of this Warrant to the Company for cashless
<PAGE>
exercise (a "Cashless Exercise"), which such surrender being deemed a
waiver of the Holder's obligation to pay all or any portion of the Exercise
Price. In the event the Holder elects a Cashless Exercise (which such
election shall be irrevocable) the Holder shall exchange this Warrant for
that number of shares of Common Stock determined by multiplying the number
of shares of Common Stock being exercised by a fraction, the numerator of
which shall be the difference between the then current Market Value of the
Common Stock and the Purchase Price, and the denominator of which shall be
the then current Market Value of the Common Stock. If the amount of the
payment received by the Company is less than the Exercise Price, the Holder
will be notified of the deficiency and shall make payment in that amount
within five (5) business days. In the event the payment exceeds the
Exercise Price, the Company will promptly refund the excess to the Holder.
Upon exercise, the Holder shall be entitled to receive, promptly refund the
excess to the Holder. Upon exercise, the Holder shall be entitled to
receive, promptly after payment in full, one or more certificates, issued
in the Holder's name or in such name or names as the Holder may direct,
subject to the limitations on transfer contained herein, for the number of
shares of Common Stock so purchased. The shares of Common Stock so
purchased shall be deemed to be issued as of the close of business on the
date on which the Company shall have received from the Holder payment in
full of the Exercise Price (the "Exercise Date").
(b) Notwithstanding anything to the contrary set forth herein, upon
exercise of all or a portion of this Warrant in accordance with the terms
hereof, the Holder shall not be required to physically surrender this
Warrant to the Company. Rather, records showing the amount so exercised and
the date of exercise shall be maintained on a ledger substantially in the
form of Annex B attached hereto (a copy of which shall be delivered to the
Company or transfer agent with each Notice of Exercise). It is specifically
contemplated that the Holder hereof shall act as the calculation agent for
all exercises of this Warrant. In the event of any dispute or
discrepancies, such records maintained by the Holders shall be controlling
and determinative in the absence of manifest error. The Holder and any
assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following an exercise of a
portion of this Warrant, the number of shares of Common Stock represented
by this Warrant will be the amount indicated on Annex B attached hereto
(which may be less than the amount stated on the face hereof).
1.2 Regulation D Restrictions. The Holder hereof represents and warrants to
the Company that it has acquired this Warrant and anticipates acquiring the
shares of Common Stock issuable upon exercise of the Warrant solely for its own
account for investment purposes and not with a view to or for resale of such
securities unless such resale has been registered with the Commission or an
applicable exemption is available therefor. At the time this Warrant is
exercised, the Company may require the Holder to state in the Notice of Exercise
such representations concerning the Holder as are necessary or appropriate to
assure compliance by the Holder with the Securities Act.
<PAGE>
1.3 Company Acknowledgment. The Company will, at the time of the exercise
of this Warrant, upon request of the Holder hereof, acknowledge in writing its
continuing obligation to afford to such Holder the registration rights to which
such Holder shall continue to be entitled after such exercise in accordance with
the provisions of a Registration Rights Agreement dated the date hereof (the
"Registration Rights Agreement"). If the Holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford such Holder any such rights.
1.4 Limitation on Exercise. Notwithstanding the rights of the Holder to
exercise all or a portion of this Warrant as described herein, such exercise
rights shall be limited, solely to the extent set forth in the Purchase
Agreement as if such provisions were specifically set forth herein. In addition,
the number of shares of Common Stock issuable upon exercise of this Warrant is
subject to reduction as specified in Section 10.3 of the Purchase Agreement.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, and in any event within five (5)
business days thereafter, the Company at its expense (including the payment by
it of any applicable issue, stamp or transfer taxes) will cause to be issued in
the name of and delivered to the Holder thereof, or, to the extent permissible
hereunder, to such other person as such Holder may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock (or Other Securities) to which such Holder shall be entitled on such
exercise, plus, in lieu of any fractional share to which such Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
applicable Purchase Price, together with any other stock or other securities and
property (including cash, where applicable) to which such Holder is entitled
upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Extraordinary Events. The Purchase Price to be paid by
the Holder upon exercise of this Warrant, and the consideration to be received
upon exercise of this Warrant, shall be adjusted in case at any time or from
time to time pursuant to Article XI of the Purchase Agreement as if such
provisions were specifically set forth herein.
4. No Impairment. The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this warrant against
impairment. Without limiting the generality of the foregoing, the Company (a)
will not increase the par value of any shares of stock receivable on the
exercise of this Warrant above the amount payable therefor on such exercise, (b)
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and unassessable shares of
stock on the exercise of this Warrant, and (c) will not transfer all or
substantially all of its properties and assets to any other person (corporate or
otherwise), or consolidate with or merge into any other person or permit any
such person to consolidate with or merge into the
<PAGE>
Company (if the Company is not the surviving person), unless such other person
shall expressly assume in writing and will be bound by all the terms of this
Warrant.
5. Accountant's Certificate as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable on the exercise of this Warrant, the Company at its expense will
promptly cause independent certified public accountants of national standing
selected by the Company to compute such adjustment or readjustment in accordance
with the terms of this Warrant and prepare a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (a) the
consideration received or receivable by the Company for any additional shares of
Common Stock (or Other Securities) issued or sold or deemed to have been issued
or sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Purchase Price and the
number of shares of Common Stock to be received upon exercise of this Warrant,
in effect immediately prior to such issue or sale and as adjusted and readjusted
as provided in this Warrant. The Company will forthwith mail a copy of each such
certificate to the Holder of this Warrant, and will, on the written request at
any time of the Holder of this Warrant, furnish to such Holder a like
certificate setting forth the Purchase Price at the time in effect and showing
how it was calculated.
6. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the Holders of any class
or securities for the purpose of determining the Holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all the assets of the Company to or consolidation or
merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the Holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for then and in each such event the
Company will mail or cause to be mailed to the Holder of this Warrant a notice
specifying (i) the date on which any such record is to be taken for the purpose
<PAGE>
of such dividend, distribution or right, and stating the amount of character of
such dividend, distribution or right, and (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any, as of which the Holders of record of Common Stock (or Other Securities)
shall be entitled to exchange their shares of Common Stock (or Other Securities)
for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 20
days prior to the date specified in such notice on which any action is to be
taken.
7. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of this Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of this Warrant.
8. Exchange of Warrant.
(a) On surrender for exchange of this Warrant, properly endorsed and
in compliance with the restrictions on transfer set forth in the legend on
the face of this Warrant, to the Company, the Company at its expense will
issue and deliver to or on the order of the Holder thereof a new Warrant of
like tenor, in the name of such Holder or as such Holder (on payment by
such Holder of any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common
Stock called for on the face of the Warrant so surrendered.
(b) Upon written notice from the Purchasers pursuant to Section
2.5(b)(iii) of the Purchase Agreement that the Purchasers have elected to
transfer amongst each other a portion of this Warrant, and on surrender for
amendment and restatement of this Warrant, the Company at its expense will
issue and deliver to or on the order of the Holder thereof a new Warrant of
like tenor, in the name of such Holder as the Purchasers (on payment by
such Holder of any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common
Stock as set forth in such notice reflecting such transfer.
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate, and that such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
<PAGE>
11. Negotiability, etc.. This Warrant is issued upon the following terms,
to all of which each Holder or owner hereof by the taking hereof consents and
agrees:
(a) title to this Warrant may be transferred by endorsement and
delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is empowered
to transfer absolute title hereto by endorsement and delivery hereof to a
bona fide purchaser hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in favor of such
bona fide purchaser, and each such bona fide purchaser shall acquire
absolute title hereto and to all rights represented hereby;
(c) until this Warrant is transferred on the books of the Company, the
Company may treat the registered Holder hereof as the absolute owner hereof
for all purposes, notwithstanding any notice to the contrary; and
(d) notwithstanding the foregoing, this Warrant may be sold,
transferred or assigned except pursuant to an effective registration
statement under the Securities Act or pursuant to an applicable exemption
therefrom.
12. Registration Rights. The Company is obligated to register the shares of
Common Stock issuable upon exercise of this Warrant in accordance with the terms
of the Registration Rights Agreement.
13. Notices, etc.. All notices and other communications from the Company to
the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such Holder or, until any such Holder furnishes to the
Company any address, then to, and at the address of, the last Holder of this
Warrant who has so furnished an address to the Company.
14. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of New York. The headings in this
Warrant are for the purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
[Signature Page Follows]
<PAGE>
DATED as of December 1, 1999.
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
By: _____________________________________
Name: ___________________________________
Title: __________________________________
[Corporate Seal]
Attest:
By: ______________________________
Secretary
<PAGE>
EXHIBIT A
FORM OF NOTICE EXERCISE - WARRANT
(To be executed only upon exercise
of the Warrant in whole or in part)
To ____________________________________________
The undersigned registered Holder of the accompanying Warrant, hereby
exercises such Warrant or portion thereof for, and purchases thereunder,
__________(1) shares of Common Stock (as defined in such Warrant) and herewith
makes payment therefor in the amount and manner set forth below, as of the date
written below. The undersigned requests that the certificates for such shares of
Common Stock be issued in the name of, and delivered to, whose address is .
The Exercise Price is paid as follows:
|_| Bank draft payable to the Company in the amount of $_____________.
|_| Wire transfer to the account of the Company in the amount of
$___________.
|_| Delivery of __________________ previously held shares of Common Stock
having an aggregate Market Price of $_____________.
|_| Cashless exercise. Surrender of ___________ shares purchasable under
this Warrant for such shares of Common Stock issuable in exchange
therefor pursuant to the Cashless Exercise provisions of the Warrant,
as provided in Section 1.1(iv) thereto.
Upon exercise pursuant to this Notice of Exercise, the Holder will be in
compliance with the Limitation on Exercise (as defined in the Securities
Purchase Agreement pursuant to which this Warrant was issued).
Date: ___________________ ____________________________________________
(Name must conform to name of Holder as
specified on the face of the Warrant)
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
Address of Holder: _________________________
_________________________
Date of exercise: ________________________
- ----------
(1)Insert the number of shares of Common Stock as to which the accompanying
Warrant is being exercised. In the case of a partial exercise, a new Warrant or
Warrants will be issued and delivered, representing the unexercised portion of
the accompanying Warrant, to the Holder surrendering the same.
<PAGE>
<TABLE>
<CAPTION>
ANNEX B
WARRANT EXERCISE LEDGER
- ------------------------------------------------------------------------------------------------------------------------------------
Original Number of Warrants Exercise Price New Balance Issuer Holder
Date Warrants Exercised Paid of Warrants Initials Initials
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
Exhibit 10.8
AMENDMENT NO. 2 TO
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
EMPLOYMENT AGREEMENT WITH GEORGE N. FARIS DATED MAY 1, 1989
Amendment dated as of the ____ day of November 1999, between AMERICAN
INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation with executive offices
located at 444 Madison Avenue, New York, NY 10022 (the "Company"), and GEORGE N.
FARIS, residing at 33 Twin Lakes Lane, Riverside, Connecticut 06878 (the
"Employee").
W I T N E S S E T H
WHEREAS, the Employee is currently the Chief Executive Officer and Chairman
of the Board of Directors of the Company and has served the Company pursuant to
an Employment Agreement dated May 1, 1989, as amended by Amendment No. 1 dated
October 13, 1995 (collectively the "Agreement"); and
WHEREAS, the Company desires to retain the Employee, and the Employee is
willing to continue to serve, as Chairman of the Board of the Company, on the
terms and subject to the conditions, set forth below:
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the Company and the Employee do hereby agree to amend the
Agreement (hereinafter referred to as the "New Amendment") as follows:
1. Section 1 of the Agreement is amended and restated in its entirety as at
the date set forth above to read as follows:
"1. Employment. The Company shall employ the Employee, and the
Employee shall serve, as Chairman of the Board of Directors of the Company.
In addition, the Company shall use its best efforts to cause the Board of
Directors (the "Board") to nominate the Employee as a Director until
December 31, 2004.
2. Section 2 of the Agreement is amended so as to extend the term of the
Agreement through December 31, 2002 (the "Initial Term"). Any further extension
thereof shall be in writing signed by the parties. Notwithstanding the above and
in no manner limiting any of the rights and privileges of Employee hereunder, if
the Initial Term is not extended beyond December 31, 2002, the Company agrees to
retain the Employee as a consultant for a period of two calendar years ending
December 31, 2004 (the "Consulting Term"), provided the Employee is then willing
to serve as a consultant. During the Consulting Term, the Company shall pay the
Employee fifty percent (50%) of his annual base salary as at December 31, 2002,
together with the benefits set forth in Section 3(c) of the Agreement. Employee
agrees to devote up to 50% of the time he devotes to the business and affairs of
the Company under the terms of this New Amendment during the Consulting Term.
3. Section 3(a) of the Agreement is amended to reduce the fixed
compensation of the Employee from $350,000 to $250,000 per year effective
January 1, 2000.
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<PAGE>
4. Section 3(b) of the Agreement is amended and restated in its entirety as
at the date set forth above to read as follows:
"(b) Incentive Compensation. Employee shall be eligible to receive an
annual performance bonus up to a maximum of fifty percent (50%) of
Employee's then annual base salary. The performance criteria, the
measurement of performance, the mode of payment of any such performance
bonus (cash or otherwise) and the amount of such performance bonus shall be
as determined at the sole and absolute discretion of the Company's Board of
Directors. Employee shall be eligible to receive other bonuses, if any,
approved by the Board in accordance with the standard policies of Company
for compensation of senior executives or as the Parties may agree upon from
time to time."
5. Section 3(c)(iv) of the Agreement is amended and restated as at the date
set forth above to read as follows:
"3(c)(iv) Club Memberships. The Company will reimburse Employee for
the cost of membership in two New York City Clubs. The parties acknowledge
that such clubs are currently the Metropolitan and the University Clubs."
6. Section 3(v) of the Agreement is amended and restated as at the date set
forth above to read as follows:
"3(v). Medical Benefits. The Company shall provide Employee (and if
Employee shall predecease his spouse, his spouse) during the Initial Term,
and thereafter, unless Employee's employment is terminated by the Company
for cause or by Employee voluntarily prior to the end of the Initial Term,
with such medical and health insurance benefits as the Company normally
accords its executive officers. Such insurance shall cover the Employee and
his dependents (wife). To the extent Employee and his spouse cannot be
directly covered by the Company's insurance, the Company shall pay Employee
an equivalent amount in cash for the period he is not so covered."
7. Section 4 of the Agreement is amended and restated in its entirety as at
the date set forth above to read as follows:
"4. Duties; Time and Effort
(a) During the term of his employment hereunder, Employee shall
serve as Chairman of the Board. In that capacity, he shall preside at
meetings of the Board of Directors and have primary responsibility for
coordinating activities of the Board, as well as supervising investor
relations, corporate communications, regulatory compliance and other
legal matters and will report directly to the Board for such
activities.
(b) Employee shall devote only such time as he deems necessary to
perform the services described in Section 4(a). The Employee may
engage in other employment or activities during the term of this New
Amendment that do not conflict with the terms of Section (8) herein
below.
(c) The Employee's principal place of employment during the term
of this New Amendment will be at the Company's offices in New York,
New York."
2
<PAGE>
8. Section 5(a) of the Agreement is amended by adding at the end thereof,
the following language:
"Notwithstanding anything contained in this Section 5(a) to the
contrary, in the event Employee remains employed by the Company through the
end of the Initial Term, the restrictions set forth in this Section 5(a)
shall lapse and in its place for a period of 12 months after the
termination of his employment hereunder, Employee agrees not to directly,
or indirectly, (i) own any interest in (except for the permitted maximum
ownership interest permitted in Section 5(a) of the Agreement prior to the
execution of this New Amendment) any company or entity engaged in oil and
gas exploration or development activities within the same geological basin
as the Company has been so engaged within the preceding 12 month period, or
(ii) participate or engage in, assist, render any services (including,
without limitation, acting as an employee, consultant, advisor, agent,
independent contractor, officer or director) on behalf of any such company
or entity with respect to such oil and gas exploration or development
activities, unless approved by the Board."
9. Section 8(d) of the Agreement is amended and restated in its entirety as
at the date set forth above by adding a new subparagraph (d) to read as follows:
"(d) If Employee's employment is not renewed at the end of the Initial
Term or the Employee does not elect to serve as a consultant as
contemplated by Paragraph 2 of this New Amendment, or if the Employee
voluntarily terminates his employment or consulting services at any time
during the Initial Term or the Consulting Term, the Company shall be
obligated to pay the Employee, and the Employee shall be entitled to
receive from the Company, a severance payment in an amount equal to one
month's salary for each full year of employment beginning January 1, 1995.
The Employee's monthly base salary at December 31, 1999 shall be used in
calculating the amount of the severance payment payable hereunder. The
severance payment shall be due and payable within 30 days after written
notice from the Employee.
Anything to the contrary in the foregoing notwithstanding, except as
provided in Paragraph 10 of this New Amendment, if at any time prior to
December 31, 2004, the Board of Directors fails to nominate the Employee as
a Director, the Company shall be obligated to pay the Employee, and the
Employee shall be entitled to receive from the Company, in addition to any
severance payment to which he may be entitled under this section, all
compensation to which he is entitled under the terms of the Agreement and
this New Amendment through and including December 31, 2004 whether or not
the Employee serves as a consultant to the Company as contemplated by
Paragraph 2 of this New Amendment. Fifty percent of these amounts shall be
due and payable to the Employee within 30 days after the date upon which
the Board nominates directors for election with the balance due within 90
days of such date.
10. Section 9 of the Agreement shall be amended and reinstated, as at the
date set forth above to read as follows:
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<PAGE>
"9. Change in Control. If, within three (3) months following the
occurrence of a Change in Control, Employee elects to terminate his
employment with the Company and/or is no longer Chairman of the Board of
the Company or its successor, then, in lieu of any severance payments
hereunder, the Company shall (1) pay the Employee, within 10 days after
Employee's election, a lump sum cash payment in an amount equal to the
Change in Control Payment and (2) provide Employee with Change in Control
Benefits. If Employee's employment is terminated prior to the date the
Employee elects to terminate but it is reasonably demonstrated that such
termination (a) was at the request of a third party who has taken steps
reasonably calculated to effect a Change in Control or (b) otherwise arose
in connection with or in anticipation of a Change in Control, then, for all
purposes of this paragraph, such termination shall be considered to have
occurred immediately following the Change in Control and Employee's
election to so terminate. As used herein, the following terms shall mean:
A "Change in Control" shall be deemed to have occurred if (i) there
shall be consummated (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or
pursuant to which shares of the Company's common stock would be
converted in whole or in part into cash, securities or other property,
other than a merger of the Company in which the holders of the
Company's common stock immediately prior to the merger own immediately
after the merger a majority of the voting stock of the surviving
corporation, or (B) any sale, lease, exchange or transfer (in one
transaction or a series of related transactions) of all or
substantially all the assets of the Company, or (ii) the stockholders
of the Company shall approve any plan or proposal for the liquidation
or dissolution of the Company, or (iii) any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), other than the Company or a
subsidiary thereof or any employee benefit plan sponsored by the
Company or a subsidiary thereof, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding securities ordinarily
(and apart from rights accruing in special circumstances) having the
right to vote in the election of directors, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases
or otherwise, or (iv) at any time during a period of two consecutive
years, individuals who at the beginning of such period constituted the
Board of Directors of the Company shall cease to constitute at least a
majority thereof as a result of the election of individuals who were
not the nominees of the Board of Directors or (v) any other event
shall occur that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange
Act; provided, however, that the term "Change in Control" shall not
include (x) any of the foregoing events if approved by Employee or a
majority of the Board (for this purpose, consisting only of (1) the
individuals serving on the date of this Amendment, excluding
individuals who resign or do not stand for re-election after the
Effective Date, or (2) individuals as to whom Employee has signified
his acceptance in writing, or (y) any bona fide financing transaction
approved by the Board.
"Change in Control Benefits" shall mean continued coverage under the
4
<PAGE>
Company's medical, dental, and group life insurance plans for Employee
and those of Employee's dependents (including Employee's spouse) who
were covered under such plans on the day prior to Employee's
termination of employment with the Company for one year from the date
of such termination at no cost to Employee and Employee's dependents
(provided, however, that in the event that continued participation in
any such Company plan is for whatever reason impossible, Company shall
arrange upon comparable terms benefits substantially equivalent to
those that were provided under such Company plan).
"Change in Control Payment" shall mean an amount equal to 2.99 times
the greater of (i) $350,000 or (ii) Employee's annual base salary as
in effect on the date of termination.
All other terms of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this New Amendment to be
executed by a duly authorized officer and the Employee has signed this New
Amendment as of the day and year written below his signature hereto.
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
By: _____________________________
Daniel Kim
Chairman of the Compensation
Committee and on behalf of
The Board of Directors
EMPLOYEE:
_________________________________
George N. Faris
Date: ___________________________
Last printed 11/18/99 12:55 PM
5
Exhibit 10.9
July 21, 1999
Mr. J.M. McKinney
3605 Ella Lee Lane
Houston, Texas 77027
Dear Joe Mike:
This letter will evidence our agreement in connection with your employment as
President of American International Petroleum Corporation ("AIPC"). The terms
and conditions of your employment with AIPC are outlined below:
1. Position: You will be employed as President and Chief Operating Officer of
AIPC. As President of AIPC you will report directly to the chief executive
officer of AIPC. Additionally, you will be elected to and become Chairman of the
Board of Directors of all AIPC subsidiaries. Further, you will be appointed as
President of the Operating Committee of AIPC which operating committee is
comprised of certain of the senior executives of AIPC and/or its affiliated
companies.
2. Effective Date: Your employment will be effective July 21, 1999 but will not
commence until such time as your requested to do so by AIPC.
3. Location: Your office shall be in AIPC's corporate office in Houston, Texas.
However, the nature of your position will require extensive travel overseas.
4. Responsibilities: As the President of AIPC, you will be its chief operating
officer with responsibility for the general supervision, management, direction
and control of the business and officers of AIPC and its subsidiaries including
supervision and management of AIPC's daily operations and responsibility for
developing and carrying out AIPC's business plan and budget as approved by the
board of directors.
5. Salary: Your salary will be $300,000.00 per year, subject, however, to such
merit increases which shall be determined by the AIPC Board of Directors and the
CEO of AIPC based upon your performance and the performance of AIPC. During your
first year of employment, your base salary shall be $275,000 in cash plus 25,000
AIPC shares to be vested as follows:
a. 5,000 shares upon effect date of your employment.
b. 10,000 shares on December 31, 1999.
c. 10,000 shares on July 20, 2000
6. Option: You will be entitled to receive stock options to purchase shares of
AIPC common stock on the same basis as other senior executives of AIPC and its
affiliated companies; provided, however, upon commencement of your employment
with AIPC you will receive an option, exercisable at any time within five (5)
years from the date of your employment to purchase 200,000 shares of AIPC common
stock at a 10% premium of the closing bid price on the day immediately prior to
the date of your acceptance of this offer, , subject, however, to the following
vesting schedule:
1
<PAGE>
a. 70,000 shares will vest after one (1) full year of employment.
b. 70,000 shares will vest after two (2) full years of employment.
c. 60,000 shares will vest after three (3) full years of employment.
In addition you will be entitled to participate in the "1999 Challenge
Option Plan" and will receive an option to purchase 100,000 shares of AIPC stock
@ $2.00/share provided AIPC stock trades at or above $5.00/share for 15
consecutive days before December 31, 1999. The standard AIPC option agreement
enumerating the preceding will be prepared and sent to you by August 30, 1999.
7. Annual Bonus: You will be entitled an annual bonus based upon your
performance and AIPC's overall achievement of its corporate goals. The amount of
such bonus shall be determined at the discretion of the AIPC Board and the CEO
of AIPC and may be up to 50% of your base salary at that time..
8. Benefits: AIPC will include you and your direct eligible family members
within its medical and dental coverage subject to any applicable waiting period
and provisions concerning pre-existing medical conditions. Additionally, you
will be entitled to all other benefits that are made available to senior
executive of AIPC, including the right to participate in AIPC's 401(K)
Retirement savings Plan but subject to any applicable eligibility requirements.
You will be entitled to three (3) weeks of vacation for each year of your
employment. The company will provide you with a full-size leased automobile, or
at your option, you may elect an equivalent amount as a car allowance up to
$500/month. Business Class travel will be allowed for all international flights
and for all domestic flights over four (4) hours in length. You will be
reimbursed promptly for all reasonable expenses which you incur in connection
with your employment.
9. Executive Medical Evacuation Program: You will be included in the Executive
Medical Evacuation Program.
10. Term of Employment: Your employment shall be for a period of one (1) year
from the date of commencement and your term of employment shall be renewed
automatically for successive periods of one (1) year each unless either party
gives the other notice of termination at least ninety (90) days prior to any
anniversary date of your employment. In such event, your employment will
terminate on the anniversary date immediately following the date of notice.
Should the Company terminate your employment for cause, no notice will required
and all non-vested portion of your options will terminate immediately. However,
should the Company terminate your employment after one full year of employment
for no cause, then all your regular options will vest immediately
11. Severance Pay: You shall be entitled to one month of salary as a severance
payment for each full year of employment.
12. Ownership of Information: All documents, drawings, memoranda, notes,
records, files correspondence, manuals, models, specifications, computer
programs, E-mail, voice mail, electronic databases, maps, and all other writings
or materials of any type embodying any of information pertaining to the business
of AIPC which you have developed, utilized or had access to are and shall be the
sole and exclusive property of AIPC. Upon termination of your employment by
AIPC, for any reason, you shall promptly deliver the same, and all copies
thereof, to AIPC.
13. Non-Solicitation: During the term of your employment and for a period of two
(2) years thereafter, you will not, directly or indirectly, solicit or contact
any employee of AIPC, with a view to inducing or encouraging such employee to
leave the employ of AIPC for the purpose of being hired by you, an employer
affiliated with you or any competitor of AIPC, or during the term of this
agreement and for a period of one year thereafter engage in or
2
<PAGE>
be interested in (as an owner, partner, 2% shareholder in a publicly traded
company, employee, officer, director, agent, consultant or otherwise), solicit
any business from, or contact any person or entity engaged in oil and gas
exploration or development activities within the same geological basin as the
Company has been operating or has been actively seeking to be so engaged.
14. Applicable Law: This Agreement is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas.
If the foregoing is acceptable to you, please sign below.
Very truly yours,
_______________________________
George N. Faris, Chairman & CEO
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
ACCEPTED AND AGREED this
______ day of _____________, 1999
_________________________________
J. M. MCKINNEY
Exhibit 10.10
November 18, 1999
Mr. J.M. McKinney
3605 Ella Lee Lane
Houston, Texas 77027
Dear Joe Mike:
This letter, when countersigned by you, amends and supersedes the letter dated
July 21, 1999 (the "July 1999 Agreement") concerning the terms of your
employment with American International Petroleum Corporation ("AIPC or the
"Company").
1. Position: You will be employed as Chief Executive Officer and President of
AIPC. In addition, AIPC agrees to use its best efforts to cause your election to
its Board of Directors and as chairman of the Board of Directors of all its
subsidiaries. Further, AIPC will use its best efforts to cause your appointment
as President and Chief Executive Officer of the Operating Committee of AIPC,
which is comprised of certain of the senior executives of AIPC and/or its
affiliated companies.
2. Effective Date: This Agreement shall become effective as of December 1, 1999
and shall supersede the terms set forth in the 1999 Agreement.
3. Location: Your office shall be in AIPC's corporate office in Houston, Texas.
However, the nature of your position will require extensive travel overseas.
4. Responsibilities: As President and Chief Executive Officer of AIPC, you will
be responsible for directing the policies and management of AIPC and its
subsidiaries, as well as the general supervision and management of AIPC's daily
operations and for developing and implementing AIPC's business plan and budget
as approved by the Board of Directors. You shall report to the Company's Board
of Directors on all matters except with respect to investor relations, corporate
communications, regulatory compliance and legal matters you shall report to the
Chairman of the Board.
5. Compensation: Your base salary, $275,000 per year, will be increased to
$350,000 per year commencing January 1, 2000. In addition, you will be
entitled to bonuses (not to exceed 50% of your base compensation) and such
other incentive compensation as the Board of Directors in its sole and
absolute discretion may determine based upon your individual and AIPC's
performance.
3
<PAGE>
6. Shares: The 25,000 AIPC shares previously issued to you under the terms of
the July 1999 Agreement will become fully vested as of December 31, 1999.
7. Option: You will be eligible to participate in AIPC's stock option plans on
the same basis as other senior executives of AIPC and its affiliated companies.
In addition to the option to purchase 200,000 AIPC shares previously granted to
you in accordance with the terms of the July 1999 Agreement, you will be granted
options to purchase an additional 500,000 AIPC shares, 250,000 shares at an
exercise price of $1.00 per share and 250,000 shares of $0.50 per share. Options
to purchase 62,500 shares of each option will become exercisable on December 31,
1999, options to purchase a cumulative total of 125,000 shares of each option
will become exercisable on December 31, 2000, options to purchase a cumulative
total of 187,500 shares of each option will become exercisable on December 31,
2001 and options to purchase a cumulative total of 500,000 shares of each option
will become exercisable on December 31, 2002. Both options will expire on
December 31, 2004, or earlier upon your termination of employment in accordance
with the terms of the stock option plan.
8. Benefits: AIPC will include you and your direct eligible family members
within its medical and dental coverage subject to any applicable waiting period
and provisions concerning pre-existing medical conditions. Additionally, you
will be entitled to all other benefits that are made available to senior
executive of AIPC, including the right to participate in AIPC's 401(k)
Retirement Savings Plan but subject to any applicable eligibility requirements.
You will be entitled to an annual vacation of three (3) weeks. The company will
provide you with a full-size leased automobile, or at your option, you may elect
an equivalent amount as a car allowance up to $500/month. Business Class travel
will be allowed for all international flights and for all domestic flights over
four (4) hours in length. You will be reimbursed promptly for all reasonable
expenses which you incur in connection with your employment.
9. Executive Medical Evacuation Program. You will be included in the Executive
Medical Evacuation Program.
10. Term of Employment. This agreement shall have an initial term of three (3)
years commencing December 1, 1999 and ending November 30, 2003 and shall be
renewed automatically for successive periods of one (1) year each unless either
party gives the other notice of termination at least six months prior to the end
of the initial term or any renewal term. In such event, your employment will
terminate on the last day of the initial term or the renewal term, as the case
may be. Should the Company terminate your employment for cause, no notice will
be required and your employment and all of your options will terminate
immediately. However, should the Company terminate your employment without
cause, then all your options will vest immediately, except for options the
vesting of which are related to the attainment of specified objectives by you,
the Company or AIPC shares, which objectives have not been satisfied by the date
your employment is terminated.
11. Severance Pay. You shall be entitled to one month of salary as a severance
payment for each full year of employment with the Company, unless your
employment is terminated for cause. The severance payment shall be due and
payable within thirty (30) days.
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<PAGE>
12. Change in Control. If, within three (3) months following the occurrence of a
Change in Control (as defined below), you elect to terminate your employment
with the Company and/or are no longer the President and Chief Executive Officer
of the Company or its successor, then, in lieu of any severance payments
hereunder, the Company shall (1) pay you, within 10 days after your election, a
lump sum cash payment in an amount equal to the Change in Control Payment (as
defined below) and (2) provide you with Change in Control Benefits (as defined
below). If your employment is terminated prior to the date you elect to
terminate but it is reasonably demonstrated that such termination (a) was at the
request of a third party who has taken steps reasonably calculated to effect a
Change in Control or (b) otherwise arose in connection with or in anticipation
of a Change in Control, then, for all purposes of this paragraph, such
termination shall be considered to have occurred immediately following the
Change in Control and your election to so terminate. As used herein, the
following terms shall mean:
A "Change in Control" shall be deemed to have occurred if (i) there shall
be consummated (A) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted in whole or in part
into cash, securities or other property, other than a merger of the Company
in which the holders of the Company's common stock immediately prior to the
merger own immediately after the merger a majority of the voting stock of
the surviving corporation, or (B) any sale, lease, exchange or transfer (in
one transaction or a series of related transactions) of all or
substantially all the assets of the Company, or (ii) the stockholders of
the Company shall approve any plan or proposal for the liquidation or
dissolution of the Company, or (iii) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), other than the Company or a subsidiary
thereof or any employee benefit plan sponsored by the Company or a
subsidiary thereof, shall become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act) of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of
directors, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, or (iv) any other
event shall occur that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act;
provided, however, that the term "Change in Control" shall not include (x)
any of the foregoing events if approved a majority of the Board or (y) any
bona fide financing transaction approved by the Board.
"Change in Control Benefits" shall mean continued coverage under the
Company's medical, dental, and group life insurance plans for you and those
of your dependents (including your spouse) who were covered under such
plans on the day prior to your termination of employment with the Company
for one year from the date of such termination at no cost to you and your
dependents (provided, however, that in the event that continued
participation in any such Company plan is for whatever reason impossible,
the Company shall arrange
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<PAGE>
upon comparable terms benefits substantially equivalent to those that were
provided under such Company plan).
"Change in Control Payment" shall mean an amount equal to 2.99 times your
annual base salary as in effect pursuant to paragraph 5 immediately prior
to your termination of employment with the Company.
13. Ownership of Information. All documents, drawings, memoranda, notes,
records, files correspondence, manuals, models, specifications, computer
programs, E-mail, voice mail, electronic databases, maps and all other writings
or materials of any type embodying any of information pertaining to the business
of AIPC which you have developed, utilized or had access to are and shall be the
sole and exclusive property of AIPC. Upon termination of your employment by
AIPC, for any reason, you shall promptly deliver the same, and all copies
thereof, to AIPC.
14. Non-Solicitation. During the term of your employment and for a period of two
(2) years thereafter, you will not, directly or indirectly, solicit or contact
any employee of AIPC, with a view to inducing or encouraging such employee to
leave the employ of AIPC for the purpose of being hired by you, an employer
affiliated with you or any competitor of AIPC, or during the term of this
agreement and for a period of one year thereafter engage in or be interested in
(as an owner, partner, 2% shareholder in a publicly traded company, employee,
officer, director, agent, consultant or otherwise), solicit any business from,
or contact any person or entity engaged in oil and gas exploration or
development activities within the same geological basin as the Company has been
operating or has been actively seeking to be so engaged.
15. Applicable Law. This Agreement is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas.
If the foregoing sets forth the agreement between us, please countersign a
copy of this letter and return the same to me.
Very truly yours,
----------------------------------
George N. Faris, Chairman
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
ACCEPTED AND AGREED this
____ day of November, 1999
- -----------------------------
J. M. MCKINNEY
4
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