-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KP4FoZ+mupy7iJgFgewjduXX86QibKg4UVx5v1cfOhGvHBBFdMNUh9xJ6aHxj5Cr QA4bfExNauX5nUZEvFfm3A== 0000916641-98-000458.txt : 19980416 0000916641-98-000458.hdr.sgml : 19980416 ACCESSION NUMBER: 0000916641-98-000458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INTERNATIONAL PETROLEUM CORP /NV/ CENTRAL INDEX KEY: 0000799119 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 133130236 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14905 FILM NUMBER: 98594847 BUSINESS ADDRESS: STREET 1: 444 MADISON AVE STE 3203 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129563333 MAIL ADDRESS: STREET 1: 444 MADISON AVE STE 3203 CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 AIP 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 0-14905 AMERICAN INTERNATIONAL PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) Nevada 13-3130236 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 444 Madison Avenue, New York, NY 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 688-3333 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par value $.08 per share Class A Warrants (Title of Each Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock of the Registrant held by non-affiliates as of April 6, 1998 was approximately $187,000,000 (assuming solely for purposes of this calculation that all directors and officers of the Registrant are "affiliates"). The number of shares of Common Stock of the Registrant outstanding as of April 6, 1998 was 48,994,257. 1 PART I Item 1. BUSINESS General American International Petroleum Corporation ("AIPC" or the "Company"), was organized on April 1, 1929 under the laws of the State of Nevada under the name Pioneer Mines Operating Company. The Company's name was changed to its current name in 1982. The Company implemented the production and processing of asphalt, vacuum gas oil and other products at its subsidiary's Lake Charles, Louisiana refinery the first quarter of 1998 utilizing low-cost, low-gravity, high-sulpher crudes from Mexico and Venezuela and is engaged in oil and gas exploration and development in western Kazkastan. The Company is also seeking other oil and gas projects in the United States, Russia and Central Asia. The Company's wholly-owned subsidiary, American International Refinery, Inc. ("AIRI") is the owner of a refinery in Lake Charles, Louisiana (the "Refinery"). A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation tower (the "Crude Unit") was leased by AIRI to Gold Line Refining Ltd. ("Gold Line"), an independent refiner, from 1990 to March 20, 1997 under a lease agreement (the "Lease Agreement") between AIRI and Gold Line. See "Domestic Operations - Refinery" below. The Company is now operating the Refinery with its own personnel to produce asphalt and other products. See "Domestic Operations - Refinery" below. The Company's wholly-owned subsidiary, American International Petroleum Kazakstan ("AIPK") is the owner of a 70% working interest in a 20,000 square kilometer exploration block in western Kazakstan. See "International Exploration and Development" below. 1229329 Ontario ("Ontario"), a wholly-owned subsidiary of the Company organized under the laws of the Province of Ontario, Canada, was created specifically to enable the Company to margin or sell in Canada shares of common stock of Mercantile International Petroleum Inc. ("MIP"), which the Company received as partial proceeds from an asset sale, which occurred on February 25, 1997 when the Company sold all of the issued and outstanding shares of common stock of its wholly-owned oil and gas exploration and production subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC"), in an arms length transaction (the "MIP Transaction"). See "International Exploration and Development - Sale of South American Subsidiaries" below. In February 1998, the Company organized another wholly-owned subsidiary, American Eurasia Petroleum Corporation ("AEPC"), to conduct business in Russia and in Central Asia. The term the "Company" includes AIPC, AIRI, AIPCC, PAIPC, AIPK, Ontario, and AEPC, unless the context otherwise requires. Prior to the MIP Transaction and the implementation of its Kazakstan operations, the Company's principal oil and gas properties consisted of (i) between 40% and 80% of the working interest in all oil and/or gas wells drilled on approximately 33,000 acres in the Puli Anticline and the Toqui-Toqui fields, located in the Middle Magdalena Region of Colombia, South America and (ii) 65% of the working interest in approximately 27,000 acres of exploratory and development contract rights in the Talara Basin in Peru, South America. The discussions included herein contain forward-looking statements that involve risks and uncertainties, including the Company's continuing losses, working capital deficits, the marketability of the Company's securities obtained from MIP in connection with the MIP Transaction, the ability to enter into profitable contracts to utilize the Refinery, completion of construction projects and financing of refinery operations, the timely development and financing of new oil and gas projects, the impact of competitive products and pricing, and other risks detailed from time to time in the Company's SEC reports. Domestic Operations Refinery In July 1988, AIRI acquired the Refinery, which is located on 30 acres of land bordering the Calcasieu River near Lake Charles, Louisiana. The Company also owns 22 acres of vacant waterfront property adjacent to the Refinery and another 45 acres of vacant land across the highway from the Refinery. The river connects with the Port of Lake Charles, the Lake Charles Ship Channel and the Intercoastal Waterway. Most of the Refinery's feedstock and refined products are handled through the Refinery's barge dock at the river. The Company recommissioned and tested the Refinery during operations between February and July 1989. During that time it processed up to 24,000 barrels of oil per day. Numerous modifications were designed and implemented to bring the Refinery into compliance with new and existing environmental regulations and to facilitate production of higher value products. Completion of most environmental compliance projects and a military specification jet fuel ("JP-4") upgrade project at the Refinery occurred in 1990. 2 The main unit of the Refinery is the Crude Unit, which is capable of producing light naptha overhead and the following side cuts: heavy naptha, kerosene (for jet fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special #5 fuel oil. The Crude Unit is also suitable for adaptation to process sour crude oil. In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit (the "VDU") which was dismantled and moved to the Refinery. Construction of the VDU on the Refinery site was completed in 1993 and, for various economic reasons, the VDU has been idle since then. However, the Company recently completed the expansion of, and certain enhancements to the Crude Unit, VDU, and other components of the Refinery to enable the Company to produce conventional and polymerized asphalt, vacuum gas oil ("VGO"), diesel, and other products. Total petroleum storage capacity at the Refinery is 725,000 barrels. Storage tanks on the Refinery's land include 275,000 barrels of crude storage, 370,000 barrels of storage for finished product sales and 80,000 barrels of product rundown storage. The Refinery also has 20,000 barrels of waste water storage capacity. The Crude Unit was leased by AIRI to Gold Line from 1990 to March 20, 1997 under the Lease Agreement. The Lease Agreement was terminated because Gold Line was in default under the terms thereof. The Company filed suit for damages and received a judgment in its favor of $1.5 million. However, since Gold Line has filed for protection under Chapter 11 of the Bankruptcy Code, and there are certain secured creditors who have made significant claims against Gold Line, the total of which claims may exceed the total value of Gold Line's assets, the collectability of this judgment by the Company is uncertain. With the recent termination of the Lease Agreement on March 20, 1997, the Company has staffed and operates the Refinery with its own employees and all operations are now under the direct control of its management. Although the primary focus at the Refinery will be the production of conventional and polymerized asphalt and VGO, it will also produce roofing flux and smaller quantities of light-end products such as naphtha, fuel oil, diesel, and jet kerosene. With the completion of the Refinery expansion, the Company now has a basic foundation upon which to build its planned asphalt business. In addition to the manufacturing and sale of asphalt, VGO, roofing flux, and other products, the Company is capable of utilizing its facility as a toll processing terminal to provide a service to blend and polymerize asphalt for other companies. The Company's VGO can be sold to major gasoline refining companies and other refiners, which are prevalent in the Gulf Coast and use VGO as a feedstock for their catalytic cracking units. Although the Company has not signed any long-term agreements to sell VGO, there is a continuous demand for VGO, and the Company has received, and continues to receive, numerous inquiries from local and out-of-state refiners interested in purchasing VGO from the Refinery. Marketing of VGO and other non-asphalt products produced in the Refinery (constituting approximately 40% of the Refinery's production) is to be handled directly by Refinery personnel. The Company's anticipated asphalt terminalling and marketing operations for conventional and polymerized asphalt will initially be applicable only to the local truck rack paving market within an approximate 100 mile radius of the Refinery. This market segment represents approximately 25% of the total capacity of the Refinery. All other asphalt manufacturing and marketing opportunities, wholesale barge and rail car, or retail truck for roofing asphalts, industrial grade asphalts, and all other conventional and polymerized asphalt products will be developed by the Company beginning in 1998. The Company has engaged Materials Resources, Inc. ("MRI") as exclusive sales representative to market the Refinery's truck rack paving asphalt in Louisiana. MRI is an established supplier of asphalt, emulsions and aggregates in Louisiana, Mississippi and east Texas. In February 1998, the Company hired an asphalt sales manager for business in the State of Texas. Recent Developments In February 1998, the construction necessary to expand and enhance the Refinery was completed and the sale of asphalt commenced. The Company has not completed negotiations of any feedstock crude oil supply agreements, but it is currently in the midst of separate supply agreement negotiations with the Mexican and Venezuelan governments and major oil companies for the upcoming processing season. ST. MARKS REFINERY In March 1998, the Company signed an agreement, subject to certain conditions, to purchase the 20,000 barrels per day St. Marks Refinery and product storage terminal located on the St. Marks River near Tallahassee, Florida in a tax free exchange of stock worth up to $4.5 million. If the Company decides not to purchase the 55-acre facility, it has agreed to an annual evergreen lease of the Refinery under specific terms and conditions. The primary advantage to the Company of the St. Marks acquisition or lease, is the immediate increase of its retail presence from two to five states along the U.S. Gulf Coast, plus a 50% increase in storage tank capacity by adding 33 more tanks totaling more than 3 460,000 barrels to the Company assets. This transaction provides an opportunity for the Company to double the retail sales capacity of petroleum products manufactured at its Lake Charles, Louisiana Refinery through access to new asphalt product markets plus jet fuel, diesel and industrial fuel oil sales in Florida, Georgia and Alabama. Refinery Financing Activities Subsequent to the purchase of the Refinery, the Company entered into a series of transactions with MG Trade Finance Corp. ("MGTF") to finance the upgrade and operations of the Refinery. In 1990, AIRI entered into a loan and security agreement (the "Loan Agreement") with MGTF whereby MGTF loaned AIRI $9,855,000 to (i) repay certain of AIRI's prior obligations; (ii) fund certain improvements related to environmental regulations and production of J-4 jet fuel; and (iii) provide working capital. In order to secure AIRI's obligations under the Loan Agreement, AIRI granted MGTF a first priority security interest in the Refinery and in substantially all of the remainder of AIRI's assets. The Company also guaranteed AIRI's obligations under the Loan Agreement and pledged to MGTF all of the capital stock of AIRI. Pursuant to the Loan Agreement, the Company granted MGTF warrants to purchase 516,667 shares (as adjusted) of the Company's common stock, par value $.08, (the "Common Stock") at an exercise price of $7.50 per share, exercisable at any time prior to June 30, 1994 (the "MGTF Warrants"). The expiration dates of 246,667 of the MGTF Warrants were extended to June 30, 1997, and the exercise price was adjusted to $15.63 per share of common stock. In April 1993, the Company negotiated an amendment to the Loan Agreement whereby MGTF reduced the balance of the loan by $750,000 through the exercise of 100,000 warrants to purchase common stock of the Company. Also, in consideration for rescheduling the loan, MGTF received a fee of $100,000 and a warrant to acquire 100,000 shares of the Company's common stock at $16.88 per share. Such warrant was exercisable at any time prior to June 30, 1997. In July 1995, MGTF released all of its then-existing warrants for cancellation and received new warrants to purchase 150,000 shares of the Company's common stock at $2.00 per share anytime prior to March 31, 1998. These warrants were exercised by MGTF in October 1997. As part of certain negotiations related to the MIP Transaction, the Company and MGTF agreed to change the due date of the unpaid balance of the Loan Agreement of $2,108,000 to September 30, 1997 from March 31, 1998. In October 1997, the Company paid the total balance due on the Loan Agreement. INTERNATIONAL EXPLORATION AND PRODUCTION Generally, oil and gas exploration is extremely speculative, involving a high degree of risk. Even if reserves are found as a result of drilling, profitable production from reserves cannot be assured. Recent Developments ZAO NAFTA On March 18, 1998, the Company signed an agreement with Zao Nafta ("ZN") a Russian closed stock company (the "Option") in which the Company received a 90-day option to acquire a 75% working interest in a joint venture for the development of 17 oil and gas licenses (the "Licenses") in the Samara and Saratov regions of European Russia, covering approximately 877,000 acres. The Russian government companies, who performed the initial exploration program in these regions, estimated total aggregate proven recoverable reserves on the Licenses to be approximately 35 million barrels of oil. Should the Company decide to complete the transaction, pending confirmation of proven reserves and modification of certain license conditions, the Company would become Operator and would have complete control of all operations. It would also be required to make a minimum investment during the first 24 months of $25 million for the rework of 16 existing wells (which tested an aggregate rate of 6,200 barrels of oil per day), construction of all necessary infrastructure, seismic investigations, and processing and drilling of new wells. ZN agreed to use its best efforts to have the minimum investment requirement reduced by approximately 25% to $17.6 million, although such reduction is not a requirement for completion of the transaction. The Company agreed to pay $11 million for the 75% working interest, $4.7 million in cash and stock and $6 million from 25% of its future net production, including a refundable $300,000 cash payment for the option. After closing, the Company intends to commence a $2 million rework program on the 16 existing shut-in wells on the Samara license and place the wells in a productive mode of operation as soon as practicable. These shut-in wells are located in a developed area, with the necessary productive infrastructure in place to enable prompt sale of oil production, if and when this occurs. Sale of South American Subsidiaries 4 On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC") (the "Purchased Shares") to MIP in an arms length transaction. The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued (giving account to the contingent portion thereof which, pursuant to GAAP, was not recorded by the Company) at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC. (b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000. (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares"). (d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangeable Debenture"), exchangeable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or the Company may demand payment on that date of $1.5 million of the principal balance thereof. (e) A $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum. (f) Up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more than $20 million) payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future tax filings in Colombia. The Company utilized a substantial portion of the cash proceeds of the sale to repay the outstanding balance to MGTF on its 12% Secured Debentures, due December 31, 1997, to pay other debts, expand its refinery, and for general corporate use. Kazakstan Agreement On May 12, 1997, the Company, through its wholly-owned subsidiary, American International Petroleum Kazakstan ("AIPK"), entered into an agreement with MED Shipping and Trading S.A. ("MED"), a Liberian corporation with offices in Frankfurt, Germany, to buy from MED, in exchange for a combination of cash and stock, 70% of the stock of MED Shipping Usturt Petroleum Ltd. ("MSUP"), a Kazakstan corporation which owns 100% of the working interest in a Kazakstan Concession (the "License Area"). The Concession is located approximately 125 kilometers from Chevron's multi-billion-barrel Tengiz Oil field near the Caspian Sea, and is bordered to the west by both Oryx/Exxon and Amoco licenses and to the south by an ELF Acquitane license. Independent, preliminary, evaluation indicates potential recoverable reserves from 8 structures in the Concession area from Jurassic Age sandstones. Eight additional structures have been identified but have not been evaluated. The Company paid $100,000 in cash and 300,000 shares of its Common Stock to MED in return for the option to acquire a 40% working interest in the License Area. Further negotiations resulted in an increase in the working interest to 70%. As consideration for its 70% interest in MSUP, the Company issued an additional 2,950,000 shares of its Common Stock, and warrants to purchase an aggregate of 500,000 shares of its Common Stock at an exercise price of $2.00 per share. The definitive agreement under which MSUP is to explore and evaluate hydrocarbon reserves in the License Area provides for the payment of a commercial bonus of 0.5% of reserve value, a subscription bonus of $975,000, and grants MSUP the exclusive right to a production license upon commercial discovery. The term of the license is five years and may be extended for an additional 4 years. The five-year minimum work program required by the license calls for MSUP to acquire and process 3,000 kilometers of new seismic data, reprocess 500 kilometers of existing seismic data, and drill 6,000 linear meters. Initial production up to 650,000 barrels is exempt from royalty, which otherwise ranges between 6% and 26%, to be negotiated in conjunction with a production agreement with 5 the government. Income tax has been set at 30% and social programs payments at $200,000 annually during exploration. MSUP will be required to expend a minimum of $14.75 million over five years, of which $6.3 million is required in the initial three years. In addition, MSUP assumed an obligation to pay the Kazakstan government three annual payments of $200,000 each, beginning in July 1998, for the purchase of existing seismic and geological data on the License Area. AIPK recently contracted with two geophysical companies to acquire 2D seismic data on the License Area. One geophysical company is to concentrate on the Chikuduk, a 60 kilometer-long structure previously identified in the eastern section of the License Area, and the other will focus on areas west of the Chikuduk. The seismic is intended to assist in a determination of the feasibility of further exploration and potential siting of future exploratory drilling. Other Financings In March 1994, the Company completed an offering of rights to its shareholders. Each right was exercised for $3.00, and the holder received two shares of common stock and one redeemable warrant to acquire an additional share of common stock at any time prior to March 1, 1996 at an exercise price of $4.00 per share. The expiration date of these warrants was extended to April 9, 1998, but the exercise price remained at $4.00 per share. Since the MIP Transaction and the termination of its Lease Agreement with Gold Line, the Company has had no revenues from operations. Although it has utilized some of the proceeds from the MIP Transaction to fund the Refinery expansion and start-up processes, its activities in Kazakstan and other operations, such proceeds were inadequate to satisfy all of the Company's debt obligations and capital requirements. Therefore, during 1997, the Company issued various promissory notes, common stock, and convertible debentures in exchange for an aggregate of approximately $20.5 million through certain private placement and agreements, most of which were issued in reliance upon the safe harbor provided by Regulation S as promulgated under the Securities Act of 1933, as amended (the "Act"). The Company utilized most of the cash proceeds from these private placements to fund its operations and activities at the Refinery and in Kazakstan, for payment of debt, and for general corporate purposes. Competition The geographic location of the Refinery in Lake Charles, La. gives the Company a distinct freight advantage over other asphalt suppliers in the area. Most of the Company's competition in its planned asphalt manufacturing business will come from those refiners that do not have downstream processing choices such as the Company's. The major competitor in the local truck rack market is a blending plant operation over 75 miles away. The average distance from the Company's refinery to the nearest competing truck rack asphalt producing refinery ranges from 150 to over 200 miles away. The Company's major competitor for barge sales is located over 400 miles farther away from the Company's major markets than the Refinery. This distance equates to more than $1.30 per barrel freight advantage to the Company into the same markets. Due to highly volatile crude oil prices and environmental regulation, many small oil refineries have ceased or curtailed production. The Company also believes, although no assurance of this can be given, that the high costs of constructing new refineries, as well as the cost of updating and modifying inactive existing refineries will discourage new competition in the asphalt and refining businesses. The oil and gas industry, including oil refining, is highly competitive. The Company is in competition with numerous major oil and gas companies and large independent companies for prospects, skilled labor, drilling contracts, equipment and product sales contracts. Many of these competitors have greater resources than the Company's. Revenues generated by the Company's oil and gas operations and the carrying value of its oil and gas properties are highly dependent on the prices for oil and natural gas. The price which the Company receives for the oil or natural gas it may produce is dependent upon numerous factors beyond the control of the Company's management, the exact effect of which cannot be predicted. These factors include, but are not limited to, (i) the quantity and quality of the oil or gas produced, (ii) the overall supply of domestic and foreign oil or gas from currently producing and subsequently discovered fields, (iii) the extent of importation of foreign oil or gas, (iv) the marketing and competitive position of other fuels, including alternative fuels, as well as other sources of energy, (v) the proximity, capacity and cost of oil or gas pipelines and other facilities for the transportation of oil or gas, (vi) the regulation of allowable production by governmental authorities, (vii) the regulations of the Federal Energy Regulatory Commission governing the transportation and marketing of oil and gas, and (viii) international political developments, including nationalization of oil wells and political unrest or upheaval. All of the aforementioned factors, coupled with the Company's ability or inability to engage in effective marketing strategies, may affect the supply or demand for the Company's oil, gas and other products and, thus, the price attainable therefor. Financial Information Relating to Foreign and Domestic Operations and Export Sales The table below sets forth, for each of the last three fiscal years, the amounts of revenue, operating profit or loss and assets 6 attributable to each of the Company's geographical areas, and the amount of its export sales.
Sales to unaffiliated customers: 1997 1996 1995 United States $ 23,298 $2,596,917 $1,403,668 Colombia 292,947 1,508,260 1,214,213 Peru * * 166,069 Kazakstan - - - Sales or transfers between geographic areas: United States - - - Colombia - - - Peru - - - Kazakstan - - - Operating profit or (loss): United States (1,165,890) 980,874 (518,462) Colombia (170,424) 39,595 (299,188) Peru * (200,000) 100,928 Kazakstan - - - Identifiable assets: United States 21,159,627 12,895,332 13,565,280 Colombia - 14,641,646 14,136,257 Peru - 4,860,559 4,247,975 Kazakstan 11,724,477 - - Export sales: - - -
*Information was not available due to dispute with partner, which dispute was settled subsequent to the MIP Transaction. See Item 1 "Business - General". Insurance; Environmental Regulations The Company's operations are subject to all risks normally incident to (i) the refining and manufacturing of petroleum products; and (ii) oil and gas exploratory and drilling activities, including, but not limited to, blowouts, extreme weather conditions, pollution and fires. Any of these occurrences could result in damage to or destruction of oil and gas wells, related equipment and production facilities and may otherwise inflict damage to persons and property. The Company maintains comprehensive and general liability coverage, as is customary in the oil and gas industry and coverage against customary risks, although no assurance can be given that such coverage will be sufficient to cover all risks, be adequate in amount, or that any damages suffered will not be governed by exclusionary clauses, thereby rendering such coverage incomplete or non-existent to protect the Company's interest in specific property. The Company is not fully covered for damages incurred as a consequence of environmental mishaps. The Company believes it is presently in compliance with government regulations and follows safety procedures which meet or exceed industry standards. Marketing After satisfactorily completing the qualification requirements and asphalt facility inspection, the Company has received approval from the Louisiana Department of Transportation ("LADOT") Materials Inspection Division to have its paving asphalt products placed on the QPL-41 list of eligible suppliers. This enables the Company to bid on state and federal highway projects in the State of Louisiana and provides an asphalt quality assurance endorsement for non-state and federal projects as well. The Company has begun an aggressive campaign to secure asphalt supply sales agreements with Louisiana hot mix manufacturers both at recent highway bid lettings and through private conventional paving projects. In the Texas market, the Company has begun to expand its truck rack retail asphalt marketing efforts with the recent hiring of an asphalt sales manager with over 30 years experience in the Texas asphalt market. A recent inspection by the Texas Department of Transportation ("TXDOT") materials division resulted in an approval for the Company to bid on state and federal highway projects throughout Texas. 7 The Company has been very successful with its initial lettings in both Louisiana and Texas and has already secured orders and sales agreements in excess of several million dollars for its polymerized and conventional asphalt products. In addition, the Company is investigating the possibility of establishing two more truck rack retail locations outside the 100 mile radius of its current facility. These market opportunities have the potential to increase the Company's expansion into new profitable retail sales outlets at greater net-back margins than can be achieved in the wholesale barge markets. The Company is committed to continue an aggressive, expanding, retail market growth program across the Gulf Coast and into other various profitable geographic areas. Lease fees from Gold Line accounted for approximately 0%, 60% and 42% of the Company's 1997, 1996 and 1995 revenues, respectively. On March 20, 1997, the Company terminated the Lease Agreement with Gold Line. Oil and Gas Effective May 1, 1994, AIPCC entered into an agreement with Carbopetrol S.A. to sell all of its crude oil produced in Colombia. This contract was a 6-month renewable fixed-price sales contract for all crude oil produced by the Company from the Toqui-Toqui field. Payments were made in Colombian Pesos adjusted for expected exchange fluctuation. Prices were based on the price of local fuel oil and had an average price, net of transportation costs, an average price to the Company less transportation cost, of approximately $11.81 and $9.98 per barrel of oil in each of 1997 and 1996, respectively. In Peru, PAIPC's contract with PetroPeru provided for a flexible royalty rate based on the amount of production and world basket price for this contract area providing a net sales price to PAIPC of approximately 65% of the world basket price for the field, which, based on an average gross price of $16.53 per barrel of oil in each of 1997 and 1996, respectively, provided a net price to the Company of approximately $10.75 and $10.75 per barrel of oil, respectively. Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for 29%, 24%, and 39% of the Company's 1997, 1996 and 1995 revenues, respectively. Sales to Ecopetrol accounted for approximately 11%, 9%, and 10% of the Company's 1997, 1996 and 1995 revenues, respectively. A continuing market for any oil and gas that the Company may produce will depend upon numerous factors, many beyond the control of the Company, and most of which are not predictable. These factors include regulation of oil production, price controls on petroleum and petroleum products, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation facilities, the marketing of competitive fuels, and other matters affecting the availability of a ready market, such as fluctuating supply and demand. Sources and Availability of Raw Materials The Company plans to purchase all raw materials needed for its operations from suppliers and manufacturers located throughout the United States and internationally. The Company believes that these materials are in good supply and are available from multiple sources. Employees As of April 1, 1998, the Company employed 73 persons on a full-time basis, including 11 persons who are engaged in management, accounting and administrative functions for AIPC and 60 who are employed by AIRI on a full-time basis, including 10 persons who are engaged in management and administrative functions, and 2 who are employed by AIPK in management and administrative positions. The Company frequently engages the services of consultants that are experts in various phases of the oil and gas industry, such as petroleum engineers, refinery engineers, geologists and geophysicists. The Company believes that relations with its employees are satisfactory. Item 2. PROPERTIES Office Facilities The Company leases approximately 2,900 square feet of office space at 444 Madison Avenue, New York, N.Y. 10022. This space comprises the Company's principal executive office. The space was leased effective November 1, 1994 for a period of four years at a monthly rental rate of $7,325. In addition, the Company leases approximately 3,400 square feet of office space in Houston, Texas at a monthly rental of $3,607. This lease expires in November 30, 1998.. The Company also owns 87 acres of land in Lake Charles, Louisiana where the Refinery is located. In addition to the structures and equipment comprising the Refinery facility (See "Item 1 - Business - Domestic Operations - Refinery"), the Refinery assets include a 4,400 square foot office building, a new 2,200 square foot asphalt plant office, and a state-of-the-art laboratory, and two metal 8 building structures serving as work shops, maintenance and storage facilities with an aggregate square footage of approximately 4,300 square feet. Oil and Gas Acreage and Wells Gross acreage presented below represents the total acreage in which the Company owned a working interest on December 31, 1997, and net acreage represents the sum of the fractional working interests owned by the Company in such acreage. The table below indicates the Company's developed and undeveloped acreage as of December 31, 1997. Gross Gross Net Net Developed Undeveloped Developed Undeveloped Acreage Acreage Acreage Acreage Kazakstan - 4,734,097 - 3,313,868 The table below indicates the Company's gross and net oil and gas wells as of December 31, 1997. Gross wells represents the total wells in which the Company owned a working interest, and net wells represents the sum of the fractional working interests owned by the Company in such wells. Productive Wells ---------------- Total Oil Gas ----- --- --- Gross Net Gross Net Gross Net Kazakstan -- -- -- -- -- -- Oil and Gas Production The table below indicates the Company's net oil and gas production, by country, for each of the three years in the periods ended December 31, 1997, 1996, 1995, along with the average sales prices for such production during these periods. Production ---------- Oil (in Average Net Sales Gas Sales Price Barrels) Price (per Barrel) (in mcf) (per mcf) -------- ------------------ -------- --------- 1997-Colombia 18,625 $11.81 -- -- -Peru * * * * -Kazakstan -- -- -- -- 1996-Colombia 130,433 $10.46 -- -- -Peru * * -- -- 1995-Colombia 137,821 $8.01 -- -- -Peru 17,794 9.29 -- -- Average foreign lifting costs in 1997, 1996 and 1995 were approximately $5.31, $4.69 and $2.75 per equivalent barrel of oil, respectively. *Information not available due to dispute with partner, which dispute was resolved subsequent to the MIP Transaction. Reserves Huddleston & Co., Inc., petroleum and geological engineers, performed an evaluation to estimate proved reserves and future net revenues from oil and gas interests owned by AIPCC as of January 1, 1997. As of January 1, 1997, all of the Company's proved reserves were located in Colombia. The report, dated February 6, 1997, is summarized below. Future net revenues were calculated after deducting applicable taxes and after deducting capital costs, transportation costs and operating expenses, but before consideration of Federal income tax. Future net revenues were discounted at a rate of ten percent to determine the "present worth". The present worth was shown to indicate the effect of time on the value of money and should not be construed as being the fair 9 market value for the Company's properties. Estimates of future revenues did not include any salvage value for lease and well equipment or the cost of abandoning any properties. Colombian Reserves Future Revenues Net Oil Future Discounted (Barrels) Net Gas (mmcf) Revenues at 10% Proved Developed Producing 917,522 1,121.1 $9,379,548 $5,899,502 Proved Developed Non-Producing 31,199 5,200.0 4,070,584 2,274,369 Proved Undeveloped 3,061,698 8,358.3 28,474,585 14,183,770 --------- ------- ---------- ---------- TOTAL 4,010,419 14,679.4 $41,924,717 $22,357,641 ========= ======== =========== =========== Huddleston & Co., Inc. used the net market price, exclusive of transportation cost, of $12.20 per average barrel of oil, $0.40 per MCF for Toqui gas and $1.00 per MCF for Puli gas in their report. The oil prices utilized were the prices received by AIPCC as of December 31, 1996 for oil produced from AIPCC's leaseholds. The gas prices utilized were based on the Ecopetrol spot price at December 31, 1996. The prices were held constant throughout the report except for where contracts provide for increases. Operating costs for AIPCC's and PAIPC's leaseholds included direct leasehold expenses only. Capital expenditures were included as required for new development wells, developed non-producing wells and current wells requiring restoration to operational status on the basis of prices supplied by the Company. The report indicates that the reserves were estimates only and should not be construed as being exact quantities. In evaluating the information at their disposal concerning the report, Huddleston & Co. excluded from consideration all matters as to which legal or accounting interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering data and such conclusions necessarily represent only informed professional judgments. The data used in the Huddleston & Co. estimates were obtained from the Company and were assumed to be accurate by Huddleston & Co.. Basic geologic, engineering and field performance data are now maintained on file by MIP. Drilling The following table sets forth the gross and net exploratory and development wells which were completed, capped or abandoned in which the Company participated during the years indicated.
1997 1996 1995 --------------------- ------------------ ----------------- Gross Net Gross Net Gross Net Exploratory Wells: South America Oil - - 1.00 1.00 2.00 2.00 Gas - - - - - - Dry - - - - 1.00 1.00 - - ---- ---- TOTAL - - 1.00 1.00 3.00 3.00 Development Wells: South America Oil - - 1.00 .65 2.00 1.30 Gas - - - - - - Dry - - - - - - TOTAL - - 1.00 .65 2.00 1.30 ------ ------ ---- --- ---- ---- TOTAL - - 2.00 1.65 5.00 4.30 ====== ====== ==== ==== ==== ====
Item 3. LEGAL PROCEEDINGS Except as described below, there is no material litigation pending to which the Company is a party or to which any of its properties is subject. Further, except as described below, there are no proceedings known to be contemplated by United States or foreign persons 10 or governmental authorities relating to either the Company or its properties. In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the IRS was considering an assessment of excise taxes, penalties and interest of approximately $3,500,000 related to the sale of fuel products during 1989. The IRS claims that AIRI failed to comply with an administrative procedure that required sellers and buyers in tax-free transactions to obtain certification from the IRS. The Company believes that AIRI complied with the substance of the then existing requirements and that such sales were either tax-free or such excise taxes were paid by the end-users of such products. AIRI offered to negotiate a settlement of this matter with IRS Appeals since early 1993. Such negotiations included face-to-face meetings, numerous phone calls and written transmittals and several offers of settlement by both the Company and the IRS. During these negotiations, the IRS Appeals officers offered to waive all of the penalties and 75% of the amount of the proposed tax liability. However, AIRI rejected this offer and requested the IRS' National Office to provide technical advice to its Appeals officers. After numerous conferences and discussions with the National Office in 1995, the National Office issued an adverse Technical Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect that AIRI should be liable for the tax on the sale of diesel fuel for the first three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS Appeals officer indicated to AIRI that the IRS still wanted to negotiate a settlement. In November 1997, the Company reached an agreement (the "IRS Agreement") with the IRS to settle this matter by agreeing to pay an aggregate of $646,633 in tax, plus interest accrued for the applicable periods involved. The method and timing of such payment is now being discussed with IRS Collections in Houston, Texas. The Company's proposal calls for the payment of the tax and interest over a period of approximately one year. In the IRS Agreement, the IRS waived all penalties and 75% of the amount of the originally proposed tax liability. The Company continues to maintain that it is not liable for the excise taxes at issue, but agreed to settle the dispute at a significantly lower amount of liability in order to bring this long-running issue to conclusion. In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the "Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and d/b/a Gold Line Refinery Ltd., American International Refinery, Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket No. 94-396), was filed in the 14th Judicial District Court for the Parish of Calcasieu, State of Louisiana. Subsequently, several parties were joined as plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other things, that the defendants, including AIRI, caused or permitted the discharge of hazardous and toxic substances from the Lake Charles Refinery into the Calcasieu River. The plaintiffs sought an unspecified amount of damages, including special and exemplary damages. In October 1997 the Plaintiffs and Defendants agreed upon a cash settlement, of which the Company's share of $45,000 was placed into escrow in October 1997. The plaintiffs attorneys are preparing the necessary release forms in order to disburse the funds, which release is expected to be completed soon. NESTE TRIFINERY V. AMERICAN INTERNATIONAL REFINERY, INC. ETC. CAUSE NO. 98-11453; IN THE 269TH JUDICIAL DISTRICT; IN AND FOR HARRIS COUNTY, TEXAS Plaintiff, Neste Trifinery ("Neste"), has filed suit in a Harris County District Court against the Company and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI"). Neste has asserted claims for recovery of compensatory and punitive damages based on the following theories of recovery; (1) breach of contract, (2) disclosure of confidential information; and (3) tortious interference with existing contractual relations. Generally, Neste has alleged that in connection with the due diligence conducted by the Company and AIRI of the business of Neste, the Company and AIRI had access to confidential or trade secret information and that the Company and AIRI have exploited that information, in breach of an executed Confidentiality Agreement, to the detriment of Neste. Neste seeks the recovery of $20,000,000 in compensatory damages and an undisclosed sum in connection with its claim for the recovery of punitive damages. In addition to seeking the recovery of compensatory and punitive damages, Neste sought injunctive relief. Specifically, Neste sought to enjoin the Company and AIRI form: (1) offering employment positions to the key employees of Neste; (2) contacting the suppliers, joint venture partners and customers of Neste in the pursuit of business opportunities; (3) interfering with the contractual relationship existing between Neste and St. Marks Refinery, Inc.; and (4) disclosing or using any confidential information obtained during the due diligence process to the detriment of Neste. The Company and AIRI have asserted to a general denial to the allegations asserted by Neste. The Company and AIRI also moved the district court to refer the matter to arbitration, as provided for in the Confidentiality Agreement, and to stay the pending litigation. On March 27, 1998, the district court referred the matter to arbitration, as requested by the Company and AIRI, and stayed litigation. At present, the dispute existing between the Company, AIRI and Neste in Texas will be decided by a panel of three arbitration judges under the American Arbitration Association rules for commercial disputes. On February 26, 1998, the Company entered into a Letter Agreement with DSE, Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company agreed to purchase or lease the refinery and terminals facility located at St. Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its storage agreement with Neste. On March 10, 1998, Neste sued St. Marks Refinery, Inc. in the United states District Court for the Northern District of Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate termination of its storage agreement. Following an evidentiary hearing, the District Judge denied Neste's application for injunctive relief and adopted the recommendations of the Magistrate, who found in part that Neste had failed to prove a substantial likelihood of success on the merits. The District Court's order was appealed by Neste to the United States Court of Appeals for he 11 Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction pending appeal. The federal court action remains pending, but Neste has agreed to remove its product from the St. Marks facility by April 25, 1998. The Company presently plans to deliver product to the St. Marks, Florida facility and begin marketing operations during the last week of April, 1998. The Company and AIRI are vigorously defending the Texas matter, and the Company's counsel does not anticipate an unfavorable outcome, although a definitive outcome is not yet determinable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 12 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and its Class A Warrants are traded on NASDAQ/NMS under the symbols "AIPN" and "AIPNW", respectively (the Class A Warrants expired on April 9, 1998). The following table sets forth, for the periods indicated, the range of closing high and low bid prices of the Common Stock and the Class A Warrants as reported by NASDAQ. These quotations represent prices between dealers, do not include retail markups, markdowns or commissions and do not necessarily represent actual transactions.
Common Stock Class A Warrants ------------ ---------------- High Bid Low Bid High Bid Low Bid -------- ------- -------- ------- 1998 First Quarter $4.91 $3.19 $2.19 $0.75 1997 First Quarter $0.73 $0.31 $0.22 $0.06 Second Quarter 0.69 0.41 0.66 0.06 Third Quarter 7.13 0.44 4.00 0.13 Fourth Quarter 6.50 3.19 3.75 1.31 1996 First Quarter $0.88 $0.50 $0.19 $0.13 Second Quarter 0.69 0.44 0.16 0.06 Third Quarter 0.59 0.38 0.16 0.06 Fourth Quarter 0.73 0.31 0.12 0.06
At April 6, 1998, the Company had approximately 1,633 shareholders of record of its Common Stock. The Company estimates that an additional 12,000 shareholders hold Common Stock in street name. Dividend Policy The policy of the Board of Directors is to retain earnings to finance the operations and development of the Company's business. Accordingly, the Company has never paid cash dividends on its Common Stock, and no cash dividends are contemplated to be paid in the foreseeable future. Item 6. SELECTED FINANCIAL INFORMATION The following selected financial data for each of the five years in the period ended December 31, 1997 have been derived from the audited consolidated financial statements for those respective years. The selected financial data should be read in conjunction with the consolidated financial statements of the Company and the related notes included elsewhere herein:
For the Years Ended December 31, -------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Condensed consolidated statement of operations: Revenues $ 827,964 $ 4,003,006 $ 2,811,308 $ 3,508,514 $ 3,990,156 Net loss(1) 17,953,621 (4,652,207) (4,338,322) (10,966,914) (14,139,737) Net loss per share(2) (0.43) (0.16) (0.20) (0.65) (2.23) At December 31, -------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Condensed consolidated balance sheet: Working capital $ (693,676) $(9,823,229) $(3,402,543) $ (28,462) $ (7,507,056) Total assets 41,839,860 34,492,431 32,640,362 32,229,713 34,996,925 Total liabilities 9,335,479 13,164,713 11,349,670 10,255,687 18,878,148 Long-term debt -0- 6,766,592 7,302,671 7,770,171 12,034,691 Stockholders' equity 32,504,381 21,327,718 21,290,692 21,974,626 16,118,777 Cash Dividends declared -0- -0- -0- -0- -0- -----------------------
1) Net loss in 1996, 1994 and 1993 included a provision for the write down of the carrying costs of oil and gas properties of $200,000, $6,904,000 and $9,975,000, respectively. 2) Adjusted, as applicable, to give effect to the one-for-10 reverse stock split effectuated by the Company on October 28, 1993. 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources At December 31, 1997, the Company had unrestricted cash of $3,721,000 and $735,000 worth of marketable securities. During the year ended December 31, 1997, approximately $7,441,000 was used in operations. Net loss for the period totaled $17,954,000 (including $12,775,000 in non-cash elements, primarily: $774,000 in depletion and depreciation costs, $2,568,000 in certain bond and loan costs, loss on marketable securities of $6,053,000, adjustment of restated stock options of $745,000, adjusted loss on the sale of subsidiaries of $564,000, and inputed interest expenses of $1,899,000 related to the discount of certain convertible debentures. (See "Results of Operations-Interest Expense" below). Approximately $2,028,000 was used during the period to increase current assets other than cash, mostly for oil feedstock inventory, and approximately $17,000 was used to decrease accounts payable and accrued liabilities. Additional uses of funds during 1997 included additions to oil and gas properties of $2,664,000 and additions to refinery property and equipment of $5,582,000. Cash for operations during 1997 was provided, in part, by the issuance of Common Stock and convertible debentures in an aggregate amount of approximately $20,503,000, and from proceeds derived from the exercise of warrants and options of $1,272,000. During the years ended December 31, 1996 and December 31, 1995, the Company generated net losses of $4,652,000 and $4,338,000, respectively. Cash flow provided by and used in operations in 1996 and 1995, totaled $551,000 and $274,000, respectively. Cash flow from operations was adjusted for depreciation, depletion and amortization of $2,552,000 and $1,502,000 in 1996 and 1995, respectively, and non-cash provisions for bad debts in 1996 and 1995 of $682,000 and $711,000, respectively. Additionally, $1,007,000 and $189,000 in 1996 and 1995, respectively, were invested in current assets other than cash. Accounts payable increased by $2,352,000 and $1,985,000 in 1996 and 1995, respectively. Additional uses of funds included investments in oil and gas properties during 1996 and 1995 of $1,590,000 and $3,194,000, respectively, net of certain recoverable costs, and additions to refinery property and equipment of $1,713,000 in 1996. Total cash used in operations and investment activity during the years ended December 31, 1996 and 1995 was $2,763,000 and $3,481,000, respectively. Cash was provided primarily from outside sources, including $3,810,000 and $3,112,000 from the issuance of Common Stock and/or convertible debentures during 1996 and 1995, respectively. On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC") (the "Purchased Shares") in an arms length transaction (the "MIP Transaction") to Mercantile International Petroleum Inc. ("MIP"). The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued, giving account to the contingent portion thereof, which was not recorded by the Company pursuant to GAAP, at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC. (b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000. (c) 4,384,375 shares of MIP common stock (the "MIP Shares"). (d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangeable Debenture"), exchangeable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or the Company may demand payment on that date of $1.5 million of the principal balance thereof. (e) A $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum. (f) Up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more than $20 million) payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions available to AIPCC on future tax filings in Colombia. Since the MIP Transaction, the Company has sold approximately 1.4 million MIP Shares for total net proceeds of approximately $2 million. These proceeds were used primarily for working capital needs and payment of debt. In January 1998, the Company exercised its right, pursuant to the Exchangeable Debenture, to demand payment from MIP on February 25, 1998 of $1.5 million of the principal balance thereof, which payment, along with accrued interest, was paid to the Company by MIP in February 1998. Since the closing of the MIP Transaction and the termination of its Lease Agreement with Gold Line in the first quarter of 1997, the Company has had no revenues from operations, until late in the first quarter of 1998 when it implemented product sales at the Refinery. Although it has utilized some of the proceeds from the MIP Transaction to fund the Refinery expansion and start-up 14 processes, its activities in Kazakstan and other operations, such proceeds were inadequate to satisfy all of the Company's debt obligations and capital requirements. Therefore, during 1997, the Company issued various promissory notes and convertible debentures in exchange for an aggregate of approximately $20.5 million through certain private placement and agreements, most of which were issued in reliance upon the safe harbor provided by Regulation S as promulgated under the Act. In addition, the Company received approximately $1.3 million and $794,000 from the exercise of Company's warrants during 1997, and during the first quarter of 1998, respectively. The Company utilized most of the cash proceeds from these transactions to fund its operations and activities at the Refinery and in Kazakstan, for payment of debt, and for general corporate purposes. The Company's recent agreement with the IRS (See "Item 3 - Legal Proceedings") calls for the Company to pay $646,633 in excise taxes, plus interest occurred for the applicable periods. The Company has submitted a proposal to the IRS which would enable the Company to pay the tax and interest due over a period of approximately one year; the tax would be paid in four equal quarterly installments and the interest would be paid in a lump sum at the end of the annual payment period. Should the Company utilize the entire proposed pay-off period to pay the tax and interest, the total amount paid would be approximately $1.5 million. During the next twelve months, excluding its pending acquisitions in Florida and Russia, discussed above, the Company expects to expend up to $25 million, of which approximately $9 million is expected to be spent on costs associated with its Kazakstan project, $12 million for debt payment and other corporate uses, and the remainder for its refinery activities. However, if the Company obtains a joint venture partner in Kazakstan, its capital expenditure requirements there would be significantly less than $9 million during the next twelve months. In February 1998, the construction necessary to expand and enhance the Refinery was essentially completed and the Company began the processing of crude oils to produce asphalt and other products. The Company was very successful with its January and February 1998 bids in Texas and Louisiana in recent lettings for asphalt. In essentially one month it secured several million dollars worth of orders for polymerized and conventional asphalt products. Beginning in the second quarter of 1998, it plans to process an average of approximately 10,000 barrels of crude oil feedstock per day. The Company has warrants outstanding which, if exercised, would provide it with approximately $14 million to fund its capital and other commitments. However, there can be no assurance that a sufficient number of warrants will be exercised to provide the Company with all of the capital it requires. In addition, the Company is having discussions with various companies who have expressed an interest in participating with the Company in its endeavors in Kazakstan and in Louisiana. In April 1998, the Company reached an Agreement with certain institutional investors which will provide it with up to $52 million in private debt and equity financing (the "Debt and Equity Financing") to be used by the Company on an as needed basis over a two year period. Initial funding could start as early as April 20, 1998, pending the execution of definitive documents scheduled for April 15, 1998. Depending on its needs, the Company could use a portion or all of the facility. The closing of the Debt and Equity Financing will ensure that the Company has the capital necessary to fund its obligations and operations, at least through the year ended December 31, 1999. The Company plans to utilize its existing working capital and proceeds from the exercise of warrants until the cash flows anticipated from its asphalt operations in 1998 are sufficient in nature to satisfy its needs. In the event the Debt and Equity Financing is not consummated, or a sufficient number of warrants are not exercised, or if the Company is unable to obtain sufficient alternative financing, or if its asphalt operations are less successful than anticipated, certain projects may be delayed or canceled. Impact of Changing Prices The Company's revenues, its ability to repay indebtedness and the carrying value of its oil and gas properties owned are affected from time to time by changes in oil and gas prices. Oil and natural gas prices are subject to substantial seasonal, political and other fluctuations that are beyond the ability of the Company to control. Since crude oil prices are an important determining factor in the carrying value of oil and gas assets, significant reductions in the price of crude oil could require non-cash write-downs of the carrying value of those assets. Results of Operations The following table highlights the results of operations for the years ended December 31, 1997, 1996 and 1995.
For the Years Ended December 31, ------------------------------------------------------ 1997 1996 1995 Exploration and Production Activity: Colombia Properties(1): 15 Revenue - Oil Sales (000's) $261 $1,365 $1,104 Lease Operating Expenses (000's) $99 $612 $364 Production Volume - Barrels 18,625 130,433 137,821 Average Price per Bbl $14.01 $10.46 $8.01 Production Cost per Bbl $5.31 $4.69 $2.65 DD&A per Bbl (2) $3.77 $3.77 $3.86 Peru Properties (3)(4): Revenue - Oil Sales (000's) - - $166 Lease Operating Expenses (000's) - - $65 Production Volume - Bbls - - 17,794 Average Price per Bbl - - $9.29 Production Cost per Bbl - - $3.66 DD&A per Bbl - - - Refinery Operations(5): Refinery Lease Fees (000's) - $2,468 $1,185 Average Daily Throughput (Bbls) - 13,138 8,116 Average Throughput Fee - $.50 $0.40 ----------------------
(1) Reflects activity through the closing of the MIP Transaction on February 25, 1997. (2) Excludes provision for reduction of oil and gas properties of $200,000 in 1996. (3) Information for 1996 was not available due to a dispute with a joint venture partner. (4) No DD&A was calculated since all properties and related capital expenditures in Peru were considered as unevaluated and therefore were excluded from the DD&A calculation in each of 1997, 1996 and 1995. (5) Earned lease fees of $442,714 in 1997 were not recorded as revenues due to circumstances surrounding the cancellation of the Lease Agreement. See "Business - Domestic Operations - Lease Agreement". Refinery Operations For the Year Ended December 31, 1997 compared to the Year Ended December 31, 1996 The Company leased the Refinery to Gold Line from 1990 until March 20, 1997 when the Company terminated the Lease Agreement. As lessee, Gold Line was responsible for all operating costs of the refinery. The Company charged Gold Line a fee for each barrel of feedstock processed at the Refinery. The fee during 1995 was $0.40 per barrel of throughput, which increased to $0.50 per barrel on January 1, 1996 and continued at this level until the Lease was terminated. During the short period of time in which Gold Line operated the Refinery in 1997, it processed approximately 885,000 barrels of product, creating a liability of approximately $443,000 in lease fees due to the Company. Because of previous non payment of lease fees and other items of default under the terms of the Lease Agreement, Gold Line was evicted from the Refinery premises on March 20, 1997, and subsequently filed for protection under Chapter 11 of the Bankruptcy Code. See "Business - Domestic Operations - Refinery". Due to these circumstances no refinery lease fee revenues were recorded for 1997. For the Year Ended December 31, 1996 compared to the Year Ended December 31, 1995 Refinery lease fee revenue increased by approximately 108% in 1996 to $2,468,000 compared to $1,185,000 in 1995. The increase was due to the increase in the throughput processing fee from $0.40 to $0.50 per barrel processed and in the increase in its throughput barrels by 62% during 1996, primarily due to Gold Line having its feedstock financing in place throughout 1996 compared to being shutdown for the first quarter of 1995 due to a lack of financing. Oil and Gas Production Activity For the Year ended December 31, 1997 compared to the Year Ended December 31, 1996 The results of operations for Colombia and Peru for 1997 reflect results for the period through February 25, 1997, the date of the sale of the Colombia and Peru subsidiaries, compared to twelve full months of operations in 1996. For the Year ended December 31, 1996 compared to the Year ended December 31, 1995. Oil production in 1996 decreased to 130,433 barrels of oil from 155,615 in 1995, a 16% 16 decrease. Approximately 11% of the 16% decrease was attributed to the lack of any production from the Peru properties during 1996. Average oil prices, net of transportation, increased, however, by 25% or $1.97 per barrel to $9.98 in 1996, as compared to $8.01 in 1995 due to renegotiated oil sales contracts and higher oil prices in 1996. The increase in oil prices during 1996 more than offset the decline in oil production for period, resulting in a 7% increase in oil revenues in 1996 compared to 1995. Production costs had a net increase of $181,000 or 42% in 1996 compared to 1995. Transportation costs of $63,000 accounted for 17% of the increase in 1996. During 1996, an increase in G&A overhead allocation of $107,000 to production costs accounted for 29% of the increase. This increase in overhead allocation is directly related to a corresponding decrease in total G&A expenses. Other Income For the Year ended December 31, 1997 compared to the Year Ended December 31, 1996 Other income increased during 1997 to approximately $567,000 from $171,000 in 1996, due primarily to a $446,000 increase in interest income in 1997 to $465,000, compared to $19,000 in 1996. This improvement is attributable to an increase in funds on deposit during 1997 compared to 1996 and to an accretion of interest on notes receivable of $168,000 during 1997. An additional increase of approximately $50,000 was attributable to a non-cash income item as a result of a negotiated reduction in certain accounts payable. These increases were partially offset by decreases of approximately $102,000 in foreign exchange rate gains and other income in Colombia and Peru in 1997 compared to 1996. For the Year ended December 31, 1996 compared to the Year Ended December 31, 1995 Other income decreased by approximately $185,000 (52%) during 1996 to $171,000 compared to $356,000 in 1995. This was due primarily to a decrease in interest income of 92% to $19,000, compared to $228,000 in 1995, related to a decrease in funds on deposit during 1996, and to the Company not recognizing $108,000 of interest income during 1996, related to notes due from Gold Line. General and Administrative For the Year ended December 31, 1997 compared to the Year ended December 31, 1996 Total General and Administrative expenses (G&A) increased during 1997 by approximately $1,551,000 or 50% compared to 1996, primarily due to non-cash charges of $745,000 from the extension of expiration dates on certain outstanding employee stock options and $225,000 for stock options issued for investor relations costs. A non-recurring $695,000 payroll expense to partially compensate key employees whose salaries had remained unchanged for the past five years was also incurred. Property insurance and property taxes increased by $123,000 and $167,000, respectively, which costs were previously paid by Gold Line prior to its eviction from the Refinery in March 1997. Legal fees increased by approximately $87,000, primarily related to certain legal matters involving Gold Line during the year. During the expansion of the Company's Refinery , which commenced during 1996, approximately $622,000 of G&A expenses were capitalized to the project in 1997, compared to $275,000 capitalized in 1996. For the Year ended December 31, 1996 compared to the Year ended December 31, 1995 Total General & Administrative Expenses ("G&A") decreased during 1996 by $496,000 or 14% compared to 1995. There was an additional $400,000 increase in 1996 in the provision for excise tax compared to the $250,000 provision charged in 1995. Decreases in other G&A expenses during 1996 compared to 1995 were: decrease in payroll expense of $95,000, decrease in professional and consulting fees of $93,000, decrease in insurance costs of $56,000, and an increase in the capitalized and reimbursed G&A expenses of $137,000. During the expansion of the Company's Refinery , approximately $275,000 of G&A expenses were capitalized. Depreciation, Depletion and Amortization For the Year ended December 31, 1997 compared to the Year ended December 31, 1996 Depreciation, Depletion, and Amortization declined approximately $491,000 during 1997 compared to 1996, which was directly related to the sale of all of the Company's oil and gas subsidiaries on February 25, 1997. For the Year ended December 31, 1996 compared to the Year ended December 31, 1995 Depreciation, Depletion, and Amortization declined slightly during 1996 as compared to 1995, primarily due to a slight decrease in oil production during 1996 versus 1995. 17 Interest For the Year ended December 31, 1997 compared to the Year ended December 31, 1996 Interest expense increased by $3,846,000 in 1997 compared to 1996, due primarily to $1,899,000 in imputed interest, recorded for discounted convertible debentures, discussed below, and a $2,964,000 increase in bond costs expensed in 1997. Interest expense of $1,899,000 and $1,216,000 for 1997 and 1996, respectively, was related to the presumed incremental yield the investor may derive from the discounted conversion rate of such instruments issued by the Company during these years. Management believes that the related amount of interest recorded by the Company is not necessarily the true cost to the Company of the instruments it issued and that it may be reasonable to conclude that the fair value of the Common Stock into which these securities may be converted was less than such stock's quoted market price at the date the convertible securities were issued (considering factors such as the period for which sale of the stock is restricted, which in certain cases was as long as six months, large block factors, lack of a sufficiently-active market into which the stock can be quickly sold, time value, etc.). However, generally accepted accounting principles require that an "intrinsic value" of the conversion feature at the date of issuance should be accounted for and that such incremental yield should be measured based on the stock's quoted market price at the date of issuance, regardless if such yield is assured. The Company expenses and also capitalizes certain other costs associated with the offering and sale of debentures. Capitalized costs are amortized as interest expense over the life of the related debt instrument. These costs include the accounting for Common Stock warrants issued with and related to certain convertible debentures, commissions paid, and certain legal expenses. Sales of debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As a result, debenture costs incurred and amortized in 1997 increased by $2,964,282 to $3,253,035, compared to a total of $289,000 in 1996. For the Year Ended December 31, 1996 compared to the Year ended December 31, 1995 Interest expense increased by $1,781,000 in 1996 compared to 1995, due primarily to $1.2 million in imputed interest recorded for discounted convertible debentures and to $450,000 in interest expense related to a pending Excise Tax dispute with the IRS. Debenture costs incurred and amortized in 1996 increased by $183,000 to $289,000 as compared to 1995. These costs were related to debentures outstanding at December 31, 1995. Realized and Unrealized Loss on Marketable Securities As partial proceeds from the MIP Transaction, the Company received approximately 4.4 million shares of MIP common stock valued at $2.00 per share. However, since the closing, the market value of MIP's shares have declined to $0.56 per share at December 31, 1997. The Company sold and disposed of approximately 1,441,000 shares of the MIP shares during 1997 for proceeds of approximately $1,979,000. The Company has recorded an aggregate net realized and unrealized loss of $6,053,298 as of December 31, 1997. Loss on Sale of Assets The Company recorded an aggregate $564,000 loss on the sale of two of its' wholly-owned subsidiaries which includes the current discount to fair value of the $3 million Exchangeable Debenture and the $1.4 million performance earn-out, both received in the MIP Transaction. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 follows Item 14 of this Report and is hereby incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 PART III. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the Company's executive officers and directors. Year First Name Age Position(s) Became a Director ---- --- ----------- ----------------- George N. Faris 57 Chairman of the Board and 1981 Chief Executive Officer William R. Smart 77 Director 1987 Daniel Y. Kim 73 Director 1987 Donald G. Rynne 75 Director 1992 - --------------------------- Biographical Information Dr. George N. Faris has been Chairman of the Board of Directors and Chief Executive Officer of the Company since 1981. Dr. Faris was the founder of ICAT, an international engineering and construction company, and served as its President from ICAT's inception in 1972 until October 1985. Prior to 1972, Dr. Faris was the President and Chairman of the Board of Directors of Donbar Development Corporation, a company engaged in the patent development of rotary heat exchangers, devices which exchange heat from medium to medium and on which Dr. Faris was granted a number of patents. Dr. Faris received a Ph.D. in Mechanical Engineering from Purdue University in 1968. Mr. William R. Smart has served as a member of the Company's Board of Directors since June 1987. Since November 1, 1983, Mr. Smart has been Senior Vice President of Cambridge Strategic Management Group, a management consulting firm.. Mr. Smart was Chairman of the Board of Directors of Electronic Associates, Inc., a manufacturer of electronic equipment, from May 1984 until May 1992. He has served on the Board of Directors of Apollo Computer Company and Executone Information Systems, Inc. Mr. Smart is presently a director of National Datacomputer Company and Hollingsworth and Voss Company. Mr. Smart received a B.S. degree in Electrical Engineering from Princeton University in 1941. Dr. Daniel Y. Kim has served as a member of the Company's Board of Directors since July 1987. Dr. Kim is a Registered Professional Geophysicist in California and Colorado. From 1981 until 1984, Dr. Kim was President and Chief Executive Officer of Kim Tech, Inc., a research and development company. In 1984, Kim Tech, Inc. was merged into Bolt Industries, a public company engaged in the manufacture of air guns and auxiliary equipment used to generate shock waves in seismic exploration for oil, gas and minerals. Dr. Kim has been a director of Bolt Industries since 1984. From 1977 to 1980, Dr. Kim was Chief Consulting Geophysicist for Standard Oil Company of Indiana. Dr. Kim received a B.S. degree in Geophysics and a Ph.D. degree in Geophysics from the University of Utah in 1951 and 1955, respectively. Mr. Donald G. Rynne has served as a member of the Company's Board of Directors since September 1992. Mr. Rynne has been Chairman of the Board of Directors of Donald G. Rynne & Co., Inc., a privately owned company engaged in international consulting and trading, since founding that company in 1956. Mr. Rynne is involved in international maritime trading and consulting, dealing primarily in the Middle East in hydrocarbon products and capital equipment. Mr. Rynne received a B.A. degree from Columbia University in 1949. The business background of each executive officer of the Company, to the extent not set forth above, is described below. Mr. Denis J. Fitzpatrick, 53, joined the Company in August 1994 as Vice President, Secretary and Chief Financial Officer. During the previous five years, Mr. Fitzpatrick was the Chief Financial Officer of Nahama & Weagant Energy Company, a publicly traded independent exploration and production company. Mr. Fitzpatrick has held various accounting and financial management positions during his 24 years in the oil and gas industry. He has also served as a Director or Officer of the Council of Petroleum Accountants Society; served on the Tax Committee of the American Petroleum Institute and as a member of the American Management Association. Mr. Fitzpatrick received a B.S. degree in Accounting from the University of Southern California in 1974. 19 Mr. William L. Tracy, 50, has been employed by the Company since February 1992 and has been Treasurer and Controller of the Company since August 1993. From May 1989 until February 1992, Mr. Tracy was self-employed as an energy consultant with the Commonwealth of Kentucky. From June 1985 until May 1989, Mr. Tracy served as President of City Gas and Transmission Corp., a public oil and gas production and refining company. He received his BBA from Bellarmine College in Louisville, Kentucky in 1974. The Company's executive officers are appointed annually by the Board to serve until their successors are duly elected and qualified. Item 11. EXECUTIVE COMPENSATION The following table discloses compensation for services rendered by the Company's Chief Executive Officer and all other executive officers of the Company whose compensation exceeded $100,000 in 1997, 1996, and 1995.
Annual Compensation Long Term Compensation ------------------- ---------------------- Name and Principal Other Annual All Other Position Year Salary Bonus Compensation 0ptions(#) Compensation - ----------- ---- ------ ----- ------------ ---------- ------------ George N. Faris 1997 $ 312,000 $257,000$ $ 7,200(3) $ 750,000 $193,000(1) Chairman of the 1996 292,000 15,000 9,600(3) 1,202,500(4) 422,000(5) Board and Chief 1995 240,000 - 45,000(2) 202,500 - Executive Officer Denis J. Fitzpatrick 1997 $ 118,000 $102,000$ - $ 125,000 $ 25,000(8) Secretary, Vice 1996 105,000 5,000 15,000(6) 120,000(4) - President and Chief 1995 105,000 - $18,000(6)(7) 20,000 - Financial Officer William L. Tracy 1997 $ 88,000 $62,000 75,000 $ 23,000(8) Treasurer and 1996 (9) - - - - Controller 1995 (9) - - - - Kenneth N. Durham 1997 (10) - - - - President and Chief 1996 (10) - - - - Operating Officer 1995 $145,000(10) - - - -
(1) Includes deferred salary payment of $109,000 and income tax reimbursement of $84,000. (2) $35,500 of this amount constituted forgiveness of interest on a debt owed to the Company, the principal of which was repaid to the Company; the remaining $9,600 was paid as a vehicle allowance. (3) Vehicle allowance. (4) The number of options shown for 1995 was issued in substitution for previously outstanding options and re-issued in 1996. The exercise price is now $.50 per share. See Ten Year Option Repricings table below. (5) On October 13, 1995, the Company and Dr. Faris executed an amendment to Dr. Faris' employment agreement, pursuant to which Dr. Faris relinquished certain rights in exchange for 900,000 shares of Common Stock. See "Employment Contract" below. (6) Mr. Fitzpatrick is reimbursed up to $15,000 per year in living expenses incurred while working in the New York office. (7) Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a signing bonus, which shares were issued in 1995. (8) Deferred salary payment. (9) Mr. Tracy's compensation was less than $100,000 in each of 1996 and 1995. (10) Mr. Durham resigned from employment with the Company effective on November 3, 1995. 20 STOCK OPTION PLANS The Company has established a 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan was approved by the Board of Directors on November 8, 1995 and by the Company's shareholders on July 11, 1996. The 1995 Plan is administered by the Board of Directors of the Company or a Committee designated by them. Under the 1995 Plan employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem with stock appreciation rights ("SAR's"), and employees, Directors, contractors and consultants are eligible to receive non-qualified stock options ("NQSO's") or NQSO's in tandem with SAR's. Options may be granted under the 1995 Plan to purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted under the 1995 Plan terminates or expires without having been exercised in full, the unexercised shares subject to that option will be available for a further grant of options under the 1995 Plan. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. Options may not be granted under the 1995 Plan after November 7, 2005. The exercise price of the options granted under the 1995 Plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. ISO's granted to shareholders owning 10% or more of the outstanding voting power of the Company must be exercised at a price equal to at least 110% of the fair market value of the shares of Common Stock on the date of grant. The aggregate fair market value of Common Stock, as determined at the time of the grant with respect to which ISO's are exercisable for the first time by any employee during any calendar year, shall not exceed $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are treated as NQSO's. The total number of options granted under the 1995 Plan, as of March 31, 1998 was 3,333,750, which included 302,500 repriced options granted in substitution for options previously held. OPTION GRANTS IN LAST FISCAL YEAR The table below includes the number of stock options granted to certain executive officers during the year ended December 31, 1997, exercise information and potential realizable value.
Individual Grants ----------------- Potential Realizable Number of Percent of Value at Assumed Securities Total Options Annual Rates of Stock Underlying Granted to Price Appreciation Options Employees in Exercise Expiration for Option Term Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($) ---- ---------- ----------- ----------- ------- --------- ------ George Faris 750,000 45% $1.05 12/31/02 $ -0- $ -0- Denis Fitzpatrick 125,000 8% $1.05 12/31/02 $ -0- $ -0- William L. Tracy 75,000 5% $1.05 12/31/02 $ -0- $ -0-
AGGREGATE OPTION EXERCISES IN 1997 AND OPTION VALUES AT DECEMBER 31, 1997 The table below includes the number of shares covered by both exercisable and non-exercisable stock options owned by certain executive officers as of December 31, 1997. Also reported are the values for "in-the-money" options which represent the positive spread between exercise price of any such existing stock options and the year-end price.
Shares ------ Acquired or Value Number of Unexercised Value of Unexercised Name Exercised Realized Options at Year End In-the-money Options - ---- --------- -------- ------------------- -------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- George N. Faris -- -- 1,764,000 187,500 $4,771,495 $436,875 Denis J. Fitzpatrick -- -- 202,500 42,500 $537,825 $99,025 William L. Tracy -- -- 101,000 25,000 $263,380 $59,415
21 EMPLOYMENT CONTRACT Effective May 1, 1989, the Company entered into an employment agreement with George N. Faris at an annual salary of $200,000, which agreement is renewed annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year. In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In February 1996, Dr. Faris' salary was reinstated to $300,000 per year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee was an officer or employee of the Company or of any of its subsidiaries during the prior year or was formerly an officer of the Company or any of its subsidiaries. During the last fiscal year, none of the executive officers of the Company has served on the Board or Compensation Committee of any other entity whose officers served either on the Board of Directors of the Company or on the Compensation Committee of the Company. Item 12. SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth certain information, as of the Record Date, regarding the beneficial ownership of Common Stock of (i) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock; (ii) each Director; (iii) each executive officer named in the Summary Compensation Table below; and (iv) all Directors and executive officers as a group. Name and Address Amount and Nature of Percent of Beneficial Holder(1) Beneficial Ownership of Class George N. Faris 3,370,000(2) 6.6% Daniel Y. Kim 163,500(3) * Donald G. Rynne 756,122(4) 1.5% William R. Smart 302,594(5) * Denis J. Fitzpatrick 202,500(6) * William L. Tracy 121,240(7) * All officers and Directors as a group (consisting of 6 persons) 4,915,956(8) 9.1% * Less than 1% of class (1) All officers and Directors have an address c/o the Company, 444 Madison Avenue, Suite 3203, New York, NY 10022. (2) Includes 1,764,500 shares of common stock issuable upon the exercise of stock options owned by Dr. Faris. Excludes 187,500 unexercisable options. (3) Includes 155,500 shares of common stock issuable upon the exercise of stock options owned by Dr. Kim. Excludes 50,000 unexercisable options. (4) Includes 160,000 shares of common stock issuable upon the exercise of stock options and warrants to purchase 89,260 shares of common stock owned by Mr. Rynne. Excludes 50,000 unexercisable options. (5) Includes 192,000 shares of common stock issuable upon the exercise of stock options and warrants to purchase 19,986 shares of common stock owned by Mr. Smart. Excludes 50,000 unexercisable options. (6) Includes 202,500 shares of common stock issuable upon the exercise of stock options owned by Mr. Fitzpatrick. Excludes 42,500 unexercisable options. 22 (7) Includes 101,000 shares of common stock issuable upon the exercise of stock options owned by Mr. Tracy. Excludes 25,000 unexercisable options. (8) Includes all of the shares of common stock issuable upon the exercise of options and warrants described in Notes (2) through (7) above. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and Directors, and persons who own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such reporting persons are required by regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely on its review of the copies of such reports received by it, or written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that, during the period from January 1, 1997 through December 31, 1997, all filing requirements applicable to its officers, Directors and greater than 10 percent beneficial owners were complied with, except that Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In April 1997, Dr. George Faris and Mr. Donald Rynne purchased certain convertible debentures (the "Debentures") of the Company, originally issued in August 1996, for their face values of $225,000 and $75,000, respectively, from a foreign investor and subsequently converted the Debentures, pursuant to the original terms thereof, for 895,349 shares and 298,342 shares of Common Stock, respectively, which shares are still held by Dr. Faris and Mr. Rynne. In July 1997, the Company's Chairman and CEO, Dr. George Faris, loaned the Company $500,000 on an interest-free basis, which loan was repaid in full by the Company in August 1997. In April 1997, the Company issued as a bonus, 25,000 shares of Common Stock to each of Dr. Faris, Mr. Fitzpatrick, Mr. Tracy, and Mr. Lorrie Olivier, a Vice President of the Company. Such issuance is subject to ratification by the Shareholders at the Company's Annual Meeting. Absent such ratification, 75% of such shares will be returned to the Company. 23 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of the Report (1) Financial Statements. Page No. Reports of Independent Accountants F-1 Consolidated Balance Sheets December 31, 1997 and 1996 F-3 Consolidated Statement of Operations Years Ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statement of Cash Flows Years Ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statement of Changes in Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 Supplementary Oil and Gas Information F-8 - (2) Financial Statement Schedules. None. (3) EXHIBITS. 2.1 Share Purchase Agreement dated February 25, 1997, among Registrant and AIPCC, PAIPC and MIP. (8) 3.1 Restated Articles of Incorporation of the Registrant. (6) 3.2 By-laws of the Registrant, as amended. (11) 4.1 Form of Class A Warrant. (3) 4.2 1995 Stock Option Plan and Form of related Option Agreements of the Registrant. (5) 4.3 Form of 8% Convertible Subordinated Debentures due August 1, 1999. (9) 4.4 Form of Subscription Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3. (9) 4.5 Form of Warrant to purchase shares of the Registrants' Common Stock issued in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3. (9) 4.6 Form of Registration Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3. (9) 4.7 Form of 14% convertible Notes due October 15, 1999. (10) 4.8 Form of Subscription Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 4.9 Form of Warrant to purchase shares of the Registrants' common Stock issued in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 4.10 Form of Registration Rights Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 24 4.11 Form of Subscription Agreement used in connection with the repayment of debt to a foreign individual. (10) 4.12 Form of Subscription Agreement used in connection with the Registrant's purchase of a 70% interest of MED Shipping Usturt Petroleum Company Ltd.(10) 4.13 Form of Warrant to purchase shares of the Registrant's common Stock issued in connection with the purchase referenced in Exhibit 4.12. (10) 4.14 1998 Stock Option Plan of the Registrant. 4.15 1998 Stock Award Plan of the Registrant. 10.1 Employment Agreement dated May 1, 1989 by and between George N. Faris and the Registrant. (1) 10.2 Amendment #1 to Employment Agreement, dated October 13, 1995, between George N. Faris and the Registrant. (6) 10.3 Registration Rights Agreement dated July 11, 1996 between George N. Faris and the Registrant. (6) 10.4 $3 million Exchangeable Debenture, granted by AIPCC to the Registrant due February 25, 1999. (8) 10.5 Agreement dated April 22, 1997 between the Registrant and MED Shipping and Trading S.A. used in connection with the Registrant's purchase of a 70% interest of MED Shipping Usturt Petroleum Company Ltd. (10) 10.6 Amendment dated May 9, 1997 to the Agreement attached hereto as Exhibit 10.5. (10) 16.1 Letter dated August 19, 1996 regarding change in certifying accountant. (6) 21.1 Subsidiaries of the Registrant. 27.1 Financial Data Schedule. - ----------------------------------------------------- (1) Incorporated herein by reference to the Registration Statement on Form S-1 declared effective on February 13, 1990. (2) Incorporated herein by reference to the Registrant's form 8-K, dated December 4, 1990. (3) Incorporated herein by reference to the Registration Statement on Form S-3, declared effective January 15, 1998. (4) Incorporated herein by reference to Amendment #19 to Schedule 13D of George N. Faris for October 13, 1995. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (6) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (7) Incorporated herein by reference to the Registrant's Form 8-K dated August 19, 1996. (8) Incorporated herein by reference to the Registrant's Form 8-K dated March 12, 1997. (9) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (10) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (11) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. (b) Reports on Form 8-K None. 25 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders American International Petroleum Corporation We have audited the accompanying consolidated balance sheets of American International Petroleum Corporation and Subsidiaries as of December 31, 1997 and 1996, and related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American International Petroleum Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. The Company reported a net loss of approximately $18.0 million during 1997, of which approximately $12.5 million represented non-operating or non-cash items, and has commitments to fund the operations of its Kazakstan subsidiary (see Note 10) and has convertible debentures totaling $10,000,000 (see Note 6), which may or may not be converted to common stock, that mature in October 1998. The Company had virtually no revenue-generating operating activities during 1997 and does not, as of December 31, 1997, have the resources to fulfill these commitments. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 2 to the financial statements. HEIN + ASSOCIATES LLP Certified Public Accountants Houston, Texas March 17,1998 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American International Petroleum Corporation In our opinion, based upon our audit and the report of other auditors, the consolidated financial statements for 1995 listed in the Index appearing under Items 14(a)(1) on page 24 present fairly, in all material respects, the Results of Operations and Cash Flows of American International Petroleum Corporation and its subsidiaries for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements for the year ended December 31, 1995 of American International Petroleum Corporation of Colombia (AIPC-Colombia), a wholly-owned subsidiary, which statements were prepared in accordance with generally accepted accounting principles in Colombia and which statements reflect total revenues of $1,214,213 for the year ended December 31, 1995. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for AIPC-Colombia, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts (including the conversion of the financial statements of AIPC- Colombia to generally accepted accounting principles in the United States) and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 2 and 11 to the financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency and is in the process of trying to resolve certain contingencies, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP Houston, Texas April 9, 1996 F-2 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
December 31, ------------------------------------ 1997 1996 ---- ---- Assets ------ Current assets: Cash and cash equivalents $ 3,721,350 $ 11,058 Cash - restricted - 161,022 Marketable securities, at market 735,958 - Accounts and notes receivable, net 1,831,008 1,073,140 Inventory 755,720 459,961 Deferred financing costs 353,490 125,353 Prepaid expenses 1,244,277 712,751 ----------------- ---------------- Total current assets 8,641,803 2,543,285 ----------------- ---------------- Property, plant and equipment: Unevaluated oil and gas property 11,724,477 5,648,630 Oil and gas properties - 32,506,656 Refinery property and equipment 22,816,897 17,235,183 Other 216,803 499,971 ----------------- ---------------- 34,758,177 55,890,440 Less - accumulated depreciation, depletion and amortization and impairments (3,894,015) (23,959,191) ----------------- ---------------- Total property, plant and equipment 30,864,162 31,931,249 Notes receiviable, less current portion 2,333,895 - Other long-term assets, net - 17,897 ----------------- ---------------- Total assets $ 41,839,860 $ 34,492,431 ================= ================ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Notes payable $ - $ 237,162 Current portion of long-term debt 6,075,931 5,968,393 Accounts payable 1,452,642 3,636,765 Accrued liabilities 1,806,906 2,524,194 ----------------- ---------------- Total current liabilities 9,335,479 12,366,514 Long-term debt - 798,199 ----------------- ---------------- Total liabilities 9,335,479 13,164,713 ----------------- ---------------- Stockholders' equity: Preferred stock, par value $0.01, 7,000,000 shares authorized, none issued Common stock, par value $.08, 100,000,000 shares authorized, 48,436,576 shares issued and outstanding at December 31, 1997 and 34,458,921 shares at December 31, 1996 3,874,926 2,756,714 Additional paid-in capital 106,689,337 78,677,265 Stock purchase warrants 1,297,754 1,297,754 Accumulated deficit (79,357,636) (61,404,015) ----------------- ---------------- Total stockholders' equity 32,504,381 21,327,718 ----------------- ---------------- Commitments and contingent liabilities (Note 10) - - ----------------- ---------------- Total liabilities and stockholders' equity $ 41,839,860 $ 34,492,431 ================= ================
The accompanying notes are an integral part of these statements. F-3 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
For the years ended December 31, ---------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Oil and gas production and pipeline fees $ 260,579 $ 1,364,581 $ 1,270,164 Refinery lease fees - 2,467,606 1,184,864 Other 567,385 170,819 356,280 -------------------- ---------------- ------------------- Total revenues 827,964 4,003,006 2,811,308 -------------------- ---------------- ------------------- Expenses: Operating 98,766 613,336 432,440 General and administrative 4,627,598 3,076,357 3,572,337 Depreciation, depletion and amortization 774,264 1,265,230 1,396,423 Interest 6,663,992 2,818,218 1,037,308 Realized and unrealized loss on marketable securities 6,053,298 - - Loss on sale of subsidiaries 563,667 - - Provison for bad debts - 682,072 711,122 Write-down of oil and gas properties - 200,000 - -------------------- ---------------- ------------------- Total expenses 18,781,585 8,655,213 7,149,630 -------------------- ---------------- ------------------- Net loss $(17,953,621) $(4,652,207) $ (4,338,322) ==================== ================ =================== Net loss per share of common stock $ (0.43) $ (0.16) $ (0.20) ==================== ================ =================== Weighted-average number of shares of common stock outstanding 41,309,102 29,598,832 21,746,719 ==================== ================ ===================
The accompanying notes are an integral part of these statements. F-4 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
For the years ended December 31, -------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net loss $ (17,953,621) $ (4,652,207) $ (4,338,322) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation, depletion, amortization and accretion of discount on debt 5,125,934 2,551,504 1,502,435 Accretion of premium on notes receivable (167,167) - - Write-down of oil and gas properties - 200,000 - Provision for bad debts - 682,072 711,122 Realized and unrealized loss on marketable securities 6,053,298 - - Loss on sale of subsidiaries 563,667 - - Issuance of stock for compensation expense 40,000 424,063 55,814 Forgiveness of debt (50,342) - - Employee stock based compensation 744,700 - - Stock based compensation for services 247,607 - - Changes in assets and liabilities: Accounts and notes receivable 57,835 (681,659) (537,569) Inventory (698,746) 44,992 446,519 Prepaid and other (1,387,484) (370,274) (98,359) Accounts payable and accrued liabilities (16,688) 2,352,361 1,984,574 ---------------- ---------------- ----------------- Net cash provided by (used in) operating activities (7,441,007) 550,852 (273,786) ---------------- ---------------- ----------------- Cash flows from investing activities: Additions to oil and gas properties (2,663,694) (1,590,165) (3,194,454) Additions to refinery property and equipment (5,581,714) (1,713,188) 14,284 Proceeds from sales of marketable securities 1,979,494 - - Proceeds from sale of subsidiaries 1,764,548 - - Other (94,191) (10,176) (26,753) ---------------- ---------------- ----------------- Net cash used in investing activities (4,595,557) (3,313,529) (3,206,923) ---------------- ---------------- ----------------- Cash flows from financing activities: Cash - restricted, loan collateral - 65,201 (11,593) Net increase (decrease) in notes payable (237,162) 170,403 66,759 Repayments of long-term debt (5,791,420) (1,434,278) (467,500) Proceeds from issuance of common stock and warrants, net 447,810 745,302 3,111,858 Proceeds from exercise of stock warrants and options 1,272,333 - 32 Proceeds from issuance of debentures, net 20,055,295 3,064,889 - ---------------- ---------------- ----------------- Net cash provided by financing activities 15,746,856 2,611,517 2,699,556 ---------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents 3,710,292 (151,160) (781,153) Cash and cash equivalents at beginning of year 11,058 162,218 943,371 ---------------- ---------------- ----------------- Cash and cash equivalents at end of year $ 3,721,350 $ 11,058 $ 162,218 ================ ================ =================
The accompanying notes are an integral part of these statements. F-5 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------
Additional Stock Common stock paid-in purchase -------------- Shares Amount capital warrants -------------- -------------- ---------------- ---------------- Balance, January 1, 1997 $ 34,458,921 $ 2,756,714 $ 78,677,265 $ 1,297,754 Conversions of debentures 7,246,882 579,751 8,763,271 - Issuance of stock in lieu of current liabilities 243,459 19,477 214,082 - Issuance of stock for compensation 100,000 8,000 32,000 - Issuance of stock for services 260,000 20,800 226,807 - Issuance of stock - Reg S Offering 1,635,593 130,847 314,465 - Issuance of stock for oil and gas properties - Reg S Offering 3,250,000 260,000 8,275,938 - Issuance of stock warrants for oil and gas properties - - 718,750 - Issuance of stock warrants - - 6,264,411 - Options and warrants exercised 1,241,721 99,337 694,189 - Imputed interest on debentures convertible at a discount to market - - 1,763,459 - Compensatory stock options - - 744,700 - Net loss for the year - - - - -------------- -------------- ---------------- ---------------- Balance, December 31, 1997 $ 48,436,576 $ 3,874,926 $ 106,689,337 $ 1,297,754 ============== ============== ================ ================ Accumulated deficit Total ----------------- --------------- Balance, January 1, 1997 $ (61,404,015) $ 21,327,718 Conversions of debentures - 9,343,022 Issuance of stock in lieu of current liabilities - 233,559 Issuance of stock for compensation - 40,000 Issuance of stock for services - 247,607 Issuance of stock - Reg S Offering - 445,312 Issuance of stock for oil and gas properties - Reg S Offering - 8,535,938 Issuance of stock warrants for oil and gas properties - 718,750 Issuance of stock warrants - 6,264,411 Options and warrants exercised - 793,526 Imputed interest on debentures convertible at a discount to market - 1,763,459 Compensatory stock options - 744,700 Net loss for the year (17,953,621) (17,953,621) ----------------- --------------- Balance, December 31, 1997 $ (79,357,636) $ 32,504,381 ================= ===============
The accompanying notes are an integral part of this statement. F-6 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------
Additional Stock Common stock paid-in purchase -------------- Shares Amount capital warrants -------------- -------------- --------------- --------------- Balance, January 1, 1996 $ 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754 Conversions of Debentures 6,535,122 522,810 1,477,190 - Issuance of stock in lieu of current liabilities 479,540 38,363 130,539 - Issuance of stock for compensation 905,000 72,400 351,663 - Issuance of stock - Regulation S Offering 1,833,333 146,667 598,635 - Imputed interest on debentures convertible at a discount to market - - 1,350,966 - Net loss for the year - - - - -------------- -------------- ---------------------------------- Balance, December 31, 1996 $ 34,458,921 $ 2,756,714 $ 78,677,265 $ 1,297,754 ============== ============== =============== =============== Accumulated deficit Total ---------------- ---------------- Balance, January 1, 1996 $ (56,751,808) $ 21,290,692 Conversions of Debentures - 2,000,000 Issuance of stock in lieu of current liabilities - 168,902 Issuance of stock for compensation - 424,063 Issuance of stock - Regulation S Offering - 745,302 Imputed interest on debentures convertible at a discount to market - 1,350,966 Net loss for the year (4,652,207) (4,652,207) ---------------- ---------------- Balance, December 31, 1996 $ (61,404,015) $ 21,327,718 ================
The accompanying notes are an integral part of this statement. F-7 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES ------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------
Notes Common stock Additional Stock receivable ------------ paid-in purchase for issuance Shares Amount capital warrants of stock --------------- ------------- -------------- ------------- -------------- Balance, January 1, 1995 $ 19,099,048 $ 1,527,924 $ 71,595,370 $ 1,297,754 $ (32,936) Warrants exercised 8 1 31 - - Issuance of stock in lieu of current - liabilities 728,205 58,256 430,994 - - Issuance of stock for compensation 10,000 800 19,512 - 32,936 Issuance of stock - Reg S Offering 4,868,665 389,493 2,722,365 - - Net loss for the year - - - - - --------------- ------------------------------------------------------------- Balance, December 31, 1995 $ 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754 $ - =============== ============= ============== ============= ============== Accumulated deficit Total ----------------- --------------- Balance, January 1, 1995 $ (52,413,486) $ 21,974,626 Warrants exercised - 32 Issuance of stock in lieu of current liabilities - 489,250 Issuance of stock for compensation - 53,248 Issuance of stock - Reg S Offering - 3,111,858 Net loss for the year (4,338,322) (4,338,322) ----------------- --------------- Balance, December 31, 1995 $ (56,751,808) $ 21,290,692 ================= ===============
The accompanying notes are an integral part of this statement. F-8 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: American International Petroleum Corporation (the "Company") was incorporated in the State of Nevada and, through its wholly-owned subsidiaries, is the owner of a refinery in Lake Charles, Louisiana and a 70% working interest in an oil and gas concession in Kazakstan. The Company is also seeking domestic and international oil and gas properties and projects. Sale of Subsidiaries On February 25, 1997, the Company sold all of the issued and outstanding common stock of two of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American Petroleum Corporation ("PAIPC") to Mercantile International Petroleum Inc. ("MIP"). Consequently, all references to these subsidiaries herein are presented in the past tense. The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC, (b) assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000, (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a trading price of approximately $2.00 per share on the date the parties agreed in principle to the sale, (d) a two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangeable Debenture"), exchangeable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or Registrant may demand payment on that date of $1.5 million of the principal balance thereof, (e) a $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum, (f) up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax benefit Deductions") is less than $50 million but more than $20 million (payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future tax filings in Colombia Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries, American International Refinery, Inc. ("AIRI"), American International Petroleum Kazakstan ("AIPK"), AIPCC and PAIPC. Intercompany balances and transactions are eliminated in consolidation. Cash and cash equivalents All liquid short-term instruments purchased with original maturity dates of three months or less are considered cash equivalents. Restricted cash represents cash utilized as collateral for the Company's borrowings in Colombia and drilling commitments in Peru. Marketable Securities Marketable securities classified as available-for-sale are stated at market value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of deferred income taxes. If a decline in market value is determined to be other than temporary, any such loss is charged to earnings. Trading securities are stated at fair value, with unrealized gains and losses recognized in earnings. The Company records the purchases and sales of marketable securities and records realized gains and losses on the trade date. Realized gains or losses on the sale of securities are recognized on the specific identification method. F-9 The Company held 2,943,818 shares of MIP at December 31, 1997. During the year the Company sold or dispersed 1,440,557 shares for net cash proceeds of $1,979,494. The gross losses on shares disposed of was $901,616. The unrealized loss on shares available for sale at December 31, 1997 was $5,151,682. There were no gains on sale of any of the MIP stock. The MIP stock was deemed impaired at December 31, 1997 and the carrying value was reduced from a carrying value of $1,648,542 to $735,958. The impairment is reflected in the gross unrealized loss on marketable securities in the accompanying Statement of Operations. Inventory Inventory consists of crude oil and asphalt feedstock and oil and gas equipment. Crude oil and asphalt feedstocks are stated at the lower of cost or market value by using the first-in, first-out method. Oil and gas equipment is stated at the lower of average cost or market. Property, plant and equipment Oil and gas properties The Company follows the full cost method of accounting for exploration and development of oil and gas reserves, whereby all costs incurred in acquiring, exploring and developing properties are capitalized, including estimates of abandonment costs, net of estimated equipment salvage costs. Individual countries are designated as separate cost centers. All capitalized costs plus the undiscounted future development costs of proved reserves are depleted using the unit-of-production method based on total proved reserves applicable to each country. Under the full cost method of accounting, unevaluated property costs are not amortized. A gain or loss is recognized on sales of oil and gas properties only when the sale involves significant reserves. Costs related to acquisition, holding and initial exploration of concessions in countries with no proved reserves are initially capitalized and periodically evaluated for impairment. Costs not subject to amortization: The following table summarizes the categories of cost which comprise the amount of unproved properties not subject to amortization.
December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- Colombia: Acquisition costs $ - $1,101,277 $1,101,277 Exploration costs - - - ----------------- ---------------- ---------------- - 1,101,277 1,101,277 Peru: Exploration costs - 4,457,964 3,832,041 Kazakstan: Acquisition Cost 11,724,477 - - Other Acquisition cost - 89,389 65,506 ------------------ ---------------- ---------------- $11,724,477 $5,648,630 $4,998,824 =========== ========== ==========
Acquisition costs of unproved properties not subject to amortization at December 31, 1997, 1996 and 1995, respectively, consists mainly of lease acquisition costs related to unproved areas. On February 25, 1997 the Company sold all of its wholly owned subsidiaries operating in Columbia and Peru. The period in which the amortization cost of the Kazakstan properties will commence is subject to the results of the Company's exploration program which will begin in 1999. F-10 Certain geological and general and administrative costs are capitalized into the cost pools of the country cost centers. Such costs include certain salaries and benefits, office facilities, equipment and insurance. Capitalized general and administrative costs are directly related to the Company's exploration and development activities in Colombia and Peru and totaled $48,404, $331,355 and $472,606 for the years ended December 31, 1997, 1996 and 1995, respectively. The net capitalized costs of oil and gas properties for each cost center, less related deferred income taxes, are expensed to the extent they exceed the sum of (i) the estimated future net revenues from the properties, discounted at 10%, (ii) unevaluated costs not being amortized; and (iii) the lower of cost or estimated fair value of unproved properties being amortized; less (iv) income tax effects related to differences between the financial statement basis and tax basis of oil and gas properties. The independent reservoir engineer's report of Estimated Future Reserves and Revenues is based on information available "as of" the date of such Report. Upward or downward revisions to the estimated value and volume of oil and gas reserves may occur based on circumstances occurring, and information obtained, subsequent to the date of the engineer's report. (See "Supplementary Oil and Gas Information for the Years Ended December 31, 1997, 1996 and 1995 - Oil and Gas Reserves. The portion of the Company's oil and gas properties held in AIPCC and PAIPC, were reduced as of December 31, 1997, to the amount realized from the sale of AIPCC and PAIPC on February 25, 1997, resulting in an impairment loss of $200,000 during 1996. Property and equipment - other than oil and gas properties Property and equipment are carried at cost and included interest on funds borrowed to finance construction. Capitalized interest was $341,000 and $43,427 in 1997 and 1996, respectively. Depreciation and amortization are calculated under the straight-line method over the anticipated useful lives of the assets which range from 5 to 25 years. Major additions are capitalized. Expenditures for repairs and maintenance are charged against earnings. Depreciation, depletion and amortization expense on property and equipment were $774,264, $1,265,230 and $1,396,423 for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, the Company's Refinery was undergoing modifications to its processing system and was not operational. Earnings per share Earnings per share of common stock are based on the weighted-average number of shares outstanding. Common stock equivalents are not presented because they are anti-dilutive. The FASB issued Statement of Financial Accounting Standards No. 128, entitled Earnings Per Share, during February 1997. The new statement, which is effective for financial statements issued after December 31, 1997, including interim periods, establishes standards for computing and presenting earnings per share. The new statement requires retroactive restatement of all prior-period earnings per share data presented. The new statement did not have a material impact upon previously presented earnings per share information. Earnings per share in the accompanying statements of operations were determined in accordance with SFAS 128. Foreign currency Foreign currency transaction gains and losses are included in the consolidated statement of operations. The Company does not engage in hedging transactions to reduce the risk of foreign currency exchange rate fluctuations and has not experienced significant gains or losses related to such events. The Company anticipates little, if any, currency and exchange risks during the initial three to five years of its operations in Kazakstan. Any revenues generated from Kazakstan during this period are planned to be reinvested in the Company's projects in Kazakstan. Subsequently, the Company will be exposed to the currency and exchange risks which typically present themselves in the Confederate of Independent States ("CIS") countries. The Company collected sales of oil and gas in Colombia and Peru in local currency and utilized those receipts for local operations. Periodically, funds were transferred from U.S. accounts to Columbia or Peru and converted into pesos or soles, respectively, when local currency was insufficient to meet obligations payable in local currency. Foreign exchange losses in 1997 were $75,878. Foreign exchange gains were $63,763 and $12,544 in 1996 and 1995, respectively. Deferred charges The Company capitalizes certain costs, primarily commissions and legal fees, associated with the offering and sale of debentures. Such costs are amortized as interest expense over the life of the related debt instrument. Sales of debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As a result, debenture costs incurred and amortized in 1997 increased by $2,964,282 to $3,253,035, compared to a total of $289,000 in 1996. F-11 Stock-based compensation Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option or similar equity instrument or plan. However, SFAS No. 123 allows an entity to continue to measure compensation costs for these plans using the current method of accounting. The Company has elected to account for employee stock compensation plans as provided under APB 25. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the related reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. The Company's financial statements are based on a number of significant estimates including the valuation of unevaluated oil and gas properties and oil and gas reserve quantities which are the basis for the calculation of depreciation, deletion, and impairment of oil and gas properties. The Company's reserve estimates are determined by an independent petroleum engineering firm. However, management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries and reserves associated with non-producing properties are more imprecise than those for producing properties with long production histories. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. New Accounting Standards On March 31, 1995, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of". SFAS No. 121 addresses the accounting for the impairment of long-lived assets, identified intangibles and goodwill related to those assets and requires that the carrying amount of impaired assets be reduced to fair value. The Company adopted SFAS No. 121 in the fourth quarter of 1995 and determined that it has no effect on the financial statements for the years ended December 31, 1997, 1996 and 1995. The FASB also issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, the standards may have on the future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. The FASB issued Statement of Financial Accounting Standards No. 128, entitled Earnings Per Share, during February 1997. The new statement, which is effective for financial statements issued after December 15, 1997, including interim periods, establishes standards for computing and presenting earnings per share. The new statement requires retroactive restatement of all prior-period earnings per share data presented. Earnings per share in the accompanying Statements of Operations were determined in accordance with SFAS 128. F-12 NOTE 2 - MANAGEMENT PLANS The Company reported a net loss of approximately $18.0 million during 1997, of which approximately $12.5 million represented non-operating or non-cash items, and has commitments to fund the operations of its Kazakstan subsidiary (see Note 10) and has convertible debentures totaling $10,000 (see Note 6), which may or may not be converted to common stock, that mature in October 1998. The Company had virtually no revenue-generating operating activities during 1997 and does not, as of December 31, 1997, have the resources to fulfill these commitments. Management of the Company has been seeking sources of capital to enable to fund its operating activities and to fulfill these and other commitments which may arise in 1998 and beyond, and on April 7, 1998, signed an agreement with certain institutional investors which provides for up to $52 million in private debt and equity financing to be utilized by the Company on an as needed-basis over a two year period. Initial funding is scheduled for April 20, 1998, pending completion and execution of definitive documents. Management believes that this private financing will be sufficient in nature to provide the necessary capital to fund its commitments during at least the next two years. In the event this financing does not occur, and the Company is unable to access adequate sources of capital, its plans and operations during 1998 would be substantial curtailed. NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: Accounts and notes receivable are shown below: December 31, ----------------------------- 1997 1996 Accounts receivable - trade $1,020,145 $1,942,946 Note receivable - Gold Line (See Note 8) 900,732 900,732 Current portion - Note receivable - MIP 1,537,808 - Other 293,200 150,980 ----------- ------------ 3,751,885 2,994,658 Less - allowance for doubtful accounts (1,920,877) (1,921,518) ----------- ----------- $1,831,008 $1,073,140 ========== ========== NOTE 4 - OTHER LONG-TERM ASSETS: Other long-term assets consist of the following: December 31, ---------------------------- 1997 1996 Notes receivable - MIP (See Note 1), net of discount of $284,634 $ 3,871,703 $ - Unamortized bond issue cost - 17,897 ------------ ---------- Less - current portion - MIP (1,537,808) - ------------ ---------- $ 2,333,895 $ 17,897 =========== =========== F-13 NOTE 5 - ACCRUED LIABILITIES: Accrued liabilities consist of the following: December 31, -------------------------------- 1997 1996 Accrued payroll $ 63,068 $ 266,429 Accrued interest 47,206 282,076 Corporate taxes 99,484 330,024 Excise taxes 1,376,170 1,100,000 Property taxes - 219,345 Other 220,978 326,320 ------------ ------------ $1,806,906 $2,524,194 ========== ========== NOTE 6 - SHORT TERM DEBT December 31, -------------------------------- 1997 1996 14% - 10,000,000 Unsecured convertible debenture net of unamortized discount of $3,924,069 - due October 15, 1998, effective interest rate - 51%* $6,075,931 $ - *Convertible after April 15, 1998 into the Company's common stock at the lesser of $6.25, 85% of market, or the lowest average market price for any five consecutive trading days following April 15, 1998. NOTE 7 - LONG-TERM DEBT: December 31, ---------------------- 1997 1996 ---- ---- Note payable to MG Trade Finance Corporation $ - $ 2,108,393 8% - $100,000 Convertible debentures - due February 14, 1997, effective interest rate - 8% - 100,000 9% - $150,000 Convertible Debentures - due December 9, 2000 effective interest rate - 17.3% - 124,445 10% - $391,629 Convertible Debentures - due April 1, 1998 effective interest rate - 34.7% - 293,040 12% Secured Debentures - due December 31, 1997, effective interest rate - 12% 25% of original principal due on December 31, 1996 - 3,510,000 12.5% - $426,000 Convertible Debentures - due January 2, 1998 effective interest rate - 49.2 to 51.7% - 380,714 F-14 Senior Convertible Subordinated Debentures due February 1, 1997, interest ranges from 8.5-10.5% per annum, payable quarterly, convertible into common shares at $50.00 per share. - 250,000 ------------- ------------ - 6,766,592 Less - Current portion - 5,968,393 -------------- ----------- $ - $ 798,199 ============= ========== The effective interest rate as stated for each of the debt instruments above does not necessarily reflect the actual cash cost to the Company for that specific debt instrument. The effective interest rate reflects presumed incremental yield the holder of the debt instrument may derive from the discounted conversion rate of such instrument and the fair value of warrants issued to debt holders. During 1997, the Company sold convertible debentures totaling $20,537,000, of which $9,343,000 were converted into the Company's common stock at discounts to market ranging from 15% to 51%. Note payable to MG Trade Finance Corporation On December 4, 1990, AIRI entered into a loan and security agreement (the "Loan Agreement") with MG Trade Finance Corp. ("MGTF"). Pursuant to the Loan Agreement, MGTF loaned AIRI $9,855,392. As collateral for the borrowings, substantially all of the assets of AIRI were pledged, payment was guaranteed by the Company and the Company pledged 100% of the common stock of AIRI. In order to induce MGTF to enter into the Loan Agreement, the Company granted MGTF warrants to purchase 516,667 shares of the Company's $0.08 par value common stock at $7.50 per share, exercisable at any time prior to June 30, 1994. Such warrants outstanding at December 31, 1993 were adjusted to an exercise price of $1.25 based on an anti-dilutive provision in the warrant agreements. In July 1995, all warrants previously held by MGTF were returned to the Company and canceled and 150,000 new warrants were issued at an exercise price of $2.00 per share of common stock, which warrants were exercised in October 1997. As part of certain negotiations related to the MIP Transaction, the Company agreed to pledge 1,000,000 shares of MIP common stock (partial consideration the Company received in the MIP Transaction) as additional collateral for the Loan Agreement and change the due date of the unpaid balance of the Loan Agreement of $2,108,000 to September 30, 1997 from March 31, 1998, which balance was repaid in full by the Company on October 1, 1997. NOTE 8 - REFINERY LEASE: In October 1990, the Company leased its refinery to Gold Line. All amounts owed to AIRI by Gold Line on October 1, 1992 were restructured to a note totaling $1,244,192, due on September 30, 1995 bearing interest at prime plus 2%. The note was to be retired in monthly installments equal to 10% of Gold Line's monthly operating cash flow, if such operating cash flow was positive. No amounts were collected pursuant to the provision and the note was fully reserved for during 1992. No interest was accrued with respect to this note. On March 22, 1995, the term of the lease was extended through March 31, 1998. In consideration for extending the lease, Gold Line executed a $1,801,464 promissory note (which amount includes the $1,244,192 note referred to above and certain trade receivables owed the Company by Gold Line of $506,332 at December 31, 1994) payable in installments of principal and interest through June 15, 1997. The promissory note bears interest at prime plus 1%. The Company established a reserve for doubtful accounts of $1,921,518 and $2,039,041 at December 31, 1996 and 1995, respectively. In February, 1996, in order to enhance the business strength of the lessee of its Refinery and to assist it in securing a new government contract, the Company agreed to reduce the fully reserved principal balance of its note receivable from the lessee to $900,732 from $1,801,464. During the third and fourth quarters of 1996, Gold Line began to fall behind in their monthly lease fee payments to AIRI, even though it was processing an average in excess of 400,000 barrels of feedstock per month during these periods. On February 3, 1997, the Company delivered a Default Notice to Gold Line informing Gold Line of various items of default under the Lease Agreement, including non-payment of lease fees totaling approximately $567,000 and 1996 real estate taxes of approximately $208,000. F-15 Subsequent Notices of Default were also delivered to Gold Line covering additional items of default, including an additional $287,000 in unpaid lease fees and $29,000 of unpaid insurance premiums (which premiums were paid by AIRI). On February 18, 1997, the Company delivered a Termination Notice and Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave written notice to Gold Line to vacate the leased premises five days from the date the Notice was delivered. Gold Line did not comply with the Company's Notice to Vacate, so on February 26, 1997 the Company filed suit against Gold Line. On March 20, 1997, the court terminated the Lease Agreement and ordered Gold Line to vacate the refinery premises within 24 hours of the Order, with which Gold Line complied. In light of the events which occurred after December 31, 1996, the Company reserved all lease fees due from Gold Line as of December 31, 1996 and did not record earned lease fees of $443,000 during 1997. See Note 10 - "Commitments and Contingent Liabilities - Gold Line Defaults". NOTE 9 - STOCK OPTIONS AND WARRANTS: Outstanding warrants and options At December 31, 1997, 1996 and 1995, the following warrants and options for the purchase of common stock of the Company were outstanding, which are exercisable upon demand any time prior to the expiration date. Number of Shares Underlying Options and Warrants at December 31, Exercise Expiration 1997 1996 1995 Price Date ---- ---- ---- ----- ---- - - 66,715 $32.500 February 26, 1996 (2) - - 7,988 $15.000 March 10, 1996 (2) - - 1,500 $36.250 April 1, 1996 (2) - - 3,000 $30.000 August 28, 1996 (2) - 5,957,347 5,957,347 $4.000 March 1, 1997 (3) - 20,000 20,000 $30.625 July 14, 1997 - - 282,500 $1.000 December 31, 1997 (1) (2) - 282,500 - $0.50 December 31, 1997 (1) (2) 5,957,207 - - $4.000 March 1, 1998 (3) - 150,000 150,000 $2.000 March 31, 1998 - - 20,000 $1.000 August 3, 1998 (1) (2) - 20,000 - $0.500 August 3, 1998 (1) (2) 100,000 - - $0.487 January 31, 1999(4) 22,681 - - $2.131 July 22, 1999(4) 960,000 - - $2.713 August 6, 1999(4) 1,500,000 - - $6.250 October 9, 1999(4) - 1,550,000 - $0.500 October 21, 1999 (1) (2) 1,852,500 - - $0.500 December 31, 1999 (1) 50,000 50,000 - $0.500 November 1, 2000 (1) 61,547 - - $0.469 July 15, 2001(4) 100,000 - - $1.000 July 15, 2001(4) 10,500 10,500 - $0.475 July 16, 2001(4) 8,333 8,333 - $0.415 August 19, 2001(4) 16,667 16,667 - $0.413 August 20, 2001(4) 18,519 18,519 - $0.406 October 31, 2001(4) 20,000 - - $0.500 November 11, 2001(4) 10,000 - - $0.500 November 12, 2001(4) F-16 30,000 - - $0.398 April 1, 2002(4) 60,000 - - $0.398 June 6, 2002(4) 200,000 - - $2.000 July 30, 2002(4) 197,500 - - $6.250 October 14, 2002(4) 10,000 - - $0.500 November 5, 2002(4) 100,000 - - $4.28 December 1, 2002(1) 1,518,750 - - $1.050 December 31, 2002 (1) --------- --------- --------- 12,804,204 8,083,866 6,509,050 ========== ========= ========= (1) Represents options held by employees and directors of the Company. The exercise price and expiration date of such options reflects the adjustments approved by the Company's Board of Directors. (2) These options and warrants were canceled or expired, as applicable, in 1996 or 1995 as indicated in the table. (3) Class A Warrants. In February 1998 the expiration date of these warrants was extended to April 9, 1998, and all unexercised warrants expired on that date. (4) Other non-employee warrants. Stock option plans 1995 Plan Under the Company's 1995 Stock Option Plan (the "1995 Plan"), the Company's employees, Directors, independent contractors, and consultants are eligible to receive options to purchase shares of the Company's common stock. The Plan allows the Company to grant incentive stock options ("ISOs"), nonqualified stock options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation rights ("SARs"; collectively "Options"). A maximum of 3,500,000 shares may be issued and no options may be granted after ten years from the date the 1995 Plan is adopted, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. The exercise price of the Options cannot be less than the fair market value of the shares of common stock on the date the Option is granted. Options granted to individuals owning 10% or more of the outstanding voting power of the Company must be exercisable at a price equal to 110% of the fair market value on the date of the grant. Activity in the 1995 Stock Option Plan for the years ended December 31, 1996 and 1997 was as follows: Weighted Average Number of Exercise Price Shares Per Share ----------- ---------------- Outstanding, December 31, 1995 305,500 $1.28 Canceled (302,500) $1.00 Granted 1,902,500 $0.50 Expired (3,000) $30.00 Outstanding, December 31, 1996 1,902,500 $0.50 Canceled (1,852,500) $0.50 Granted 3,471,250 $0.84 Expired - - Outstanding December 31, 1997 3,521,250 $0.83 F-17 As of December 31, 1997, options to acquire 2,773,333 shares of the Company's common stock with exercise prices ranging from $0.50 to $1.05, were fully vested and exercisable at a weighted average exercise price of $0.67 per share. The remaining 747,917 options, with exercise prices ranging from $0.50 to $4.28, having a weighted average exercise price of $1.51 per share, will vest through 2002. If not previously exercised, options outstanding at December 31, 1997, will expire as follows: 1,852,500 options expire on December 31, 1999; 50,000 options expire on November 1, 2000; 1,518,750 options expire on December 31, 2002; and 100,000 options expire on December 1, 2002. The weighted average grant date fair value of the options issued during 1997 and the weighted average exercise price of those options amounted to $1.04 and $0.85, respectively. The weighted average grant date fair value of the options issued during 1996 and the weighted average exercise price of those options amounted to $0.34 and $0.50, respectively. During 1997, 1,852,500 options were granted whose exercise price was less than the stock price on grant date. These options were existing options issued in prior years and whose expiration date was extended in 1997 to December 31, 1999. The option exercise price was not changed during 1997. Under generally accepted accounting practices, the extension of these expiration dates constitutes a new issue of options. New issues in 1997 of 1,618,750 options were granted with exercise prices greater than the stock price on grant date. During 1996, all options granted, 1,902,500, were granted with exercise prices greater than the stock price on grant date. The fair value of each option grant was estimated on the date of grant using the Black-Schools option pricing model with the following assumptions: risk- free rates of 5.9% to 6.1%; volatility of 113.6%, no assumed dividend yield; and expected lives of one to five years. The 1995 Plan was submitted to and approved by the Company's stockholders at its annual meeting in 1996. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS 123. The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation expense for the Company's stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below: 1996 1997 ---- ---- Net loss As reported $(4,652,207) $(17,953,621) Pro forma (4,851,124) (19,325,148) Net loss per common share As reported (0.16) (0.43) Pro forma (0.16) (0.47) Options which were issued to employees during previous fiscal years at an exercise price of $4.00 per share were revalued at $1.00 per share during 1995. During 1996 the exercise price of these options was reduced to $0.50 per share. During 1997, the expiration date of these options was extended from December 31, 1997 until December 31, 1999. In accordance with SFAS 123 the revaluation and/or the extension of the expiration dates of the options constitutes a new issuance of options. Accordingly, compensation expense of $174,020 was reflected in the pro forma amounts for 1995 for those options revalued in 1995. No expense was reflected in the 1996 pro forma amounts because the value of the options had declined. In 1997, $744,000 was charged to compensation expense and is reflected in the net loss as reported. F-18 NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES: IRS Excise Tax Claim In May 1992, AIRI was notified by the Internal Revenue Service ("IRS") that the IRS was considering an assessment of excise taxes, penalties and interest of approximately $3,500,000 related to the sale of fuel products during 1989. The IRS claims that AIRI failed to comply with an administrative procedure that required sellers, and buyers in tax-free transactions, to obtain certification from the IRS. The Company believes that AIRI complied with the substance of the existing requirements and such sales were either tax-free or such excise taxes were paid by the end-users of such products. AIRI has offered to negotiate a settlement of this matter with IRS Appeals since early 1993. Such negotiations included face-to-face meetings, numerous phone calls and written transmittals and several offers of settlement by both the Company and the IRS. During these negotiations, the IRS Appeals officers offered to waive all of the penalties and 75% of the amount of the proposed tax liability. However, AIRI rejected this offer and requested the IRS' National Office provide technical advice to its Appeals officers. After numerous conferences and discussions with the National Office in 1995, the National Office issued an adverse Technical Advice Memorandum ("TAM") to the effect that AIRI should be liable for the tax on the sale of diesel fuel for the first three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS Appeals officer indicated to AIRI that the IRS still wanted to negotiate a settlement. In November 1997, the Company reached an agreement with the IRS (the "IRS Agreement") to settle this matter by paying an aggregate of $646,633 in tax, plus interest accrued for the applicable period involved. The IRS has agreed to a payment plan that calls for payment of the tax and interest over a period of approximately one year. In the IRS Agreement, the IRS waived all penalties and 75% of the amount of the originally proposed tax liability. The Company accrues an estimated loss from a loss contingency when a liability has been incurred and the amount of such loss can be reasonably estimated. Such accruals are based on developments to date and the Company's estimate of the liability. Based on the status of ongoing discussions with the IRS during 1996 and 1997, the Company determined that it needed to increase the allowance for this contingency from $250,000 (recorded in 1995) to $1.1 million and $1.4 million as of the years ended 1996 and 1997, respectively. Environmental lawsuit On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the "Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and d/b/a Gold Line Refinery Ltd., American International Refinery, Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket No. 94-396), was filed in the 14th Judicial District Court for the Parish of Calcasieu, State of Louisiana. Subsequently, several parties were joined as plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other things, that the defendants, including AIRI, caused or permitted the discharge of hazardous and toxic substances from the Lake Charles Refinery into the Calcasieu River. The plaintiffs sought an unspecified amount of damages, including special and exemplary damages. In October 1998 the Plaintiffs and Defendants agreed upon a cash settlement, of which the Company's share of $45,000 was placed into escrow in October 1998. The plaintiffs attorneys are preparing the necessary release forms in order to disburse the funds, which release is expected to be completed during the first quarter of 1998. Employment agreements The Company has an employment agreement with its chief executive officer under which the officer receives a base salary of $300,000 annually. Gold Line Defaults During the third and fourth quarters of 1996, Gold Line defaulted on their obligations to pay lease fees, insurance premiums, property taxes and other items to AIRI under the terms of the Lease Agreement totaling an aggregate of $567,000. In addition, Gold Line paid no lease fees to AIRI during the first quarter of 1997. On February 18, 1997, AIRI filed suit against Gold Line for termination of the Lease Agreement and damages including unpaid processing fees, real-estate taxes, insurance premium and other items which may be due under the terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and after the demand to vacate was not met, F-19 a pleading to evict Gold Line was filed as an incident to the original suit. After a hearing on March 20, 1997, the court granted the eviction and Gold Line vacated the Refinery premises. The Company filed suit for damages and received a judgment in its favor of $1.5 million. However, since Gold Line has filed for protection under Chapter 11 of the Bankruptcy Code, and there are certain secured creditors who have made significant claims against Gold Line, the total of which claims may exceed the total value of Gold Line's assets, the collectibility of this judgment by the Company is uncertain. The Company has provided an allowance during 1996 of $682,000, which fully reserves all amounts due AIRI from Gold Line as of December 31, 1997. Lease commitments The Company leases office space under various operating leases which all expire in 1998. Future minimum payments under these operating leases are $112,032 as of December 31, 1997. Minimum lease payments have not been reduced by minimum sublease rentals due in the future under noncancelable subleases. The composition of total rental expense for all operating leases was as follows: 1997 1996 1995 ---- ---- ---- Minimum rentals $158,313 $307,912 $297,502 Less - sublease rentals (21,740) (130,437) (114,213) ---------- ---------- ----------- Total $136,573 $177,475 $183,289 ======== ========= ========== Other Contingencies In addition to certain matters described above, the Company and its subsidiaries are party to various legal proceedings, including environmental matters. Although the ultimate disposition of these proceedings is not presently determinable, in the opinion of the Company, any liability that might ensue would not be material in relation to the consolidated financial position or results of operations of the Company. Transfer of Funds - U.S. and Foreign The Company currently operates in the Republic of Kazakstan and there are no restrictions on the transfer of funds into and out of the country between the Company's U.S. and foreign branch of its subsidiary, AIPK. Neste Trifinery V. American International Refinery, Inc. Etc. Cause No. 98-11453; in the 269th Judicial District; in and For Harris County, Texas Plaintiff, Neste Trifinery, has filed suit in a Harris County District Court against the Company and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI"). Neste Trifinery has asserted claims for recovery of compensatory and punitive damages based on the following theories of recovery; (1) breach of contract, (2) disclosure of confidential information; and (3) tortious interference with existing contractual relations. Generally, Neste Trifinery has alleged that in connection with the due diligence conducted by the Company and AIRI of the business of Neste Trifinery, the Company and AIRI had access to confidential or trade secret information and that the Company and AIRI have exploited that information, in breach of an executed Confidentiality Agreement, to the detriment of Neste Trifinery. Neste Trifinery seeks the recovery of $20,000,000 in compensatory damages and an undisclosed sum in connection with its claim for the recovery of punitive damages. In addition to seeking the recovery of compensatory and punitive damages, Neste Trifinery sought injunctive relief. Specifically, Neste Trifinery sought to enjoin the Company and AIRI from: (1) offering employment positions to the key employees of Neste Trifinery; (2) contacting the suppliers, joint venture partners and customers of Neste Trifinery in the pursuit of business opportunities; (3) interfering with the contractual relationship existing between Neste Trifinery and St. Marks Refinery, Inc.; and (4) disclosing or using any confidential information obtained during the due diligence process to the detriment of Neste Trifinery. The Company and AIRI have asserted to a general denial to the allegations asserted by Neste Trifinery. The Company and AIRI also moved the district court to refer the matter to arbitration, as provided for in the Confidentiality Agreement, and to stay the pending litigation. On March F-20 27, 1998, the district court referred the matter to arbitration, as requested by the Company and AIRI, and stayed litigation. At present, the dispute existing between the Company, AIRI and Neste Trifinery in Texas will be decided by a panel of three arbitration judges under the American Arbitration Association rules for commercial disputes. The Company and AIRI are vigorously defending the Texas matter, and the Company's counsel does not anticipate an unfavorable outcome, although a definitive outcome is not yet determinable. On February 26, 1998, the Company entered into a Letter Agreement with DSE, Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company agreed to purchase or lease the refinery and terminals facility located at St. Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks Refinery, Inc. in the United states District Court for the Northern District of Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate termination of its storage agreement. Following an evidentiary hearing, the District Judge denied Neste's application for injunctive relief and adopted the recommendations of the Magistrate, who found in part that Neste had failed to prove a substantial likelihood of success on the merits. The District Court's order was appealed by Neste to the United States Court of Appeals for he Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction pending appeal. The federal court action remains pending, but Neste has agreed to remove its product from the St. Marks facility by April 25, 1998. The Company presently plans to deliver product to the St. Marks, Florida facility and begin marketing operations during the last week of April, 1998 Kazakstan On May 12, 1997, the Company, through its wholly-owned subsidiary, American International Petroleum Kazakstan ("AIPK"), entered into an agreement with Med Shipping and Trading S.A. ("MED"), a Liberian corporation to buy from MED, in exchange for a combination of cash and stock, a 70% working interest in a Kazakstan concession. As part of the acquisition, the Company is required to perform certain minimum work programs over the next five years which consists of the acquisition and processing of 3,000 kilometers of new seismic data, reprocessing 500 kilometers of existing seismic data, and drill 6,000 linear meters. In addition, the Company assumed an obligation to pay the Kazakstan Government three annual payments of $200,000 each beginning July 1998 for the purchase of existing seismic and geological data on the Kazakstan concession. The Company has also entered into a consulting agreement with certain MSUP joint venture partners. The consulting agreement requires monthly payments of $12,500 through July 31, 1998 and $23,000 monthly through April 22, 2000. Year 2000 Issues The Company is evaluating the potential impact of the nearly universal practice in the computer industry of using two digits rather than four to designate the calendar year, leading to incorrect results when computer software performs arithmetic operations, comparisons or date field sorting involving years later than 1999. Management believes that in light of the limited nature of the computer software used by the Company and the limited scope of its electronic interaction with other entities, issues relating to modification or replacement of existing systems will not have a material effect on the operations or financial condition of the Company. Although the Company is not aware of any circumstances in which the failure of a supplier or customer to deal successfully with such issues would have a material impact, there can be no assurance that such will be the case. NOTE 11 - INCOME TAXES: The Company uses the asset and liability approach for financial accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company reported a loss from operations during 1995, 1996, and 1997 and has a net operating loss carryforward from prior years' operations. Accordingly, no income tax provision has been provided in the accompanying statement of operations. The Company has available unused tax net operating loss carryforwards of approximately $58,000,000 which expire in years 1997 through 2009. Due to a change in control, as defined in Section 382 of the Internal Revenue Code, which occurred in 1994, the Company's utilizable tax operating loss carryforwards to offset future income have been restricted. These restrictions will limit the Company's future use of its loss carryforwards. The amount of the Company's net operating loss available at the end of 1997 is approximately $26,900,000. F-21 The components of deferred tax assets and liabilities are as follows:
December 31, --------------------------------------- 1997 1996 ---- ---- Deferred taxes: Net operating loss carryforwards $ 10,088,000 $ 6,942,000 Unrealized loss on marketable securities 1,932,000 - Allowance for doubtful accounts 720,000 721,000 Accrued liabilities 13,000 - Depreciation, depletion, amortization and impairment (1,603,000) (984,000) ---------------- ------------- Net deferred tax asset 11,150,000 6,679,000 --------------- ------------- Valuation allowance $(11,150,000) $(6,679,000) ============== ===========
The valuation allowance relates to the uncertainty as to the future utilization of net operating loss carryforwards. The increase in the valuation allowance during 1997 primarily reflects the increase in the Company's net operating loss carryforwards during the year. NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable were $293,260 and $3,871,703 at December 31, 1997, respectively. Refinery processing fees were earned through lease of the Company's refinery to Gold Line. Trade accounts receivable and notes receivable from Gold Line aggregated $1,920,877 at December 31, 1997, net of reserves for uncollectible amounts of $1,920,877. The Company's ability to collect outstanding amounts from Gold Line and restrictions thereon were subject to agreements between MGTF, Gold Line, NationsBank (a Gold Line creditor), and the Company (Notes 2 and 8). The Company has filed suit as discussed previously in Note 10 to collect certain reserved amounts from Goldline. The estimated fair value of the Company's financial instruments is as follows:
1997 1996 ----------------------- -------------------------- Carrying Fair Carrying Fair value value value value ---------- ---------- ---------- ---------- MIP Notes Receivable $3,871,703 $3,871,703 - - MIP Marketable Securities $ 735,958 $ 735,958 - - Short-term debt $6,075,931 $6,075,931 $6,766,592 $6,766,592
For investments, fair value equals quoted market price. Fair value of fixed- rate long-term debt and notes receivable are determined by reference to rates currently available for debt with similar terms and remaining maturities. As of December 31, 1997, 100% of the Company's long-term debt matures during 1998. As a result, the Company believes the carrying value of its long-term debt, approximates fair value. The reported amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term maturities. The MIP notes receivable were recorded at a discount to yield a fair market interest rate. The Company believes the effective interest rate on the MIP notes approximates market rates at December 31, 1997. F-22 NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION: The Company's operations involve a single industry segment, the exploration, development, production, refining and marketing of oil and natural gas. Its principal oil and gas activities are concentrated in foreign countries. Operating in foreign countries subjects the Company to inherent risks such as a loss of revenues, property and equipment from such hazards as exploration, nationalization, war and other political risks, risks of increases of taxes and governmental royalties, renegotiation of contracts with government entities and changes in laws and policies governing operations of foreign- based companies. The Company's oil and gas business is subject to operating risks associated with the exploration, production and refining of oil and gas, including blowouts, pollution and acts of nature that could result in damage to oil and gas wells, production facilities or formations. In addition, oil and gas prices have fluctuated substantially in recent years as a result of events which were outside of the Company's control. The Company periodically maintains cash balance in financial institutions which exceed the FDIC limit. Management does not believe any significant credit risk exists with respect to these balances. Financial information, summarized by geographic area, is as follows:
Geographic Segment ------------------ Consolidated 1997 United States Columbia Peru Kazakstan Total - ---- ------------- ----------- ------- --------- ---------- Sales and other operating revene $ 23,298 $ 292,947 $ - $ - $ 316,245 Interest income and other corporate revenues 511,719 ---------- Total revenue $ 827,964 Costs and operating expense 1,189,188 463,371 $ - $ - 1,652,559 ------------- ------------ ----------- ---------- ----------- Operating profit (loss) $ (1,165,890) $(170,424) $ - $ - $ 824,595) ============ ========== =========== ========== ========= General corporate expense 10,465,064 Interest expense 6,663,992 Net loss $(17,953,651) ============= Identifiable assets at December 31, 1997 $ 21,159,627 $ - $ - $11,724,477 $ 32,884,104 ----------- -------------- -------------- ----------- Corporate assets 8,955,756 --------- Total assets at December 31, 1997 $ 41,839.860 ============= F-23 Depreciation, depletion and amortization rate per equivalent barrel of oil $ - $ 3.77 $ - $ - $ 3.77 ============ =========== ============ ============ ================= Capital Expenditures, net of cost recoveries $ 5.606,031 $ - $ - $11,724,477 $ 17,330,508 ============ ========== ============ =========== ============ Geographic Segment ------------------ Consolidated 1996 United States Colombia Peru Kazakstan Total - ---- ------------- -------- ------- ---------- Sales and other operating revenue $2,596,917 $1,508,260 $ - $ - $ 4,105,177 Interest income and other corporate revenues 5,337 ------------ Total revenue 4,110,514 Costs and operating expense 1,616,043 1,468,665 200,000 $ - 3,284,708 ----------- --------- ------------ ------------ ------------ Operating profit (loss) $ 980,874 $ 39,595 $(200,000) $ - 825,806 ============ ============= ========= =========== General corporate expense 2,659,795 Interest expense 2,818,218 ----------- Net loss $ (4,652,207) ============ Identifiable assets at December 31, 1996 $12,895,332 $14,641,646 $4,860,559 $ - $ 32,397,537 =========== =========== ========== ============ Corporate assets 2,094,894 ----------- Total assets at December 31, 1996 $34,492,431 =========== Depreciation, depletion and amortization rate per equivalent barrel of oil $ - $ 3.77 $ - $ - $ 3.77 ------------ ------------- -------------- --------------- ================= Capital Expenditures, net of cost recoveries $ 1,713,188 $ 719,954 $ 825,923 $ - $ 3,259,065 ========== ======== ========== ============== ============= F-24 Geographic Segment ------------------ Consolidated 1995 United States Colombia Peru Kazakstan Total - ---- ------------- ----------- --------- --------- ---------- Sales and other operating revenue $ 1,403,668 $ 1,214,213 $ 166,069 $ - $ 2,783,950 Interest income and other corporate revenues 27,358 ----------- Total revenue 2,811,308 Costs and operating expense 1,922,130 1,513,401 65,141 $ - 3,500,672 ------------- ------------- ------------- -------------- ----------- Operating profit (loss) $ (518,462) $ (299,188) $ 100,928 $ - $ (689,364) ============ ============ =========== ============== ============== General corporate expense 2,611,650 Interest expense 1,037,308 Net loss $ (4,338,322) =========== Identifiable assets at December 31, 1995 $13,565,280 $ 14,136,257 $4,247,975 $ - $ 31,949,512 =========== =========== ========== ============= Corporate assets 690,850 ----------- Total assets at December 31, 1995 $32,640,362 =========== Depreciation, depletion and amortization rate per equivalent barrel of oil $ - $ 3.86 $ - $ - $3.86 ============ ============ ============== ============ ============= Capital Expenditures, net of cost recoveries $ 400,368 $ 1,265,989 $1,528,095 $ - $ 3,194,452 ============ ============ ========== ============ ============
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:
1997 1996 1995 ---- ---- ---- Conversion of debentures $9,343,022 $2,000,000 $ - Stock issued in lieu of current liabilities 233,559 168,902 489,250 Issuance of warrants related to convertible debentures 6,264,411 - - Issuance of stock - unearned compensation - 424,063 20,312 F-25 Issuance of stock - compensation 40,000 - - Issuance of stock - services 247,607 - - Issuance of stock and warrants - for oil and gas properties 9,254,688 - -
Cash paid for interest, net of amounts capitalized, was $765,312, $808,477, and $964,609, during 1997, 1996, and 1995, respectively. Cash paid for corporate franchise taxes was $70,003, $114,128, and $52,050, during 1997, 1996 and 1995, respectively. NOTE 15 - SUBSEQUENT EVENTS: Regulation S Offerings In 1998, the Company received aggregate net proceeds of $794,000 from the exercise of warrants to acquire shares of common stock (see Note 9). The exercise price of these warrants ranged from $.40 to $2.00 per share. Class A Warrants At December 31, 1997 the Company had 5,957,207 Class A Warrants that had an expiration date of March 1, 1998. On February 13, 1998 the Company extended the expiration date of these Warrants until April 9, 1998. Although the Company has preliminary indication that approximately 55,000 Warrants have been exercised through this date, the Company has not received a final accounting from its Depositary Agent of the total number of Warrants that may have been exercised as of the expiration date. SUPPLEMENTARY OIL AND GAS INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The accompanying unaudited oil and gas disclosures are presented as supplementary information in accordance with Statement No. 69 of the Financial Accounting Standards Board. F-26 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 Colombia Peru -------------------------------- ---------------------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Unevaluated property not subject to amortization $ - $ 1,101,277 $ 1,101,277 $ - $4,457,964 $3,382,041 Proved and unproved properties - 31,924,991 31,225,040 - 200,000 - Accumulated deprecia- tion, depletion and amortization - 19,870,122 19,364,606 - 200,000 - -------------------------------- ----------------------------------- Net Capitalized costs $ - $13,166,146 $12,951,711 $ - $4,457,964 $3,832,041 ================================ =================================== Kazakstan/Other Total ----------------------------------- -------------------------------------- 1997(1) 1996(2) 1995(2) 1997 1996 1995 ------- ------- ------- ---- ---- ---- Unevaluated property not subject to amortization $11,724,477 $ 89,389 $ 65,506 $11,724,477 $5,648,630 $ 4,998,824 Proved and unproved properties - 371,665 351,257 - 32,506,656 31,566,297 Accumulated deprecia- tion, depletion and amortization - 371,655 65,506 - 17,713,499 16,849,258 ----------------------------------- -------------------------------------- Net Capitalized costs$ $11,724,477 $ 89,389 $ 65,506 $11,724,477 $17,713,499 $16,849,258 =================================== ====================================== Costs incurred in oil and gas property acquisition, exploration and development activities Columbia Peru ------------------------------------ --------------------------------------- Property acquisition costs - proved and unproved properties $ - $ - $ - $ - $ - $ - Exploration Costs - - 744,549 - - - Development costs - 719,954 527,595 - - - Results of operations for oil and gas producing activities Oil and gas sales $ 292,947 $ 1,364,581 $1,104,095 $ - $ - $ 166,069 ------------------------------------ --------------------------------------- Lease operating costs 98,766 611,857 363,680 - - 65,141 Depreciation, depletion and amortization 70,216 491,732 531,989 - - - Provision for reduction of oil and gas properties - - - - 200,000 65,141 ------------------------------------ ------------------------------------------ 1 05,982 1,103,589 895,589 - 200,000 - ------------------------------------ ----------------------------------------- Income (loss) before tax provision 186,965 260,992 208,506 - (200,000) 100,928 Provision (benefit) for income tax - - - - - - ------------------------------------------ --------------------------------------- Results of operations $ 186,965 $ 260,992 $208,506 $ - $ (200,000) $ 100,928 ======================================= ======================================== Kazakstan/Other Total ------------------------------------- --------------------------------------------- Property acquisition costs - proved and unproved properties $11,724,477 $ - $ - $11,724,477 $ - $ - Exploration Costs - - - - - 744,549 Development costs - - - - 719,954 527,595 Results of operations for oil and gas producing activities Oil and gas sales $ - $ - $ - $ 292,947 $1,364,581 $ 1,270,164 ------------------------------------- --------------------------------------------- Lease operating costs - - - 98,766 611,857 428,741 Depreciation, depletion and amortization - - 351,257 70,216 491,732 883,246 Provision for reduction of oil and gas properties - - 351,257 - 1,303,589 1,311,987 -------------------------------------- -------------------------------------------- - - 351,257 105,482 1,303,589 1,311,987 -------------------------------------- --------------------------------------------- Income (loss) before tax provision - - (351,257) 186,955 60,992 (41,823) Provision (benefit) for income tax - - - - - - ------------------------------------- ----------------------------------------- Results of operations $ - $ - $(351,257) $ 186,965 60,992 $ (41,823) ====================================== =========================================
Unevaluated property not subject to amortization reflected in 1997 includes Kazakstan properties only. Unevaluated property not subject to amortization and proved and unproved properties reflected in 1996 were non-Kazakstan oil and gas projects, which have been fully amortized and retired as of December 31, 1997. F-27 OIL AND GAS RESERVES: Oil and gas proved reserves cannot be measured exactly. Reserve estimates are based on many factors related to reservoir performance which require evaluation by the engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data become available during the producing life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on limited data from the first well or wells. Subsequent data may better define the extent of the reservoir and additional production performance, well tests and engineering studies will likely improve the reliability of the reserve estimate. The evolution of technology may also result in the application of improved recovery techniques such as supplemental or enhanced recovery projects, or both, which have the potential to increase reserves beyond those envisioned during the early years of a reservoir's producing life. The following table represents the Company's net interest in estimated quantities of proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities at December 31, 1997, 1996 and 1997. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion.
United States Colombia Total -------------------- ------------------------------ ------------------------------ Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF ---------- -------- ---------------- ------------ ------------------ -------------- January 1, 1995estimates - - 1,166,258 - 1,166,258 - Extensions, discoveries and other additions - - 302,836 3,061,200 302,836 3,061,200 Production - - (137,821) - (137,821) - ---------------- -------------- --------------- ------------- December 31, 1995 - - 4,106,480 11,381,400 4,106,480 11,381,400 Revisions of previous estimates - - 34,372 3,298,000 34,372 3,298,000 Extensions, discoveries and other additions - - - - - - Production - - (130,433) - (130,433) - ------------- -------------- --------------- ------------- December 31, 1996 - - 4,010,419 14,679,400 4,010,419 14,679,400 Revisions of previous estimates - - - - - - Extensions, discoveries and other additions - - - - - - Sales of reserves - - (3,892,146) (14,679,400) (3,892,146) (12,679,400) Production - - (118,273 - (118,273 - ---------- -------- ---------------- ------------ ------------------ -------------- December 31, 1997 - - - - - - =========== =========== ================ ============= ================== ==============
F-28
United States Colombia Total -------------------- ------------------------ ----------------------- Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF Net proved developed reserves January 1, 1995 - - 899,971 4,160,200 899,971 4,160,200 December 31, 1995 - - 1,012,896 5,100,000 1,012,896 5,100,000 December 31, 1996 - - 948,721 6,321,100 948,721 6,321,000 December 31, 1997 - - - - - -
Changes to reserves in 1997 reflect the sale of the Colombia subsidiary as of February 25, 1997. Revisions to reserves in 1996 reflect an increase in gas reserves due to the Company's gas field development program and anticipated recompletion of Puli No. 3. Revisions to crude oil reserves in 1995 reflect the increased working interest participation of the Company in the proved undeveloped reserves due to nonparticipation of the other joint venture partners. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW: The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves is calculated and presented in accordance with Statement of Financial Accounting Standards No. 69. Accordingly, future cash inflows were determined by applying year-end oil and gas prices to the Company's estimated share of the future production from proved oil and gas reserves. Future production and development costs were computed by applying year-end costs to future years. Future income taxes were derived by applying year-end statutory tax rates to the estimated net future cash flows. A prescribed 10% discount factor was applied to the future net cash flows. In the Company's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Company's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies.
Colombia ----------------------------------------------------- 1997 1996 1995 ---- ---- ---- Future cash inflows $ - $61,173,696 $46,433,879 Future development costs - (12,170,000) (10,780,000) Future production costs - (8,012,891) (9,409,442) Future income tax expenses - - - ---------- ---------------- ------------ Future net cash flows - 40,990,805 26,244,437 Annual discount 10% rate - (19,088,789) (13,885,290) ---------- ------------ ------------ Standardized measure discounted future net cash flows $ - $21,902,016 $12,359,147 ========== =========== ===========
As previously discussed, the Colombia subsidiary was sold on February 25, 1997. Future cash flows in 1996 increased as a result of the increased selling price of oil in the world market in 1996 and also as a result of the upward revision in estimated future recoverable equivalent barrels of oil by approximately 585,000 BOE. F-29 Estimated future income taxes were eliminated in 1995 and 1996 because estimated future tax deductions related to oil and gas properties exceeded estimated future net revenues based on oil and gas prices and related costs at December 31, 1995 and 1996. CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: The aggregate change in the standardized measure of discounted future net cash flows was a decrease of $21,902,016 in 1997 and an increase of $9,542,869 and $2,288,243 in 1996 and 1995, respectively. The principal sources of change were as follows:
For the years ended December 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- Beginning of year $ 21,902,016 $12,359,147 $10,070,904 Sales and transfer of oil and gas produced, net of production costs (161,813) (752,724) (740,495) Net changes in prices and production costs - 6,764,808 135,987 Extensions, discoveries, additions and improved recovery, less related costs - - 660,594 Net change due to sales of minerals in place (21,740,203) - - Previously estimated development costs incurred during the year - 719,954 527,595 Changes in estimated future development costs - (973,650) (2,032,144) Revisions of previous reserve quantity estimates - 1,460,849 3,783,148 Changes in timing and other - 1,087,717 (1,053,532) Accretion of discount - 1,235,915 1007,090 ---------- --------- --------- End of year $ - $21,902,016 $12,359,147 ============ =========== ===========
F-30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN INTERNATIONAL PETROLEUM CORPORATION Dated: April 15, 1998 By: /s/ Denis J. Fitzpatrick Denis J. Fitzpatrick Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: By: /s/ George N. Faris Date: April 15, 1998 George N. Faris, Chairman of the Board of Directors and Chief Executive Officer By: /s/ Denis J. Fitzpatrick Date: April 15, 1998 Denis J. Fitzpatrick Vice President, Secretary, Principal Financial and Accounting Officer By: /s/ Donald G. Rynne Date: April 15, 1998 Donald G. Rynne, Director By: /s/ Daniel Y. Kim Date: April 15, 1998 Daniel Y. Kim, Director By: /s/ William R. Smart Date: April 15, 1998 William R. Smart, Director Exhibit Index Exhibit Number Description 4.14 1998 Stock Option Plan of the Registrant 4.15 1998 Stock Award Plan of the Registrant 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule EX-4 2 EXHIBIT 4.14 Exhibit 4.14 1998 Stock Option Plan The Board of Directors has deemed that it is in the best interests of the Company to establish the 1998 Plan so as to provide employees of the Company and its subsidiaries, as well as Directors, independent contractors and consultants of the Company and/or its subsidiaries an opportunity to acquire a proprietary interest in the Company by means of grants of options to purchase Common Stock in order to provide a closer identification of their interests with those of the Company and its shareholders. The Company currently employs 73 persons and has 3 outside directors. It is the opinion of the Board of Directors that by providing the employees, Directors, independent contractors and consultants of the Company and its subsidiaries the opportunity to acquire an equity investment in the Company, the 1998 Plan will maintain and strengthen their desire to remain with the Company, stimulate their efforts on the Company's behalf, and also attract other qualified personnel to become employed by or otherwise become associated with the Company. The 1998 Plan was adopted by the Company's Board of Directors on April 2, 1998. As of April 12, 1998, no options have been granted pursuant to the 1998 Plan. The closing market price of the Common Stock, as reported by Nasdaq on April 2, 1998 was $3.81 per share. The Board of Directors has directed that the shares underlying the 1998 Plan be registered pursuant to the Securities Act of 1933, and the Company intends to take steps to file a Registration Statement on Form S-8 to register such shares promptly after approval of this Proposal 3. The following discussion summarizes certain provisions of the 1998 Plan, which is qualified in its entirety by reference to the text of the Plan, copies of which are available for examination at the Securities and Exchange Commission and at the principal office of the Company, 444 Madison Avenue, New York, NY 10022. The 1998 Plan allows the Company to grant incentive stock options ("ISOs"), as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify under Section 422(b) of the Code, and ISOs or NQSOs in tandem with Stock Appreciation Rights ("SARs"). ISOs, NQSOs and SARs are referred to collectively herein as "Options." Options granted under the 1998 Plan prior to the approval of the 1998 Plan by the Company's shareholders are conditioned upon approval of the 1998 Plan by such shareholders on or before June 29, 1998. If such approval is not obtained by such date, such Options shall become null and void, and the 1998 Plan shall terminate. ELIGIBILITY FOR PARTICIPATION The 1998 Plan provides that ISOs or ISOs in tandem with SARs may be granted to employees of the Company and its subsidiaries, including officers and Directors who are also employees and that NQSOs or NQSOs in tandem with SARs may be granted to employees of the Company and its subsidiaries, Directors, independent contractors, consultants and other individuals who are not employees of, but are involved in the continuing development and success of, the Company and its subsidiaries ("Participants"). ADMINISTRATION The 1998 Plan is administered by the Board of Directors and/or a stock option committee of the Board of Directors (the "Committee"). The Board of Directors and/or the Committee will, among other things, select the optionees, determine the number of shares to be subject to each Option and determine the vesting period, option period and option price. In making such determinations, there will be taken into account the nature of the services rendered by Participants, their present and potential contributions to the success of the Company, and such other relevant factors as the Board and/or the Committee in its discretion shall deem relevant. TERMS OF OPTIONS The terms of Options granted under the 1998 Plan are to be determined by the Board of Directors and/or the Committee. Each Option is to be evidenced by a stock option agreement between the Company and the Participant to whom such Option is granted and is subject to the following additional terms and conditions: (a) Exercise of the Option: The Board of Directors and/or the Committee will determine the time periods during which Options granted under the 1998 Plan may be exercised. An Option must be granted within 10 years from the date the 1998 Plan was adopted. The 1998 Plan is deemed adopted on April 2, 1998. Options may be exercisable in whole or in part at any time during the period but may not have an expiration date later than 10 years from the date of grant. ISOs or ISOs in tandem with SARs granted to holders of more than 10% of the Common Stock, however, may not have a term of more than 5 years. An Option is exercised by giving written notice of exercise to the Company specifying the number of full shares of Common Stock to be purchased and tendering payment of the purchase price to the Company in cash or certified check, or if permitted by the instrument of grant with respect to ISOs or ISOs granted in tandem with SARs and at any time as permitted by the Board of Directors or the Committee with respect to other Options, by delivering a promissory note or exchanging shares of Common Stock owned by the Participant, or by a combination of cash, promissory notes and/or shares of Common Stock, or, in the sole discretion of the Board or the Committee, by another medium of payment. The ability to pay the option exercise price in shares of Common Stock may enable a Participant to engage in a series of successive stock-for-stock exercises of an Option and thereby fully exercise an Option with little or no cash investment. Officers and Directors who receive grants of SARs may exercise them at any time after 6 months from the date of grant, but generally may only exercise them within the period of 10 business days following publication of the Company's quarterly financial information. (b) Option Price: In no event may the option price of the shares subject to an ISO or a SAR issued in tandem with an ISO be less than the fair market value of the Common Stock on the date of grant. The Board of Directors and/or the Committee may set the price of an NQSO or an NQSO granted in tandem with a SAR without any limitation. Fair market value in the case of ISOs 1 shall be the closing price of the Common Stock on its principal market on the date of grant, if the Common Stock is traded on an exchange, or the average of the closing bid and asked prices, if it is traded over-the-counter. ISOs or ISOs in tandem with SARs granted to holders of more than 10% of the Common Stock are subject to the additional restriction that the option price must be at least 110% of the fair market value of the Common Stock on the date of grant. (c) Vesting: The Board of Directors and/or the Committee, will determine the time or times the Options become exercisable. However, the 1998 Plan provides that, with respect to holders of more than 10% of the Common Stock, such Options must become first fully exercisable not later than 5 years from the date of grant, and no less than 20% of the Option must become exercisable in each of the first 5 years of the Option until fully exercisable. (d) Termination of Employment; Disability; Death: If the employment of a Participant under the 1998 Plan is terminated for any reason (other than because of death, disability, voluntary termination or for cause), his ISOs and SARs issued in tandem with ISOs shall expire and no longer be exercisable 3 months after such termination, but in no event later than the expiration date of the Options, and his other Options shall terminate as determined under the option agreement, but not later than the expiration date. In the event a Participant's employment is terminated voluntarily or for cause, his Options shall immediately expire. In the event a Participant dies while in the employ of the Company or its subsidiaries or within 3 months thereafter, his Options may be exercised by a legatee or legatees of such Options under such Participant's last will or by his personal representatives or distributees within a period determined by the Board or the Committee of at least 6 months after his death, but in no event later than the expiration date of the Options. A Participant's employment with the Company or a subsidiary will not be considered to be terminated for purposes of the 1998 Plan while the Participant is not active due to a disability; provided, that an ISO may only be exercised within 6 months after the Participant's employment would be considered terminated because of such disability under applicable Sections of the Code, except as determined by the Board of Directors or the Committee, but in no event later than the expiration date of the Option. Under the 1998 Plan, Participants on military or sick leave, or on any other bona fide leave of absence, are to be considered as remaining in the employ of the Company or its subsidiaries for 90 days or such longer period as is guaranteed either by contract or statute. (e) Nontransferability of Options; No Liens: An Option is nontransferable and non-assignable by the Participant, other than by will or the laws of descent and distribution and is exercisable during the Participant's lifetime only by the Participant. (f) Maximum Number of ISOs or SARs in Tandem with ISOs which may Be Issued: No employee may receive a grant of ISOs or SARs in tandem with ISOs if the aggregate fair market value of all ISOs and SARs in tandem with ISOs 2 granted to him under the 1998 Plan and any other qualified incentive stock option plan of the Company exceeds $100,000, as determined at the date of grant. Any options granted in excess of the $100,000 limit are deemed to be NQSOs under the 1998 Plan. The option agreement may contain such other terms, provisions and conditions not inconsistent with the 1998 Plan as may be determined by the Board of Directors and/or the Committee. TERMINATION; AMENDMENT OR DISCONTINUANCE The 1998 Plan (but not Options previously granted under the 1998 Plan) shall terminate 10 years from the date of its adoption by the Board of Directors. No Option will be granted from the 1998 Plan after termination of the such plan. The Board of Directors of the Company may terminate the 1998 Plan at any time prior to its expiration date, or from time to time make such modifications or amendments of the 1998 Plan as it deems advisable. However, the Board may not, without the approval of holders of a majority of the outstanding shares of the Company, except under conditions described under "Adjustments Upon Changes in Common Stock," increase the maximum number of shares as to which Options may be granted under the 1998 Plan, or materially change the standards of eligibility under the 1998 Plan. No termination, modification or amendment of the 1998 Plan may adversely affect the terms of any outstanding Options without the consent of the holders of such Options. ADJUSTMENTS UPON CHANGES IN COMMON STOCK In the event that the number of outstanding shares of Common Stock of the Company is changed by reason of recapitalization, reclassification, stock split, stock dividend, combination, exchange of shares or the like, or as a result of a merger, consolidation or reorganization involving the Company or its subsidiaries, the Board of Directors will make an appropriate adjustment in the aggregate number of shares of Common Stock available under the 1998 Plan, in the number of shares of Common Stock issuable upon the exercise of then outstanding Options and in the exercise prices of such Options. Any adjustment in the number of shares will apply proportionately only to the unexercised portion of Options. FEDERAL INCOME TAX CONSEQUENCES The following discussion is only a summary of the principal Federal income tax consequences of the Options and is based on existing Federal law, which is subject to change, in some cases retroactively. This discussion is also qualified by the particular circumstances of individual Participants, which may substantially alter or modify the Federal income tax consequences herein discussed. Generally, under present law, when an Option qualifies as an ISO under Section 422 of the Code, (i) an employee will not realize taxable income either upon the grant or the exercise of the Option, (ii) the amount by which 3 the fair market value of the shares acquired by the exercise of the Option at the time of exercise exceeds the option price is included in alternative minimum taxable income for purposes of determining the employee's alternative minimum tax, (iii) any gain or loss (the difference between the net proceeds received upon the disposition of the shares and the option price paid therefor), upon a qualifying disposition of the shares acquired by the exercise of the Option will be treated as capital gain or loss if the stock qualifies as a capital asset in the hands of the employee, and (iv) no deduction will be allowed to the Company for Federal income tax purposes in connection with the grant or exercise of an ISO or a qualifying disposition of the shares. A disposition by an employee of shares acquired upon exercise of an ISO will constitute a qualifying disposition if it occurs more than 2 years after the grant of the Option and one year after the issuance of the shares to the employee. If such shares are disposed of by the employee before the expiration of those time limits, the transfer would be a "disqualifying disposition" and the employee, in general, will recognize ordinary income (and the Company will receive an equivalent deduction) equal to the lesser of (i) the aggregate fair market value of the shares as of the date of exercise less the option price, or (ii) the amount realized on the disqualifying disposition less the option price. Ordinary income from a disqualifying disposition will constitute compensation for which withholding may be required under Federal and state law. The maximum rate of tax on ordinary income is greater than the rate of tax on long-term capital gains. In the case of an NQSO granted under the 1998 Plan, no income generally is recognized by the Participant at the time of the grant of the Option assuming such NQSO does not have a readily ascertainable fair market value. The Participant generally will recognize ordinary income when the NQSO is exercised equal to the aggregate fair market value of the shares acquired less the option price. Withholding may be required, and the Company will receive an equivalent deduction, subject to excessive employee remuneration provisions of Section 162 (m) of the Code. Section 162 (m) generally disallows a deduction for employee remuneration paid by a company in any taxable year to an executive officer in excess of $1,000,000 (unless such compensation is considered performance based compensation). For purposes of determining remuneration paid, the excess of the fair market value of the Common Stock upon exercise of an NQSO over the exercise price is considered remuneration paid in the year of exercise unless the income is considered performance-based compensation. One of the requirements to qualify as performance-based compensation is that the 1998 Plan set forth the maximum number of Options to which a Participant may be entitled. The 1998 Plan does not contain such a provision. Therefore, the NQSOs granted under the 1998 Plan will not be considered performance-based compensation for purposes of Section 162(m). Shares acquired upon exercise of an NQSO will have a tax basis equal to their fair market value on the exercise date or other relevant date on which ordinary income is recognized and the holding period for the shares generally will begin on the date of the exercise or such other relevant date. Upon subsequent disposition of the shares, the participant will recognize capital gain or loss if the stock is a capital asset in his hands. Provided the shares are held by the Participant for more than one year prior to disposition, such gain or loss will be long-term capital gain or loss. As set forth above, the maximum rate of tax on ordinary income is currently greater than the maximum rate of tax on long-term capital gains. To the extent a Participant recognizes a capital loss, such loss generally may offset capital gains and $3,000 of ordinary income. Any excess capital loss is carried forward indefinitely. The grant of an SAR is generally not a taxable event for the optionee. Upon the exercise of an SAR the optionee will recognize ordinary income in an amount equal to the amount of cash and the fair market value of any Common Stock received upon such exercise, and the Company will be entitled to a deduction equal to the same amount. Notwithstanding the above, if the sale of any shares received upon the exercise of an NQSO or a SAR in tandem with an NQSO would be subject to Section 16(b) of the Securities Exchange Act of 1934, recognition of ordinary income attributable to such shares received will be deferred until the date such sale would not give rise to a Section 16(b) action. However, such shares will be valued at the fair market value at such later time, unless the optionee has made an election under Section 83(b) of the Code within 30 days after the date of exercise to recognize ordinary income as of the date of exercise based on the fair market value at the date of exercise. The foregoing discussion is only a brief summary of the applicable Federal income tax laws as in effect on this date and should not be relied upon as being a complete statement. The Federal tax laws are complex, and they are subject to legislative changes and new or revised judicial or administrative interpretations at any time. In addition to the Federal income tax consequences described herein, a Participant may also be subject to state and/or local income tax consequences in the jurisdiction in which the grantee works and/or resides. EX-4 3 EXHIBIT 4.15 EXHIBIT 4.15 1998 STOCK AWARD PLAN 1. Purpose of the Plan. The AMERICAN INTERNATIONAL PETROLEUM CORPORATION 1998 Stock Award Plan (the "Plan") is intended to attract, retain, motivate and reward employees and officers of, and consultants to, AMERICAN INTERNATIONAL PETROLEUM CORPORATION (the "Company") and its Affiliates who are and will be contributing to the success of the business; to provide competitive incentive compensation opportunities; and to further opportunities for stock ownership by such employees, officers, and consultants in order to increase their proprietary interest in the Company. Affiliates shall mean any corporation or other business organization in which the Company owns, directly or indirectly, 50% or more of the voting stock or capital at the time of granting of such award. Accordingly, the Company may from time to time, grant to selected employees, officers and consultants ("participants") awards ("awards") of shares of Common stock of the Company $.08 par value ("Stock"), together with, to the extent determined by the Company in its sole discretion at the time of the grant of the award, reimbursement by the Company of amounts payable by the recipient of the award as a consequence of any such award ("Cash Amount") subject to the terms and conditions hereinafter provided. 2. Administration of the Plan. The Plan shall be administered by the Board of Directors of the Company as such Board of Directors may be composed from time to time and/or by a Stock Grant Committee or Compensation Committee (the "Committee") which shall be comprised of solely of at least two Outside Directors (as such term is defined in regulations promulgated from time to time with respect to Section 162(m)(4)(C)(i) of the Code) appointed by such Board of Directors of the Company. As and to the extent authorized by the Board of Directors of the Company, the Committee may exercise the power and authority vested in the Board of Directors under the Plan. The Board of Directors or the Committee to the extent authorized by the Board of Directors, is authorized to interpret the Plan and may from time to time adopt such rules and regulations for carrying out the Plan as it deems appropriate, including rules and regulations to comply with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 and Section 162(m) of the Code. Decisions of the Board of Directors and/or the Committee in connection with the administration of the Plan shall be final, conclusive, and binding upon all parties including the Company, stockholders, employees and consultants. In addition to such other rights of indemnification as they have as Directors or as members of the Committee, the members of the Board of Directors and the Committee shall be indemnified by the Company against reasonable expenses (including, without limitation, attorneys' fees) actually and necessary incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any awards granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved to the extent required by and in the manner provided by the Certificate of Incorporation and Bylaws of the Company relating to indemnification of directors) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Director or Committee member or members did not act in good faith and in a manner he, she 1 or they reasonably believed to be in or not opposed to the best interest of the Company. Subject to the terms, provisions, and conditions of the Plan as set forth herein, the Board of Directors and the Committee, to the extent authorized by the Board of Directors, shall have sole discretion and authority: (a) to select the employees, officers, and consultants to be awarded Stock (it being understood that more than one award may be granted to the same person); (b) to determine the number of shares to be awarded to each recipient and whether or not to grant any Cash Amount which may be granted in tandem therewith; (c) to determine the time or times when the awards may be granted; and (d) to prescribe the form of stock legend for the certificates of shares of Stock or other instruments, if any, evidencing any awards granted under this Plan. 3. Stock Subject to the Plan. The aggregate number of shares of Stock which may be awarded under the Plan shall not exceed 500,000 shares of Stock of the Company. In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split-up, combination or exchange of shares of Common Stock or like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Board of Directors, as determined by the Board of Directors and/or the committee, in the aggregate number of shares of Common Stock available under the Plan. Shares to be awarded under the Plan shall be made available, at the discretion of the committee, either from the authorized but unissued shares of Stock of the Company or from shares of Stock reacquired by the Company, including shares purchased in the open market. 4. Eligibility. Stock shall be awarded only to employees of and consultants to the Company (the term "employees" shall include officers as well as other key employees of the Company, and shall include directors who are also key employees of the Company). 5. Awards and Certificates. (a) Each recipient shall be issued a certificate in respect of shares of Stock awarded under the Plan. Each certificate shall be registered in the name of the participant, and shall bear an appropriate restrictive legend on its face, which legend shall be subject to removal pursuant to an effective registration statement or an opinion of counsel satisfactory to the Company that such registration is not required. The Company may register, on behalf of the recipients, shares issued pursuant to the Plan. Notwithstanding anything contained herein to the contrary, no recipient shall be entitled to more than 50,000 shares of Common Stock issuable pursuant to awards under the Plan. (b) The Board of Directors or Committee may, in its sole discretion, grant to a recipient of an award, a cash amount not to exceed the federal, state and local taxes the recipient must pay as a result of the fair market value of the award being included in income for federal, state and local; income tax purposes. The grant of a Cash Amount to one recipient shall in no 2 way require the Board of Directors or the Committee to grant a Cash Amount to any other recipient of an award. 6. Termination and Amendment. The Committee may amend, suspend, or terminate the Plan at any time provided that no such modification without the approval of stockholders shall: (a) increase the maximum number of shares of Stock which are available for awards under the Plan; (b) extend the period during which awards may be granted under the Plan beyond April 2, 2008; or (c) impair the rights of any recipient under any award. 7. Miscellaneous (a) Nothing in the Plan shall require the Company to issue or transfer any shares pursuant to an award if such issuance or transfer would, in the opinion of the Committee, constitute or result in a violation of any applicable statute or regulation of any jurisdiction relating to the disposition of securities. (b) Notwithstanding any other provision of the Plan, the Committee may at any time make or provide for such adjustment to the Plan, to the number of shares available thereunder, or to any awards of Stock as it shall deem appropriate, to prevent dilution or enlargement of rights, including adjustments in the event of changes in the number of outstanding shares of Stock by reason of stock dividends or distributions, stock splits or other combinations or subdivisions of stock, recapitalization, issuances by reclassification, mergers, consolidations, combinations or exchanges of shares separations, reorganizations, liquidations, or other similar corporate changes. Any such determination by the Committee shall be conclusive. (c) No employee, consultant or other person shall have any claim or right to be granted shares of Stock under the Plan, and neither the Plan nor any action taken thereunder shall be construed as giving any participant, recipient, employee, consultant or other person any right to be retained in the employ of or by the Company and/or an Affiliate. (d) A recipient who receives an award shall have rights as a share owner with respect to the stock covered by such award to receive dividends in cash or other property or other distributions or rights in respect of such stock and to vote the Stock as the record owner thereof. (e) Income realized as a result of an award of stock shall not be included in the recipient's earnings for the purpose of any benefit plan in which the recipient may be enrolled or for which the recipient may become eligible unless otherwise specifically provided for in such plan. (f) If and when a recipient is required to pay the Company an amount required to be withheld under an federal, state or local income tax laws in connection with an award of stock under the Plan, the Committee may, in its sole discretion and subject to such rules as it may adopt, permit the participant to satisfy the obligation, in whole or in part, by electing to have the Company withhold shares of Common Stock having a fair market value 3 equal to the amount required to be withheld. The election to have shares withheld must be made on or before the date the amount of tax to be withheld is determined. (g) The Plan and all determinations made and actions taken pursuant thereto shall be governed by the laws of the State of Nevada and construed in accordance therewith. 8. Effective Date and Term of the Plan. The effective date of the Plan shall be April 2, 1998, subject to approval by the stockholders of the Company at the 1998 Annual Meeting of Stockholders. Notwithstanding the foregoing, awards of Stock may be made by the Committee as provided herein, subject to such subsequent stockholder approval. No awards of stock may be made under the Plan after April 2, 2008. EX-21 4 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of the Registrant American International Refinery, Inc. State of Incorporation - Louisiana American International Petroleum Kazakstan State of Incorporation - Nevada American Eurasia Petroleum Corporation State of Incorporation - Nevada 1229329 Ontario Limited Province of Incorporation - Ontario EX-27 5 FDS -- AMERICAN INTERNATIONAL PETROLEUM
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,721,350 735,958 3,751,885 1,920,877 755,720 8,641,803 34,758,177 3,894,015 41,839,860 9,335,479 0 0 0 3,874,926 28,629,455 41,839,860 260,579 827,964 98,766 98,766 12,018,827 0 6,663,992 (17,953,621) 0 0 0 0 0 (17,953,621) (0.43) 0
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